CAAD 656/2015-T: SGPS IRC Financial Charges & Article 32 EBF

Process: 656/2015-T

Date: July 21, 2016

Tax Type: IRC

Summary

CAAD Case 656/2015-T addresses the complex issue of financial charge deductions for SGPS (Portuguese holding companies) under Article 32 of the Tax Benefits Statute (EBF) for IRC purposes in fiscal year 2012. The claimant SGPS challenged the Tax Authority's rejection of its self-assessment, seeking recognition of significant tax losses. The central legal dispute concerned how to allocate financial charges incurred from loans used to acquire equity interests. Article 32 EBF provided that both capital gains/losses from equity sales and related financial charges would not count toward taxable profit if equity was held for at least one year. However, the law contained no specific methodology for determining which financial charges related to equity acquisitions versus other corporate purposes. The Tax Authority issued Circular 7/2004 establishing a proportional, indirect calculation method to address this allocation problem. The claimant argued this administrative circular exceeded legal authority and violated constitutional legality principles, contending the AT cannot create tax incidence rules through circulatory law. The claimant maintained that only a direct, actual allocation method would be constitutionally valid, and that financial charge adjustments should occur only in the fiscal year when equity interests are sold, not prospectively. The arbitral tribunal was constituted under RJAT provisions with three arbitrators appointed by CAAD's Deontological Council. The case raises fundamental questions about administrative law limits, tax benefit interpretation, and the temporal application of SGPS tax regimes under Portuguese IRC law.

Full Decision

ARBITRAL DECISION

The arbitrators Judge Counselor Fernanda Maças (arbitrator president), Dr. João Gonçalves da Silva and Dr. André Festas da Silva (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on November 6, 2015, agree on the following:

I. REPORT

I.1

On September 28, 2015, the taxpayer A… S.A., with headquarters at…, no.…, …, Floor…, …-… …, requested, pursuant to and for the purposes of Article 2, clause a), number 1, and Article 10, both of Decree-Law no. 10/2011, of January 20, the constitution of an Arbitral Tribunal with appointment of a collective of three arbitrators by the Deontological Council of the Administrative Arbitration Center, in accordance with Article 6, clause a), number 2, of the aforementioned decree.
The request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on November 6, 2015.
The Claimant did not proceed with the appointment of the arbitrators, wherefore, pursuant to Article 5, number 3, clause a), and Article 6, number 2, clause a) of the RJAT, the undersigned were appointed by the President of the Deontological Council of CAAD to form this Collective Arbitral Tribunal, having accepted in accordance with legal provisions.
The AT submitted its response on March 9, 2016.
By order of March 16, 2016, the Claimant was invited to respond, within a period of ten days, to the exceptions raised by the Respondent.
On March 28, 2016, the Claimant requested an extension of the deadline by another ten days to respond to the exceptions, which was granted by order dated April 4, 2016.
By order of April 27, 2016, the holding of the meeting provided for in Article 18 of the RJAT was dispensed with, and it was decided that, should the parties not waive their submissions, the proceedings would continue with written final submissions. Finally, August 1, 2016 was designated as the deadline for delivery of the final decision.
The parties submitted submissions reiterating the arguments advanced in the previous pleadings.
The Claimant seeks that the Arbitral Tribunal declare the illegality of the rejection of the administrative complaint and, likewise, the partial illegality of the IRC self-assessment relating to the fiscal year 2012, correcting the Claimant's individual fiscal result to a tax loss of €2,527,766.78, consequently altering the aggregate fiscal result to €11,742,853.62, or, subsidiarily, correcting the Claimant's individual fiscal result to a tax loss of €2,384,072.31, consequently altering the aggregate fiscal result to €11,599,159.15.

I.A. The Claimant supports its claim, in summary, in the following terms:

With the entry into force of Law no. 32-B/2002, of December 30, a tax benefit was introduced into the Portuguese tax legal system intended for SGPSs and Venture Capital Companies ("SCR").
Included in the EBF - originally in Article 31 and subsequently in Article 32 - this regime (subsequently repealed by Law no. 2/2014, of January 16) provided for the non-concurrence, for the formation of taxable profit, of the amount determined as capital gains and losses realized by SGPSs with the sale of equity interests, provided that these were "held for a period of not less than one year," among other requirements.
Concurrently, the aforementioned regime likewise provided for the non-concurrence of financial charges (expenses) for the formation of taxable profit, provided that these were borne by the aforementioned companies (i.e., SGPSs), as a result of loans contracted for the purpose of acquiring equity interests.
However, this regime proved to be of considerable operational complexity, since it was often not possible to determine which part of the financial charges (expenses) annually borne by SGPSs would correspond to the acquisition of equity interests (namely, because the financing contracted, as a rule, had more than one application).
In this sense, and as a result of the uncertainties demonstrated by taxpayers regarding the practical applicability of the aforementioned regime (due to its specificities), the AT issued Circular no. 7/2004, of March 30, for the purpose of assisting in determining the adjustment to be made.
It should be noted, in this respect, that the present Claimant proceeded to increase the entirety of the financial charges (expenses) borne.
Administrative directives, in particular circulars, bind only the AT, insofar as they are generic service orders, created to rationalize and simplify the functioning of tax services.
Article 32 of the EBF, the only rule where the aforementioned regime was embodied, did not provide, either formally or materially, any mechanism or formula that would allow the financial charges (expenses) incurred with financing contracted for the purpose of acquiring equity interests to be allocated to the latter (thus not making it possible to determine which financial charges were fiscally accepted and which charges would not concur for the formation of taxable profit of SGPSs), having regard to the multiple uses of the money received as a result of the loans contracted.
The approach set forth in the AT circular was based on a method of proportional, indirect, and presumptive calculation, which, in the opinion of the Claimant, severely distorted the tax framework applicable to the taxpayer, substantially exceeding the scope of Article 32 of the EBF.
The law does not establish criteria for allocating financial resources to the acquisition of equity participations and the tax administration cannot, through administrative means, create rules of tax incidence (through the so-called "circulatory law"), under penalty of there being material unconstitutionality, since such rules must emanate from Law (of the Assembly of the Republic) or Decree-Law (of the Government) duly authorized.
Notwithstanding the regime enshrined in Article 32, number 2 of the EBF does not establish any criterion that would allow distinguishing between financial charges allocated (or not) to the acquisition of equity interests, the present Claimant understands that the AT could only, within the scope of its competences, move in the direction of developing a method that respected direct and actual allocation, because only that would be compatible with the principle of legality constitutionally enshrined.
For the Claimant, in accordance with the understanding set forth in Circular no. 7/2004, of March 30, the aforementioned charges should be increased in the fiscal year in which they were materialized, notwithstanding the applicability of the tax regime of those companies, enshrined in Article 32, number 2 of the EBF being only validated a posteriori (i.e., at the moment when the sale of the respective equity participations was realized).
The present Claimant cannot, under any circumstances, accept that the increase of the financial charges previously mentioned (provided that they are properly determined and supported) occurs before the onerous transfer of the equity interests to which they relate (since, in accordance with that administrative instruction, it was at that moment that the application, or not, of the regime applicable to SGPSs should be assessed).
In these terms, it is clear, for the Claimant, that the legislator intended to limit this differentiated tax treatment to a single fiscal year, simultaneously disregarding, from the determination of taxable profit of SGPSs, the capital gain (or loss) possibly realized with the onerous transfer of equity interests and, likewise, the financial charges (expenses) borne with the financing contracted for the purpose of acquiring them.
If there were any correction to the taxable profit of an SGPS, this could only occur at the moment when the possible onerous transfer of the equity interests to which those charges would relate took place, since only in that way would it be materially possible to ensure that the objective sought with the introduction of the aforementioned benefit (enhancement of the competitiveness of holding companies) was not compromised.
There being no provision in the Law, in the terms previously referred to, that would allow the operationalization of the tax regime applicable to SGPSs, and, likewise, the indirect allocation method contained in Circular no. 7/2004, of March 30, being defective with illegality, the only way to ensure the applicability of the regime in question was based on the attempt to realize that allocation in a direct manner (i.e., demonstrating, explicitly, the correspondence between financing contracted and equity interests acquired).
In the scope of its activities as holding of Group B…, the present Claimant contracted, over the years, large-scale financing.
This is because, in addition to being the preferred platform for leveraging the growth of the Group, and, in that context, having acquired various strategic equity participations, the present Claimant also had other responsibilities within its competences, namely the financing of its subsidiaries.
In this sense, and unable to make such correspondence in any other way (i.e., through a direct allocation method), the present Claimant considers that, out of respect for the principle of tax legality, the financial charges (expenses) by it increased in the past that should be partially accepted as expense, should, alternatively, be fiscally accepted, in their entirety, within the determination of taxable profit (out of respect for fiscal year 2012).
In this sense, by deducting the entirety of the financial charges (expenses), in the amount of €2,139,162.12 (two million, one hundred and thirty-nine thousand, one hundred and sixty-two euros and twelve cents), the Claimant would determine, out of respect for fiscal year 2012, an individual tax loss of €2,527,766.78 (two million, five hundred and twenty-seven thousand, seven hundred and sixty-six euros and seventy-eight cents).
Likewise, the algebraic sum of the fiscal results of Group B…, out of respect for fiscal year 2012, would be corrected to an aggregate tax loss of €11,742,853.62 (eleven million, seven hundred and forty-two thousand, eight hundred and fifty-three euros and sixty-two cents), in the terms illustrated in the table below.

I.B In its Response the AT invoked the following:

The claim constituting the main claim of the arbitration petition is opposed and contrary to the claim made in the administrative complaint (and subsidiarily in the present arbitration proceedings);
The request for "application of the calculation method of Circular no. 7/2004, of March 30" (and its consequences in the specific case) is the opposite of the request "for the declaration of illegality of that Circular".
The claim that constitutes the main claim in the present proceedings was not made, by way of administrative complaint, before the Respondent so that it could rule on it and, in accordance, correct the hypothetical error in the self-assessment.
It is provided in Article 2, clause a) of Ordinance 112-A/2011 that the binding of the AT to the jurisdiction referred to has as its object the assessment of claims relating to taxes whose administration is entrusted to it, referred to in number 1 of Article 2 of the RJAT, "with the exception of claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process".
The material incompetence of the Tribunal for the assessment of the claim set forth in clause a) of the petition constitutes a dilatory exception that prevents the continuation of the proceedings, leading to absolution of the instance as to the claim in question, in accordance with Articles 576, number 2, and 577, clause a) of the Code of Civil Procedure (CPC), applicable ex vi Article 29, number 1, clause e) of the RJAT.
Furthermore, the Respondent alleges that the new claim formulated in clause a) of the petition was formulated in an untimely manner.
Article 10 of the RJAT establishes, regarding acts of assessment/self-assessment, that the deadline for presenting the arbitration petition is 90 (ninety) days, referring, regarding when counting begins, to what is provided in Article 102, numbers 1 and 2 of the CPPT.
The deadline for payment would coincide, at the latest, with May 31, 2013.
The request for constitution of the arbitration tribunal was presented on October 28, 2015.
Therefore, the claim for correction of the fiscal result set forth in clause a) of the petition (main claim in the proceedings) should be declared unfounded, as untimely, and, consequently, the Respondent should be absolved of the instance – cf. clause e), of number 1, of Article 278 of the CPC, applicable ex vi Article 29, number 1, clause e) of Decree-Law no. 10/2011, of January 20.
The Respondent further argues that the claims made by the Claimant exceed the tribunal's jurisdiction (Article 2, number 1 of the RJAT).
The material incompetence of the Tribunal for the assessment of the claims identified constitutes a dilatory exception that prevents the continuation of the proceedings, leading to absolution of the instance as to the claim in question, in accordance with Articles 576, number 2, and 577, clause a) of the CPC, applicable ex vi Article 29, number 1, clause e) of the RJAT.
Notwithstanding the exceptions raised, the Respondent also argues that the reasoning developed by the Claimant to support its claims is anchored, in essence, in the thesis of the non-applicability of number 2 of Article 32 of the EBF, in the part relating to the non-deductibility of financial charges borne with the acquisition of equity interests, when it is not possible to proceed with their specific allocation, and in the understanding that Circular no. 7/2004, of March 30, in recommending the adoption of an indirect method, does not respect the principle of legality.
In the view of the Respondent, such claim is manifestly illegal in light of the provision of number 2 of Article 32 of the EBF in force on the date of the fiscal year.
It is not sufficient for the Claimant to merely allege that it failed to proceed with direct allocation between the financing obtained and the equity interests acquired, in order to preclude the application of number 2 of Article 32 of the EBF (and, incidentally, of Circular no. 7/2004, of March 30);
This interpretation is legally inadmissible, since any illegality of the provisions of Circular no. 7/2004 could never constitute a basis for the express and assumed violation of the regime of Article 32, number 2 of the EBF, translated in not increasing to the net result of the fiscal year the financial charges attributable to equity interests.
The Respondent emphasizes that the reference to "financial charges borne with their acquisition" [of equity interests] contained in the wording of number 2 of Article 32 of the EBF does not provide any explicit indication that the rule intended only to reach financial charges borne with the obtaining of financing directly applied to the acquisition of equity interests, wherefore, applying the Latin maxim ubi lex non distinguir, nec nos distinguere debemus ("where the law does not distinguish, nor should the interpreter do so"), there exists no valid and solid basis supporting the thesis that only financial charges for which it is possible to establish a direct and specific allocation with the acquisition of equity interests are at issue.
Thus, in order to refute the validity of applying an indirect method, it is not sufficient grounds to allege, in abstract terms, that it leads to a presumptive and proportional apportionment of financial expenses, contrary to the principle of legality; rather, it would be necessary to demonstrate the inadequacy of the indicators and the formula used to reflect the reality of the facts at hand regarding the allocation of financial resources (from external and own sources) by classes of assets, and above all, that the formula applied does not ensure the safeguarding of the neutrality of profits and costs associated with capital gains excluded from taxation, that is, the ratio legis of number 2 of Article 32 of the EBF.
The provision of Article 74, number 1 of the General Tax Law (LGT) must always be heeded, concerning the allocation of burden of proof between the Tax Administration and the taxpayer, whereby "the burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them".
This means that the Claimant would always have to demonstrate the validity of the concrete values invoked and requested and the impossibility of direct allocation of the charges borne to the equity interests acquired.
For the Respondent, it is manifest that Circular no. 7/2004, of March 30 did not alter or distort the legal provision of number 2 of Article 32 of the EBF.
Limiting itself to promoting the uniformization of the interpretation and application of the tax rule in question – Article 68-A of the LGT.
The temporal dissociation between the non-deduction (immediate) of financial charges and exemption (future) from taxation of realized capital gains does not imply the violation of the principle of contributory capacity (Article 103, number 2 of the Constitution), as an expression of the principle of equality in the tax field, nor does it result from this discriminatory treatment of SGPSs, in comparison with other IRC taxpayers holding equity interests, nor is either the principle of taxation of real profit or the principle of proportionality infringed.
In the case sub judice the initiative for correction was of the taxpayer, for whom it would be incumbent to demonstrate which allocation method it adopted in determining the financial charges subject to correction and the errors in which it may have incurred.
The Claimant did not demonstrate the correctness of the values requested, as was incumbent upon it by determination of Article 74 of the LGT.
The interpretation of Article 32, number 2 of the EBF, as propounded by the Claimant, is not only manifestly illegal, but unconstitutional by privileging SGPSs that operate as mixed holdings.
This interpretation assures mixed holdings thus a "double" benefit translated into the exclusion from taxation of capital gains relating to equity interests and the integral deduction of financial charges borne with their acquisition, which would constitute negative discrimination of pure holdings, violating the principle of tax equality and the principle of contributory capacity, inherent in Articles 13 and 103 and 104, number 2 of the Constitution of the Portuguese Republic.
Any illegality of the provisions of Circular no. 7/2004 could never constitute a basis for the express and assumed violation of the regime of Article 32, number 2 of the EBF, translated in not increasing to the net result of the fiscal year the financial charges attributable to equity interests, under penalty of violation of the principle of contributory capacity, inherent in Article 104, number 2 of the Constitution of the Portuguese Republic.

I.C The Claimant responded to the exceptions as follows:

The claim formulated in clause a) of the petition by the Claimant does not constitute any exception.
The claim results from previously rendered judicial and arbitral decisions.
Although the claim was not previously made, the Respondent had the legal obligation (Article 58 of the LGT) to carry out all necessary diligences with a view to discovering the material truth, not being subordinated to the initiative of the plaintiff, particularly because the Claimant had submitted an administrative complaint.
The claim was implicit in the administrative complaint and was petitioned in the arbitration petition.
The administrative complaint is characterized by the dispensation of essential formalities or by its simplicity (Article 69 of the CPPT).
The interpretation and application of procedural rules should favor access to the court or avoid situations of denial of justice, in particular due to excess of formalism, and therefore the exception should be judged unfounded.
The success of the exception constitutes a violation of the constitutional principle of effective judicial protection (Article 268, number 4 of the CRP).
The procedural means of challenge (arbitration petition) is timely, given that the immediate object of the present proceedings is the (fiction of) the decision of rejection (tacit) of the administrative complaint submitted on error in the self-assessment presented (second-degree act), with the IRC self-assessment act of 2012 constituting its mediate object (first-degree acts).
What is at issue in the present arbitration proceedings is the assessment of the (il)legality of the tax act of IRC self-assessment of 2012, which, consequently, will give rise to the correction of the Claimant's fiscal result.
By force of the principles of pro actione and in dubio pro favoritate instanciae, as well as of the principle of effective judicial protection (Article 268, number 4 of the CRP), the arbitral tribunal will have to be considered competent.

II. DISMISSAL

1.1. The exception of material incompetence of the Arbitral Tribunal is invoked, which must be assessed preliminarily.

The Respondent alleges that the claim formulated in the arbitration petition is opposed and contrary to the claim made in the previously submitted administrative complaint. According to the Respondent, in the administrative complaint the Claimant requested the application of Circular no. 7/2004 of March 30, and now in the arbitration petition it requests the declaration of illegality of the said circular. The Respondent argues that, since we are dealing with a self-assessment, prior administrative complaint is mandatory. Since the claims are distinct, the AT did not have the opportunity to rule previously on the new claim.

The Respondent concludes that, since the claim was not subject to prior complaint, the Arbitral Tribunal is prevented from assessing it (Article 2, number 1, clause a) of the RJAT and Article 2, clause a) of Ordinance no. 112-A/2011).

Quid Juris?

The jurisdiction of the arbitral tribunals functioning at CAAD is defined, in the first place, by Article 2, number 1 of the RJAT, which establishes the following:

"1 - The jurisdiction of the arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of assessable matter and of acts of fixing patrimonial values;"

In the second place, the jurisdiction of the arbitral tribunals functioning at CAAD is limited by the binding of the Tax and Customs Authority which, pursuant to Article 4, number 1 of the RJAT, came to be defined by Ordinance no. 112-A/2011, of March 12, which establishes in Article 2 the following, insofar as relevant here: "The services and bodies referred to in the previous article bind themselves to the jurisdiction of the arbitral tribunals functioning at CAAD that have as their object the assessment of claims relating to taxes whose administration is entrusted to them referred to in number 1 of Article 2 of Decree-Law no. 10/2011, of January 20, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process;

(…)"

In the case at hand, the act being challenged is the IRC self-assessment relating to fiscal year 2012. It is manifest and accepted by all that the taxpayer submitted an administrative complaint against this self-assessment. It happens that, in this arbitral phase, it presents distinct grounds.

The object of the arbitration petition is the self-assessment act and not the act that decided the administrative complaint. What is truly at issue is the legality, or lack thereof, of the self-assessment. In this sense, cf. the Decisions of the STA of October 28, 2009, case no. 595/09 and of May 18, 2011, case no. 156/11).

Thus, regarding the object of the case, it does not appear to us that there exists any obstacle to the invocation of grounds distinct from those invoked previously in the administrative phase.

Articles 99 and 131 of the CPPT do not impose any limitation on the grounds of challenge. The legislator has not expressly imposed any limitation as to the grounds to invoke in the context of judicial challenge. Rather on the contrary, it is manifest that Article 99 of the CPPT admits that any illegality may be invoked.

Furthermore, in accordance with Article 70, number 1 of the CPPT, the administrative complaint may be made with the same grounds foreseen for judicial challenge (Article 99 of the CPPT). The cited rule does not impose any limitation on the invocation in judicial proceedings of the grounds invoked previously in the administrative complaint. Therefore, in accordance with Article 9, number 3 of the Civil Code, we should understand that the legislator enshrined the most correct solution and knew how to express its thinking in adequate terms. Thus, there exists no legal limitation on the grounds to invoke in judicial proceedings.

Article 268, number 4 of the CRP guarantees effective judicial protection of any harmful act. The limitation of the reviewability of acts, without any express legal restriction, appears to us to be incompatible with this constitutional provision. Imposing such limitation, ultimately, may lead to an interpretation that the judicial phase is merely a continuation of the administrative phase. This conclusion is incompatible with the constitutional principle of the separation of the administrative function from the judicial function (Articles 111, 202, and 266, all of the C.R.P.).

It is also important to emphasize that fundamental rules of the administrative complaint are simplicity, the dispensation of essential formalities, and the lack of necessity for representation by an attorney (Article 69, clauses a) and b) of the CPPT). Bearing these characteristics in mind, admitting the preclusive effect as to the invocation in judicial proceedings of grounds not invoked in the administrative complaint would constitute an inadmissible limitation of access to law (Article 20, number 1 of the CRP) and to the courts and would be contrary to the rules of the administrative complaint.

In the words of PEDRO GONÇALVES "(…) prior administrative challenge to contentious recourse does not imply any limitation to the invocation of grounds (cause for action) in such recourse, wherefore the appellant can allege defects not alleged in the administrative proceedings and can refrain from alleging defects that it invoked as a cause for action in that forum" (cf. Relations between administrative challenges necessary and contentious recourse for annulment of administrative acts, Almedina, 1996, page 84).

Moreover, it is indubitable that the taxpayer previously submitted an administrative complaint. The principles of justice, equality, and legality (Article 266, number 2 of the CRP and Article 55 of the LGT) impose that the Respondent correct the self-assessment that may possibly result in the collection of a sum that, in light of the law, is not due (In this sense, cf. DIOGO LEITE CAMPOS/BENJAMIM R SILVA RODRIGUES/JORGE LOPES DE SOUSA, General Tax Law, Annotated, 4th Ed., 2012, page 711). In the same sense, cf. the Decisions of the STA rendered on May 11, 2005, case 319/05, on September 12, 2015, case no. 476/12, on May 4, 2016, case no. 407/15, and the Decision of the TCAS rendered on May 21, 2015, case no. 7787/14). The AT has the duty to revoke illegal acts, with limitations of a temporal nature corresponding to the revision period of Article 78 of the LGT (In this sense, cf. the Decision of the STA of July 12, 2006, case no. 402/06).

Thus, contrary to what is alleged by the Respondent, it had the opportunity to correct a possible illegality. However, the Respondent did nothing, and the act remained in place.

Therefore, by requirement of the principles cited, if the tax act suffers from any defect that has been invoked in judicial proceedings, the same should be assessed. It is established jurisprudence of the STA (case no. 156/11 of May 18, 2011, and case no. 793/15 of June 3, 2015, the latter being from the Plenary of the Tax Court Section) that in judicial challenge subsequent to the decision of the AT that decides an administrative complaint or a request for revision of the tax act, the judicial bodies must know of all illegalities, even if they were not raised in the administrative phase.

In light of the foregoing, the exception invoked is unfounded, and the arbitral tribunal is judged to be materially competent (Article 2, number 1, clause a) of the RJAT and Article 2, clause a) of Ordinance no. 112-A/2011 of March 22).

1.2. An exception of untimeliness of the claim formulated in clause a) of the arbitration petition is also invoked.

The Respondent alleges that the claim formulated in clause a) of the arbitration petition was not formulated at the time of presentation of the administrative complaint. Thus, the Respondent understands that it is a new claim, and therefore should be presented within a period of 90 days following the voluntary payment deadline of the assessment (May 31, 2013). Having the arbitration petition been presented on October 28, 2015, the Respondent concludes that it was filed outside the deadline.

Quid Juris?

Pursuant to Article 10, number 1, clause a) of the RJAT:

1 - The request for constitution of an arbitral tribunal is presented:

a) Within 90 days, counted from the facts provided for in numbers 1 and 2 of Article 102 of the Code of Tax Procedure and Process, regarding acts susceptible of autonomous challenge and, likewise, from the notification of the decision or the end of the legal period for decision of the hierarchical appeal;

In the case sub judice the taxpayer submitted the IRC declaration relating to fiscal year 2012 on May 27, 2013. On March 30, 2015 it submitted an administrative complaint (Article 131, number 1, of the CPPT). The administrative complaint was tacitly rejected on July 30, 2015 (Article 57, numbers 1 and 5 of the LGT). The taxpayer presented the arbitration petition on October 28, 2015.

The allegation of untimeliness is the logical result of the allegation of material incompetence that was previously assessed and rejected.

The response to the exception of untimeliness has implicit in it the same arguments presented in the assessment of the exception of material incompetence.

Both in the administrative complaint and in the arbitration petition the Claimant requested the "correction" of the self-assessment. The request for correction is made in both, not being a new claim. The act being assessed is the same. What is being assessed now, just as previously in the context of the administrative complaint, is the self-assessment.

However, the defects indicated are different. In compliance with the principle of dispositivity, it falls to the Claimant to indicate the cause for action, that is, to indicate the defects from which the act suffers (Article 5, number 1 of the CPC ex vi Article 2, clause e) of the CPPT and Article 108, number 1 of the CPPT) (In this sense cf. Decision of the STA of March 13, 1996, case no. 010519). The Claimant should allege all the factual circumstances necessary for the affirmation of the existence of the right invoked, and it is also incumbent upon it to indicate the motives and reasons which it uses to sustain the cause for action.

The Claimant now alleges, against the same act, defects distinct from those invoked in the administrative complaint. However, as was mentioned above, there is no legal limitation, in particular in Articles 99 and 131 of the CPPT, as to the grounds that can be invoked in the administrative phase and subsequently in the judicial phase.

We conclude that the request for correction of the self-assessment now presented in the arbitral context was previously presented, at the time of the administrative complaint, with different grounds.

Even though it is a matter exclusively of law, which does not require the use of prior administrative complaint (Article 131, number 3 of the CPPT), the taxpayer can, if it wishes, lodge an administrative complaint within the period provided for in Article 131, number 1 of the CPPT. It was precisely what the taxpayer did in the case at hand. Within the two-year period provided for in Article 131, number 1 of the CPPT, the taxpayer filed an administrative complaint. Faced with the tacit rejection pursuant to Article 102, number 1, clause d) of the CPPT and Article 10, number 1, clause a) of the RJAT, within the ninety-day period, the taxpayer presented its arbitration petition. Thus, the arbitration petition was presented in a timely manner.

In this sense, it was stated in the Decision of the STA, of May 22, 2013, case no. 0187/13: "Even in cases where the law does not oblige the filing of the administrative complaint provided for in Article 131 of the CPPT to enable access to contentious proceedings – and which are the cases in which it was made in accordance with generic directives issued by the tax administration or the challenge is restricted to a matter of law – the interested party is not prevented from filing it, that is, is not subject, should it wish to lodge a complaint of the act, to filing the complaint within the general period provided for in Article 70 of the CPPT (120 days), being able to file it in accordance with the terms and period provided for in number 1 of Article 131 of the CPPT (2 years)." In the same sense, cf. Decision of the TCAS of October 11, 2011, case no. 04513/11, and JORGE LOPES DE SOUSA, Code of Tax Procedure and Process, Annotated, Áreas Publisher, Volume II, page 408.

Therefore, the arbitration petition was filed in a timely manner (Article 102, number 1, clause d) of the CPPT and Article 10, number 1, clause a) of the RJAT), the exception of untimeliness being judged unfounded.

1.3. Finally, the exception of material incompetence of the arbitral tribunal to order the Respondent to take acts of correction of fiscal results is invoked.

The Respondent alleges that the arbitral tribunal, pursuant to Article 2, number 1 of the RJAT, does not have competence to assess the claims formulated in the arbitration petition. The Respondent concludes that this dilatory exception should lead to absolution of the instance.

Quid Juris?

The right to effective judicial protection is a fundamental right, which should lead us to reject merely ritualistic and formal interpretations (Article 20, number 1 of the CRP). The reform of administrative justice expressly condemned excess of formalism (Article 7 of the CPTA). Procedural rules should be interpreted in the sense of promoting the issuance of rulings on the merit of the claims made.

The same philosophy is followed by the CPC "(...) which aims, whenever possible, at the prevalence of substance over form, as well as at the healing of procedural irregularities and obstacles to the normal continuation of the instance, with a view to the maximum use of procedural acts" In Decision of the TRC of February 24, 2015, case no. 1530/12.7 TBPBL.C1

It is first necessary to analyze the form filled out by the Claimant upon filing its request for constitution of the arbitral tribunal. This is an electronic form available on the CAAD website. The computerization of this request allows us to identify without doubt the elements required in Article 10, number 2 of the RJAT. One of the elements is the identification of the act that is the object of the petition and another element is the identification of the arbitration petition. In these, the field identifying the act that is the object of the petition and the field identifying the Claimant's arbitration petition were filled in respectively with the identification of the IRC self-assessment and the declaration of illegality of the self-assessment act.

In the request for constitution of the arbitral tribunal, there is no doubt that the Claimant indicates as its claim the declaration of illegality of the IRC self-assessment. Nevertheless, the request for constitution of the tribunal should not be confused with the arbitration petition, which should be submitted as an attachment in an independent document to the request for constitution of the arbitral tribunal (Article 10, number 2, clause c) of the RJAT).

In the arbitration petition, correction of the Claimant's individual fiscal result is effectively requested. The correction of the Claimant's individual fiscal result presupposes that the inherent self-assessment be corrected. It is true that in current practice, in the petition, it is customary to identify the self-assessment that is intended to be annulled and to refer consequently to the acts that should be annulled or altered by virtue of the annulment of the self-assessment, as well as the other consequences.

Taking into account the pleadings presented, it would appear to us to be excessive formalism to conclude that the Claimant in the case at hand does not request the annulment of the self-assessment. Throughout the entire petition and in the claim the Claimant expressly indicates the material tax relationship consubstantiated implicitly in the self-assessment. See for example Articles 25, 26, 27, 28, 29, 32, 34 to 38, and 45 of the arbitration petition.

Bearing in mind the principle of effective judicial protection (Article 20, number 1 of the CRP) in the interpretation of procedural documents, we should take into account the figure of the implicit claim.

On this point, one can read in the Decision of the STA, case no. 01508/14 of December 16, 2015:

"II - In the interpretation of procedural documents, the criteria imposed by the principles of modern procedure must be observed, as well as by the constitutional principle of effective judicial protection, wherefore the court must extract from the wording given to the claim in the initial pleading the meaning most favorable to the interests of the petitioner, establishing, even with recourse to the figure of the implicit claim, which is the true claim for legal protection". In the same sense, cf. the decisions of the STA, case no. 01265/13 of January 7, 2016, and case no. 022186 of May 27, 1998.

The arbitration petition contains an implicit claim in the sense of annulment of the self-assessment since it questions its legality, and the claim for correction of the Claimant's individual fiscal result should be interpreted as the foreseeable consequence of the annulment of the self-assessment. In a similar sense, mutatis mutandis, cf. the Decision of the STA of September 26, 2012, case no. 0678/12.

As Judge Counselor JORGE LOPES DE SOUSA states: "(…), the essential purpose of the process of judicial challenge being the legal elimination of an act in tax matters, provided that the challenger identifies it and indicates the defects it understands it to suffer, it may be understood that there is an implicit claim for annulment or declaration of nullity or non-existence of that act (cf. cited work, p. 208).

Moreover, the Respondent itself acknowledges in Articles 40 and 82 of its response that what is at issue is the assessment of the claim tending toward the declaration of illegality of acts of self-assessment concretized in the correction of the fiscal result.

In these terms, this arbitral tribunal understands that the Claimant's claim consists of the partial annulment of the self-assessment, in the part relating to its individual fiscal result. Therefore, pursuant to Article 2, number 1, clause a) of the RJAT, the arbitral tribunal considers itself materially competent, judging the exception of material incompetence unfounded.

In light of the foregoing, in conclusion, the Tribunal is competent and is regularly constituted, pursuant to Articles 2, number 1, clause a), 5, and 6, all of the RJAT.
The parties have legal personality and capacity.
The parties are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of March 22.
The proceedings are proper.
There are no other preliminary questions that require assessment, nor defects that invalidate the proceedings.

It is now necessary to assess the merit of the claim.

III. THEMA DECIDENDUM

The central question to be decided in the present proceedings revolves around the meaning and scope of Article 32, number 2, of the Statute of Tax Benefits, more precisely in what concerns determining:

a) What is the moment at which financial charges should be considered;

b) What is the methodology for determining the quantum of charges to be considered.

IV. MATTERS OF FACT

IV.1. Proven Facts

Before entering into the assessment of the questions, it is necessary to present the factual matter relevant to its understanding and decision, which, upon examination of the documentary evidence, the tax administrative file and taking into account the facts alleged, is fixed as follows:

On May 27, 2013, the Claimant submitted its Form 22 IRC declaration relating to fiscal year 2012.
On May 29, 2013, the Claimant submitted, as the parent company, the Form 22 IRC declaration relating to fiscal year 2012 of the group of companies.
The claimant is the parent company of Group B… composed of the following companies:

[Table structure maintained but content not fully legible in original]

The Group is taxed pursuant to the Special Regime for Group Taxation.
The IRC declaration, relating to the consolidated tax position, presented an aggregate tax loss in the amount of €9,603,691.50, determining an amount payable of €452,638.73.
In the Claimant's individual IRC declaration relating to 2012, an increase of financial charges was made in the amount of €2,139,162.12, through entry of such amount in field 779 of table 07 of Form 22.
The Claimant presented tax losses in the amount of €388,604.66.
The financial charges borne by the claimant in fiscal year 2012 amounted to €2,139,162.12.
Part of the financial charges borne by the Claimant are related to the acquisition of equity interests.
On March 30, 2015, the claimant submitted an administrative complaint against the individual IRC self-assessment submitted on March 27, 2013.
The respondent did not issue any decision on the submitted administrative complaint.
The claimant submitted its arbitration petition to CAAD on September 28, 2015.

IV.2. Facts Given as Not Proven

There are no facts given as not proven, since all facts relevant to the assessment of the claim were given as proven.

IV.3. Motivation of Factual Matter

The facts contained in numbers 1 to 12 are taken as established by the analysis of the administrative file, by the documents submitted by the Claimant (documents 1 and 3 to 6 of the request for constitution of the Arbitral Tribunal) and by the position assumed by the parties.

V. APPLICATION OF LAW TO FACTS

Matters of Law

a) What is the moment at which financial charges should be considered;

b) What is the methodology for determining the quantum of charges to be considered.

Moment at which financial charges should be disregarded

The Claimant alleges that it is indisputable "that the understanding set forth in point 6 of the Circular is a clear example of the illegality thereof, since, in its understanding, if there were any correction to the taxable profit of an SGPS (…), this could only occur at the moment when the possible onerous transfer of the equity interests to which those charges would relate took place, since only in that way would it be materially possible to ensure that the objective sought with the introduction of the aforementioned benefit (enhancement of the competitiveness of holding companies) was not compromised".

The wording of number 2 of Article 32 of the EBF was as follows:

"2 - The capital gains and losses realized by SGPSs, SCRs and ICRs on equity interests held by them, provided that held for a period of not less than one year, and likewise the financial charges borne with their acquisition, do not concur for the formation of taxable profit of these companies."

Regarding the moment of consideration/disregard of financial charges, Circular no. 7/2004 provides in its number six that:

"6. Regarding the fiscal year in which the financial charges should be disregarded as costs, for tax purposes, one should proceed, in the fiscal year to which they relate, to the tax correction of those that were borne with the acquisition of participations that are susceptible to coming to benefit from the special regime established in number 2 of Article 31 of the EBF, regardless of whether all conditions for the application of the special regime of taxation of capital gains are already satisfied. Should it be concluded, at the moment of sale of the participations, that not all requirements for application of that regime are met, one should then, in that fiscal year, proceed to the consideration as a tax cost of the financial charges that were not considered as costs in previous fiscal years."

For purposes of making a decision on this matter, we clarify from the outset that we do not consider that there is a "circulatory" right, that is, we do not attribute legal force to AT circulars, admitting only that their binding effect is limited to AT officials. It goes without saying to refer to the learned opinions of the vast majority of tax experts on this matter and the extensive jurisprudence on the matter. What we mean by this is that only provisions of an AT circular that do not contradict tax law should be accepted – in the case at hand, number 2 of the then Article 32 of the EBF associated with the IRC Code itself in its version applicable to the case under analysis (2012).

The main arguments of each of the parties are as follows: the Claimant considers that the disregard of financial charges should remain suspended until the possible realization of a capital gain with a financial participation that would not be relevant for determining the taxable matter of IRC relating to the year of realization of the capital gain to achieve temporal matching between "non-fiscal gain/non-fiscal cost"; the Respondent considers that one should follow in this matter the provision conveyed by number 6 of Circular no. 7/2004, also relying as justification for this fact on the regime of accrual (or economic periodization).

To pronounce ourselves on this point, we will begin by considering the purpose of the special regime of capital gains on the sale of financial participations by SGPSs that was in effect at the time. It appears clear to us that the regime aimed to benefit that type of company for the majority of its income/gains. Let us not forget that SGPSs are prohibited from a series of operations (cf. Decree-Law no. 495/88, of December 30, with all subsequent amendments), with its principal income/gains being precisely those derived from the sale of equity interests, to which this more favorable tax regime was applied. Therefore, the normal would be the disregard of capital gains, on one hand, and of financial charges, on the other.

Furthermore, Article 17 of the IRC Code establishes a relationship of dependence, albeit partial, between the fiscal result and the result determined by accounting. The aforementioned provision has the following content:

"Article 17

Determination of Taxable Profit

1 — The taxable profit of collective entities and other entities mentioned in clause a) of number 1 of Article 3 is constituted by the algebraic sum of the net result of the period and of positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code.

2 — For the purposes of the provision in the previous number, the net surpluses of cooperatives are considered as the net result of the period.

3 — In order to enable the determination referred to in number 1, accounting must:

a) Be organized in accordance with accounting standardization and other legal provisions in force for the respective sector of activity, without prejudice to compliance with the provisions provided for in this Code;

b) Reflect all operations performed by the taxpayer and be organized so that the results of operations and patrimonial variations subject to the general regime of IRC can clearly be distinguished from those of the remainder."

In turn, number 1 of Article 18 of the same Code, under the heading "Economic Periodization of Taxable Profit," determines the application of the regime of economic periodization in the process of determining taxable results, stating that "Income and expenses, as well as other positive or negative components of taxable profit, are imputable to the taxation period in which they are obtained or borne, regardless of their receipt or payment, in accordance with the regime of economic periodization."

Now, as the IRC Code does not define what this principle consists of, it must import it from accounting rules, with the Conceptual Framework of the SNC establishing, in its § 22:

"Accrual regime (economic periodization) (paragraph 22):

22 — In order to meet their objectives, financial statements are prepared in accordance with the accrual method of accounting (or economic periodization). Through this method, the effects of transactions and other events are recognized when they occur (and not when cash or cash equivalents are received or paid), being recorded in accounting and reported in the financial statements of the periods to which they relate."

It should also be added that the Accounting Standard and Financial Reporting (NCRF) 10 "Costs of Obtained Borrowings," provides in its § 1 that (our emphasis):

"1 — The objective of this Accounting and Financial Reporting Standard is to prescribe the treatment of costs of obtained borrowings. This Standard requires that, in general, they be immediately considered as expenses of the period, except as to the costs of obtained borrowings that are directly attributable to the acquisition, construction or production of an asset that qualifies, in which case their capitalization is permitted."

Having reached this point, it is clear that the general regime of accounting recognition of financial charges is that they be considered expenses or losses of the period to which they relate. And, by combining Articles 17, 18, and 23 of the IRC Code – the latter in the part providing: "1 — Expenses are considered those that are provably indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely (…) c) Of a financial nature, such as interest on borrowed capital applied to exploitation, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments measured at amortized cost;(…)" – it will result that, as a rule, the tax regime of such charges follows the principle of temporal allocation by which they will be deductible at the moment they are recognized as accounting expenses or losses.

This general principle of allocation of financial charges to the fiscal years to which they relate can only be set aside if there are tax rules that, in specific situations, provide otherwise.

Thus, this is the essential question that it is important to analyze, with a view to ascertaining whether the Claimant's thesis finds support in the provisions of the SNC/IRC Code.

Let us examine.

As previously mentioned, NCRF 10 - Costs of Obtained Borrowings establishes that "in general, they be immediately considered as expenses of the period, except as to the costs of obtained borrowings that are directly attributable to the acquisition, construction or production of an asset that qualifies, in which case their capitalization is permitted."

Now, an asset that qualifies can have, at an accounting level, a regime of allocation of financial charges different from the general rule. The answer for the definition of an asset that qualifies is found in §§ 4 and 6, which are transcribed below:

4 — The terms that follow are used in this Standard with the meanings specified:

Asset that qualifies: is an asset that necessarily takes a substantial period of time to become ready for its intended use or for sale.
Costs of obtained borrowings: are the costs of interest and other costs incurred by an entity relating to requests for borrowing of funds.

6 — Examples of assets that qualify are inventories that require a substantial period of time to put in a saleable condition, industrial facilities, power generation facilities and investment properties. Other investments and inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time are not assets that qualify. Assets that are ready for their intended use or for sale when acquired are also not assets that qualify."

The IRC Code expressly adopts, in certain cases, this special regime of temporal allocation of financial charges.

Let us examine Article 26 (our emphasis), whose content is as follows:

"Article 26

Inventories

1 — For purposes of determining taxable profit, inventory revenues and expenses are those resulting from the application of methods using:

a) Costs of acquisition or production;

b) Standard costs determined in accordance with appropriate accounting techniques;

c) Selling prices less normal profit margin;

d) Selling prices of products harvested from biological assets at harvest, less estimated costs at point of sale, excluding transportation and other costs necessary to put products on the market;

e) Special valuations for inventories held as basic or normal.

2 — In the case that inventories require a period greater than one year to reach their condition of use or sale, the costs of obtained borrowings directly attributable to them are included in the cost of acquisition or production in accordance with accounting standardization specifically applicable."

As can be observed, the tax legislator is not unacquainted with regimes of specific allocation of financial charges. The SNC consecrates them and the IRC Code, in certain situations, adopts them.

An application of tax rules for special accounting rules relating to the allocation of the so-called "interest expenses" can also be verified in Article 39 of the IRC Code. There, it is permitted that the designated "interest expenses" resulting from the recognition of a provision at its present or discounted value be, in periods subsequent to that discount, considered tax expenses.

See Article 39 of the IRC Code (tribunal's emphasis), with the following content:

Article 39

Fiscally Deductible Provisions

1 — The following provisions may be deducted for tax purposes:

a) Those intended to meet obligations and charges arising from court proceedings in progress regarding facts that would determine the inclusion of those among the expenses of the taxation period;

b) Those intended to meet charges with guarantees to customers provided for in sale and service provision contracts;

c) Technical provisions constituted as mandatory, by force of rules emanating from the Insurance Institute of Portugal, of a generic and abstract nature, by insurance companies subject to its supervision and by branches in Portugal of insurance companies with headquarters in another Member State of the European Union;

d) Those constituted with the objective of meeting charges with repair of damage of an environmental character at sites used for exploitation, whenever such is mandatory in accordance with applicable legislation and after cessation thereof. (Redaction of Law no. 82-D/2014, of December 31)

(…)

3 — When the provision is recognized at present value, the expenses resulting from that discount are likewise subject to this regime."

In summary, it is verified that the IRC Code is not unacquainted with special regimes for allocation of financial expenses. But being these, by definition, outside the general regime, those special or particular regimes must be expressly foreseen. In our view, the Claimant would only be right if in the tax rules (maxime in Article 32 of the EBF or in another rule related to it) a regime of tax allocation of financial charges different from that in effect as a general rule were determined.

In this sense also points Article 11 of the LGT and Article 9 of the Civil Code. Article 11 of the LGT provides, in its number 1, that "In the determination of the meaning of tax rules and in the qualification of the facts to which they apply, the general rules and principles of interpretation and application of laws are observed." For its part, Article 9 of the Civil Code provides that: "However, the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, however imperfectly expressed, cannot be considered by the interpreter," and that "In fixing the meaning and scope of the law, the interpreter will presume that the legislator enshrined the most correct solutions and knew how to express its thinking in adequate terms" (cf. numbers 2 and 3 respectively).

In particular, Article 9 of the Civil Code, in numbers 2 and 3, rejects the Claimant's interpretation, since the thesis by it upheld has no legal support in the law. Moreover, given that there are in the IRC Code particular rules for allocation of financial charges, this constitutes an additional reason to deny the Claimant's position on this point.

Finally, it is emphasized that the principle of balancing between fiscal costs and revenues, which would ultimately be the result of the Claimant's thesis, was clearly rejected by doctrine and by jurisprudence. In this sense, it was stated in Case 0779/12, by the Supreme Administrative Court, as follows:

"I - In the understanding that doctrine and jurisprudence have been adopting for the purpose of ascertaining the indispensability of a cost (cf. Article 23 of the IRC Code in the version in effect in 2001), the AT cannot examine the wisdom and opportuneness of the company's management decisions, under penalty of intruding on the freedom and autonomy of company management.

II - Thus, a cost will be accepted tax-wise if, in a judgment made as of the moment in which it was incurred, it is adequate to the productive structure of the company and the obtaining of profits, even if it comes to prove to be an unfruitful or economically ruinous operation, and the AT can only disregard as tax costs those that do not fall within the scope of the taxpayer's activity and were incurred, not in the interest of the latter, but for the pursuit of third-party objectives (when it is to be concluded, in light of the rules of common experience, that it had no potentiality to generate profits).

III - Being the taxpayer a company dedicated to the construction of buildings, the AT cannot disregard the costs relating to the acquisition of two properties based on failure to demonstrate indispensability, even if such business comes to prove economically non-profitable by virtue of its sale at a price six times lower than that at which they were acquired having generated a loss."

In truth, jurisprudence has been reiterating, in this manner, that the question of indispensability, which until 2014 was in Article 23 of the IRC Code, does not imply any mandatory nexus of causality between expenses and income. It is sufficient that the expense falls within the activity or corporate purpose of the taxpayer and is incurred with a purpose of obtaining income or of maintaining the productive source, thus fulfilling the requirement of the said indispensability.

In such a context, it would be absurd to require that business expenses be related to deals that proved to be profitable. Economic risk is felt with particular intensity. Thus, previously incurred expenses, in many cases, do not have the expected contribution to the profitability of the entities that bore them. This constitutes an economic inevitability, an external risk factor, that is uncontrollable by the management of business organizations.

The STA, in the aforementioned decision, also clarifies the question of the moment to which the judgment on the adequacy of expenses should be reported.

Proceeding from what was said concerning business risk, it is clear that the moment should be that at which the decision to bear those expenses is made. The information serving as the basis for decisions that induce business expenses can only be that which is available at the moment in which those decisions are made. What happens afterwards is, in large measure, outside the control of the decision-maker, and cannot be considered as an element to ascertain the justness, reasonableness or correctness of the decision.

Now, if in the relationship between expenses and income the nexus of causality and of temporal balancing should be set aside, it would also be clearly inconsistent in the specific case at hand of which this tribunal is concerned to impose such balancing or equivalence between expenses and income. Tax law imposes it nowhere, and doctrine and jurisprudence are unanimous in its rejection.

In conclusion, given what has been set forth, the Claimant is not right in this regard.

In the same sense, the Arbitral Tribunal constituted in the context of Cases no. 269/2015-T and 679/2015-T pronounced itself.

Methodology for determining the quantum of charges to be considered

Also on this question, the applicable tax law to the case under analysis is number 2 of Article 32 of the EBF in the wording applicable on the date of occurrence of the situation in dispute (2012).

As is evident from the reasoning of each of the parties, Circular no. 7/2004 was also referred to, only this time its number seven, which we transcribe:

"7. Regarding the method to be used for purposes of allocation of the financial charges borne to the acquisition of equity participations, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, such allocation should be made based on a formula that takes into account the following: the remunerated liabilities of SGPSs and SCRs should be allocated, in the first place, to remunerated loans granted by these to participating companies and to other investments generating interest, with the remainder being allocated to other assets, namely equity participations, proportionally to their respective acquisition cost."

The Claimant does not accept this methodology for the reasons also already stated, in summary form, previously.

Let us construct some examples to try to apply what the tax legislator intended when elaborating number 2 of Article 32 of the EBF and which consists, essentially, in disregarding the financial charges related to financing obtained for the acquisition of equity interests by SGPSs that will benefit from the favorable tax regime that consists of non-taxation of capital gains upon their sale. It seems to us legitimate to infer from this that, if there are no charges related to the acquisition of those equity interests, there will be nothing to disregard, by non-existence. This is what elementary common sense would dictate – in this case, at the fiscal level.

Let us suppose that the SGPS is constituted at the end of year N, with shareholder contributions of €500 thousand that were used to acquire €500 thousand of financial participations in companies. In N+1, it did not acquire any other equity interests but contracted, on January 1 of N+1, a bank loan at an annual interest rate of 5% for the full financing of a real estate property for its headquarters, which it came to acquire at the beginning of the year for €500 thousand. The financial charges borne with that loan in N+1 will be €25 thousand. Question: what should be, in this year, the amount of financial charges to disregard because they relate to the acquisition of equity interests in other companies? We have no doubt that the legislator of Article 32 of the EBF would not hesitate to answer that no value should be disregarded for that reason since the acquisition of those equity interests had been fully realized with own capital in the previous year. And, if instead of the shareholders having entered with the €500 thousand in cash, they had realized the capital contribution in kind, precisely through those financial participations? It seems to us that the answer would be the same: as there was no remunerated liability associated with the acquisition of those equity interests, neither can any financial charges be allocated to them.

And what would have been the position of the AT if it had followed the provision of number 7 of Circular no. 7/2004, given that at the end of N+1, the only assets of the S.G.P.S. were the financial participations acquired in the previous year for €500 thousand and the real estate property that cost €500 thousand at the beginning of N+1? To simplify this example, but without detracting from its coherence, let us assume that other assets at the end of N+1 would equal the value of depreciations of N+1 (and, consequently, of accumulated depreciations of that year). Now, as there would be no remunerated loans to participating companies and/or other investments generating interest, 50% of the interest borne (€12.5 thousand) would be disregarded in that year as fiscal costs.

Moreover, the mechanism provided for in point 7 of the Circular can result in the allocation to equity interests of financing in an amount greater than the acquisition value of the equity interests themselves. This result is evident in the example presented in point 8 of the Circular in which the amount of remunerated liabilities allocable to equity interests amounts to €26,666.70, notwithstanding the acquisition cost of the equity interests being only €20,000.00.

The question that arises is whether it is possible in light of constitutional principles that an administrative instruction originating from the Ministry of Finance so evidently surpasses a legal provision (number 2 of Article 32 of the EBF), whether in its letter or in its spirit. The answer seems obvious to us: it is not possible. Everything in which Circular no. 7/2004 contradicts the scope of the said article of the EBF cannot be accepted as a "fatality," either by taxpayers or by the AT itself.

One might argue that the examples given in the previous point are very simple and that the reality of SGPSs is much more complex, which leads to the "…extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow…" and that the AT had to adopt an indirect method which, in a first phase of the calculation process, compensates remunerated liabilities with remunerated loans granted to participating companies and/or other assets generating interest. We agree with the first point (that the reality of SGPSs is quite complex); but as to the methodology recommended by the AT, we by no means consider that its "blind" adoption is to be admitted since it is evident that it fails drastically in some cases. In fact, what makes its eventual more general application unfeasible is the expression "…such allocation should be made based on a formula that takes into account the following…". If the circular referred to "…may…" and added something like "…or to any other criterion duly substantiated…" and "…provided that it be totally unfeasible to make a direct allocation of those financial charges to the S.G.P.S. participations…" we would have no problem in accepting such provisions since they would not infringe Article 32 of the EBF.

Based on another example, with a greater degree of complexity, we can even suggest ways of resolving this problem that we consider more adequate.

Let us suppose that a company that until the end of N-1 was not an S.G.P.S. and whose assets were, at the end of that year, €100 million, with remunerated liabilities of €20 million, with the remainder of asset financing distributed between own capital and non-remunerated liabilities. At the beginning of N, it became an SGPS, and at the end of this year the assets were €150 million, of which €30 million corresponded to the acquisition value of financial participations. At the end of the year, the remunerated liability was €40 million, with an annual interest rate of 5% (with that liability having been contracted on January 1 of N). Adopting an incremental logic, we would not be shocked to use as the criterion for allocation of the financial charges to disregard the increase in remunerated debt in proportion allocable to financial participations (30/50 x 20) multiplied by the annual interest rate. Doing the math, it would give €0.6 million to disregard and €1.4 million would be accepted as fiscal expenses. If the method of Circular no. 7/2004 were applied, the financial charges disregarded would be 30/150 x 2 = €0.4 million.

And if at the end of year N+1 the assets increased to €210 million, of which €30 million corresponded to the acquisition value of the same financial participations, with no new acquisitions of that type having occurred, and the remunerated liability increased to €80 million, with an annual interest rate again of 5% (and with that new liability having been contracted on January 1 of N+1), the interest corresponding to the increase in remunerated debt should be totally accepted since, clearly, they were not allocable to new equity interests. Thus, there would have to be disregarded the same €0.6 million from the previous year and would be fiscally deductible €3.4 (5% x €40 million, which would correspond to the annual increase in indebtedness in N+1). But if we were to follow the criterion recommended by Circular no. 7/2004, the financial charges disregarded would be 30/210 x 4 = €0.57 million.

We therefore argue that in the event that it is not possible to proceed with direct allocation, a method based on incremental remunerated assets and liabilities would be more adequate than that contained in Circular no. 7/2004. Be it understood, however, that these examples are intended as a source of reflection to assess the general adequacy of the criterion proposed by the AT in the said Circular. And the conclusion is that they are not adequate, particularly for situations in which it is evident that the acquisition of the equity interests was done through own capital.

This understanding is corroborated by jurisprudence of the TCAN (Case 00946/09.0BEPRT, January 15, 2015), whose content is transcribed below as the situation is transposable to the case under consideration:

"As Article 74, number 1 of the LGT determines, the burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them. This is the wording in effect of number 1, which was also the initial wording. The provision was amended by Law no. 55-B/2004 of December 30 to the following wording: The burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them, except in situations of non-subjection, in which it always falls on the taxpayers. However, Law no. 50/2005, of August 30 restored the initial wording, which has been maintained to the present.

Knowing that the burden of proof of the facts constitutive of the rights of the tax administration or of the taxpayers falls on whoever invokes them, what does this mean? What does this rule translate to in practical terms? Very simply, as has been pacifically understood, it means that in the 'absence of special rules, that is, except for legally enshrined presumptions, it is thus to the tax administration that it falls to demonstrate the factual presuppositions of its action, in particular the existence of the tax facts in which the assessment of the tax that was not declared by the taxpayer is based' (António Lima Guerreiro, 'Annotated LGT,' Rei dos Livros, 2001, pp. 329).

Or, put differently, it falls to the Tax Administration to demonstrate the legal (binding) presuppositions of its action, in particular if aggressive (positive and unfavorable), with the burden, in turn, falling on the administrated parties to present sufficient proof of the illegality of the act, when those presuppositions are shown to be verified. (Decision of TCAN no. 00624/05.0BEPRT of January 12, 2012, Rapporteur: Catarina Almeida and Sousa)

This rule, although forming part of the set of rules concerning procedure, also applies to judicial proceedings, being its content moreover not distinct from the general criterion of allocation of burden of proof provided for in Article 342 of the Civil Code.

So that, intending the ATA to disregard the costs accounted for by the appealing company based on violation of Article 31, number 2 of the EBF, it should have demonstrated the presuppositions of its right to taxation, that is, should have proven that those costs were not legally deductible either because less-than-one-year capital losses were realized with the onerous transfer of equity interests held for less than one year, or because financial charges were supported and accounted for with their acquisition.

But instead of that proof, the ATA proceeded to disregard the costs accounted for by the appealing company (parent company) in the amount of €3,237,838.62, taking as granted that this amount related to financial charges borne with the acquisition of equity interests and that were improperly considered as a fiscal cost. With the same basis, €56,081.74 relating to subsidiary S... SGPS, SA were disregarded, which entailed corrections to the taxable profit of the group in the amount of €3,293,920.36, whereby the fiscal results contained in the group model 22 declaration went from €14,017,394.34 declared to €17,311,314.70 corrected.

The ATA took as granted that a certain amount of the accounted-for financial charges were borne with the purchase of equity interests, but proved nothing to that effect. It did not identify the financing used for that purpose, nor the equity interests that would have been acquired with them, completely failing in the fulfillment of its burden of proof.

We can say that the ATA failed in the presuppositions of taxation and in the quantifying method used.

It failed in the presuppositions of taxation because it did not manage to demonstrate the legal factual requirements of its action, as mentioned above. And it failed in the quantifying method because it divorced itself from the necessity of ascertaining whether there was sale of equity interests and what the amount of financing used in their acquisition was.

But only in the presence of these two requirements – sale of participations and respective financing used in their acquisition – could the ATA have disregarded the financing costs.

In ignorance of both, the ATA resorted to correction and taxation making use of three (at least) presumptions: one, that equity interests were sold; another, that costs with the financing were accounted for for the acquisition of those participations; and the third constituted by the calculation operations: (1) it allocated the remunerated liabilities of the SGPS to remunerated loans granted by this to participating companies and to other investments generating interest; and (2) allocated the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost; (3) after obtaining the value of remunerated liabilities allocable to the remaining non-remunerated assets, it determined proportionally the value of remunerated liabilities allocable to equity interests.

With this set of presumptions, the ATA concluded that the taxpayer bore in the fiscal year, as financial charges for the acquisition of participations, the amount of €3,237,838.62.

The fact that in its methodology it used the criteria recommended in Circular no. 7/2004, of March 30, in particular its points numbers 7 and 8, does not save the legality of the operation, since the criteria and presuppositions for allocation of remunerated liabilities of SGPSs manifestly exceed the content of Article 31, number 2 of the EBF by creating presumptions and proportional determinations that the legislator manifestly did not assume nor consent to. As emphasized by Júlio Tormenta (in Holding Companies as an Instrument of Tax Planning and Its Limits, Coimbra Publisher, pp. 145) 'A question that is raised regarding what is established in Article 32 of the EBF in its numbers 2 and 3 is how to ascertain or what are the financial charges directly related with the acquisition of equity interests (in their majority constituted by the current interest charges from service of the debt relating to a loan or other form of credit used by the SGPS to acquire equity interests) from those that are used by the SGPS in the pursuit of its object that has nothing to do with acquisition of participations. The tax administration has been arguing that that allocation should be made in respect for the "principle of financial balance" (cf. the Memorandum of September 1, 2003 of the Director-General of IRC Services), which advises that an asset be financed with capital of maturity compatible with the economic life of that asset and capacity of generation of monetary means.

For the Tax Administration the financial charges should be allocated based on a formula that takes into account the following: the remunerated liabilities of SGPSs should be allocated, in the first place, to remunerated loans granted by these to participating companies and to other investments generating interest, being allocated direct and automatically the remainder to other assets, namely equity interests, proportionally to their respective acquisition cost.

The principle of legality is in effect in Portugal, having as a corollary, according to classical doctrine, the principle of closed typicity, with the matter of tax incidence being of relative reservation of law of the Assembly of the Republic. In the present case, the law does not establish criteria for allocation of financial resources to the acquisition of equity interests and the tax administration cannot, through administrative means, create rules of tax incidence (through the so-called "circulatory law"), under penalty of being faced with material unconstitutionality, since such rules must emanate from law (of the Assembly of the Republic) or Decree-Law (of the Government) duly authorized. The taxpayers are not obliged to follow the procedures set forth in Circular 7/2004 of March 30, 2004 (hereinafter referred to as Circular 7/2004) since only the tax officials are bound by them under their supervision and nothing more. We cannot agree with what is stated in Circular 7/2004 in its point 7 where it refers to "given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow": due to the development and sophistication of the management information systems available on the market, direct allocation method should be privileged and only in the impossibility of using the same would one proceed with the method recommended in Circular 7/2004.'

If the legislator did not institute any criterion that allows distinguishing in the total financial costs of SGPSs which those are due to the purchase of equity interests and which those were used for other purposes, the ATA could only move within the scope of a method...

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Frequently Asked Questions

Automatically Created

What are the rules for deducting financial charges in SGPS holding companies under Article 32 of the EBF for IRC purposes?

Under Article 32 of the EBF (Tax Benefits Statute), SGPS holding companies could exclude from taxable profit both capital gains/losses from equity sales and financial charges incurred from loans contracted to acquire equity interests, provided the equity interests were held for at least one year and other requirements were met. However, the legislation did not establish specific criteria or formulas for allocating financial charges between equity acquisitions and other corporate purposes, creating significant operational complexity for SGPSs with multi-purpose financing. This regime was subsequently repealed by Law 2/2014 of January 16, but remained applicable to the 2012 fiscal year at issue in this case.

How does Circular 7/2004 affect the tax treatment of financial charges in Portuguese SGPS companies?

Circular 7/2004 of March 30, 2004, was issued by the Tax Authority to assist SGPS companies in applying Article 32 EBF, establishing a proportional, indirect, and presumptive calculation method for allocating financial charges to equity acquisitions. However, this circular became highly controversial as taxpayers argued it exceeded the AT's administrative authority by creating substantive tax incidence rules that should emanate from formal legislation. Critics contended the circular violated constitutional legality principles because it established criteria not found in the enabling statute itself, essentially creating tax law through administrative means rather than through Law of the Assembly of the Republic or authorized Government Decree-Law. The claimant in this case argued only a direct, actual allocation method would be legally valid.

Can a tax arbitral tribunal rule on disputes involving IRC tax benefits and SGPS financial charge deductions?

Yes, Portuguese tax arbitral tribunals constituted under CAAD (Administrative Arbitration Center) have material jurisdiction to decide disputes involving IRC tax benefits and SGPS financial charge deductions under Article 32 EBF. This jurisdiction derives from Article 2(a)(1) and Article 10 of Decree-Law 10/2011 of January 20, which established the legal regime for tax arbitration (RJAT). Case 656/2015-T itself demonstrates this competence, as the arbitral tribunal was properly constituted with three arbitrators appointed by CAAD's Deontological Council to resolve the taxpayer's challenge to the Tax Authority's rejection of claimed financial charge deductions and the resulting IRC self-assessment for fiscal year 2012.

What is the deadline for filing an arbitral ruling request (pedido de pronúncia arbitral) to challenge an IRC self-assessment?

The deadline for filing an arbitral ruling request (pedido de pronúncia arbitral) to challenge an IRC self-assessment is governed by the RJAT (Legal Regime of Tax Arbitration) established by Decree-Law 10/2011 of January 20. While the specific time limit is not detailed in this case excerpt, Portuguese tax arbitration procedures generally require filing within the statutory period for challenging administrative tax acts, which typically runs from notification of the decision being contested. In this case, the request was filed on September 28, 2015, and accepted by the CAAD President, with notification to the Tax Authority on November 6, 2015, indicating compliance with temporal requirements. Timeliness (tempestividade) of the request was listed as one of the case themes, suggesting it may have been contested.

What was the outcome of CAAD decision 656/2015-T regarding the partial illegality of the IRC self-assessment for SGPS fiscal losses?

The full outcome of CAAD decision 656/2015-T is not provided in the available excerpt, which cuts off during the claimant's argumentation section. However, the case record shows the claimant sought a declaration of illegality of the administrative complaint rejection and partial illegality of the IRC self-assessment for fiscal year 2012. The primary request was to correct the individual fiscal result to a tax loss of €2,527,766.78 (with aggregate fiscal result of €11,742,853.62), or subsidiarily to a tax loss of €2,384,072.31 (with aggregate result of €11,599,159.15). The arbitral tribunal was composed of three arbitrators and proceedings included written submissions from both parties, with a decision deadline of August 1, 2016.

CAAD 656/2015-T: IRC Tax Benefits for SGPS – Deduction of Financial Charges Under Article 32 EBF

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

I.1

I.A. The Claimant supports its claim, in summary, in the following terms:

I.B In its Response the AT invoked the following:

I.C The Claimant responded to the exceptions as follows:

II. DISMISSAL

III. THEMA DECIDENDUM

IV. MATTERS OF FACT

IV.1. Proven Facts

IV.2. Facts Given as Not Proven

IV.3. Motivation of Factual Matter

V. APPLICATION OF LAW TO FACTS

Matters of Law

Moment at which financial charges should be disregarded

Methodology for determining the quantum of charges to be considered

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

CAAD 656/2015-T: IRC Tax Benefits for SGPS – Deduction of Financial Charges Under Article 32 EBF

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

I.1

I.A. The Claimant supports its claim, in summary, in the following terms:

I.B In its Response the AT invoked the following:

I.C The Claimant responded to the exceptions as follows:

II. DISMISSAL

III. THEMA DECIDENDUM

IV. MATTERS OF FACT

IV.1. Proven Facts

IV.2. Facts Given as Not Proven

IV.3. Motivation of Factual Matter

V. APPLICATION OF LAW TO FACTS

Matters of Law

Moment at which financial charges should be disregarded

Methodology for determining the quantum of charges to be considered

Frequently Asked Questions

Tags

FRESH Legal Group

Related Articles

Table of Contents