Tax Arbitration on IRC Financial Charges Deduction Under Circular 7/2004 and EBF Art 32

ARBITRAL DECISION

The arbitrators Counselor Jorge Manuel Lopes de Sousa (arbitrator-president), (designated by the other Arbitrators), Dr. Ricardo da Palma Borges and Professor Doctor Manuel Pires, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Court, constituted on 02-02-2016, agree as follows:

1. Report

A… – …, SGPS, S.A. legal entity no. …, with registered office at Av. …, no. …, Lisbon, hereinafter referred to as "A… SGPS" or "Claimant", dominant company of a group (the B… Group) subject to the special regime for taxation of groups of companies, filed a request for constitution of a Collective Arbitral Court, articles 2, no. 1, paragraph a), 10, nos. 1 and 2, of Decree-Law no. 10/2011, of January 20 (hereinafter "RJAT"), with a view to declaring the illegality of the self-assessment of corporate income tax (IRC) relating to the fiscal year 2011 and the administrative appeal against the same that it filed.

The Claimant seeks to have declared the illegality of the self-assessment act, to the extent that it reflects the non-deduction of financial charges in the amount of €2,851,725.87, to which corresponds an amount of self-assessed tax in the fiscal year 2011 in the value of €755,137.01.

The Claimant also seeks the reimbursement of the amount of €755,137.01, plus compensatory interest, from 01-09-2012 until full reimbursement.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Dr. Ricardo da Palma Borges, under the provisions of article 6, no. 2, paragraph b), of the RJAT.

The request for constitution of the Arbitral Court was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 13-11-2015.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of the RJAT, and within the period provided for in no. 1 of article 13 of the RJAT, the highest-ranking official of the Tax Administration Service designated as Arbitrator Professor Doctor Manuel Pires.

The Arbitrators designated by the Parties agreed to designate Counselor Jorge Lopes de Sousa as arbitrator president, who accepted the designation.

Pursuant to and for the purposes of the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 18-01-2016.

Thus, in accordance with the provisions of no. 7 of article 11 of the RJAT, after the period provided for in no. 1 of article 13 of the RJAT had elapsed without the Parties making any submissions, the Collective Arbitral Court was constituted on 02-02-2016.

The Tax Authority and Customs Authority raised the preliminary question of incompetence of this Arbitral Court to consider the claim for reimbursement of the amount paid by the Claimant.

By order of 07-03-2016, the meeting provided for in article 18 of the RJAT was dispensed with and it was determined that the proceedings continue with written submissions.

The Parties submitted their arguments.

The Arbitral Court was duly constituted.

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

The proceedings do not suffer from any nullities.

The preliminary question of partial incompetence of this Arbitral Court ratione materiae has been raised, which requires preliminary consideration.

2. Question of Material Incompetence of the Arbitral Court to Consider the Claim for Reimbursement of the Amount Paid

In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim, against which no appeal or challenge may be lodged, binds the tax administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax courts, "restore the situation that would exist if the tax act that was the subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose", which is in line with the provisions of article 100 of the General Tax Law [applicable by virtue of the provisions of paragraph a) of no. 1 of article 29 of the RJAT] which establishes that "the tax administration is obligated, in case of full or partial success of an administrative appeal, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that was the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral courts that function within CAAD, without reference to condemnatory decisions, it should be understood that included in their jurisdictions are the powers that in judicial challenge proceedings are attributed to tax courts, and this is the interpretation that is consistent with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process for the annulment of tax acts, admits the condemnation of the Tax Administration to the payment of compensatory interest, as follows from article 43, no. 1, of the General Tax Law, which establishes that "compensatory interest is owed when it is determined, in an administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due" and article 61, no. 4, of the Tax Code of Civil Procedure (in the version given by Law no. 55-A/2010, of December 31, which corresponds to no. 2 in the initial version), that "if the decision that recognized the right to compensatory interest is judicial, the payment period is counted from the beginning of the voluntary execution period".

Thus, no. 5 of article 24 of the RJAT, in stating that "payment of interest is owed, regardless of its nature, in accordance with the provisions of the General Tax Law and the Code of Tax Procedure and Process" should be understood as permitting the recognition of the right to compensatory interest in the arbitral process, when it is a consequence of the annulment of assessment or self-assessment acts.

The determination of compensatory interest derived from the illegality of an assessment act presupposes the existence of an amount to be reimbursed, so it must be concluded that it is within those jurisdictions to determine the payment of the amount to be reimbursed, which is a prerequisite of the right to compensatory interest.

However, the existence of this jurisdiction to decide reimbursement does not imply that it is determined whenever an arbitral claim is judged successful, for not always does success necessarily result in the right to reimbursement and compensatory interest ([1]), there may not be such a right in cases where it is viable to redo the act challenged without offense to the judgment, a possibility that is inherent in paragraph a) of no. 1 of article 24 of the RJAT, which is consistent with article 100 of the General Tax Law.

Therefore, whenever the grounds for the success decision do not exclude the possibility of performance of a new act, the reimbursement should not be ordered in the declaratory proceeding.

However, this eventual inability to decide the reimbursement of the amount paid does not preclude the jurisdiction of the Arbitral Court to issue a decision on this matter.

Thus, the exception of incompetence to consider the claim for reimbursement of the amount paid is without merit, as a consequence of any eventual annulment of the self-assessment.

3. Matter of Fact

3.1. Facts Established

The following facts are considered proven:

A) On 30-05-2012, the Claimant filed its individual model 22 declaration relating to the fiscal year 2011, in which it increased, for purposes of determining its taxable profit/fiscal result, the amount of €2,851,725.87 as "Non-deductible financial charges (article 32, no. 2, of the Tax Benefits Statute)" in field 779 of table 07 (document no. 6 attached with the arbitration request, whose content is hereby reproduced);

B) On 31-05-2012, the Claimant, in its capacity as the dominant company of the B… Fiscal Group, filed the model 22 decision relating to the fiscal year 2011 and proceeded to the self-assessment of corporate income tax, state surtax and municipal surtax (document no. 1 attached with the arbitration request, whose content is hereby reproduced);

C) On 28-05-2014, the Claimant filed an administrative appeal against the aforementioned self-assessment of corporate income tax (including state surtax) and resulting municipal surtax for the fiscal year 2011 (document no. 2 attached with the arbitration request, whose content is hereby reproduced), in which it stated, among other things, the following:

1. Now, the recourse to the methodology for determining non-deductible financial charges under no. 2 of article 32 of the Tax Benefits Statute provided for in the aforementioned Circular resulted from a correction carried out by the then Tax Inspection Services Department (DSIT), for the first time, in the fiscal year 2007, the year in which the Appellant adopted the legal form of SGPS.

2. Despite its disagreement with the arguments supporting the aforementioned correction, which were based essentially on the disregard of any method of direct allocation of the financial charges borne by A… SGPS in detriment of the methodology provided for in Circular no. 7/2004 of the Income Tax Services Department, and taking into consideration the shareholder structure of the Appellant at that time, it nonetheless ended up accepting the correction and adopting, in the following fiscal years, the same methodology.

3. In fact, it was in strict compliance with the principle of good faith that should guide the relations between taxpayers and the Tax Authority and Customs Authority (TA) that the Appellant ended up accepting the corrections promoted by the TA, proceeding itself to make such adjustment in the following fiscal years.

4. However, as a result of more careful consideration, the Appellant now understands that the application of that Circular proves to be totally inadequate to its situation, which is why it considers it appropriate to immediately set aside its application.

5. Furthermore, in the opinion of the Appellant, the imposition of the application of the methodology provided for in Circular no. 7/2004 of the Income Tax Services Department suffers from a defect of violation of law, insofar as, as the Appellant will seek to demonstrate, this would result in a violation of the constitutional principle of taxation on actual income.

6. Whence it is concluded that the amount determined by the Appellant in accordance with the aforementioned Circular (€2,851,725.87) should not have been increased for purposes of determining its taxable income, which is why it requests the reimbursement of the corresponding corporate income tax, in a total amount of €712,931.47, as presented below.

(...)

1. Now, having concluded that the application of the methodology provided for in Circular no. 7/2004 is not mandatory, the Appellant now seeks to demonstrate that it is even inadequate to its specific situation.

2. Now, the Appellant wishes to state that none of the financing it obtained was contractually intended for the acquisition of equity interests.

3. In fact, the Appellant did not obtain specific financing, through the use of borrowed capital, for the acquisition of equity interests, and it is equally important to note that only a portion of the equity interests held by the Appellant were actually acquired, so that, at most, only with respect to those equity interests could the eventual application of the methodology provided for in Circular no. 7/2004 be admitted.

4. In this regard, it is important to recall that the amount of financial charges that was not considered fiscally deductible in the fiscal year 2011 amounted to €2,851,725.87, divided among the various equity interests held by the Appellant as follows:

5. First, the Appellant would like to state that the value imputed to the equity interest held in C… (which represents approximately 49% of the total value of the increased financial charges) should not have been increased by the simple fact that that company resulted from a process of spin-off of the Appellant and, thus, there is not, unequivocally, associated with it any financing.

6. In fact, one cannot ignore the fact that the B… Group had its origin within the O… Group, only becoming legally autonomous from it in November 2000 (6), following one of the stages of the re-privatization process of the O… Group and the liberalization of the European energy market. (7)

7. It is important, therefore, to recall that the Appellant was constituted on August 18, 1994, under the corporate name P… - …, S.A., by virtue of Decree-Law …, following a process of spin-off of the former Q… -…, S.A. (Q), and its capital was "paid in kind and by the patrimonial values resulting from the valuation provided for in that same" statute.

8. Thus, in 2006, and within the framework of the restructuring of the energy sector, whose guiding lines were established through Council of Ministers' Resolution no. …/2005, of … September (Document no. 6 attached), that which would become the B… Group began to integrate the infrastructure for electricity and natural gas transmission, through the acquisition of natural gas assets held by the R… Group and the celebration of a concession agreement with the Portuguese State for a period of 40 years for the exercise of regulated activities in the natural gas sector, including its transportation, storage and reception - natural gas business unbundling process.

9. Within this framework, and in order to separate the electricity activity from the natural gas activity, and as determined by Council of Ministers' Resolution no. 85/2006, of June 30 (Document no. 7 attached), at the end of fiscal year 2006 the Appellant constituted S… - …, S.A. (current C…), having proceeded to the subscription of capital in kind through the transfer of the assets and liabilities associated with the electricity transmission network concession. )

10. In fact, and as provided for in no. 6 of the aforementioned Council of Ministers' Resolution no. …/2006, the capital of C… was paid in kind, by way of contribution of assets.

11. It follows, unequivocally, that there does not exist, nor could there exist, any financing associated with the "acquisition" of the Appellant's equity interest in C….

12. All the more so that, as was seen, that company resulted from the realization of a contribution in kind of assets that were held by it, which had already been contributed to its sphere through Q…, under Decree-Law no. 131/94, of May 19.

13. Whence it results unequivocally that the holding, by the Appellant, of the equity interest in C… was not effected with recourse to any financing, and thus the increase of any charges associated with this equity interest is not due under no. 2 of article 32 of the Tax Benefits Statute.

14. In the same sense, the equity interests held by the Appellant in D… and E…, whose increased charges represent approximately 40% of the total value of charges increased by the Appellant in the period of 2011, also resulted from an operation of contribution of assets allocated to the concessions related to the natural gas business, as follows from the aforementioned Council of Ministers' Resolution no. …/2006, of … June (which is attached as Document no. 7).

15. In fact, it is important to note in this regard that, following the aforementioned Council of Ministers' Resolution no. …/2006, the current Appellant acquired from T… - …, S.A. (T) the (i) regulated assets that made up the natural gas transmission network and (ii) underground natural gas storage facilities.

16. In September 2006, E… and D… were constituted by the Appellant, and the capital of those companies was paid through the contribution in kind of those assets.

17. In other words, also with respect to these equity interests it will be necessary to conclude that there was no financing associated with the "acquisition" of those social shares, since there was not, in fact, any acquisition of social shares.

18. In light of the foregoing, it is important to recall that no. 2 of article 32 of the Tax Benefits Statute also expressly refers to "financial charges borne with their acquisition". (Appellant's emphasis)

19. In this sense, and having verified that the equity interests held by the Appellant in C…, E… and D… resulted from operations of capital contribution in kind, it will be necessary to conclude that the increase of any charges allegedly borne with the acquisition of those equity interests is not due.

20. Thus, it is duly demonstrated that, with respect to the total amount of €2,522,834.86 (€1,385,946.44 + €956,462.40 + €180,425.52), the increase considered by the Appellant, as a result of the application of the methodology provided for in no. 2 of article 32 of the Tax Benefits Statute, is not due, which is why it requests, immediately, the reimbursement of excessive corporate income tax in the amount of €712,931.47, as well as excessive municipal surtax in the amount of €42,205.54.

21. With respect to the remaining portion of the financial charges increased by it (€328,891.50), the Appellant also considers that such increase is not due.

22. This is because, (i) as it had the opportunity to state, none of the financing it obtained was intended to finance the acquisition of those equity interests, and the Appellant is willing, under the principle of cooperation that should guide its relationship with the TA, to present the information that it deems necessary for the full clarification of this matter and, (ii) according to the Appellant's understanding, the increase of that amount, through the application of the methodology provided for in the Circular of the Income Tax Services Department no. 7/2007, suffers from a defect of illegality of the law, and is therefore unconstitutional.

(...)

1. Furthermore, in the opinion of the Appellant, nothing in the textual formulation of the law (and even less in its interpretation in conformity with the constitution, as will be seen better below) authorizes the use of such a formula to decide, without any consideration or attention to the particular situation of the taxpayer, the amounts of non-deductible financial charges for purposes of determining the taxable income of SGPSs.

2. Recall that these charges, under the terms of no. 2 of article 32 of the Tax Benefits Statute, are simply those "borne with the acquisition of equity shares".

3. In this sense, the Appellant considers that, as the law has not adopted any formula, its provisions can only be interpreted as enshrining the natural criterion (in the absence of express deviation established in a formula) of actual allocation of financial charges, that is, that the method that actually reflects the determination of the financial charges borne by each SGPS with the acquisition of the equity shares it holds be considered.

4. Which is why the Appellant considers that the interpretation of the Income Tax Services Department, based on a "blind" formula, is illegal, since it has no adherence to the letter of the law and, more than that, violates it, which requires attention to the "charges borne with the acquisition of equity shares", an objective that the aforementioned formula does not ensure.

(...)

1. In sum, the Appellant considers that the administratively constructed formula is a method that, if applied in a "mandatory" manner, deviates from what is the objective provided for in no. 2 of article 32 of the Tax Benefits Statute, thereby originating, inevitably, and often, grossly incorrect results, which is why it should provide for the possibility of the taxpayer producing contrary evidence and, if not, should be considered as violating the principle of legality.

D) On 22-09-2014, the Claimant was notified of a decision to dismiss the administrative appeal, without ruling on the claim made therein (document no. 3 attached with the arbitration request, whose content is hereby reproduced);

E) The Claimant filed an administrative hierarchy appeal of the decision dismissing the administrative appeal, which was successful (administrative proceeding 1);

F) On 07-07-2015, the Claimant was notified of a draft decision on its administrative appeal in which the claim therein was finally considered (document no. 4 attached with the arbitration request, whose content is hereby reproduced);

G) In the draft decision referred to in the preceding paragraph, agreement was manifested with Information no. …-…/2015, which is contained in the same document no. 4, in which is stated, among other things, the following:

§ II. OF THE CLAIM AND CAUSE OF ACTION

1. The subject matter of our information, as required, is the claim for annulment of the aforementioned tax act of "self-assessment" of corporate income tax, based on the direct assessment made by the Taxpayer itself, here the Appellant, in accordance with the declaration submitted under articles 117 et seq. of the Corporate Income Tax Code.

2. To support the claim for annulment sub juditio, the Taxpayer, now Appellant, alleges, in sum, that the aforementioned tax act, here in contention, is practiced with a material defect, of law, as better argued in its initial petition contained in the file, which, for the appropriate purposes, is hereby fully reproduced.

Wherefore,

1. In its view, it should be annulled for the amount now contested, in accordance with the provisions of article 163 of the Code of Administrative Procedure, in turn combined with the determination of article 100 of the General Tax Law.

2. Consistently, the competent Order was issued directing that this information be provided, now in fulfillment.

§ III. OF THE ANALYSIS OF THE CLAIM

1. Having reviewed the contents of the initial petition submitted by the Taxpayer, now Appellant, and considering that, in the file, the issue is whether the tax act under examination suffers or does not suffer from the defects of illegality that are pointed out to it, we are then to assess the quality of the arguments brought to our knowledge here. This pari passu with the path followed by the presenter.

That said,

§ III.1. Of the Taxable Materia

§ III.I.I. Financial Charges with the Acquisition of Equity Shares

§ III.I.I.I. Of the Arguments of the Appellant

1. The Taxpayer, here appellant, states that, from the outset, by reference to the fiscal year 2011, it made several adjustments to the net result of the period, among which the increase of the amount relating to financial charges borne with the acquisition of equity shares, non-deductible by virtue of the provisions of no. 2 of article 32 of the Tax Benefits Statute (hereinafter EBF).

2. It continues to state that the amount in question resulted from the methodology provided for in Circular no. 7/2004, of March 30 of the Income Tax Services Department (hereinafter DSIRC), which, in essence, provides for a pro-rata (proportional) allocation of remunerated liabilities to the assets reflected in the balance sheet of a Holding Company for Capital Interests (hereinafter SGPS).

However,

1. The Taxpayer, here Appellant, now believes that the aforementioned methodology proves to be totally inadequate to its reality, and that, allegedly, the method of direct allocation is most appropriate to its situation.

Moreover:

1. It invokes the non-existence of a binding character for taxpayers of generic guidelines, as provided for in paragraph b) of 14 of article 68 of the General Tax Law, in addition to the violation of article 73 of the same statute and article 104 of the Constitution of the Portuguese Republic, which establishes the principle of taxation on actual income and, jointly, the principles of equality, of contributory capacity and of neutrality in the application of the rule contained in article 32 of the EBF, through the imposition of the adoption of the formula provided for in points 7 and 8 of Circular no. 7/2004, of March 30, of the DSIRC.

2. The Taxpayer, now Appellant, also maintains that no methodology for allocation of non-deductible financial charges under no. 2 of article 32 of the EBF can be created through an administrative instruction, given that they are subject to the principle of equality in its material aspect, as follows from paragraph c) of no. 2 of article 8 of the General Tax Law.

Finally,

1. The Taxpayer, now Appellant, states that there was never any financing intended for the acquisition of social shares, except possibly for a portion of the social shares held, and that only with respect to those would it be possible to apply the mentioned administrative instruction.

§ III.I.I.II. Of the Assessment

1. Through Circular 7/2004, of March 30, of the DSIRC, the Tax Administration came to issue instructions on the tax regime applicable to holding companies for capital interests (hereinafter SGPS) and venture capital companies (hereinafter SCR), more precisely with respect to the regime provided for in no. 2 of article 31 of the EBF, later renumbered article 32 of the EBF. At issue is filling a practical order question related to the distinction between the financial charges borne with loans obtained for the acquisition of equity shares from the charges borne with loans obtained for other purposes. Thus, through this circular it is intended to present a method for determining these financial charges, so as to determine the charges to be corrected for tax purposes, in accordance with no. 2 of article 32 of the EBF, and therefore in no way violates any tax administration competence.

In fact,

1. The legislator sought to limit the activity of SGPSs to the management of stable social shares, preventing them from serving as a means of stock speculation or evasion of taxation on capital gains. Thus, Law no. 32-B/2002, of December 30 (State Budget Law for 2003), came in its article 38 to introduce a significant change to the tax regime applicable to the activity that constitutes the typical object of SGPS activity through the alteration it introduced in article 31 (current article 32) of the EBF. This tax regime is characterized by the non-taxation of income resulting from the activity of management of social shares, dividends and capital gains/losses from the disposal of social shares, as well as the non-acceptance as a tax expense of the financial charges borne with financing obtained for the acquisition of equity shares.

2. This is materialized in no. 2 of article 32 of the EBF which establishes that "The capital gains and capital losses realized by SGPSs, (...) of equity shares of which they are holders, provided that held for a period of at least one year, and, as well, the financial charges borne with their acquisition do not concur for the formation of the taxable income of these companies'".

3. This regime is embodied in the grant of a benefit that, however, was compensated by the non-concurrence, for purposes of determining the taxable income, of the financial charges borne, creating an environment of neutrality between gains on certain financial assets and expenses associated with the liability necessary for the acquisition and maintenance of those assets, assets that in the future generate gains wholly excluded from taxation.

Thus,

1. Article 32 establishes the existence of a connection between the acquisition and holding of equity shares over a given minimum period and the tax relevance of the financial charges borne with their acquisition.

2. As to the method to be considered for the disregarding as an expense of the financial charges related to the acquisition of equity shares, in the sense of identifying the sources of the capital applied in these acquisitions and, namely, the borrowed capital related to those acquisitions, it must be considered that one of the characteristics of money is fungibility, which prevents the possibility of determining which is the specific application of the capital obtained through a certain loan.

Thus,

1. Thus, the most appropriate solution consists in allocating the remunerated liabilities of SGPSs, first to the loans made by this to the participating companies and other interest-generating investments, with the remainder being allocated to the remaining assets, namely equity shares, proportionally to their respective acquisition cost.

2. In that sense the Tax Administration, interpreting and applying the law, made public Circular no. 7/2004, of March 30, of the DSIRC, which sanctions the following understanding: as to the scope of temporal application "it applies to financial charges borne in tax periods beginning after January 1, 2003, even if they relate to financing contracted before that date" as follows, moreover, from no. 5 of article 38 of Law 32-B/2002, of 12.30, which establishes that the new regime provided for in article 31 of the EBF (current article 32) applies "to capital gains and capital losses realized in periods beginning after January 1, 2003."

Now,

1. In those fiscal years the fiscal corrections of the financial charges should be made: "With respect to the fiscal year in which financial charges should be disregarded as costs for tax purposes, the fiscal correction of those borne with the acquisition of shares that are susceptible to being able to benefit from the special regime established in no. 2 of article 32 of the EBF should be proceeded with, regardless of whether all the conditions for the application of the special regime have already been met. If it is concluded, at the time of disposal of the shares, that the requirements for application of that regime are not met, in that fiscal year, the consideration as a tax expense of the financial charges that were not considered as a cost in previous fiscal years will be proceeded with."

2. As to the method to be used for purposes of allocation of financial charges: "(…) given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, that allocation should be effected based on a formula that takes into account the following: the remunerated liabilities of SGPSs should be allocated, first, to the loans made by these to the participating companies and to other interest-generating investments, with the remainder being allocated to the remaining assets, namely social shares, proportionally to their respective acquisition cost."

3. Finally, it is important to emphasize that the aforementioned Circular is limited to establishing the methodology to be observed in calculating the financial charges allocable to equity shares so as, thereby, to operationalize the application of what is established in no. 2 of article 32 of the EBF.

Moreover:

1. It should also be added that nothing in the letter of no. 2 of article 32 of the EBF prevents the application of the indirect method in the aforementioned allocation of financial charges. This taxation regime became, by the above, applicable regardless of the origin of the social shares and regardless of the date of their acquisition, excluding for tax purposes, in the fiscal year in which they are borne, the financial charges inherent to loans contracted for the acquisition of equity shares whose capital gains and capital losses realized are susceptible to being framed in the regime.

Moreover:

1. In the ruling of the Supreme Administrative Court, of September 5, 2012, in the context of proceeding no. 0314/12, one can read: "In no. 2 of article 32 of the EBF, the legislator establishes the general rule that do not concur for the formation of the taxable income the capital gains and capital losses realized by SGPSs, by way of onerous transmission, for whatever reason it operates, of equity shares of which they are holders, provided that there is holding of shares or social shares by the SGPS for more than one year, and establishes no restriction as to whether the social shares resulted from derivative or original acquisition, that is, resulting from the purchase of shares of companies or resulting from subscription of new shares.

Concluding,

1. With a view to materializing what is provided for in no. 2 of article 32 of the EBF and in accordance with the methodology sanctioned by Circular no. 7/2004, the financial charges borne with liabilities intended to finance equity shares are excluded, for purposes of determining the taxable income.

§ IV. OF THE CONCLUSION

In accordance with all the foregoing, since it is prevented for this Unit of Large Taxpayers to understand anything other than what was stated above, we propose that the claim made in the file be dismissed in accordance with the contents of the "summary table" first identified in the introduction of our information, with all legal consequences.

H) On 31-07-2015, by means of Order no. …, of 30-07-2015, the Claimant was notified of the decision to dismiss the claim in its administrative appeal, by order issued on the same date by the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit (document no. 5 attached with the arbitration request, whose content is hereby reproduced);

I) The order referred to in the preceding paragraph manifests agreement with an information from the services of the Tax Authority and Customs Authority contained in the same document no. 5, whose content is hereby reproduced, in which is stated, among other things, the following:

§ I. INTRODUCTION

1. The Taxpayer, now Appellant, company constituted under the commercial legal form that uses the corporate name "A… - …, SGPS, SA", Tax Identification Number …, with tax domicile at Av.…, no º …. …-… Lisbon, comes, in accordance with the provisions of paragraph f) of no. 1 of article 54 of the General Tax Law, in combination with the provisions of articles 68 and 131 of the Code of Tax Procedure and Process, both by virtue of article 137 of the Corporate Income Tax Code, to file an administrative appeal against the tax act of "self-assessment" of corporate income tax relating to the tax period corresponding to the civil year 2011.

2. After consideration of the arguments invoked by the Taxpayer, here Appellant, in its initial petition, this Unit of Large Taxpayers prepared the competent "Draft Decision" in the file, embodied in our prior Information no. …-…/2015.

3. Through an order issued by this Unit of Large Taxpayers, the Taxpayer, here Appellant, was duly notified to, if so wished, exercise its right of participation, in the modality of prior hearing, in written form, in accordance with the provisions of paragraph b) of no. 1 of article 60 of the General Tax Law, in turn in combination with the provisions of article 122 of the Code of Administrative Procedure.

4. After the period granted for the exercise of its right of participation, in the modality of prior hearing, in written form, neither the Taxpayer, here Appellant, on one hand, came to add to the file any other elements that had not already been settled in our prior "Draft Decision", nor did this Unit of Large Taxpayers, on the other hand, find any other elements capable of calling into question the conclusions previously proposed.

In these terms,

1. Considering the permanence of the validity of the assumptions that, in fact and in law, grounded our prior "Draft Decision", we are then to understand by its definitiveness, with all legal consequences.

§ II. OF THE CONCLUSION

In accordance with the foregoing and after examining all the elements of the file, namely our prior "Draft decision" and the procedural documents submitted by the Taxpayer, here Appellant, namely the initial petition and its request for the right of hearing, since it is prevented for this Unit of Large Taxpayers to understand anything other than what was stated above, it seems to us appropriate to dismiss the claim in the file, in accordance with the contents of the "summary table" mentioned in the introduction of our Information, with all legal consequences, namely, as the case may be, with respect to the provisions of article 163 of the Code of Administrative Procedure and, as well as, to the fulfillment of the determination of article 100 of the General Tax Law.

J) On 30-03-2004, the Tax Authority and Customs Authority issued Circular no. 7/2004, of March 30, of the DSIRC, a copy of which is contained in document no. 7 attached with the arbitration request, whose content is hereby reproduced;

K) On 23-10-2015, the Official Technical Accountant of the Claimant issued document no. 8 attached with the arbitration request, whose content is hereby reproduced, in which is stated, among other things, that the amount of €2,851,725.87 relating to financial charges is allocable to the various equity interests held by the Claimant in accordance with the table that follows:

L) On 29-10-2015, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceeding.

3.2. Facts Not Established

No judgment is rendered on the form of acquisition of the social shares held by A… SGPS and financial charges it may have borne with their acquisition, as this matter was not considered in the decision on the administrative appeal that is the immediate subject of the proceeding and whose content limits the powers of cognition of the Court in annulment contention.

3.3. Basis for the Determination of Facts

The facts were proven based on the documents attached with the arbitration request and by the Tax Authority and Customs Authority and those that are part of the administrative proceeding.

4. Matter of Law

4.1. Determination of the Subject Matter of the Arbitration Request

The Claimant, in its arguments, raises the question of whether the Tax Authority and Customs Authority is able in the present proceeding to add new grounds to the decision on the administrative appeal that is being challenged.

In cases in which, following self-assessment, an express decision was issued in an administrative appeal, it is this decision that remains in the legal order as an act that defines the position of the Tax Authority and Customs Authority vis-à-vis the taxpayer.

Consequently, the question that arises for the Arbitral Court in a proceeding of mere annulment in which a decision on an administrative appeal was issued, which considered the legality of an act of self-assessment, is whether the grounds invoked in that decision ensure or do not ensure such legality.

In fact, as established jurisprudence holds, subsequent justification is irrelevant.

In a contention of mere annulment, as is that which prevails in the process of judicial challenge and in arbitral processes, which are its alternative (article 124, no. 2, of Law no. 3-B/2010, of April 28), the legality of the challenged act must be assessed as it occurred, with the justification that was used in it, other possible justifications that could support other acts, with decision content wholly or partially coinciding with the act performed, being irrelevant.

Thus, the Court cannot, upon finding the invocation of an illegal ground as support for the decision to dismiss the administrative appeal, consider whether it should be dismissed for other reasons ([2]), although the Tax Administration is not prevented from, in a new act, being able to invoke other grounds.

Therefore, it is in light of the justification of the administrative appeal decision that the question of its legality must be considered and, indirectly, that of the self-assessment, which in the present case is reduced to knowing whether the grounds invoked in that decision justify that the self-assessment was done in the way it was.

Thus, as the administrative appeal decision is the act that is the immediate subject of the proceeding and delimits the questions of legality that must be considered, it is important, first of all, to interpret it, to clarify the assumptions of fact and law on which it was based.

In the present case, the Claimant argued in the administrative appeal that the social shares it held in C…, E… and D… resulted from operations of contribution of capital in kind, and therefore had not been acquired on the basis of any financing, and that, as for the remainder, "none of the financing it obtained was intended to finance the acquisition of those shares"; it also maintained that the determination of the increase on the basis of the method provided for in the Circular was illegal (points 60 to 63 of the administrative appeal).

The Tax Authority and Customs Authority, in the decision on the administrative appeal (through the reference to the draft decision) understood, in essence, that article 32 establishes "the existence of a connection between the acquisition and holding of equity shares over a given minimum period and the tax relevance of the financial charges borne with their acquisition" and that, to "identify the sources of the capital applied in these acquisitions and, namely, the borrowed capital related to those acquisitions, it must be considered that one of the characteristics of money is fungibility, which prevents the possibility of determining which is the specific application of the capital obtained through a certain loan", so that "the most appropriate solution consists in allocating the remunerated liabilities of SGPSs, first to the loans made by this to the participating companies and other interest-generating investments, with the remainder being allocated to the remaining assets, namely equity shares, proportionally to their respective acquisition cost", understanding that was adopted in the aforementioned Circular (points 19 to 24 of the decision on the administrative appeal).

Following, it is stated in the decision on the administrative appeal that "the aforementioned Circular is limited to establishing the methodology to be observed in calculating the financial charges allocable to equity shares so as, thereby, to operationalize the application of what is established in no. 2 of article 32 of the EBF", of which letter does not "prevent the application of the indirect method in the aforementioned allocation of financial charges" and that "this taxation regime became, by the above, applicable regardless of the origin of the social shares and regardless of the date of their acquisition, excluding for tax purposes, in the fiscal year in which they are borne, the financial charges inherent to loans contracted for the acquisition of equity shares whose capital gains and capital losses realized are susceptible to being framed in the regime" (points 26 and 27 of the decision).

By this justification, it is observed that the Tax Authority and Customs Authority attributed no relevance to the facts alleged by the now Claimant relating to the lack of connection between the social shares it indicated and the financial charges borne in the year 2011, and point 26 well explains the respective reason: "this taxation regime became (...) applicable regardless of the origin of the social shares".

Apparently in contradiction, at point 28 of the decision, the Tax Authority and Customs Authority says that "with a view to materializing what is provided for in no. 2 of article 32 of the EBF and in accordance with the methodology sanctioned by Circular no. 7/2004, the financial charges borne with liabilities intended to finance equity shares are excluded, for purposes of determining the taxable income". In light of this statement, it seems that the Tax Authority and Customs Authority should understand that the financial charges not "borne with liabilities intended to finance equity shares" would be relevant for purposes of determining the taxable income, and, if this were the case, the origin of the social shares would not be indifferent, as it would be important to know whether the social shares were or were not financed with liabilities.

However, it is clear that in the justification there was no concern to ascertain whether or not the statement of the now Claimant that some social shares it indicated had not been acquired with "liabilities" was true, which is only explicable, in coherence, based on that understanding contained in point 26 that "this taxation regime became (...) applicable regardless of the origin of the social shares".

Thus, it is concluded that the justification for the dismissal is not the lack of correspondence to reality of the Claimant's statements about the origin of the social shares referred to, nor even the doubt about such divergence, but rather the irrelevance of the "origin of the social shares", for, regardless of it, "this taxation regime became (...) applicable".

So much so that the Tax Authority and Customs Authority even cites a ruling of the Supreme Administrative Court in which it is stated, with respect to the part of article 32, no. 2, of the EBF that refers to capital gains and capital losses realized, that no "restriction is established as to whether the social shares resulted from derivative or original acquisition, that is, resulting from the purchase of shares of companies or resulting from subscription of new shares". It is doubtful whether the pertinence of the citation of this understanding of the Supreme Administrative Court, as it refers to the capital gains and capital losses realized, referred to in the initial part of article 32, no. 2, and not to the financial charges, provided for in its final part. But, the very fact that the citation was made confirms that the Tax Authority and Customs Authority understood that, also with respect to the financial charges, its origin is indifferent, as it had stated at point 26.

Thus, interpreting the decision on the administrative appeal it is concluded that:

– in it, it was understood that the taxation regime provided for in article 32, no. 2, of the EBF is "applicable regardless of the origin of the social shares", including for the charges provided for in its final part;

– it was not a ground for dismissal any doubt or lack of proof about the origin of the social shares referred to by the now Claimant, nor did the Tax Authority and Customs Authority formulate any judgment about whether or not the Claimant's statements about this matter correspond to reality.

It is, therefore, in light of this justification that the legality of the challenged act must be assessed, which makes irrelevant, for this purpose, the subsequent justification embodied in the questions that the Tax Authority and Customs Authority raises in the present proceeding about the lack of proof of the origin of the social shares in question.

4.2. Question of the Regime Applicable to Financial Charges Borne with the Acquisition of Social Shares

4.2.1. Positions of the Parties

The Claimant defines the question to be considered as being "whether it is legitimate, in the sense of in conformity with legality, the imposition by the TA of a criterion of proportional and notional allocation, in opposition to a criterion of direct (or specific) and real allocation, for purposes of applying the non-deductibility of certain financial charges, those relating to the acquisition of certain equity shares, provided for in (in 2011) no. 2 of article 32 of the EBF".

The Claimant understands, in sum, that the criterion provided for in Circular no. 7/2004, of March 30, of the DSIRC, will only be admissible if it is in conformity with what is provided for in article 32, no. 2, of the EBF and that, in the case, "the prescription that is contained in the transcribed provision is clear: only the financial charges borne with the acquisition of equity shares, and among these only those borne with the acquisition of equity shares held for at least one year, are those whose tax deduction is set aside".

The Claimant argues that the aforementioned Circular and the understanding adopted in the decision on the administrative appeal are illegal.

The Tax Authority and Customs Authority, with respect to the question of the exclusion of financial charges from the scope of application of article 32, no. 2, of the EBF (setting aside the question of doubts or lack of proof of the origin of the social shares which, for what was said, embodies subsequent justification irrelevant to the decision of the case), argues, in sum, the following:

– to the charges borne with financing obtained for the acquisition of social shares there will always be denied fiscal deductibility, and they must be increased for purposes of determining the taxable income;

– any eventual illegality of the provisions of Circular no. 7/2004 could never constitute grounds for the express and deliberate violation of the regime of article 32, no. 2 of the EBF, reflected in the non-increase to the net result of the fiscal year of the financial charges allocable to equity shares;

– article 32, no. 2, of the EBF, in determining that the financial charges borne with the acquisition of social shares do not concur for the formation of the taxable income of SGPSs, did not establish the method to be used for purposes of allocating the financial charges to the social shares;

– Circular no. 7/2004, in respect for the ratio legis implemented with the legislative alteration that occurred to no. 2 of article 32 of the EBF, intends nothing more than to give effect to the law, determining the method and manner of calculation of the financial charges borne with the acquisition of social shares, resolving the ambiguities raised;

– the pro rata allocation provided for in point 7 of Circular no. 7/2004, an indirect method of allocation, was therefore as legitimate and as compatible with the ratio legis of the rule as any other method – while, in contrast, it cannot be sustained that the objectives of that rule (of any rule) could be achieved in the complete absence of any method;

– the aforementioned Circular did not alter or distort the legal provision of no. 2 of article 32 of the EBF, limiting itself, moreover, within the scope of its legal framework, to promoting the standardization of the interpretation and application of the tax rule in question – article 68-A of the General Tax Law;

– the Circular has at its origin reasons of practicability and feasibility of a legal normative and the duty that no. 3 of article 59 of the General Tax Law imposes on the TA to disclose generic guidelines on the interpretation and application of tax rules and promote legal certainty and contributes to the effective realization of the extrafiscal purposes stated above (and that presided over the very creation of the special regime for SGPSs) and has the virtue, no less important, of preventing taxpayers from using the rule in question to pursue aims completely foreign to the aims envisaged in the law and that subvert the justice of the entire tax system;

– the Respondent did not proceed to the creation of any tax incidence rule, limiting the understanding embodied in Circular no. 7/2004, of 30/03, to attempting to clarify the emerging doubts about the tax regime applicable to SGPSs and SCRs, provided for in article 32 of the EBF, which is why a purported violation of the principle of taxation on actual income invoked by the Claimant, which would result from the application of the method of allocation of financial charges contained in Circular no. 7/2004, of 30/03, should likewise be disregarded;

– the interpretation of article 32, no. 2 of the EBF, as advocated by the Claimant, is not only manifestly illegal, but unconstitutional, as "it is poorly understood that, in the formulation of the parameters delimiting this tax benefit, the legislator intended to obstruct the adoption of the indirect method for the determination of non-deductible financial charges, because, if it did, it would, in practice, be circumscribing the application of the last part of no. 2 of article 32 of the EBF to SGPSs that acted as pure holdings", privileging mixed holdings, for, "it is in these companies where the coexistence of ancillary activities with the main activity creates greater probability that the resources financing obtained from third parties be applied not only in the acquisition of equity shares but also in other assets", "thereby assuring them a 'double' benefit reflected in the exclusion of taxation of capital gains relating to equity shares and in the full deduction of the financial charges borne with their acquisition", violating the principle of equality and contributory capacity, by negative discrimination against pure holdings;

– "no. 2 of article 32 of the EBF is based on a 'logic of balancing, equilibrium and neutrality', insofar as it results in a consistent treatment given to the financial expenses and the typical income of an SGPS (dividends and capital gains), given the correlation or matching established between gains and costs";

– "an SGPS that develops activities not covered by the special regime provided for in no. 2 of article 32 of the EBF, by virtue of the combination of this provision with paragraph b) of no. 3 of article 17 of the Corporate Income Tax Code, is bound by the fulfillment of the duty of separation or autonomization of the activities subject to differentiated tax regimes", "which, in the context of the special tax regime of the SGPS, implies the identification of the financial charges directly or indirectly related to the acquisition of the equity shares aimed at by the exclusion of deduction in order to proceed, as the case may be, to the respective increase to the taxable income";

– "any eventual illegality of the provisions of Circular no. 7/2004 could never constitute grounds for the express and deliberate violation of the regime of article 32, no. 2 of the EBF, reflected in the non-increase to the net result of the fiscal year of the financial charges allocable to equity shares";

– "it appears unconstitutional article 32, no. 2 of the EBF when interpreted in the sense that, being inapplicable Circular no. 7/2004 (on the basis of which the subject undertook to determine the respective non-deductible financial charges of the fiscal year), all and any financial charges borne with financing related to acquisitions of social shares are deductible, regardless of proof promoted by that subject for that purpose, insofar as this is violative of the principle of contributory capacity, contained in article 104, no. 2 of the Constitution of the Portuguese Republic".

4.2.2. Assessment of the Question

Law no. 32-B/2002, of December 30, which approved the State Budget for 2003, amended article 31, no. 2, giving it the following wording:

2 - The capital gains and capital losses realized by SGPSs and SCRs by way of onerous transmission, for whatever reason it operates, of equity shares of which they are holders, provided that held for a period of at least one year, and, as well, the financial charges borne with their acquisition, do not concur for the formation of the taxable income of these companies.

Subsequently, the Tax Authority and Customs Authority issued Circular no. 7/2004, of March 30, in which, among other things, the following is stated:

1. As to the method to be used for purposes of allocation of the financial charges borne with the acquisition of social shares, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, that allocation should be effected based on a formula that takes into account the following: the remunerated liabilities of SGPSs and SCRs should be allocated, first, to the loans made by these to the participating companies and to other interest-generating investments, with the remainder being allocated to the remaining assets, namely social shares, proportionally to their respective acquisition cost.

Applying the method provided for in the aforementioned Circular, the Claimant, in the model 22 declaration relating to the year 2011, indicated as non-deductible under article 32, no. 2, of the EBF financial charges that it bore, not because they were actually borne with the acquisition of social shares, but only because, as determined in that Circular, the remainder of the remunerated liabilities should be allocated, after allocation to the loans made to participating companies and to other interest-generating investments, "to the remaining assets, namely social shares, proportionally to their respective acquisition cost".

It was the question of the illegality of the application of the Circular to this situation that the Claimant raised before the Tax Authority and Customs Authority in its administrative appeal.

The thesis of the Tax Authority and Customs Authority, adopted in the decision on the administrative appeal, is reduced to applying the method provided for in this Circular, feigning that part of the financial charges borne in the year 2011 were intended to finance the acquisition of social shares, regardless of whether these were or were not acquired with use of means that involved the payment of financial charges, in the year in question.

In fact, in the present case, the Tax Authority and Customs Authority did not even call into doubt, in the decision on the administrative appeal, that the social shares referred to by the now Claimant had not been acquired in the ways that the latter indicated, limiting itself to applying the method indicated in the aforementioned Circular, understanding that "this taxation regime became (...) applicable regardless of the origin of the social shares".

Article 32, no. 2, of the EBF, in the wording in force in 2011, establishes that "the capital gains and capital losses realized by SGPSs, SCRs and IRCs of equity shares of which they are holders, provided that held for a period of at least one year, and, as well, the financial charges borne with their acquisition do not concur for the formation of the taxable income of these companies".

In this no. 2 of article 32 of the EBF it is established that the "financial charges borne with their acquisition" do not concur for the formation of the taxable income, referring to equity shares, and therefore it is manifest that its literal content indicates that only the financial charges that are connected with the acquisition of social shares are covered by the non-deductibility that is established there.

Beyond being this the interpretation that results from the literal content, it is corroborated by the explanation for its introduction in the EBF that was given in the Report of the State Budget for 2003 (Law no. 32-B/2002, of December 30).

In fact, as is referred to in Circular no. 7/2004, the regime of this rule was introduced in the EBF by Law no. 32-B/2002, of December 30, which approved the State Budget for 2003, then in article 31, the regime of which became part of article 32 after the renumbering effected by Decree-Law no. 108/2008, of June 26.

In Proposal for Law no. 28-IX, which came to give rise to the Budget Law for 2003, this article 31, no. 2, was contained, with wording identical to that in force in 2011 (in article 32, no. 2), the only difference being the addition of the reference to "IRCs" (abbreviation of "investors in venture capital"), which is irrelevant for the interpretation of the rule.

In the aforementioned Report of the State Budget for 2003 ([3]) the introduction of this rule is announced, with a view to the "broadening of the tax base and moralization and neutrality measures", in the following terms:

"There is established the disregarding of deductibility, for purposes of determining the taxable income, of the financial charges of a financial nature directly associated with the acquisition of social shares by SGPSs";

It is unequivocal, thus, that it was intended that only the financial charges directly associated with the acquisition of social shares be covered by the non-deductibility.

On the other hand, as seen from this explanation of the scope of this final part of no. 2, it is an autonomous legislative measure in relation to the part in which it is established that capital gains and capital losses realized do not concur for the formation of the taxable income, as it is obvious that the non-concurrence of capital gains does not broaden the tax base, rather it narrows it and, therefore, that reason does not apply.

By that express reference in the Report to the need for financial charges to be directly associated with the acquisition of social shares (which is also expressed in the text of the rule through the reference to "financial charges with their acquisition"), it is concluded that it is not enough to determine the non-deductibility of financial charges the fact that the SGPS is a holder of social shares, it being necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of certain social shares.

It is a corollary of this interpretation, imposed by the literal content of article 32, no. 2, that, if certain social shares were not acquired with liabilities generating financial charges, they are irrelevant for purposes of application of that rule, in the part that refers to the non-deductibility of financial charges.

There is thus no legal support for setting aside the rule of deductibility of financial charges, which is contained in paragraph c) of no. 1 of article 23 of the Corporate Income Tax Code, with respect to charges that are not directly associated with the acquisition of social shares.

On the other hand, even if it were understood (as may be implicit in point 7 of Circular no. 7/2004, but also without support in the text of the law) that article 32, no. 2, has inherent in it a presumption that there is association between financial charges and the acquisition of social shares, that hypothetical presumption would always admit contrary evidence, by virtue of the provisions of article 73 of the General Tax Law, which refers to rules of incidence in the broad sense, which encompasses all those that "define the plane of incidence, that is, the complex of assumptions whose combination results in the birth of the tax obligation, as well as the elements of the same obligation". In this sense, rules of incidence are those that determine the active and passive subjects of the tax obligation, those that indicate what the taxable or collectable matter is, the rate and the tax benefits. ([4])

For this reason, a conclusion in the sense of the non-deductibility of the financial charges referred to by the Claimant in the administrative appeal could only be reached by the Tax Authority and Customs Authority following consideration of the evidence presented by the now Claimant, relating to the manner in which the social shares it indicated were acquired.

Being this the regime that is provided for in the law, it cannot be altered by way of regulations, as provisions created by acts of a legislative nature cannot be, with external effect, interpreted, integrated, modified, suspended or revoked by acts of another nature (article 112, no. 5, of the Constitution of the Portuguese Republic).

Furthermore, the definition of the assumptions of taxation is a matter subject to the principle of legality, from the outset by virtue of the provisions of article 103, no. 2, of the Constitution of the Portuguese Republic which establishes that "taxes are created by law, which determines the incidence, the rate, the tax benefits and the guarantees of taxpayers".

This principle of legality is reaffirmed and expanded by the General Tax Law, in its article 8.

It is, thus, clear that the rules relating to the assessment of taxes, namely those that define the incidence and tax benefits, are subordinated to the principle of legality, and consequently the possibility of, by way of the administration, creating rules that result in an actual charging of taxpayers is set aside. ([5])

Point 7 of Circular no. 7/2004 embodies a rule of an innovatory nature concerning the determination of the taxable matter of corporate income tax, creating situations of non-deductibility of financial charges not provided for in law (those in which there is no relationship between charges of that kind and the acquisition of social shares), and therefore is invalid by violation of the principle of legality.

For this reason, in the present case, to conclude that the financial charges referred to by the Claimant in the model 22 declaration should not be deducted from the taxable income by virtue of the final part of no. 2 of article 32 of the EBF, the Tax Authority and Customs Authority should demonstrate that those charges were borne with the acquisition of the social shares referred to by the Claimant.

With respect to the allegation of the Tax Authority and Customs Authority that this interpretation violates the principle of equality and, as well, the principle of contributory capacity, it is based on a wrong assumption, as the allocation of financing to the acquisition of equity shares, when it occurs, is necessarily direct.

The "indirect allocation" created by the Tax Authority and Customs Authority through Circular no. 7/2004 is a mere fiction, based on presumptions whose basis is not explained in it, to lead to the conclusion that there was an allocation (necessarily direct) of financing to the acquisition of social shares without ascertaining whether it occurred or not and in what measure.

Now, as is obvious, to taxpayers with respect to whom it is not proved that they allocated financing to the acquisition of equity shares cannot be given the legal treatment that is given to those in which such allocation is proved, for purposes of article 32, no. 2, of the EBF, as the allocation is the necessary assumption of its provision.

For the rest, nor is it perceived how such a regime, requiring the verification of the connection between certain financial charges and the acquisition of certain social shares, discriminates positively mixed holdings in relation to pure holdings, as it is applicable to SGPS companies of all types and the alleged "greater probability that the resources financing obtained from third parties be applied not only in the acquisition of equity shares but also in other assets", if it were to occur, has no relevance for this purpose: regardless of the type of holding, if it bears charges with the acquisition of social shares it cannot deduct them; regardless of the type of holding, if it has other financial charges related to other assets or activities it can deduct them; if a holding, of any type, has no financial charges, then it cannot deduct them, as none can deduct what it did not have; it does not constitute positive discrimination, surely, a company of any type that bore more financial charges than another can deduct more charges than the latter, as there is a difference between both that justifies the different deductibility.

With respect to the alleged unconstitutionality of article 32, no. 2, of the EBF, by violation of the principle of contributory capacity, enunciated in article 104 of the Constitution of the Portuguese Republic, when interpreted in the sense that, being inapplicable Circular no. 7/2004, all and any financial charges borne with financing related to acquisitions of social shares are deductible, regardless of proof promoted by that subject for that purpose, nor is it perceived the pertinence of its placing in the present case, as the interpretation adopted here is precisely the contrary: article 32, no. 2, of the EBF permits SGPSs to prove that the financial charges it bore are not related to the acquisition of social shares and it is those that are deductible; the interpretation of that rule adopted by the Tax Authority and Customs Authority, based on Circular no. 7/2004, by preventing such proof, if it were the one provided for in law, could generate difficulty in its compatibility with that constitutional principle, in addition to others.

It is concluded, thus, that the challenged act suffers from a defect of violation of law, by not having observed the regime of article 32, no. 2, of the EBF and having infringed the principle of legality, in its formal aspects (articles 103, no. 2, of the Constitution of the Portuguese Republic and 8, no. 1, of the General Tax Law) and procedural aspects (articles 55 of the General Tax Law and 266, no. 2, of the Constitution of the Portuguese Republic).

For this reason, the arbitration request succeeds, in this part.

5. Claim for Restitution of Amounts Paid and Compensatory Interest

The Claimant makes claims for reimbursement of the amount of €755,137.01 and compensatory interest, from 01-09-2012 until full reimbursement.

As grounds for the claim, it invokes article 43 of the General Tax Law which establishes the following:

1. Compensatory interest is owed when it is determined, in an administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due.

2. It is also considered that there is error attributable to the services in cases in which, despite the assessment being effected on the basis of the taxpayer's declaration, the latter has followed, in its completion, the generic guidelines of the tax administration, duly published.

3. Compensatory interest is also owed in the following circumstances:

a) When the legal deadline for voluntary restitution of taxes is not met;

b) In case of annulment of the tax act by initiative of the tax administration, from the 30th day after the decision, without the credit note having been processed;

c) When the revision of the tax act by initiative of the taxpayer is effected more than one year after its request, except if the delay is not attributable to the tax administration.

1. The rate of compensatory interest is equal to the rate of compensatory interest.

2. In the period between the date of the end of the period of voluntary execution of a final judicial decision and the date of issuance of the credit note, with respect to the tax that should have been reimbursed by final judicial decision, compensatory interest at a rate equal to twice the rate of compensatory interest defined in general law for debts to the State and other public entities is owed.

The Tax Authority and Customs Authority argues that the situation of the Claimant is framed in paragraph c) of no. 3 of the same article 43 in which it is established that compensatory interest is owed "when the revision of the tax act by initiative of the taxpayer is effected more than one year after its request, except if the delay is not attributable to the tax administration".

This rule refers to the revision of the tax act provided for in article 78 of the General Tax Law and, in the present case, no request fitting there was submitted, but rather an administrative appeal, provided for in articles 67 et seq. and 131 of the Tax Code of Procedure and Process.

For this reason, it is in light of nos. 1 and 2 of article 43 of the General Tax Law that the right to compensatory interest must be assessed.

In the present case, it is concluded that there is error of law in the decision on the administrative appeal directly attributable to the Tax Authority and Customs Authority and error of law in the self-assessment that is also deemed attributable to it by virtue of the provisions of no. 2 of article 43 of the General Tax Law, insofar as the Claimant has acted in harmony with the generic guidance contained in no. 7 of Circular no. 7/2004.

However, it is found that it was not assessed in the decision on the administrative appeal and, consequently also in the present proceeding which has it as its immediate subject, whether the financial charges indicated by the Claimant in the model 22 declaration as covered by article 32, no. 2, of the EBF were determined in connection with the social shares that the Claimant indicated in the administrative appeal, nor was it determined whether all of them were acquired in the ways referred to there.

Thus, the possibility of performance of a new act compatible with the present ruling is not to be excluded, within the powers/duties that are attributed to the Tax Authority and Customs Authority by article 24, no. 1, of the RJAT, in harmony with article 100 of the General Tax Law, which is why there is no basis for deciding in this proceeding whether or not there is a right to reimbursement and compensatory interest, without prejudice to the possible rights that may be recognized in execution of judgment.

6. Decision

In accordance with the foregoing, the Arbitral Court agrees on:

a) To judge successful the claim for declaration of illegality of the decision on the administrative appeal;

b) To judge successful the claim for declaration of partial illegality of the self-assessment of corporate income tax, state surtax and resulting municipal surtax of the B… fiscal group relating to the fiscal year 2011, to the extent that it refers to the amount entered in field 779 of table 7 of the individual model 22 declaration submitted by the Claimant;

c) To annul the aforementioned decision on the administrative appeal and the self-assessment to the extent that its illegality is declared.

d) To judge unsuccessful the claims for reimbursement and payment of compensatory interest and to acquit the Tax Authority and Customs Authority of these claims, without prejudice to the rights that may be recognized to the Claimant in execution of judgment.

7. Value of the Proceeding

In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure of 2013, article 97-A, no. 1, paragraph a), of the Tax Code of Procedure and Process and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €755,137.01.

Lisbon, 25-05-2016

The Arbitrators

(Jorge Lopes de Sousa)

(Ricardo da Palma Borges)

(Manuel Pires)
(with the declaration of vote attached)

DECLARATION OF VOTE

I voted disagreeing with the recognition of the Court's jurisdiction relating to the possible reimbursement of the tax, given the provisions of the law (see arbitral ruling in proceeding no. 244/2013-T). I also voted and without disregard to the type of proceeding in question, understanding it necessary to deepen the analysis of Circular no. 7/2004, of March 30, of the DSIRC (see arbitral ruling in proceeding 258/2015-T), of the problematics it raises, taking into account namely the quantitative or evaluative aspect of the objective assumption of taxation and the ways for its determination, as well as the consequences derived from that deepening, including the invocation of constitutional principles. Given the interpretive and guiding character of article 32, no. 2 of the EBF, by part of the circular, contributing to the security derived from standardization – article silent as to the method applicable in the determination of the charges therein referred to -, it is necessary the correct interpretation of the provision in question, attending to its ratio essendi (to avoid double relief and even schemes more or less refined to avoid tax), resorting, if necessary, to extensive interpretation – today accepted, with the setting aside of outdated orientations such as merely literal interpretation, even in the domain of the essential elements of the tax -, interpretive work that conduces to the setting aside of the exclusivity of direct or specific allocation. Also it is important to analyze the fulfillment of the burden of proof, a burden that cannot or could not be underestimated or inverted, even if one arrives or arrived at the conclusion that the aforementioned circular is against law, and one should not be given the possibility of understanding as proven something, even if proof is difficult, with the invocation sic et simpliciter of the non-existence of connection of financing with the acquisitions, given that the availability of the information one desires is offered and even in the sequence of something that possibly has been proven. There is still a need to deepen the justification of the Respondent, given that it is not appropriate the observation of the irrelevance of the requirement of the origin of the acquisitions, given namely what immediately follows it in the aforementioned justification.

25.05.2016

(Manuel Pires)