Summary
Full Decision
DECISION
The arbitrators José Poças Falcão (president), João Taborda da Gama and João Gonçalves da Silva (adjunct arbitrators), appointed by the Ethics Council of the Centre for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, constituted on 19 January 2016, hereby decide as follows:
I – STATEMENT OF FACTS
1. On 3 November 2016, the taxpayer and herein Claimant, A… S.A., with registered office at …–…, …-… …–…, requested, pursuant to the terms and purposes of the provisions of Article 2, paragraph 1, subparagraph a) and Article 10, both of Decree-Law No. 10/2011, of 20 January, the constitution of an Arbitral Tribunal with the appointment of a collective of three arbitrators by the Ethics Council of the Centre for Administrative Arbitration, in accordance with the provisions of Article 6, paragraph 2, subparagraph a) of the aforesaid decree, with a view to examining the legality of the assessment of Corporate Income Tax ("IRC"), by reference to the taxation period of 2013, under number 2016…, a document appended to the request for arbitral ruling, the contents of which are hereby incorporated by reference.
2. The Claimant makes the following requests:
a) A declaration of illegality and consequent annulment of the tax assessment act No. 2016…, relating to the taxation period of 2013, so as to proceed to the immediate and full restoration of legality;
b) Payment of the costs incurred by the Claimant and those to be incurred with the provision of a bank guarantee for the suspension of the enforcement proceedings instituted as a consequence of the Claimant's failure to pay the contested assessment.
3. The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD and was notified to the Tax and Customs Authority (hereinafter designated as TA or "Respondent") on 18 November 2016.
4. The Claimant did not proceed to appoint arbitrators, and therefore, pursuant to the provisions of Article 5, paragraph 3, subparagraph a) and Article 6, paragraph 2, subparagraph a) of the Rules of Tax Arbitration (RJAT), the signatories were appointed by the President of the Ethics Council of CAAD to form the present Collective Arbitral Tribunal, having accepted in accordance with the legally foreseen conditions.
5. On 4 November 2016, the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.
6. Thus, in accordance with the provisions of Article 11, paragraph 1, subparagraph c) of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 19 January 2017.
7. The TA filed its response on 23 February 2017, in which it argued that the request should be dismissed.
8. By order of 13 March 2017, the holding of the meeting provided for in Article 18 of the RJAT was dispensed with and it was decided that the proceedings would proceed with written final submissions.
9. The parties submitted submissions reiterating the arguments raised in the previous pleadings.
10. The arbitral tribunal was regularly constituted, in accordance with the provisions of Articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January, and is competent.
11. The parties have legal personality and capacity, are duly represented, and are legitimate and represented (Articles 4 and 10, paragraph 2, of the same decree and Article 1 of Ordinance No. 112-A/2011, of 22 March).
12. There are no other preliminary issues to be examined nor defects that invalidate the proceedings.
13. The proceedings are free from nullities.
14. The positions of the parties
15. The Claimant supports its request, in summary, in the following terms:
i. Article 44 of the IRC Code established that capital gains were not taxed if the sale value was reinvested in the acquisition of other assets, further establishing in its paragraph 6 the following: when the object of the reinvestment – in the case under analysis, the "B… shares" – was alienated, "the value of the difference between capital gains and capital losses not taxed in accordance with paragraph 1 shall be deducted from the acquisition cost of the assets in which the reinvestment was made for the purposes of determining any taxable result of IRC in relation thereto."
ii. This regime was extended to SGPSs by virtue of Article 7 of Decree-Law No. 495/88, of 31 December.
iii. Paragraph 6 of Article 44 of the IRC Code was not, therefore, a rule of incidence, establishing the taxation of capital gains, but merely a legal provision on the fiscal quantification of the gain.
iv. As a result of the merger of B… SGPS into C…-SGPS, the B… shares ceased to form part of its assets, and therefore, for the calculation of taxable profit, the previously non-taxed capital gain should be deducted from the acquisition cost of such shares.
v. And, in this way, the profit resulting from such shares ceasing to be owned by C…-SGPS would be determined.
vi. Law No. 30-G/2000, of 29 December, came to alter the fiscal regime, previously in force, of capital gains, establishing in subparagraph b) of paragraph 7 of Article 7 that "the part of the positive difference between capital gains and capital losses relating to non-depreciable assets, corresponding to the value deducted from the acquisition cost of the assets in which the reinvestment was made in accordance with paragraph 6 of Article 44 of the IRC Code in the prior wording, shall be included in taxable profit, in equal instalments, for 10 years";
vii. However, the said Law maintained in force Article 44 of the IRC Code as regards capital gains already realized in which reinvestment had already occurred, or could still occur.
viii. The said Law also established that when capital gains were to be taxed, if the calculation included the prior non-taxed capital gain, there would be a deferral of its taxation for 10 years.
ix. Thus, Law No. 30-G/2000 is not a rule of incidence, which determines the taxation of capital gains, but rather and only a rule on the calculation of the capital gain and the period of its taxation.
x. Once the capital gain is calculated, it is necessary to determine whether it is or is not taxed in accordance with the regime specific to C… and the operation that generated it, in the case of the merger.
xi. The IRC Code established specific rules regarding the fiscal regime applicable to merger operations, pursuant to which (paragraph 6 of Article 68 of the IRC Code), when the recipient company (C… SGPS, S.A.) holds a shareholding in the capital of the merged company (B…) "the capital gain or capital loss, if any, resulting from the cancellation of the capital shares held" in the merged company "as a consequence of the merger or demerger does not contribute to the formation of profit."
xii. One cannot invoke any prevalence of the regime enshrined in Law No. 30-G/2000, of 29 December, over the fiscal regime of mergers, specifically, over paragraph 6 of Article 68 of the IRC Code.
xiii. Indeed, based on Article 44, paragraph 6 of the IRC Code, without Law No. 30-G/2000, the capital gain of C…, SGPS, resulting from the cancellation of the shareholding in B…, would be calculated by deducting from the acquisition price of that shareholding the previously non-taxed capital gain.
xiv. After the calculation of that capital gain, it is not, however, taxed, because paragraph 6 of Article 68 of the IRC Code prevents it.
xv. Since Law No. 30-G/2000 does not establish a rule of tax incidence, but only and exclusively that the capital gain calculated in accordance with the provisions of paragraph 6 of Article 44 of the IRC Code, if to be taxed (it is necessary to ascertain previously whether such capital gain is or is not taxable and whether there is or is not some regime that excludes it), shall be so in a special and more "benevolent" manner for the taxpayer, that is, over 10 years.
xvi. Paragraph 6 of Article 68 of the IRC Code is a clear and unequivocal rule of exclusion: whenever, as a result of a merger, the cancellation of the shareholding in the merged company occurs, the result of that cancellation – whether capital gain or capital loss – does not contribute to the formation of taxable profit.
xvii. The Central Administrative Court of the South has already ruled on this matter in the Decisions of 12/6/2014, Case No. 07437/14, of 5/2/2015, Case No. 06585/13 and of 21/5/2015, Case No. 08650/15.
xviii. In the first of those decisions it is stated that "the distinction made by the Respondent Public Treasury that the capital gains in question are not derived from the merger, but occur at an earlier moment because they are suspended due to the legal regime of capital gains, does not hold, because it is at the moment of the merger operation that the capital gains which were suspended from taxation become capable of being taxed, considering the provisions of Article 44, paragraph 6 of the IRC Code, because it is at that moment that (…) the shares representing (…) are extinguished, cancelled, by incorporation (…). Thus, it is at the moment when the merger of the companies takes place that taxation of the capital gains could occur, but for the provision in paragraph 6 of Article 68 of the IRC Code, which precludes it".
xix. In the contested assessment, the Tax Authority came to tax the capital gain resulting from the cancellation of the capital shares held by C… SGPS in the merged company, that is, B..., thereby violating the provisions of paragraph 6 of Article 68 of the IRC Code and paragraph 1 of Article 7 of Directive 90/434/EEC.
xx. As payment of the contested assessment was not made, the TA instituted the respective enforcement proceedings.
xxi. To obtain the suspension of the aforementioned enforcement proceedings, the Claimant, pursuant to Article 169 of the Code of Tax Procedure and Process (CPPT), provided a bank guarantee.
16. In its Response, the Tax and Customs Authority alleged the following:
i) The roll-over system of capital gains translated, in practical terms, into the deferral of the taxation of these gains, which would only end in the event of onerous alienation of the assets in which the reinvestment had been made or the occurrence of any fact that determined the determination of any taxable result of IRC in relation to those assets (see paragraph 6 of Article 44 of the IRC Code) without the intention to reinvest the realization value being declared.
ii) Well then, the repeal, by Law No. 30-G/2000, of 29.12, of Article 7 of Decree-Law No. 495/88, together with the modification of the reinvestment regime provided for in Article 44 of the IRC Code, dictated the end of the roll-over system of capital gains and the concomitant deferral of their taxation, however, to prevent that all capital gains whose taxation was suspended would immediately be subject to taxation, the legislator created a transitional regime in paragraph 7 of Article 7 of the said Law.
iii) Under subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000, in taxation periods beginning on or after 1 January 2001, "The part of the positive difference between capital gains and capital losses relating to non-depreciable assets, corresponding to the value deducted from the acquisition cost of the assets in which the reinvestment was made in accordance with paragraph 6 of Article 44 of the IRC Code, in the prior wording, shall be included in taxable profit, in equal instalments, for 10 years, counted from the date of the realization, provided that, in accordance with the law, the reinvestment of the part of the realization value which proportionally corresponds to it is effectuated;".
iv) Looking at the configuration and tenor of the transitional regime, it is easy to infer that, contrary to the understanding presented by the Claimant in Article 37 of the claim, a "unique meaning" cannot be attributed to it, least of all because the normative of subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000 enables the interpreter to draw the following conclusions:
v) The first is that the deferral of the taxation of capital gains realized before 1 January 2001 would end with the alienation or the occurrence of any fact that determined the determination of a taxable result in relation to the shareholdings to which they were associated;
vi) The second, that the inclusion in taxable profit would be effectuated in equal instalments over ten years, in the event of reinvestment of the realization value; and
vii) The third consists in that the special treatment envisaged would require the identification and separation of those capital gains in relation to other capital gains (or losses) resulting from subsequent operations that had as their object the assets (e.g., shareholdings) to which they were associated.
viii) The merger operation in the course of which C… SGPS SA incorporated B… SGPS, S.A., involved the extinction of the shares representing the capital of the incorporated company and the consequent determination of a capital gain, which, pursuant to paragraph 6 of Article 68 of the IRC Code "does not contribute to the formation of taxable profit".
xxii. The transitional regime, created by subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000, imposes an autonomous calculation of tax gains, with a view to their quantification at the date of the merger and eventual inclusion in taxable profit, which is distinct from the determination of the capital gain or loss referred to in paragraph 6 of Article 68 of the IRC Code.
xxiii. This capital gain had already been realized by the incorporating/recipient company in an alienation of shareholdings effected in 2000, with the suspension of its inclusion in taxable profit by reason of the reinvestment regime, and could not therefore be considered as a result generated by the merger operation.
xxiv. In reality, the merger and the consequent transfer of the assets of the merged company to the recipient company merely allowed the occurrence of the fact which, pursuant to the transitional regime, triggered the end of the suspension and the inclusion in taxable profit.
xxv. Neither in Law No. 30-G/2000, nor in subsequent acts, did the legislator express the intention to extend the treatment provided for in paragraph 6 of Article 68 to capital gains covered by the transitional regime, which shows that its consequences would continue to manifest themselves as soon as a fact occurred that determined their inclusion in taxable profit.
xxvi. The calculation of the capital gain referred to in that normative does not take into account the provisions of the transitional regime of subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000 which imposes the recapture of capital gains which were suspended from taxation.
xxvii. The TA acted in full compliance with the applicable legal norms, when considering that the cancellation, as a consequence of the merger, of the shares of B… SGPS, SA to which was associated the capital gain whose taxation was suspended triggered the realization of the fact that determines the inclusion of that capital gain in taxable profit, as provided in the transitional regime,
xxviii. And that such inclusion should be effectuated in equal instalments, for 10 years (see calculations shown in point III.C.2 of the Tax Inspection Report);
xxix. By the fact that the reinvestment of the part of the realization value corresponding thereto was effectuated, through the replacement of the extinguished shares by the assets of the incorporated company transferred by the merged company to the recipient/incorporating company.
xxx. Moreover, the TA adopted an understanding consistent in this matter, established in Information from the IRC Department: "... the capital gains attributed to the securities in which the reinvestment was made shall be subject to taxation at the moment of extinction of the securities, because (…) they should be separated from the portion of capital gains that would be obtained in the absence of these attributed capital gains (those effectively resulting from the merger operation), subjecting each of these portions to the respective fiscal regime, in accordance with the transitional regime provided for in paragraph 7 of Article 7 of Law No. 30-G/2000 (…). Thus, only the 'new capital gain', that is, that resulting from the cancellation of the shareholding by virtue of the merger, will be excluded from taxation, under the provisions of paragraph 6 of Article 68 of the IRC Code".
xxxi. The Claimant makes an incorrect interpretation of this normative by attempting to attribute to it a scope different from that which derives from the purposes of the special regime applicable to mergers which naturally restricts itself to the capital gains and losses determined in the operation of transfer of assets to the recipient company.
xxxii. Therefore, a capital gain whose formation is prior to the realization of the merger operation does not fall within the special regime of mergers.
xxxiii. It being true that subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000 does not establish any rule of tax incidence, as it merely fixes how and when capital gains realized until 31.12.2000 should be included in taxable profit;
xxxiv. It is equally undeniable that it does not prescribe the removal of the transitional regime, in the event of extinction of the shareholdings in which the reinvestment was made, specifically as a consequence of a merger.
xxxv. Nor should it be claimed that the taxation of capital gains covered by the transitional regime established by subparagraph b) of paragraph 7 of Article 7 of Law No. 30-G/2000 violates the provisions of paragraph 1 of Article 7 of Directive 90/434/EEC, of 23.07.1990, because,
xxxvi. That provision was transposed to paragraph 6 of Article 68 of the IRC Code and, as has already been reiterated, the capital gain in question had already been obtained in 2000, did not result from the cancellation of the capital shares as a consequence of the merger, and therefore falls outside the scope of this normative.
xxxvii. The invocation of the application of the anti-abuse clause provided for in paragraph 10 of Article 67 has no useful meaning in this context, to the extent that it is nothing more than a passing reference in the Tax Inspection Report, from which no consequences are drawn, as, as is evident, it did not constitute the legal basis for the correction made to taxable profit.
xxxviii. The contested assessment should be maintained, as it corresponds to the correct application of the Law to the facts determined and not contested by the Claimant.
All matters considered, it is proper to decide the dispute.
II. REASONING
ON THE FACTS
Facts Established
For not having been expressly contested and also on the basis of the documentary evidence contained in the file and the copy of the instructing administrative proceedings attached, the following facts are considered established:
a) In the financial year 2000, a company called "C…– SGPS, S.A." obtained capital gains resulting from the alienation of shareholdings of which it was the owner.
b) These capital gains were not taxed for IRC purposes, in accordance with the provisions then applicable of Article 44 of the IRC Code and Article 7 of Decree-Law No. 495/88, of 31 December, since the said company "C…– SGPS, S.A." manifested the intention to proceed with the reinvestment of the respective realization value, which duly occurred through the acquisition of shareholdings in a company called "B… SGPS, S.A.", following which "C…– SGPS, S.A." came to hold 100% of B… SGPS, S.A..
c) In 2004, a merger operation by incorporation was effected, in accordance with Article 116 of the Commercial Companies Code, through which B… SGPS, S.A. was incorporated into C…, SGPS, S.A., the assets and liabilities of B… SGPS, S.A. being thus transferred to C…, SGPS, S.A..
d) The said merger was effected in accordance with the fiscal regime established in the then applicable Articles 67 and following of the IRC Code, as evidenced by point 5 of the merger project, annexed to the Tax Inspection Report.
e) As a result of the merger, the shares representing the capital of B…, SGPS, S.A., of which C…, SGPS, S.A. was the owner, were extinguished, acquired as reinvestment in accordance with Article 44 of the IRC Code, the capital gains whose realization value was reinvested in the acquisition of B… SGPS, S.A. shares not having been subjected to taxation for IRC purposes.
f) Subsequently, C…– SGPS, S.A. was incorporated in a merger process into A…, S.A. (the Claimant).
g) C…– SGPS, S.A. was subject to a tax inspection concerning the financial year 2013.
h) As mentioned in the respective tax inspection report, the Tax and Customs Authority understood that "the transitional regime does not exclude the taxation of capital gains realized in 2000, it merely suspends them, until the extinction of the asset which was underlying them (capital shares in company B…), which in the present case occurred in 2004, with the merger of company B… into C… SGPS, S.A. – moment in which the operations resulting from this same process are separated and treated. For that reason, the merger process cannot prevent the taxation of the capital gain which occurred at an earlier moment (2000) and which is in no way related to the process itself (merger)".
i) In the same report, the Tax and Customs Authority concludes that "(…) the suspended capital gains, associated with the capital shares of company B… SGPS, S.A., in which the reinvestment of the realization value was made, are taxable pursuant to paragraph 7 of Article 7 of Law 30-G/2007, of 29 December, read in conjunction with the information Nos. 1488/2007 and 1594/2007 and the Notice No. 7/2002, all from the IRC Department, which is why, in each of the periods from 2004 to 2013, for the purposes of determining taxable profit, the amount of € 5.190.564,00 (€ 3.003.850,00 + € 2.186.714,00) is added".
j) Following the said correction to taxable profit made by the Tax and Customs Authority, assessment No. 2016…, of 9.6.2016 was made and the respective assessment statement No. 2016…, of 14.6.2016 was issued, which resulted in the determination of the balance payable by the Claimant, by 10-8-2016, in the amount of €1.138.936,59 [Doc 1, attached to the initial request].
k) The Claimant did not effect voluntary payment and, consequently, enforcement proceedings No. …2016…, were instituted at the Tax Service of …-….
l) To suspend the said enforcement proceedings, the Claimant presented bank guarantee No.…, for the amount of €1.442.209,76, issued on 21-9-2016, by Bank "D…".
Facts Not Established
There are no other essential facts for the decision of the dispute, whether established or not established.
Process Management
The parties have legal personality and capacity, are duly represented and are legitimate.
The proceedings are free from nullities and no preliminary, incidental or subsequent issues and/or exceptions have been raised that would prevent the examination of the merits of the case, the conditions being met for a final decision on the merits to be rendered.
III Reasoning (continued)
The Law
The legal question at issue in the present case may be formulated as follows: what is the fiscal treatment of capital gains suspended from taxation when the shareholdings in which they were reinvested are cancelled by virtue of the extinction of the company whose capital they represent by incorporation through merger? Viewed from another angle, what is at issue here is the relationship between the norms that provided a transitional regime for capital gains realized in 2000, and the legal regime of neutrality of mergers. In the abstract, we can reach three distinct conclusions:
(i) One of them, which is that defended by the Claimant, is that the two regimes are of successive application. For the Claimant, the transitional regime of taxation of reinvested capital gains applies to capital gains suspended from taxation when the shareholdings in which they were reinvested are realized by cancellation of the shareholding through merger. Consequently, the application of the transitional regime of taxation of reinvested capital gains has the effect that that capital gain (suspended) is relevant in the determination of the value of the fiscal capital gain resulting from the realization of the shareholdings subject to reinvestment of the realization value. This fiscal relevance, sustains the Claimant, is limited to the calculation of the capital gain generated therein and does not permit, by itself, to draw effects as to the taxation of that capital gain. To ascertain, therefore, the fiscal relevance of the fiscal capital gain thus calculated, it is necessary to apply the normative regime that applies specifically to the taxation of that fiscal capital gain already calculated. Now, being that fiscal capital gain realized in the context of a merger operation, it must be considered that it is exempt from taxation given the neutrality regime of mergers.
(ii) The other position is that defended by the Respondent. According to the Tax Administration, the application of the transitional regime of taxation of reinvested capital gains has a scope different from the regime of neutrality of mergers. Having a taxpayer opted to reinvest capital gains realized, deferring thus the taxation, when the asset in which the reinvestment was made is realized there will be two fiscal consequences relating, so to speak, to two different capital gains: on the one hand, the triggering of the taxation of the suspended capital gain, in this case, for ten years, having in regard the transitional regime; on the other, the taxation of the (remaining) capital gain eventually generated by the realization of the securities which will follow the regime applicable to it at the moment of realization.
(iii) There would abstractly be yet a third conclusion theoretically possible to reach which would be that the suspended capital gain, in cases of extinction of the shareholding in which it had been reinvested would continue suspended, now in the corresponding securities of the recipient company until a moment of realization that was not generated by extinction of the shareholding, or within the scope of fiscal neutrality. We will not follow this hypothesis because, although arguable, strictly it cannot be extracted from the legal framework by interpretation and could only have been taken as an option by the legislator, and never by interpreters-appliers.
Let us then see what the regime in force was in 2000 when C…-SGPS, S.A. realized the capital gains whose treatment is under discussion. In the year 2000[2] - the financial year in which the capital gain occurred with the alienation of shareholdings - a regime[3] was in force that can be synthesized in the following aspects[4]:
i) The positive difference between capital gains and capital losses realized was not taxed provided there was reinvestment of the realization value until the third financial year following that of the realization[5];
ii) Non-taxation would be directly proportional to the percentage of reinvestment of the realized values;
iii) The taxable person had to declare the intention to reinvest in the financial year of alienation[6];
iv) The taxable person had to declare the reinvestment(s) in the corresponding financial year(s) to its realization[7];
v) The positive difference between capital gains and capital losses not taxed by effect of the reinvestment was subtracted from the acquisition cost of the asset subject to reinvestment (rollover[8])[9];
vi) Due to this deduction, when the asset in which the reinvestment had been made was alienated - and there was no new reinvestment -, taxation would arise. This fell on a difference between capital gains and capital losses calculated on the basis of a fiscal acquisition cost of the assets now alienated which was lower than the real acquisition cost to the extent of the deduction referred to in the previous point (that is, the capital gain would be larger or the capital loss smaller)[10];
vii) Furthermore, the deduction meant that, in the case of depreciable assets, fiscal depreciation was reduced;
viii) If the reinvestment was not realized in the three subsequent financial years, the uncollected tax would be assessed (with reference to the year of alienation) in the third subsequent financial year, together with compensatory interest[11];
ix) In the same circumstances (there being no reinvestment) and if, considering the difference between capital gains and capital losses, there was no IRC payment due in the year of realization, the value of the tax losses for that year would be corrected in the third subsequent financial year[12].
This regime was altered by the 2000 reform law.[13]
Thus, in the case of capital gains realized after 1 January 2001, the law came to determine that the difference between capital gains and capital losses should be considered in one fifth per year for five years, with the first of those financial years being the year of realization[14]. The condition for the application of this regime also changed: the reinvestment would have to be made between the financial year prior to that of realization and the second financial year following the realization[15]. If there was no reinvestment, the entire difference between capital gains and capital losses would be taxed in the year of realization.
But for capital gains realized before 2001 and not taxed, such as those whose taxation we are concerned with, a transitional regime was created, provided for in Article 7, paragraph 7, of the said Law No. 30-G/2000:
"Article 7
Miscellaneous and Transitional Provisions
(…)
7 - The provisions in the new wording of Article 44 of the IRC Code apply in taxation periods beginning on or after 1 January 2001 without prejudice to the following:
a) The provisions in the prior wording of Article 44 of the IRC Code continue to apply to capital gains and capital losses realized before 1 January 2001 until the realization, inclusive, of capital gains or capital losses relating to assets in which the reinvestment of their respective realization values was made;
b) The part of the positive difference between capital gains and capital losses relating to non-depreciable assets, corresponding to the value deducted from the acquisition cost of the assets in which the reinvestment was made in accordance with paragraph 6 of Article 44 of the IRC Code, in the prior wording, shall be included in taxable profit, in equal instalments, for 10 years, counted from the date of the realization, provided that, in accordance with the law, the reinvestment of the part of the realization value which proportionally corresponds to it is effectuated;
c) With respect to capital gains and capital losses realized in taxation periods beginning in 2001, the regime of Article 44 of the IRC Code applies when the reinvestment referred to in paragraph 1 of this article takes place until the end of the third taxation period following that of the realization."
That is, Article 7, paragraph 7, subparagraph a) of Law No. 30-G/2000 establishes that to these cases the provisions of the prior Article 44 of the IRC Code still apply, that is, the regime which we described above. The transitional norm expressly includes aspects of the regime of capital gains and losses relating to the assets in which the realization value was reinvested. Thus, according to the provisions of this article, the regime of 2000 "continues to apply to capital gains and capital losses realized before 1 January 2001 until the realization, inclusive, of capital gains or capital losses relating to assets in which the reinvestment of their respective realization values was made".
The 2000 regime still applies to capital gains realized in 2001 (or in financial years beginning in 2001), provided that the reinvestment is made until the end of the third financial year following that of the realization. This is what subparagraph c) of the same Article 7, paragraph 7 of the 2000 reform law determines.
As regards non-depreciable assets, the transitional regime adds a norm. With respect to capital gains realized on the alienation of assets in which the reinvestment of capital gains realized until 1 January 2001 had been made, there would be taxation of the positive balance between capital gains and losses only in the part corresponding to that value which had been deducted from the acquisition cost of the reinvestment assets, phased over 10 years, provided that the realization value was again reinvested[16].
Let us recall: in the regime in force in 2001 (and which was later further amended), the difference between capital gains and capital losses became relevant, in five financial years, but in its entirety. Thus, the rollover which we described above ceased to apply and it ceased to be possible to defer taxation with new reinvestments. Applying this regime without further ado, a company that alienated (in the validity of the new regime) the assets in which it had reinvested (in accordance with the prior regime) would be taxed, in five financial years, for the entirety of the fiscal capital gains realized, i.e. the commercial capital gains realized on the sale of the assets in which it reinvested plus the value deducted from the acquisition cost, in accordance with Article 44, paragraph 6 of the IRC Code, in the version in force in 2000[17].
Now, the transitional regime comes precisely to mitigate this effect. Thus, according to Article 7, paragraph 7, subparagraph a) of Law No. 30-G/2000, of 29 December, the part corresponding to the value deducted from the acquisition cost is not relevant in five financial years, but in ten, from the financial year of realization of the assets in which the company reinvested.
Subsuming:
In the present case this means that in 2004, the year in which the merger took place, it is considered that there was realization for the purposes of the application of the provisions of Article 44 of the IRC Code, by way of Article 7, paragraph 7, subparagraph a) of Law No. 30-G/2000, that is, the positive difference between capital gains and capital losses not taxed by effect of the reinvestment was deducted from the acquisition cost of the asset subject to reinvestment, which allows the capital gain generated in the sphere of C… in 2004 to be calculated.
The question which now arises is therefore whether, and how, this capital gain is taxed.
Let us see:
The capital gain in question, calculated in accordance with the combined provisions of Article 7, paragraph 7 of Law No. 30-G/2000 and Article 44 of the IRC Code, occurs in the context of a merger.
Will the regime of fiscal neutrality of mergers then apply to capital gains suspended from taxation via the application of the regime provided for in 2000?
Our courts have already ruled on this matter. Indeed, the Central Administrative Court of the South has already decided in at least three cases that the regime of fiscal neutrality of mergers prevents suspended capital gains from contributing to the formation of taxable profit in the event of a merger. Indeed, in Case No. 7437/14, of 12 June 2014, it was decided that, quoting, "given the aforesaid Article 68, paragraph 6 of the IRC Code, which governs the regime of fiscal neutrality of mergers and demergers, '[w]hen the recipient company holds a shareholding in the capital of the merged or demerged companies, the capital gain or capital loss, if any, resulting from the cancellation of the capital shares held in those companies as a consequence of the merger or demerger does not contribute to the formation of taxable profit'.
That is, as a result of the merger performed in the case, there was a cancellation of the capital shares held in the merged company, and, in this case, it is this legal fact that determines the taxation of the capital gains (paragraph 6 of Article 43 of the IRC Code), but simultaneously, it is also this legal fact that leads to those capital gains not contributing to the formation of taxable profit (Article 74, paragraph 6 of the IRC Code), and consequently, are not subject to taxation.
The distinction [made by the Respondent Public Treasury] that the capital gains in question are not derived from the merger, but occur at an earlier moment because they are suspended due to the legal regime of capital gains does not hold, because it is at the moment of the merger operation that the capital gains which were suspended from taxation become capable of being taxed considering the provisions of Article 44, paragraph 6 of the IRC Code, because it is at that moment that, as we have already stated, the shares representing ... are extinguished, cancelled, by incorporation into the company "... -SGPS, S.A.". Thus, it is at the moment when the merger of the companies takes place that taxation of the capital gains could occur, but for the provision in paragraph 6 of Article 68 of the IRC Code which prevents it.
Note that, as we have already stated, the legislator established a legal regime of its own to exclude the regime of fiscal neutrality of mergers and demergers, when it is concluded that the operations covered by it had tax evasion as the principal objective or as one of the principal objectives, providing the TA with a legal means to intervene, correcting the taxable base, in situations that fall within the scope of the provision of the norm.
It is established in Article 67, paragraph 10 of the IRC Code when it can be considered that the operations covered by the regime of fiscal neutrality of mergers and demergers had tax evasion as the principal objective or as one of the principal objectives, which can be considered to be the case, in particular, in cases where the companies involved do not have all of their income subject to the same regime of taxation in IRC or when the operations have not been carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies participating therein, and then, if applicable, the corresponding additional tax assessments are made.
It happens that the provision in Article 67, paragraph 10 of the IRC Code in no moment constituted the basis for the correction in question in the case, and therefore cannot be considered by the tribunal to assess the legality of the correction, as was decided in the judgment under appeal.
The TA had the legal means (Article 67, paragraph 10 of the IRC Code) to be able to prevent, eventually, the regime of fiscal neutrality of mergers from operating in this case, and thus to tax the capital gains which were suspended, but what it cannot intend is to tax based on a ground which has no support in the law, especially when the legislator provides a particular legal regime, as is the case in this particular instance, with provisions that adequately and sufficiently protect the tax claims, allowing the TA to intervene with full legal cover".
This reasoning was upheld in two other decisions of the same Court: in Case No. 6585/13, of 5 February 2015 and in Case No. 8650/15, of 21 May 2015 (See Decisions submitted by the Claimant). These cases relate to the same entity, also the present Claimant, and, so to speak, the same capital gain which is discussed here, although relating to different financial years.
We concur with the conclusion reached by the Administrative Court, which is also that of the Claimant. Indeed, the central thesis of the Claimant also has merit – that the transitional regime of taxation of reinvested capital gains applies to the calculation of the capital gain, but the answer as to whether it should or should not be taxed is given to us by the regime of fiscal neutrality of mergers (underlined), and never by Article 7, paragraph 7, subparagraph b) of Law No. 30-G/2000 which only contains a rule of specialization of inclusion in taxable profit which logically can only operate when that inclusion is legally possible having regard to the norms governing both the act of realization and the taxed entity.
This reasoning, coherent from a formal point of view, is greatly strengthened by the inherent teleology of the aforesaid regime of fiscal neutrality of mergers. In this regard, Article 68, paragraph 1 of the IRC Code stated that "in the determination of taxable profit of merged companies (…) no result derived from the transfer of assets as a consequence of the merger is considered", clarifying in paragraph 6 specifically for cases where there is cancellation of the shareholding through vertical or inverted incorporation that "when the recipient company holds a shareholding in the capital of the merged or demerged companies, the capital gain or capital loss, if any, resulting from the cancellation of the capital shares held in those companies as a consequence of the merger or demerger does not contribute to the formation of taxable profit".
This regime, common throughout the world, is intended to ensure that the tax burden is not an obstacle to companies finding the most economically efficient way of organizing themselves. As Saldanha Sanches[18] stated "the merger of two or more commercial companies with the creation of a new company or the integration of one or more companies into an already existing company, just as demerger (in which a company transforms into other companies), are current forms of companies adapting to new realities; these operations constitute optimizing solutions that seek to increase the efficiency of forms of business organization[19].
However, companies could be subject to tax, despite there being no profit as a result of these operations. For this reason, the analysis of the fiscal consequences of these operations and the possible advantages and disadvantages that may result from them is always present - whether from the perspective of the taxable person, who seeks to maximize these advantages, or from the perspective of the legislator, who will create limits to their fiscal consequences. (…)
The absence of any direct result from the operation – the merger or demerger are justified only because they will increase the perspective of future profits or stem present losses – means that the taxation of these operations is an important disincentive, especially when it is a merger or demerger operation without money payments. These operations differ from mere purchase of a company, because they are not made through a money payment of alienated rights (…)
Now, it is precisely this possibility of transactions without liquidity – which are those most frequently carried out in the context of restructuring - which makes the taxation of these operations more problematic. And this occurs whether the restructuring takes place within a group of companies or whether the expansion or contraction is made between companies that are at normal market distance: in many cases, the operation will only be carried out because it does not constitute an investment in the sense of requiring the mobilization of financial resources, even though very large values are at stake.
Thus, if this operation is accompanied by a tax to be paid (and we will see which taxes may result from these operations), in most cases it will not be carried out. The restructuring has advantages because it will (in the future) increase the economic efficiency of the business structure, but it would have to be very high advantages - and very certain - to compensate for the existence of the tax. If tax exists, instead of the operation that would optimize the organization of companies, some other form will be sought, even if less efficient, to compensate for the existing organizational disadvantage: the two companies, instead of merging (paying high taxes for a restructuring which is intended to increase future profits, but which, considered in itself, produces no profit), will make a cooperation agreement or a consortium. The absence of fiscal neutrality in the system[20] means that solutions are sought which provide some of the advantages of acting together, without the fiscal cost of the merger.
We have here, therefore, a case of "excess burden": the tax will remove the incentive which the parties have to carry out the transaction, since the amount of the tax is higher than the net benefit which the parties would derive (increase in economic efficiency) from its performance. Neither will the State collect the tax, nor will the parties obtain the economic advantage they intended[21].
As all those involved end up losing in the case of restructuring operations that cease to take place for fiscal reasons, the usual solution of the legal order is the non-taxation of these operations, that is, their fiscal neutrality - a non-taxation which does not even imply a loss of tax revenue, since it is a tax which, as has been said, in most cases, would not be collected, because the operation would not take place."
It is precisely this idea of preventing legal acts of reorganization from triggering fiscal effects that also presided over the European Law regime contained in "Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, demergers, transfers of assets and exchanges of shares between companies of different Member States", which specifically contained in its preamble that "mergers, demergers, transfers of assets and exchanges of shares between companies of different Member States may be necessary to create conditions in the Community analogous to those of an internal market and thus ensure the achievement and proper functioning of the common market; that such operations should not be hindered by restrictions, disadvantages or special distortions resulting from the fiscal provisions of the Member States; that it is accordingly necessary to establish, for such operations, fiscal rules neutral with respect to competition, in order to allow companies to adapt to the requirements of the common market, increase their productivity and strengthen their competitive position at the international level", and that the "fiscal provisions currently penalize such operations compared to those carried out between companies of the same Member State; that it is necessary to eliminate this penalty".
This means, then, that also through the evaluative and interpretive force of European Tax Law, the combination of the norms in question (Article 44 of the IRC Code, Article 7 of Law No. 30-G/2000 and Article 68 of the IRC Code) must be understood in a sense which excludes the interpretive possibility of, by virtue of a merger operation, the cancellation of a shareholding triggering the verification of undesired fiscal effects. Whether because we are talking about a capital gain generated in 2000 and suspended in 2004, as the Respondent argues, or because we are talking about a capital gain occurring in 2004 with the merger, as the Claimant argues, what is certain is that, in both cases, there is no doubt that what the Tax Administration intends and what is to tax the values not taxed in 2000, only and exclusively occurs because there was a merger operation. Now, we understand that the neutrality regime seeks to prevent any tax effects, especially those resulting from capital gains (then generated, or years before, a question of less importance than that which the parties attribute to it) that result from the value of the shares transferred or extinguished. That is, the regime of fiscal neutrality of mergers contained in Article 68 of the IRC Code prevents, in this case, the fiscal relevance of the suspended capital gain which, because it was realized in the context of a neutral merger, should not be taxed.
This Arbitral Tribunal also fully and equally subscribes to the aforesaid judicial understanding to the effect that the merger operation in question is not capable of generating any taxation, with an impact on generated capital gains.
Hence the illegality of the tax act now contested and the consequent granting of the request.
Bank Guarantee
Being alleged and demonstrated that the Claimant provided a bank guarantee to suspend the enforcement of the tax claim now subject to this contest, the costs incurred and to be incurred arising from that guarantee are reimbursable.
Indeed, Article 53 of the General Tax Law (LGT) provides:
Guarantee in case of undue provision
1 - The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the damage resulting from its provision, if it has maintained it for a period exceeding three years in proportion to the success in administrative recourse, judicial review or opposition to enforcement which have the debt guaranteed as their subject matter.
2 - The period referred to in the previous number does not apply when it is verified, in administrative petition or judicial review, that there was an error attributable to the services in the assessment of the tax.
3 - The indemnification referred to in paragraph 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnity interest provided for in the present law and may be requested in the administrative petition or judicial review itself, or autonomously.
4 - The indemnification for provision of undue guarantee shall be paid by deduction from the revenue of the tax of the year in which payment is made.
It has been understood by doctrine, with regard to the cited legal provision, that "the reason justifying the attribution of the right to indemnification is the presumed damage caused to the private party by illegal action of the tax administration, in carrying out an incorrect assessment" (Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law - Annotated and Commented, 3rd Edition, Vislis Publishers, p. 230).
In the present case, the assessment, in the understanding of the Tribunal, suffers from an error attributable to the Services of the Tax Administration.
Now, since it is public and notorious that for the service of provision of a bank guarantee charges/commissions are paid to banks depending, in particular, on risk, value and duration of the guarantee, it must be concluded that, despite not having been alleged, the Claimant has borne [and certainly continues to bear] charges for the maintenance of the guarantees.
Having provided the guarantees for the total value of the assessment (and still, as results from the Law, interest, costs and surcharges, in the total of 1.442.209,76 - See Article 199-6 of the CPPT) and having obtained, as will be seen below, complete success in this arbitral ruling request, the Claimant meets the prerequisites which confer the right to indemnification under the cited Article 53 of the LGT.
It is certain that the indemnification amount was not quantified.
This, however, would not necessarily have had to be alleged, since those who claim indemnification do not need to indicate the exact amount of the damage – See Article 569 of the Civil Code.
The calculation of the indemnification shall thus take place in the implementation of judgment and bearing in mind the limitations of its amount provided for in Article 53-3 of the LGT.
III – DECISION
Therefore, this Collective Arbitral Tribunal agrees:
a) To grant the arbitral ruling request and
b) To annul the IRC assessment act now under contest
c) To grant the request for indemnification for provision of undue bank guarantee and, consequently,
d) To condemn the Tax and Customs Authority to pay to the claimant, A…, SA, the legal indemnification, on the terms and grounds above, with calculation in the implementation of judgment.
Process Value
The value of the case is fixed at € 1.138.936,59, pursuant to the provisions of Article 97-A of the CPPT, applicable ex vi Article 29, paragraph 1, subparagraph a), of the RJAT and Article 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).
Costs
Costs, in the amount of € 15.606,00 charged to the Respondent, Tax and Customs Authority, given that the present request was granted in full, pursuant to Schedule I of the RCPAT and Articles 12, paragraph 2 and 22, paragraph 4, both of the RJAT.
Lisbon, 15-7-2017
The Collective Arbitral Tribunal
José Poças Falcão
(President Arbitrator)
João Taborda da Gama
(Adjunct Arbitrator)
João Gonçalves da Silva
(Adjunct Arbitrator)
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