CAAD 67/2018-T: IRC Transitional Regime SNC Fair Value Adjustments and Article 45(3) CIRC Reduction

ARBITRAL DECISION (consult full version in PDF)

The Arbitrators Maria Fernanda dos Santos Maçãs (Presiding Arbitrator), Dr. Elísio Brandão and Prof. Doctor Miguel Patrício (Deputy Arbitrators), appointed pursuant to subparagraph a) of paragraph 1 of article 6 of the Legal Framework for Tax Arbitration (RJAT) by the Deontological Council of the Administrative Arbitration Centre, to constitute the present Arbitral Tribunal, hereby agree on the following:

I – REPORT

1.1. The Company A... SGPS, S.A. (hereinafter designated Applicant), with tax identification number..., with registered office at ..., ..., ..., ..., ...-... Lisbon, filed, pursuant to the combined provisions of articles 2, paragraph 1, subparagraph a), and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration - RJAT), a request for the constitution of a collective arbitral tribunal, in which the Tax and Customs Authority (hereinafter designated AT) is the Respondent.

1.2. The claim subject to the request for arbitral pronouncement consists of assessing the legality of the total dismissal of the ex gratia claim no. ...2017..., relating to CIT of 2012, and of the partial dismissal of the ex gratia claim no. ...2017..., relating to CIT of 2014, by order of 13 November 2017, and, consequently (and in final or ultimate terms), the additional assessment of CIT relating to 2012 with no. 2016... and the self-assessment act of CIT relating to 2014 with no. 2015....

1.3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

1.3.1. The Applicant did not appoint an arbitrator, wherefore, pursuant to subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of RJAT, the President of the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the prescribed period.

1.3.2. The parties were notified of the appointment of the arbitrators and neither raised any objections.

1.3.3. In accordance with the provision of subparagraph c) of paragraph 11 of RJAT, the collective arbitral tribunal was constituted on 3 May 2018.

1.3.4. In these terms, the Arbitral Tribunal is regularly constituted to assess and decide the subject matter of the case.

1.4. To substantiate the request for arbitral pronouncement, in which it formulates three claims (consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime relating to CIT of 2012; consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime in the self-assessment of 2014; and consideration of 100% of the value of the loss of 1/5 of the adjustments from the transitional regime, with reference to CIT of 2010 and 2011, and subsequent carry-forward to CIT of 2012), the Applicant alleges, in summary, the following:

a. By virtue of tax inspection (Proc. OI2016...), the AT made the following technical corrections to the Applicant's fiscal results in 2012:

b.

c. At issue in the present proceedings is the application of the transitional regime for IAS and the use of the fair value valuation model for holdings of 5% or less in companies listed on a regulated market, as provided in article 5 of Decree-Law no. 159/2009, of 13 July.

d. By oversight of its auditor, the Applicant did not make in 2010 (nor in the following years) the adjustment for the variation in the value of the social holdings held.

e. The AT itself made the calculations of the amounts to be deducted under the transitional regime, but reduced such amounts by half by application of paragraph 3 of article 45 of the Corporate Income Tax Code in the wording in force at the time.

f. The Applicant submitted an ex gratia claim to reflect, in 2014, 1/5 of the losses from the adjustments of the transitional regime.

g. The AT "agreed to consider this result in 2014 (...) but recognised only the value (1/5) which it itself made in 2012 in favour of the claimant, that is, only 50% of 1/5 of the established loss."

h. The Applicant invokes that such reduction does not apply to losses linked to the costs of the application of the fair value method, citing decisions to this effect by CAAD in proceedings no. 393/2016 (of 14 December 2016) and 89/2016T.

i. It thus considers that "the additional assessment is unlawful insofar as the (i) correction in 2012 in favour of the taxpayer (the loss corresponding to 1/5 of the adjustments from the transitional regime) should have been double what the AT recognised (€148,290.81), that is, €296,581.62 (column 6 of table 3 on page 7 of the inspection report) for each year (2012 and 2014) and should not accept the correction in the amount of €338,894.17, corresponding to 50% of the loss that the claimant recognised in 2012 for adjustments of losses and gains from variations in fair value of the 2012 financial year".

j. The Applicant further raises the question of whether the AT was not obliged to make an upward correction in the carry-forward of the Applicant's losses.

k. Having the AT established that the Applicant did not comply with a legal possibility, and this being to its detriment, there would be grounds for the AT "In compliance with the constitutional principle of contributory capacity, noting (...) that the taxpayer made an excusable error, in the 2 years prior to the year in question, should, properly, make the correction in the income tax return forms model 22 relating to 2010 and 2011, deducting in each one 1/5 of the expense it established and ex officio make the correction of the respective assessments and draw the due consequences regarding the carry-forward of losses to be considered in 2012."

l. It concludes, moreover, that "If the AT has no doubt as to the total value to be deducted due to adjustments resulting from the adoption of the fair value method (transitional regime) and also has no doubt that the present claimant could have deducted it although distributed over 5 years, it is the most elementary justice that the AT consider ex officio corrected the fiscal result declared by the present claimant in 2010 and 2011 and carry it forward to 2012."

It ends by formulating the following requests:

1.5. The AT submitted a response and attached the administrative file, alleging, in summary, the following:

A. By way of exception:

a. Illegal cumulation of claims

a.1. The AT alleges that in the consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime relating to CIT of 2012 and in the consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime in the self-assessment of 2014, the same factual circumstances and the same legal questions are at issue.

a.2. As regards the carry-forward to 2012 of losses that were not established in 2010 and 2011, losses resulting from the transitional regime for adjustment of fair value, but which were not established by the AT or by the taxpayer, the legal presuppositions on which ex officio review of the tax act depends are at issue, pursuant to article 78 of the General Tax Law, with the questions of fact and law associated with their interpretation and application, as well as the rules on the carry-forward of established losses, that is, the determination of the taxable income of CIT of 2010 and 2011, and the application of the carry-forward rules in the event of a loss to carry forward.

a.3. It therefore argues that the cumulation of the claims for consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime relating to CIT of 2012 and for consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime in the self-assessment of 2014 is only admissible.

b. Lack of subject matter

b.1. In the alternative, it understands that, with an ex officio review pending (with no. ...2017...) on the question of the carry-forward of losses of fiscal results relating to the years 2010 and 2011, it is necessary to conclude that there is no subject matter for the request for arbitral pronouncement, under the combined provisions of article 2 and paragraph 1 of article 10 of RJAT.

B. By way of contested merits

1. In some way, the AT interpreted the Applicant's reasons in the sense of affirming that "the deduction limit set out in paragraph 3 of art. 45 of the CIRC is a disincentive that has the function of penalising the taxpayer and that, as a control and disincentive measure, does not apply to adjustments that result from the application of objective market criteria that were in no way influenced by the taxpayer's will."

2. On the contrary, the AT understands that "the limits imposed by the tax legislator on factors capable of contributing to the erosion of the taxable base and consequent determination of tax do not only aim at combating tax evasion and fraud," and are justified, "also, on grounds of economy and logic of the tax itself."

3. The AT invokes that "For that reason the legal rule in question encompasses various realities, also applying to 'other losses or negative patrimonial variations relating to capital shares or other components of equity', without excluding from this reality situations that result from the application of objective criteria that occur due to vicissitudes of the market."

4. And that "The 50% limitation provided for in paragraph 3 of art. 45 of the CIRC applies both to realised gains and to expenses resulting from the application of the fair value method, as results from the letter of the law in referring to 'negative patrimonial variations relating to capital shares or other components of equity'."

5. The AT further specifies that "that legal rule was only applied to losses (negative variations in fair value), that is, it was only applied in the calculation of the value of €148,290.81 (=50% x €296,581.61 – cf. Table 3 of the report, p. 110), and not in the correction to gains in the amount of €39,565.56 (cf. End of point II – 1 ABOVE), it thus not being €187,856.37 the value resulting from the application of the rule, as was stated in points 35 and 36 of the claim."

6. As for "the intended carry-forward to 2012 of losses that the Applicant did not consider in the fiscal result of 2010 and 2011", it understands that "there was no alteration to the fiscal losses established in the tax return forms model 22 for CIT of 2010 and 2011 that would justify the intended carry-forward with reference to CIT of 2012."

7. In any case, it would be impossible for another reason: "the said deduction of losses corresponds to the maximum value provided in the wording in force in 2012 in paragraph 2 of art. 52 of the CIRC, that is, 75% of taxable profit (corrected taxable profit €1,546,923.63 × 75% = €1,160,192.72)."

8. On the other hand, with regard to CIT of 2014, the AT understands that "it should be recognised, with regard to the fiscal result for the financial year 2014, the deduction of the value of €108,725.25, resulting from the algebraic sum of the two corrections mentioned in point III.2.1 of the 2012 report (€-148,290.81 and €39,565.56)."

9. But that "Here too the 50% limit provided for in paragraph 3 of art. 45 of the CIRC is at issue."

1.6. Having been given the opportunity to the taxpayer to exercise contradiction, in writing, on matters of exception, and there being no evidence to be produced, the Tribunal, by order of 10 July, dispensed with the holding of the meeting provided for in article 18 of RJAT. The parties were notified, by virtue of the same order, to submit successive submissions within 15 days and 3 November was set as the deadline for issuing the arbitral decision.

1.7. The parties did not submit submissions.

1.8. Having examined the contents of the allegations in points 29 and 30 of the arbitral request and, in particular, the claims formulated, it appeared to the Tribunal that the taxpayer asks that the Respondent be condemned to ex officio consider corrected the fiscal result declared in 2010 and 2011 and to carry it forward to 2012 in the exact measure of 2/5 of the value of the loss as a result of the adjustments from the transitional regime which the AT itself calculated. Accordingly, considering that this claim exceeds the Tribunal's jurisdiction, the taxpayer was ordered, by order of 29 September, to exercise contradiction.

II. PRELIMINARY DETERMINATION

The parties have legal standing and capacity, are shown to be legitimately interested and are regularly represented (article 4 and paragraph 2 of article 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

However, the AT first raises the question of the illegal cumulation of the third claim of the Applicant (Consideration of 100% of the value of the loss of 1/5 of the adjustments from the transitional regime, with reference to CIT of 2010 and 2011, and subsequent carry-forward in CIT of 2012) with the others.

Alternatively, the AT raises the question of lack of subject matter in relation to the same claim (consideration of 100% of the value of the loss of 1/5 of the adjustments from the transitional regime, with reference to CIT of 2010 and 2011, and subsequent carry-forward in CIT of 2012), because a request for ex officio review with no. ...2017... is pending which has not yet been decided.

The Applicant, notified to exercise contradiction on the matter of exception, said nothing.

Having been notified of the order of 29 September, by which the tribunal raises doubts about its jurisdiction to assess the claim insofar as it asks for the Respondent to be condemned to ex officio consider corrected the fiscal result declared in 2010 and 2011 and to carry it forward to 2012, in the exact measure of 2/5 of the value of the loss as a result of the adjustments from the transitional regime which the AT itself calculated, the taxpayer stated that it respects the Tribunal's decision not to know the said claim, but the tribunal should recognise the remaining claims "(consideration of 100% of the loss of 1/5 of the adjustments from the transitional regime in each of the years 2012 and 2014), and thus the proceedings should continue on these terms)".

It is necessary to analyse and decide.

As we have seen, the taxpayer alleges at one point that "Having the AT established that the Applicant did not comply with a legal possibility, and this being to its detriment, there would be grounds for the AT "In compliance with the constitutional principle of contributory capacity, noting (...) that the taxpayer made an excusable error, in the 2 years prior to the year in question, should, properly, make the correction in the income tax return forms model 22 relating to 2010 and 2011, deducting in each one 1/5 of the expense it established and ex officio make the correction of the respective assessments and draw the due consequences regarding the carry-forward of losses to be considered in 2012."

It concludes, moreover, that "If the AT has no doubt as to the total value to be deducted due to adjustments resulting from the adoption of the fair value method (transitional regime) and also has no doubt that the present claimant could have deducted it although distributed over 5 years, it is the most elementary justice that the AT consider ex officio corrected the fiscal result declared by the present claimant in 2010 and 2011 and carry it forward to 2012."

Now, this claim, constituting a request for condemnation to a conduct or recognition of a right, exceeds the merely annulment jurisdiction of the Tribunal, as the taxpayer came to recognise in exercising contradiction on this matter.

In these terms, the incompetence officially raised for the Tribunal to assess the claim formulated by the taxpayer, insofar as it asks for the Respondent to be condemned to "ex officio consider corrected the fiscal result declared by the present claimant in 2010 and 2011 and carry it forward to 2012," proceeds.

Having thus delimited the subject matter of the claim to "(consideration of 100% of the loss of 1/5 of the adjustments from the transitional regime in each of the years 2012 and 2014)", the exceptions raised by the Respondent, both as to illegal cumulation of claims and as to lack of subject matter, fall away.

The proceedings do not suffer from defects, with the conditions being met for a final decision to be issued.

III. ON THE MERITS

III.1. Established Facts

With relevance for the assessment and decision of the questions raised, preliminary and substantive, the following facts are established and proven:

i. From the inspection action on the Applicant – Proc. OI2016... – it resulted that "the result for tax purposes of the financial year 2012 changed from a fiscal loss of €1,732,329.65 to a taxable profit of €1,546,923.63";

ii. It also resulted that "The taxable base changed from €0.00 to €386,730.91, due to the deduction from the corrected taxable profit of fiscal losses carried forward from previous financial years";

iii. Consequently, the note showing the additional CIT assessment relating to 2012 was €132,466.25, with a payment deadline of 12 January 2017;

iv. The Applicant paid the amount due (p. 25 of the administrative file and express statement by the AT on p. 5 of the administrative file);

v. Of the three corrections to the taxable profit made by the AT relating to that financial year, the Applicant submitted an ex gratia claim (...2017...) only regarding the one corresponding to the transition to IAS and the use of the fair value valuation model, whose dismissal was communicated to it by letter of 15 November 2017;

vi. The Applicant did not make in 2010 the adjustment for the variation in the value of the social holdings held (provided they were 5% or less of its capital stock and listed on a regulated market);

vii. Consequently, it also did not reflect in the fiscal result of the five following years 1/5 of that variation, as permitted by article 5 of Decree-Law no. 159/2009;

viii. Thus, the AT's inspection determined the establishment, in relation to each of the securities held by the Applicant on 31 December 2009, of the variation in its market value on the first day of 2010 compared to its acquisition value (and its division by 5, to distribute that variation over the 5 years provided for in law);

ix. This resulted in corrections of €39,565.56 for securities with gains, and of -€148,290.81, for securities with losses, because in these cases the AT reduced by half this correction (which was -€296,581.61) by virtue of the provision in paragraph 3 of article 45 of the CIRC;

x. With regard to 2012, the maximum amount permitted by law was, moreover, already deducted (paragraph 2 of article 52 of the CIRC): €1,160,192.72, which represented 75% of the corrected taxable profit (€1,546,923.63), for which reason the claim submitted was fully rejected;

xi. An ex officio review process is underway with no. ...2017..., in which the Applicant requested the reduction of the fiscal results relating to CIT of 2010 and 2011, which has not yet been subject to decision.

xii. With regard to the financial year 2014, whose tax return was submitted before the corrections made by the AT, the Applicant also submitted an ex gratia claim (...2017...), whose partial approval was communicated to it by letter of 15 November 2017.

xiii. This partial approval translated into the deduction from the fiscal result of the financial year 2014 "of the value of €108,725.25, resulting from the algebraic sum of the two corrections mentioned in point III.2.1 of the 2012 report (€-148,290.81 and €39,565.56)", thus changing its loss for tax purposes from €1,143,369.37 to €1,252,094.62.

xiv. Such variation resulted from the translation into the fiscal results of the financial year 2014 of the effects of the transitional regime provided for in paragraphs 1 and 5 of article 5 of Decree-Law no. 159/2009, which the Applicant had not considered in its return, limited to 50% (of the losses in the 1/5 considered) on the basis of paragraph 3 of article 45 of the Corporate Income Tax Code.

III.2. Unproven Facts

There are no other facts with relevance for assessing the merits of the case that have not been proven.

III.3. Substantiation of the Proven and Unproven Factual Matter

The Tribunal's conviction as to the facts established and unproven resulted from the examination of the documents attached to the proceedings and contained in the request and response of the parties, as well as from the analysis of the administrative file.

III.4. On the Law

The parties agreed that what is essentially at issue is the application of the provision in paragraph 3 of article 45 of the CIRC (in the wording of Law no. 60-A/2005, of 30 December, then still as art. 42[1]), which the AT considered applicable to the Applicant's situation, and the Applicant understands that it was not. According to paragraph 3 of the said article 45:

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

Let us examine this then.

As we have seen above (in the Preliminary Determination), the question at issue is only to ascertain whether the Applicant is right when it petitions for consideration of 100% of the loss of 1/5 of the adjustments from the transitional regime provided for in article 5 of Decree-Law no. 159/2009, of 13 July, in two situations: in the additional CIT assessment relating to the financial year 2012 and in the self-assessment of CIT relating to the financial year 2014. As will be seen, and although there is a common ground in both, the solution is different in one case and the other, insofar as there are different legal frameworks to be considered in both situations.

Let us begin with the question relating to the self-assessment of CIT of 2014, which was the subject of the ex gratia claim no. ...2017.... Thus, in view of the arguments put forward by the parties, as well as the other elements contained in the present proceedings, regarding the application of the said paragraph 3 of article 45 of the Corporate Income Tax Code, the understanding already set out in multiple Arbitral Decisions of CAAD[2] should be followed, such as, for example, those issued in proceedings no. 108/2013-T, of 25/11/2013, no. 155/2017-T, of 12/1/2018 or no. 59/2015-T, of 5/10/2015 (which will be cited below), which dealt with the same legal question and with whose reasoning we agree:

"This is a question that has already been addressed by CAAD judgments, namely the one issued in proceedings 108/2013-T, which we will follow closely. Article 45, paragraph 3, CIRC, provided that «the negative difference between gains and losses realised through the onerous transfer of capital shares, including their redemption and amortisation with capital reduction, as well as other components of equity, in particular supplementary contributions, contribute to the formation of taxable profit at only half their value.»

First and foremost, it must be noted that the aforementioned art. 45, paragraph 3, CIRC, results from a legislative amendment that was guided, according to the Report of the Ministry of Finance for the 2003 State Budget, by «two priorities, namely, the fight against tax fraud and evasion and the broadening of the tax base», with the amendment of interest here fitting within the scope of «Broadening of the tax base and measures of moralization and neutrality».

The wording of the rule under analysis resulted from the amendment implemented by Law no. 60-A/2005 of 30 December, and according to the corresponding Report of the Ministry of Finance, the measure in question was framed within «Combating Tax Evasion and Fraud and Other Measures Aimed at Budget Consolidation».

Thus, with Law no. 60-A/2005, of 30/12, the rule came to have a broader wording, encompassing, in the limitation of losses to 50%, not only the «negative difference between gains and losses realised through the onerous transfer of capital shares», but also «other losses or negative patrimonial variations relating to capital shares or other components of equity, in particular supplementary contributions». [...].

A critical look at art. 45, paragraph 3, which admitted, within its scope, not only losses (as defined in art. 23) but also negative patrimonial variations (as defined in art. 24), as well as costs (as defined in art. 23), would lead to, for example, the acquisition cost of capital shares only contributing at half their respective value to the determination of taxable profit, which would obviously be inconceivable for a minimally reasonable legislator. By «losses» should be understood facts qualifiable as such in light of the CIRC and by «negative patrimonial variations» should be understood negative patrimonial variations not reflected in the net result of the financial year, as defined in art. 24.

One should then conceive, given the panorama set out, that Decree-Law no. 159/2009, of 13 July, came to introduce, with regard to the part covered by the acceptance of the application of the fair value model in financial instruments, a special regime of relevance for the computation of taxable profit, justified both by its own objectivity and by the stated intention of convergence between accounting and taxation. This amendment cannot be disregarded when the legal question to be resolved is analysed.

Now, faced with the current wording of the CIRC, that assertion generates no doubts, as can be seen, in particular, by the wording of arts. 20, paragraph 1, subparagraphs f) and h), 23, paragraph 1, subparagraphs i) and l), and, in particular art. 46, paragraph 1, subparagraph b), against which the legislator's intention to remove adjustments resulting from the application of the fair value criterion in financial instruments, as recognised by the CIRC, from the regime of gains and losses is clearly evident. Nevertheless, the situation is different when it comes to the former art. 45, paragraph 3, CIRC, arising this article as an antithesis of that congruence of rules that surround it.

That is to say: in the regime for which the rule of article 45, paragraph 3 was designed and instituted, the realisation of losses, and other situations listed, was dependent on a voluntary action corresponding to the realisation of the same. Now, in this context, it will be understandable that the legislator institutes mechanisms of disincentive to an action susceptible of being considered as undesirable, in this case the realisation of losses or other negative patrimonial variations. By providing that such situations will only be relevant at 50% of the amount accounted for, the tax legislator is, objectively, conditioning the actions encompassed by the legal provision, imposing a negative incentive to the same.

On the other hand, and being financial instruments of non-objectively quantifiable value at issue, the non-consideration of 50% of the negative patrimonial variations verified would also have a function of «compensating» the natural tendency of economic operators to, at the fiscal level, inflate losses.

However, the same cannot be concluded in situations encompassed by art. 18, paragraph 9, subparagraph a) – such as those in the present case. Here, being adjustments resulting from the accounting of fair value, determined by objective criteria (with «a price formed in a regulated market»), there is any doubt or intervention of the taxpayer's will in the verification of the negative or positive patrimonial adjustment. That is to say, these will occur, or not, regardless of the action and will of the taxpayer.

Now, penalising, in these cases, the taxpayer with a non-consideration of 50% of the cost incurred, would be entirely unjustified, either from an economic point of view or a legal point of view, and even less so, at the accounting level.

Given that, in the regime of the defunct art. 45, paragraph 3, the realisation of losses, and other situations provided for, was dependent on a voluntary action corresponding to the realisation of the same. Faced with this factuality, it will be understandable that the legislator institutes mechanisms of disincentive to an action susceptible of being considered as undesirable, in this case the realisation of losses or other negative patrimonial variations. By providing that such situations will only be relevant at 50% of the amount accounted for, the tax legislator is, objectively, conditioning the actions encompassed by the legal provision, imposing a disincentive to the same.

The non-application of art. 45, paragraph 3, CIRC, to costs and, concretely, to «Costs resulting from the application of fair value in financial instruments», with full consideration of the patrimonial repercussions verified, whether positive or negative, leads to a congruence of taxation regardless of when the disposal of the financial instrument takes place.

On the contrary, if one applies the rule of art. 45, paragraph 3, CIRC, as the AT intends, from the moment a negative patrimonial change is verified, there will be a disparity between the fiscal relevance of negative and positive patrimonial variations, without any justification. It seems clear that random results and without any substantial foundation to sustain them cannot have been intended by a reasonable legislator.

It is true that the alternative solution, which excludes the application of art. 45, paragraph 3, CIRC, leads to that, in the event of a loss being ultimately verified, it ends up having been considered at 100%, and not at 50%, as would occur under the principle of realisation. However, this positive discrimination (or rather, non-negative discrimination) by the choice of the fair value criterion, may be justified, firstly, because in the regime of art. 18, paragraph 9, subparagraph a), any disincentive to the realisation of losses no longer makes sense, since they will be fiscally relevant regardless of their actual realisation. One should also not disregard that, on the one hand, the accounting at fair value is considered more in line with the convergence between accounting and taxation, an objective confessedly pursued by the legislator of Decree-Law no. 159/2009, of 13 July, and, on the other, the circumstance that we are dealing with objectively evaluated realities, without significant room for fiscally convenient manipulations. That is, as had already been stated, the reasons for combating tax fraud and evasion, nor the reasons for budget consolidation, which demonstrably were at the origin of the rule of art. 45, paragraph 3, of the CIRC, are present. [...].

As a consequence of the above, and in obedience to the hermeneutic impositions of art. 9, Civil Code, it is understood that art. 45, paragraph 3, CIRC, should be interpreted in the sense that its provision does not include costs resulting from the application of fair value in financial instruments that are relevant to the formation of taxable profit, pursuant to subparagraph a) of paragraph 9 of art. 18.

Having regard to the logical, systematic and rational organisation of the legal framework of the rule contained in art. 45, paragraph 3, of the CIRC, in the set of rules in which it is inserted and which was explained above, there is a clear incongruence between the strict application of this rule, as the AT intends, and the implicit (and erroneous) results to which that application leads. In particular, by operating a strict application of art. 45, paragraph 3, of the CIRC, we have a clear violation of the principle of equity."

Much the same was, moreover, written in the Arbitral Decision issued in proceedings no. 208/2015-T, of 25/9/2015.

In the same sense, see also the recent Judgment of the Superior Administrative Court of 6/6/2018, issued in proc. 0582/17:

"following the republication of the CIRC, carried out by Decree-Law no. 159/2009, of 13 July, the rule in question became paragraph 3 of art. 45, and presently this article 45 is already repealed.

The existence of this rule aimed, therefore, immediately to combat fraud and tax evasion, avoid manipulation of fiscal results, and mediately to obtain a broadening of the tax base resulting from the significant reduction of those mechanisms used by taxpayers to reduce or annul the amount of tax to pay.

Let us now see to what extent the measurement of assets – financial instruments listed on regulated markets – at Fair Value can be reconciled with this CIRC rule [...].

The concept of Fair Value resulting from accounting rules, both national (Accounting Standards System – SNC, Decree-Law no. 158/2009, of 13 July) and international (IAS), when incorporated into the tax system, is substantiated, essentially, in «the amount at which an asset could be exchanged, or a liability settled, between knowledgeable parties willing to do so, in a transaction where there is no relationship between the parties».

José de Campos Amorim states that, «IAS/IFRS and the SNC, with changes to the financial reporting standards, introduced greater fairness in the valuation of company assets for the benefit of users of the company's economic, financial and equity situation. This opening of accounting to fair value meets the needs of investors who wish to obtain real and reliable information before deciding to invest in the company. It is not information that can condition certain economic or financial operations, such as, for example, the increase or decrease of capital, but it is of great relevance to the investor who wishes to have a real and current understanding of the company's assets. It is for this reason that accounting is oriented not towards historical cost but towards the current value of assets.», cf. Fair Value and Its Tax Implications, IV Tax Law Congress, Economic Life, p. 168.

Therefore, the consideration of Fair Value, regarding what interests us here (the introduction of the Fair Value model within the scope of CIT when financial instruments are at issue, was operated by Decree-Law 159/2009, of 13 July) and for tax purposes (which, under article 17, paragraph 1, of the CIRC is directly linked with the company's own accounting), has an immediate link to the official quotation of the securities, in the case of the proceedings it is subject to a market regulated by official entities, leaving the tax fact to cease to be associated with the sale of securities – realisation of gains or losses – and coming to be associated with the oscillation of the official quotation between the beginning and end of the tax period, cf. Tomás Castro Tavares, Fair Value and Taxation of Capital Gains on Shares of Listed Companies, Studies in Memory of Prof. Doctor J.L. Saldanha Sanches, vol. IV, pp. 1137 and 1138.

These «gains or losses» thus determined by Fair Value are merely potential or provisional – the value of the assets is embodied in a financial position – because there is no actual entry of capital or loss of capital compared to historical cost, as is recognised by the legislator itself in article 32, paragraph 2, of the Commercial Companies Code.

There is, thus, no doubt that negative Fair Value, the negative financial position resulting from Fair Value, is not underlain by a motivation of tax evasion, by value metric arbitrariness, for the simple reason that the taxation of fair value is confined to assets transacted in an organised market, where the quotation of the asset (appreciation and depreciation) is completely independent of the taxpayer's tax will… The taxpayer's will never shapes the tax fact based on fair value: the economic obstacle of lock-in disappears (the tax fact is dissociated from the decision to sell); if fair value gains are fully taxed (the regime of gains and losses never applies to them), expenses should also be fully accepted; and there is, finally, no asymmetric inclination to realise the fair value cost, in comparison with the gain – for the simple reason that the tax fact of fair value (positive and negative) is, completely, independent of the taxpayer's will…cf. Tomás Castro Tavares, ibidem, pp. 1143 and 1144.

Therefore, the legislator with the rule of article 18, paragraph 9, subparagraph a), for cases such as those in these proceedings, moved away from the principle of realisation and brought closer, even more, the tax rule to the accounting rule, giving fiscal relevance to the annual variation in the value of financial instruments, with price formed in a regulated market, when Fair Value rules are applied, cf. articles 20, paragraph 1, subparagraph f), and 23, paragraph 1, subparagraph i) of the CIRC.

From the foregoing, it results clearly, under the provision of article 9 of the Civil Code, that the rule of article 45, paragraph 3, of the CIRC under analysis is not consistent with the determination – at Fair Value – of the value of assets subject to a market regulated by official entities, because the reason for its existence, combating tax evasion and avoidance, has no justification in the concrete case, the value of the assets – the financial position – ends up being «foreign» and alien to the taxpayer's will which, ultimately, has no relevance for the appreciation or depreciation of the respective asset."

In summary, and in full agreement with the arguments contained in the Superior Administrative Court judgment and also the Arbitral Decisions cited above, we equally conclude in the present case that: i) article 45, paragraph 3, of the CIRC, should be interpreted in the sense that its provision does not include costs resulting from the application of fair value in financial instruments, which are relevant to the formation of taxable profit under subparagraph a) of paragraph 9 of art. 18 of the CIRC; ii) such interpretation is in consonance with the interpretative rules of art. 9 of the Civil Code and is the one that is appropriate to the ratio of paragraph 3 of art. 45 of the CIRC; iii) Decree-Law no. 159/2009, of 13/7, came to introduce, regarding the part covered by the acceptance of the application of the fair value model in financial instruments, a special regime of relevance for the computation of taxable profit, justified by its own objectivity and its intention to convergence between accounting and taxation; iv) the application of the rule of art. 45, paragraph 3, of the CIRC, to situations encompassed by art. 18, paragraph 9, subparagraph a), of the CIRC, is shown to be unreasonable in its results (given that it creates discrepancies in the fiscal relevance of positive and negative patrimonial variations) and moves away, without an acceptable justification, from the ratio underlying the set of rules in which the first rule is inserted.

Consequently, it is concluded that the self-assessment of CIT relating to 2014, in the part contested, and the decision on the ex gratia claim no. ...2017... are defective with the vice of violation of law, due to erroneous interpretation of art. 45, paragraph 3, of the CIRC, whereby its declaration of illegality is justified.

As regards CIT of 2012, which was the subject of the ex gratia claim no. ...2017..., the rule of paragraph 2 of article 52 of the Corporate Income Tax Code is also at issue (in the wording in force until 31/12/2014) which prevented the consideration of correction to the result of 2012.

Indeed, by virtue of Law no. 64-B/2011, of 30/12, applicable from 2012 onwards, the deduction of losses was limited to 75% of the respective taxable profit, as can be read in article 52, paragraph 2, of the CIRC: "The deduction to be made in each tax period may not exceed the amount corresponding to 75% of the respective taxable profit, without, however, prejudicing the deduction of the part of such losses that have not been deducted, under the same conditions and until the end of the respective deduction period."

In this respect, the AT states, in the draft decision on the said ex gratia claim filed by the applicant against the additional CIT assessment relating to the financial year 2012 that, following tax inspection of the applicant, "corrections were made totalling the amount of €3,279,253.28 to be added to the value of the fiscal result declared by the claimant [...]. Thus the result for tax purposes of the financial year 2012 changed from a fiscal loss of €1,732,329.65 to a taxable profit of €1,546,923.63. The taxable base changed from €0.00 to €386,730.91, due to the deduction from the corrected taxable profit of fiscal losses carried forward from previous financial years, under the terms of art. 52 of the CIRC, in the amount of €1,160,192.72." (see points i. and ii. of the proven facts).

In the said draft, the AT further adds that "the said deduction of losses corresponds to the maximum value provided in the wording in force in 2012 of paragraph 2 of art. 52 of the CIRC, that is, 75% of the taxable profit (corrected taxable profit €1,546,923.63 × 75% = €1,160,192.72)."

In fact, as noted in point x of the proven facts, it is verified that, with regard to 2012, the maximum amount that could be admitted by law was deducted: €1,160,192.72, which represented 75% of the corrected taxable profit (€1,546,923.63).

Given the foregoing, it is concluded that, even without the carry-forward of losses from 2010 and 2011 (as requested by the Applicant), such limit had already been reached, and could not be exceeded given the aforementioned wording of article 52, paragraph 2, of the CIRC.

Thus, the Applicant's claim for "consideration of 100% of the loss of 1/5 of the adjustments from the transitional regime" is prejudiced, as regards the CIT relating to the financial year 2012, since any increase in the negative patrimonial variation in its capital by means of the non-application of the limit set in paragraph 3 of article 45 of the Corporate Income Tax Code would always be limited by the fact that the deduction already made (€1,160,192.72) corresponds to the maximum permitted by law.

The Applicant's claim is therefore unfounded with regard to the additional CIT assessment of 2012.

III.4.1. Right to Indemnity Interest

According to the provision in subparagraph b) of art. 24 of RJAT, the arbitral decision on the merits of the claim from which there is no appeal or challenge 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 favour of the taxpayer and until the end of the period provided for spontaneous execution of judgments from tax courts, "restore the situation that would have existed if the tax act subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for the purpose".

In the same sense, see article 100 of the General Tax Law [applicable by virtue of the provision in subparagraph a) of paragraph 1 of article 29 of RJAT]: "the tax administration is obliged, in case of total or partial success of an ex gratia claim, judicial challenge or appeal in favour of the taxpayer, to the immediate and complete restoration of the legality of the act or situation subject of the dispute, including the payment of indemnity interest, if applicable, from the end of the period of execution of the decision".

The judicial challenge process, despite being essentially a process of annulment of tax acts, admits condemnation of the Tax Administration to payment of indemnity interest, as can be inferred from art. 43, paragraph 1, of the General Tax Law, in which it says that "indemnity interest is due when it is determined, in an ex gratia claim or judicial challenge, that there was error attributable to the services which resulted in payment of the tax debt in an amount higher than that legally due".

In these terms, paragraph 5 of article 24 of RJAT, in saying that "payment of interest is due, regardless of its nature, under the terms provided in the general tax law and in the Tax Procedure and Process Code", should be understood as allowing the recognition of the right to indemnity interest in the arbitral process.

Accordingly, it is necessary to verify whether there is grounds for reimbursement of the amount paid by the applicant and to indemnity interest in cases of self-assessment of tax.

In cases of undue payment of tax, the taxpayer has the right to be reimbursed, as results from the provision in articles 100 of the General Tax Law and 24, paragraph 1, subparagraph b), of RJAT. As for the substantive regime of the right to indemnity interest, this is found in article 43 of the General Tax Law, already cited above.

Reading the said art. 43 it is concluded that it is a necessary condition for the attribution of the mentioned interest the demonstration of the existence of error attributable to the services. In that sense, see, for example, the following judgments: "The right to indemnity interest provided for in paragraph 1 of art. 43 of the General Tax Law [...] depends on having been demonstrated in the proceedings that that act is affected by error regarding the factual or legal presuppositions attributable to the AT." (Judgment of the Superior Administrative Court of 30/5/2012, proc. 410/12); "The right to indemnity interest provided for in paragraph 1 of article 43 of the General Tax Law presupposes that in the proceedings it is determined that in the assessment «there was error attributable to the services», understood as the «error regarding the factual or legal presuppositions attributable to the Tax Administration»" (Judgment of the Superior Administrative Court of 10/4/2013, proc. 1215/12).

However, it is found, in the case at hand, that the only part of the tax improperly paid was self-assessed (that relating to the financial year 2014), whereby the AT had no intervention in the practice of the act on which such payment was based – reason for which the said practice should be attributed to the Applicant itself. For this reason, it is concluded, as regards the self-assessment act, that there was no error attributable to the services, and there is thus no right to indemnity interest arising from its practice.

As regards the additional CIT assessment relating to the financial year 2012, it has already been stated that, although the Applicant could, in the abstract, be right as to the undue application of the limit provided for in paragraph 3 of article 45 of the Corporate Income Tax Code (reduction to 50% of negative patrimonial variations), its subjection to another limit – the maximum limit provided in the wording in force in 2012 of paragraph 2 of art. 52 of the CIRC, that is, 75% of taxable profit – prevented that undue application from having any influence in altering the tax to be paid, as the AT invoked in the dismissal of the respective ex gratia claim.

Now, there having been, in neither of the cases, error attributable to the services, it is concluded by the unfounded nature of the request for payment of indemnity interest.

IV. DECISION

In view of the foregoing, it is decided:

• To declare the Tribunal incompetent (materially) to assess the claim formulated by the taxpayer, insofar as it asks for the Respondent to be condemned to "ex officio consider corrected the fiscal result declared by the claimant in 2010 and 2011 and to carry it forward to 2012";

• To declare the request for arbitral pronouncement well-founded as regards the claim for declaration of illegality of the order of dismissal issued in the ex gratia claim with no. ...2017... (relating to CIT of 2014), in the part restricted to the non-consideration of 100% of the value of the loss of 1/5 with adjustments from the transitional regime provided for in article 5 of Decree-Law no. 159/2009, of 13 July, relating to CIT of 2014;

• To annul (partially), with all legal effects, the said order on that ex gratia claim (in the part dismissed), in the exact terms referred to above;

• To annul, with all legal effects, the self-assessment act of CIT (relating to 2014) with no..., in the part relating to the limitation to half of the adjustments resulting from the application of fair value of holdings of 5% or less in companies listed on a regulated market;

• To declare the request for arbitral pronouncement unfounded as regards the claim for declaration of illegality of the order issued in the ex gratia claim with no. ...2017... relating to CIT of 2012, with the consequent maintenance in the legal order of the dismissal of the ex gratia claim;

• To declare the request for arbitral pronouncement unfounded as regards the claim for obtaining indemnity interest.

V. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at €132,466.25 (one hundred thirty-two thousand four hundred sixty-six euros and twenty-five cents), under the terms of the provision in art. 32 of the Tax Procedure and Process Code and in art. 97-A of the Tax Court Procedural Code, applicable by virtue of the provision in art. 29, paragraph 1, subparagraphs a) and b), of RJAT, and of art. 3, paragraph 2, of the Tax Arbitration Regulatory Code.

VI. COSTS

Costs, in the amount of €3,060.00 (three thousand and sixty euros), under the terms of Table I of the Tax Arbitration Regulatory Code, in compliance with the provision in articles 12, paragraph 2, and 22, paragraph 4, both of RJAT, and of the provision in art. 4, paragraph 5, of the said Regulation, divided in the percentage of the respective failure, which is set at 70% to be borne by the Applicant and 30% to be borne by the Respondent.

Notify.

Lisbon, 26 October 2018.

The Presiding Arbitrator

(Fernanda Maçãs)

The Arbitrator Member

(Elísio Brandão)

The Arbitrator Member

(Miguel Patrício)

[1] This rule was repealed by Law no. 2/2014, of 16 January.

[2] In addition to the Arbitral Decisions mentioned below, the Arbitral Decisions issued in proceedings no. 396/2015-T, of 11/1/2016, no. 89/2016-T, of 14/10/2016, and no. 393/2016-T, of 14/12/2016, also follow the line that will be defended here.