CAAD 671/2015-T: IRS Tax Substitute Liability & Anti-Abuse Clause

Process: 671/2015-T

Date: August 25, 2016

Tax Type: IRS

Summary

CAAD Case 671/2015-T examined whether the Portuguese Tax Authority could hold a company liable as a tax substitute for IRS withholding tax under the general anti-abuse clause (Article 38(2) LGT) when the company itself received no tax benefit. The claimant company challenged an IRS withholding tax assessment of €1,232,680.93 for 2010, arguing that shareholders who benefited from revaluing shares from €1.00 to €1,380.214 before disposal should bear tax liability, not the company acting as tax substitute. The core legal issue centered on whether anti-abuse provisions permit the Tax Authority to reconstruct hypothetical transactions and impose withholding obligations on tax substitutes for abusive arrangements benefiting third parties. The claimant argued that Article 38(2) LGT renders abusive transactions ineffective only for tax purposes without authorizing alternative reality reconstructions. The company contended it was impossible for tax substitutes to assess counterparties' fiscal motivations in normal business dealings, making such liability unconstitutional under proportionality principles and property rights protections. The Tax Authority characterized the share revaluation as artificial, designed to convert what should be taxed as capital income (subject to higher withholding rates under Article 71(1)(a) CIRS) into capital gains (taxed at lower rates). The claimant alternatively argued that if anti-abuse applied, only €211,872.17 was due given statute of limitations on 2009 obligations. The arbitral tribunal noted dissenting opinions from two arbitrators on different aspects of the decision, reflecting the complexity of applying anti-abuse clauses to tax substitutes who neither participated in nor benefited from the abusive tax planning scheme.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), José Poças Falcão (who voted against the main decision, as per the attached dissenting opinion) and Jorge Carita (who voted against the decision on the subsidiary claim, as per the attached dissenting opinion), appointed as arbitrators at the Administrative Arbitration Centre, to constitute an Arbitral Tribunal:

I – REPORT

On 9 November 2015, A…, S.A., with registered office at … no.…, …-… …, holder of the single registration and identification number for legal entities…, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, for short, referred to as RJAT), seeking the declaration of illegality of the act of assessment of withholding tax on Personal Income Tax ("IRS") for 2010 no. 2014…, of 11 November, in the amount of € 1,232,680.93, and the respective assessment of compensatory interest no. 2014…, in the amount of € 200,606.15.

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

the taxable persons identified in its initial petition were the beneficiaries of the tax advantages resulting from the transaction at issue in these proceedings, and therefore, they should be responsible for payment of the amounts corresponding to those same advantages, and not the Claimant, as it is completely unrelated to the situation, in particular, as it has not enjoyed any tax advantage. It supports this argument in the decision of CAAD issued in case no. 379/2014-T;

the consequence that may arise from the wording of article 38, no. 2 of the General Tax Code (LGT) regarding the application of the general anti-abuse clause is the ineffectiveness of the act or legal transaction deemed abusive, solely and exclusively, for tax purposes, while maintaining, however, all other effects produced by such acts or transactions, with its legal classification remaining unaffected;

the Tax Authority cannot, on the basis of applying the general anti-abuse clause, seek to perform a reconstruction of reality, hypothetical and alternative, which would exist if income from capital had, in fact, been distributed instead of capital gains, to the point of holding the Claimant responsible for failure to comply with a withholding tax obligation existing solely for the purpose of assessing the tax advantage that benefited others and not the same Claimant;

considering that the Claimant is a tax substitute, in relation to all acts in which it intervenes, according to the conception of the Tax Authority, with which it does not agree, it would have to proceed not only to determine the respective normal tax legal treatment, but also to ascertain whether and to what extent the other parties would be participating in such acts motivated essentially or mainly by fiscal concerns, and whether from the perspective of those other parties the legal acts in question could be considered abusive, in which case it would be incumbent upon it to proceed with withholding tax in the amount that proved due in view, not of the legal act performed, but of the one that would predictably take place if the abusive conduct did not exist;

if one were to admit that the Tax Authority, having ascertained the existence of abusive conduct, would be competent only to demand from the tax substitute the tax abusively avoided by the taxpayer, on the argument that a withholding tax obligation was breached, such behaviour would correspond to the complete transfer to the sphere of the tax substitute, not only of the duty of tax inspection of fiscally abusive conduct – responsibility of the Tax Authority – but also of the tax burden itself – obligation of the taxpayer – finding itself the tax substitute in a situation where it would no longer have the amounts on which the withholding tax would have to occur, bearing in its sphere the missing tax;

the Claimant understands that such an interpretation would obligate tax substitutes to face the highly complex (or even impossible) task of ascertaining and determining the intellectual motivations of its counterparties in the context of the normal conduct of business dealings, running the risk of the nature of their conduct and living in the contingency of respective liability for failure to perform a withholding obligation existing only in the face of that eventual abuse – an interpretation which it considers unconstitutional, as explained in the CAAD decision issued in case no. 379/2014-T, by violation of the principles of proportionality and the right to property (articles 18/2 and 62/1 of the Portuguese Constitution);

the Claimant also mentions in its initial petition that the general anti-abuse clause provided for in article 38, no. 2 of the LGT contains 5 elements of cumulative verification, namely: a) Means element; b) Result element; c) Intellectual element; d) Normative element; and e) Sanctioning element;

taking into account that it was the taxable persons set out in paragraph 15 of the initial petition that obtained tax advantages from the transaction carried out, that is, non-taxation of income in 2009, and taxation of income in 2010, at the rate of 20%, instead of 21.5%, and not the Claimant – the result element does not occur, and therefore the examination of the remaining elements is rendered moot by its uselessness;

the Claimant considers that the interpretation adopted by the Tax Authority regarding the application of the general anti-abuse clause to the Claimant is incorrect, and in this context the entire withholding tax assessment of IR no. 2014…, of 11.11 and the respective assessment of compensatory interest no. 2014…, in the total amount of € 1,433,287.08 should be annulled;

admitting, however, that, in the present case, the elements of the anti-abuse clause were verified – which is not conceded – the Claimant understands that the Tax Authority could only proceed to assess the amount of tax of € 211,872.17 concerning the birth of the tax obligation dated 05.07.2010, in view of the statute of limitations of the obligation arising on 02.07.2009, instead of what the Tax Authority intends in the assessed amount of € 1,232,680.93.

On 10-11-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant proceeded to appoint an arbitrator, having appointed His Excellency Counsellor Jorge Manuel Lopes de Sousa, under article 11/2 of RJAT. As such appointment was not accepted, His Excellency Judge José Poças Falcão was then appointed by the Claimant.

Under article 11, no. 3 of the same provision, the Respondent appointed as arbitrator His Excellency Dr. Jorge Carita.

The arbitrators appointed by the parties were named and accepted their respective duties. Under article 6, no. 2, paragraph b) of RJAT and article 5 of the Regulation for Selection and Appointment of Arbitrators in Tax Matters, the present Reporter was appointed to preside over this Arbitral Tribunal, who, within the applicable period, also accepted his appointment.

On 19-01-2016 the parties were notified of such appointments and expressed no intention to challenge any of them.

In accordance with the provision in paragraph c) of article 11, no. 1 of RJAT, the collective Arbitral Tribunal was constituted on 08-02-2016.

On 09-03-2016, the Respondent, duly notified for this purpose, presented its response defending itself solely by way of challenge, and alleging, in summary, that:

the revaluation of shares from €1.00 to € 1,380214 is fictitious and artificial, being merely an artificial scheme to pay remuneration on a financial investment without subjecting it to the withholding tax rate provided for in paragraph a) of article 71, no. 1 of the Personal Income Tax Code (CIRS), insofar as it does not reflect the reality of B… and its subsidiary C…, since, on the one hand, and taking into account the acquisition by B… of 33.75% of the stake in C… from D… for € 37,294,399.52, from which results a valuation of C… at € 110,501,924.50, this does not align with reality, and with the information provided by the Hungarian Tax Authority, according to which "the valuation of the company's assets at more than 100 million euros in 2008 is not correct", given that, from 2008 to 2010, C… held assets valued at € 19,670,374.57, a value much lower than the valuation supporting the purchase of the same by B… from D…, and that, on the other hand, from the analysis of B…'s accounts for the years 2008 to 2010, it was found that this company systematically presented losses and a decrease in total equity from € 20,000,000.00 on 25.08.2008 to € 12,446,231.47 on 31.12.2010;

the operations carried out by the shareholders and revaluation of shares from €1.00 to €1,380214 per share find no justification whatsoever, which also cannot be explained on the basis of market speculation movements, since B… is not a listed company;

in April 2009, company E… SGPS, SA acquired an additional 7.5% of the capital of C… for €6,030,000.00, to which corresponds a total valuation of such company at €80,400,000.00, which had already occurred with the acquisition of more than 11.25% of C… in September 2008 by B… for the amount of € 9,045,237.60;

the main asset of B… (namely C…) lost value from 2008 to 2009, moving from a total valuation of € 110,501,924.50 to € 80,400,000.00, that is, it lost 27%;

it is not understood how D… purchases definitively, on 05.07.2010, the shares of B… from the shareholders who subscribed the capital increase on 25.06.2008, at € 1,380214 per share, and in the closure of accounts for 2010 recognizes an impairment of the shares of B… of € 12,800,000.00, such shares thus coming to have a nominal value of € 0.66 per share;

all operations of purchase, sale, and repurchase, final sale were always suggested by the customer managers of D… and the investment in Hungary belonged to Group F… and continued to be managed by D… after the entry of the new shareholders;

the legal transactions under analysis resulted from a scheme, pre-planned with the interposition of B… between the investor and D…, SGPS, SA, which culminated in the artificial revaluation of the shares of company B… with the aim of minimizing the taxes to be "borne" in the remuneration paid to the investor for the application of capital;

despite the majority of the capital, at the time of the capital increase, belonging to the taxable persons (individual shareholders), the truth is that control and decision-making centre always belonged and remained with D…;

we are faced with a set of sequential, logical and planned acts or transactions, organized in a unitary manner (linked), with a view to achieving the intended fiscal objective: to remunerate investors without subjecting them to taxation at the withholding tax rate provided for in paragraph a) of article 71, no. 1 of CIRS;

through the artificial revaluation of shares, the remuneration of the application of capital is made available to the shareholders, avoiding final withholding taxes and benefiting from the exclusion of taxation provided for in article 10/2 of CIRS, at the time of the facts;

nevertheless, the acts and legal transactions that make up this structure are, in themselves, valid and lawful, corresponding to the will of the taxable persons, the truth is that no economic substance can be attributed to them, insofar as the abstention from participation by the shareholders in the management of the company, the fact that the investment is being managed by D… and continues to be so, even after its passage to minority shareholder in the capital of B…, added to the fact that the remuneration of the administrators of this company is a charge of D…, without the majority shareholders being called upon to participate in expenses, leads to the conclusion that with this operation, the new shareholders in B… in no way altered their position, that is, they had a financial investment in D… and maintained it, and should, therefore, be considered as being faced with income from capital and not income from capital gains, due to the revaluation of shares not having been effective, but merely artificial.

On 18-03-2016, an order was issued, pursuant to paragraphs c) and e) of article 16, and article 29, no. 2, both of RJAT, dispensing with the holding of the meeting referred to in article 18 of RJAT, as well as the presentation of arguments, and setting a period of 60 days for delivery of the decision.

The date set for delivery of the decision was extended successively by 60 and 30 days, by orders of 16-05 and 17-07 respectively, and the period set in article 21/1 of RJAT was extended by 2 months, pursuant to the provision in no. 2 of the same article, by order of 07-08.

The Arbitral Tribunal is materially competent and is regularly constituted, under articles 2, no. 1, paragraph a), 5 and 6, no. 1, of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to examination of the merits of the case.

All considered, it is now appropriate to render

II. DECISION

A. FACTUAL MATTER

A.1. Facts Established as Proven

In compliance with Internal Service Order no. OI2014…, an internal inspection action was undertaken against the Claimant by the Finance Directorate of….
On 22 July 2014, the Claimant was notified of the draft tax inspection report for application of the general anti-abuse clause, provided for in article 38, no. 2 of the General Tax Code ("LGT").
The Claimant chose not to exercise the right of prior hearing available to it, and the proposed correction in the amount of € 1,232,680.93, contained in the draft report became final through Official Letter no.…, of 14 November 2014.
On 31 December 2014, the Claimant made voluntary payment of the tax and compensatory interest additionally assessed, in the total amount of € 1,433,287.08.
On 30 April 2015, the Claimant filed a Gracious Complaint against such assessments.
Through Official Letter no.…, dated 9 July 2015, from the Division of Tax Management and Assistance of the Large Taxpayers Unit, the Claimant was notified of the draft decision on the Gracious Complaint, under which the correction effected was upheld.
The Claimant having chosen not to exercise the right of prior hearing available to it, through Official Letter no.…, of 10 August 2015, it was notified that the Gracious Complaint had been dismissed, by order issued on the same date, by the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit.
B…, SGPS, S.A. was incorporated on 18 June 2008 with capital of €4,200,000.00, corresponding to 4,200,000 shares, with a nominal value of €1.00 each, with a single shareholder: D…, SGPS, SA.
On 25 June 2008, the capital of B… was increased by €15,800,000.00, with the entry of new shareholders identified in the Tax Inspection Report.
The capital was distributed as follows:
The new shareholders came to hold 78.79% of the capital of B….
The company maintained the same administrators (G… and H…, senior staff of Group F…) and offices at the facilities of Group F….
By resolution of 23 June 2008, it was determined that the corporate bodies would not receive remuneration.
The two Administrators of B… received, at the time, income from Category A in the years in question, paid by D…, S.A.
At the General Assemblies for approval of accounts for 2008 and 2009, of 25 May 2009 and 25 May 2010, respectively, the new shareholders appointed the aforementioned G… as their representative, to whom they granted "…full powers to vote, as he deems fit, all items on the Agenda established for said General Assembly".
Thus, despite the changes in the shareholding structure resulting from the capital increase, the same administrators (belonging to the staff of D…) were maintained, the office remained in the same location, and the representation of the new shareholders was entrusted to the aforementioned G… (administrator at the time of D… SGPS).
On 2 December 2010, following the result of the Public Acquisition Operation of D… SGPS, SA, launched by I…, IPSS, the aforementioned administrators resigned from office, with the new shareholder appointing new administrators.
According to the resolutions of the General Assembly of B…, its activity is limited to the management of the stake in C…, a Hungarian company.
On 26 June 2008, the day following the capital increase of B… mentioned above, the company acquired 33.75% of the stake in C… from D…, S.A. for the amount of € 37,294,399.52.
In the consolidated accounts report for the year 2007 of the Group, with D… SGPS as the "parent" company, the cost of acquisition of C… declared was € 22,598.00.
In September 2008, B… acquired from D… an additional 11.25% of C… for the amount of € 9,045,237.60.
In April 2009, E… recorded the acquisition of 7.5% of the capital of C… for € 6,030,000.00.
According to the Board of Directors meeting minutes, until December 2009, B… proceeded with the following commercial paper issuances:

i. On 26-06-2008, €20,000,000.00;

ii. On 15-12-2008, €10,000,000.00;

iii. In June 2009, €25,000,000.00;

iv. In December 2009, €20,000,000.00.

On 31 December 2010, the financing to C…, accounted for in B… as loans, in account "41- Financial Investments", totalled €12,105,738.00.
According to the accounts of B…, in the years 2008, 2009 and 2010, this company always presented losses.
Such losses result essentially from the application of the equity method and financing interest.
In the context of the information request submitted to the Hungarian Tax Administration, under the convention celebrated between the Portuguese Republic and the Republic of Hungary, with the aim of characterizing the activity of C…, it was possible to establish that:

i. C… held a Hungarian tax identification number and registered office in Budapest;

ii. The activity carried out was asset management;

iii. The shareholders were Portuguese companies B…, SGPS, J… SGPS and E…, SGPS;

iv. The persons responsible for management were K…, L…, M… and N…, then employees of O…, SA, and P…, then an employee of D….

Taxpayer Q… (founder of Group R…) declared, in the year 2009, the sale and repurchase of the shares of B…, which occurred on 2 July 2009, at a unit value of €1.3163 per share and with a cost of acquisition of €1.00 per share, from which resulted a capital gain of €3,711,375.63, which benefited from the exclusion of taxation provided for in paragraph a), no. 2 of article 10 of CIRS.
In the year 2010, he declared the sale of the shares of B…, with a realization value of €1,380214 per share and with a cost of acquisition €1.3163 per share, with the declared capital gain of €702,203.94 being taxed, as a result of the entry into force of Law no. 15/2010 of 26 July, which repealed no. 2 of article 10 of CIRS.
Taxpayer Q… was notified, through official letter no. … of 2013-05-21, following Internal Service Order no. OI2013…, to analyze Form 39 declarations, for the years 2010 and 2011, to provide proof of the source of income that allowed him to earn that amount of interest in the year 2011, and it was possible to ascertain the facts contained on pages 26 and 27 of the Tax Inspection Report.
Taxpayer S… and spouse declared, in 2009, also the sale and repurchase of shares of B…, which occurred on 2.07.2009, at a unit value per share of €1.3163 and with a cost of acquisition of €1.00 per share, from which resulted a capital gain of €1,098,674.38, which benefited from the exclusion of taxation provided for in paragraph a), no. 2 of article 10 of CIRS.
In 2010 he again declared the sale of the shares of B…, with a realization value of €1,380214 per share and with a cost of acquisition €1.3163 per share, with the declared capital gain of €222,006.55 being taxed, as a result of the entry into force of Law no. 15/2010 of 26 July.
T… and U… also declared the sale and repurchase of shares of B… from which resulted a non-taxed capital gain of €66,992.34 (2009) and, in the year 2010, they declared the sale of the shares of B…, from which resulted a capital gain of €13,536.99 taxed, as a result of the entry into force of Law no. 15/2010 of 26 July.
In 2010, taxpayer V… declared the sale of the shares of B… acquired in the capital increase of 25.06.2008 with a unit cost of acquisition of €1.3163.
This cost of acquisition also results from the sale and repurchase of 84,720 shares on 2.07.2009 at the value per share of €1.3163.
On 2 July 2009 he acquired an additional 407,505 shares, at €1.3163 each, which totals the amount of €536,398.83.
On 5 July 2010 he sold all shares at €1,380214, from which resulted a gain of €58,257.01.
Finally, taxpayer W… proceeded with the sale and repurchase of the shares of B… in 2009 and the final sale in 2010.
In the income tax returns, for the years 2009 and 2010, of the five shareholders who subscribed the capital increase of B…, all shareholders adopted the same behaviour, that is, they subscribed the capital increase at €1.00, on 25.08.2008, sold and repurchased on 2.07.2009 at €1.3163 per share and sold, definitively, on 5 July 2010, the shares to D… SGPS for €1,380214 per share.
The transactions in question are reflected in the following tables:
On 17 June 2014, the inspection services notified the taxable persons Q… and S…, posing to them the questions indicated on pages 11 to 15 of the Tax Inspection Report, where the answers obtained to such questions are contained, where it reads, among other things:

"the capital involved had been applied at D… for many years, in time deposit applications. (…) my applications were always regularly for 6 months and in the new applications proposed I always intended to maintain the same period.

Subsequently the Bank came to propose another application, in a company B… SGPS, S.A. [which was] unknown to me, the application made was proposed by the bank following the previous expired operation, I never had knowledge of the amount of capital that this company held, much less that with the financial application made I would reach a majority position in it. (…) I did not know that the application would give rise to any capital increase, but I thought it would only be a financial application proposed by the bank.

(…) Regarding the activity of that company, I was simply informed, at the time, that it was a company in the real estate sector, with investments in Romania, but as the operation was presented and proposed by the bank. My only objective was the financial application and its return and never the intervention in the company.

I was never notified of any assembly nor was I even informed of the agenda of the same, nor later of the resolutions taken, nor did the company or even the bank show me any minutes. I also do not know, nor did I have knowledge, why the administrators accepted to manage the company without earning any remuneration from B…, (…).

The reason for carrying out the operation of sale on 02.07.2009 and purchase on the same day was because my operations I assimilate them to financial operations as if they were time deposits, as they came from the past and I always wanted to know the result of my applications for periods of six months or one year, (…). As the proposal for the initial operation was made entirely by the bank, this same proceeded to sell and subsequently buy the shares of the same company. As I had no interest in choosing which shares to buy and as the operation was proposed by the bank, it carried it out as presented. (…) my objective was financial return and as the operation was presented by the bank, for me it was not a question of where to invest. Differently it occurred in the following period, on 05.07.2010, when there came to be the incidence of capital gains and then, I did not accept that the bank make the application in shares and returned to the application to time deposits.

(…) the operations, which were initially and for many years of time deposits, only ceased to be so by proposal of D…, because the financial market changed in the offer of rates, reducing them. Therefore, I had no personal interest in buying and selling the shares of the same company and on the same day (I recall that I did not know of my qualified representativity in the capital of the company.) As for the price of the shares, I was informed and indicated directly and solely by the bank."

In the information request submitted to the Hungarian Tax Administration, the following question was posed: "Validate whether the company's assets justify its valuation at more than 100 million euros in 2008", to which the following response was obtained: "With respect to the valuation of the company's assets at more than 100 million euros in 2008, they inform that this value is not correct and that the correct value is contained in the annexes:".
In 2008 and until 2010, C… held assets valued at €19,670,374.57.
In April 2009, company E… SGPS, S.A. acquired an additional 7.5% of the capital of C… for € 6,030,000.00.
D… purchased definitively the shares of B… from the shareholders who subscribed the capital on 25 June 2008, on 5 July 2010, at €1,380214 per share.
In the closure of accounts for 2010, the same D… recognized an impairment of the shares of B… of €12,800,000.00.

A.2. Facts Established as Not Proven

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

A.3. Reasoning of the Factual Matter Proven and Not Proven

Regarding the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, it being rather incumbent upon it to have the duty to select the facts that matter for the decision and discriminate proven factual matter from that not proven (see article 123, no. 2, of the Tax Procedural and Process Code and article 607, no. 3 of the Code of Civil Procedure, applicable ex vi article 29, no. 1, paragraphs a) and e), of RJAT).

Thus, the facts relevant to the adjudication of the case are chosen and delimited according to their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (see former article 511, no. 1, of the Code of Civil Procedure, corresponding to current article 596, applicable ex vi article 29, no. 1, paragraph e), of RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the Tax Procedural and Process Code, the documentary evidence and the case file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, taking into account that, as written in the Decision of the Court of Administrative Appeal-South of 26-06-2014, issued in case 07148/13, "the probative value of the tax inspection report (…) may have probative force if the assertions contained in it are not challenged".

B. LAW

Under article 124 of the Tax Procedural and Process Code:

"1 - In the judgment, the court shall examine primarily the defects that lead to the declaration of non-existence or nullity of the impugned act and, then, the defects alleged that lead to its annulment.

2 - In the said groups the examination of defects is done in the following order:

a) In the first group, those defects whose merit, according to the prudent judgment of the judge, determines more stable or effective protection of the interests infringed;

b) In the second group, that indicated by the impugning party, provided that it establishes between them a relationship of subsidiarity and no other defects are alleged by the Public Ministry or, in other cases, that set forth in the preceding paragraph."

It is appropriate, then, to examine the defects alleged by the Claimant to the tax act that is the subject of the present arbitral action, in order to ascertain their merit.

The situation that is presented for decision in these proceedings is, as regards the essential traits relevant thereto, simply defined. What is verified in the case, in summary, is that, faced with a situation which it understood to be evasive, in terms of justifying the application of the general anti-abuse clause (GAAC), the Tax Authority understood it should demand the tax from the tax substitute, and not from the taxpayer. It objects to what was decided by the Tax Authority, because, for the reasons examined below, it understands that the mechanism of the GAAC is incapable of being applied to the tax substitute.

The Claimant then alleges, as its first argument, that it were the taxable persons identified in its initial petition, the beneficiaries of the tax advantages resulting from the transaction at issue in these proceedings, and therefore, they should be responsible for payment of the amounts corresponding to those same advantages, and not the Claimant, as it is completely unrelated to the situation, in particular, as it has not enjoyed any tax advantage. It supports this argument in the decision of CAAD issued in case no. 379/2014-T.

It adds, further, that the consequence that may arise from the wording of article 38, no. 2 of the LGT regarding the application of the anti-abuse clause is the ineffectiveness of the act or legal transaction deemed abusive, solely and exclusively, for tax purposes, while maintaining, however, all other effects produced by such acts or transactions, with its legal classification remaining unaffected, and therefore, argues that the Tax Authority cannot, on the basis of applying the anti-abuse clause, seek to perform a reconstruction of reality, hypothetical and alternative, which would exist if income from capital had, in fact, been distributed instead of capital gains, to the point of holding the Claimant responsible for failure to comply with a withholding tax obligation conceived for the purpose of assessing the tax advantage that benefited others and not the same Claimant.

Thus, considering that the Claimant is a tax substitute, in relation to all acts in which it intervenes, according to the conception of the Tax Authority, with which it does not agree, it would have to proceed not only to determine the respective normal tax legal treatment, but also to ascertain whether and to what extent the other parties would be participating in such acts motivated essentially or mainly by fiscal concerns, and whether from the perspective of those other parties the legal acts in question could be considered abusive, in which case it would be incumbent upon it to proceed with withholding tax in the amount that proved due in view, not of the legal act performed, but of the one that would predictably take place if the abusive conduct did not exist.

The Claimant further alleges that, if one were to admit that the Tax Authority, having ascertained the existence of abusive conduct, would be competent only to demand from the tax substitute the tax abusively avoided by the taxpayer, on the argument that a withholding tax obligation was breached, such behaviour would correspond to the complete transfer to the sphere of the tax substitute, not only of the duty of tax inspection of fiscally abusive conduct – responsibility of the Tax Authority – but also of the tax burden itself – obligation of the taxpayer – finding itself the tax substitute in a situation where it would no longer have the amounts on which the withholding tax would have to occur, bearing in its sphere the missing tax.

Indeed, the Claimant understands that such an interpretation would obligate tax substitutes to face the highly complex (or even impossible) task of ascertaining and determining the intellectual motivations of its counterparties in the context of the normal conduct of business dealings, running the risk of the nature of their conduct and living in the contingency of respective liability for failure to perform a withholding obligation existing only in the face of that eventual abuse – an interpretation which it considers unconstitutional, as explained in the CAAD decision issued in case no. 379/2014-T, by violation of the principles of proportionality and the right to property (articles 18/2 and 62/1 of the Portuguese Constitution).

The Claimant further maintains that, taking into account that it was the taxable persons indicated in the initial petition that obtained tax advantages from the transaction carried out, that is, non-taxation of income in 2009, and taxation of income in 2010, at the rate of 20%, instead of 21.5%, and not the Claimant – the result element of the GAAC does not occur, one of the 5 elements of cumulative verification in which it is traditionally divided (the result element), seeing by this that the examination of the remaining elements is rendered moot by its uselessness.

In this manner, the Claimant considers that the interpretation adopted by the Tax Authority regarding the application of the general anti-abuse clause to the Claimant is incorrect, and in this context the entire withholding tax assessment of IR no. 2014…, of 11.11 and the respective assessment of compensatory interest no. 2014…, in the total amount of € 1,433,287.08 should be annulled.

For the eventuality that, in the present case, it is considered that the elements of the GAAC are verified – which it does not concede – the Claimant understands that the Tax Authority could only proceed to assess the amount of tax of €211,872.17 concerning the birth of the tax obligation dated 05-07-2010, in view of the statute of limitations of the obligation arising on 02-07-2009, instead of what the Tax Authority intends in the assessed amount of €1,232,680.93.

For its part, the Tax Authority maintains that the transformation of a financial investment into a purchase and sale of shares, with the artificial revaluation of such shares, had no other motivation than to take advantage of an exclusion of taxation provided for in paragraph a) of article 71, no. 2 of CIRS, so as to diminish or eliminate taxation, and therefore it is incumbent upon the Tax Authority to consider ineffective, within the tax scope, the characterization of this income as a capital gain and to characterize it as income from capital, under paragraph b) of article 5, no. 2 of CIRS, subject to the withholding tax rate provided for in paragraph a) of article 71, no. 1 of the same statute.

Considering, then, that there is a set or succession of acts/transactions coordinated between them, the law enforcer should operate an integrated treatment, viewing them as a single transaction, tending toward a single and final result, which will refer, in the present case, to the receipt of capital increases with the final sale of the shares, which would be what would happen in the absence of the composite evasive operation, that is, on 05-07-2010, as only on that date was it made known to the investors what the value of their capital increase was, and only at that moment would they be in a position to demand it from D…, occurring at that moment, the date of vesting, which counts for determining the birth of the tax obligation for the tax substitute, which in the present case is D…, which should have withheld at the withholding tax rate of 21.5% the amount of € 1,260,147.78 when making the income available, under the provision of paragraph b) of article 101, no. 2 of CIRS.

In the present case, the Tax Authority does not see any economic rationality in the transaction, since:

a) There was no creation of value by B… as a consequence of the entry of the new investors, rather the opposite, the company presented losses, as did its subsidiary C…;

b) B… is a vehicle company created by D…, having no activity other than holding the stake in C… and financing such subsidiary;

c) The financing to C… was entirely carried out by D…, with no interference from other banks;

d) The investment in the company was the responsibility of Group F… and continued to be managed by it, regardless of its participation in the capital of the Hungarian company being reduced from a direct participation of 33.75% to an indirect participation of 21.21% over 33.75%, which corresponds to only 7.15%;

e) No market event occurred that could lead to the extraordinary revaluation of the B… stake;

f) In the year 2010, the shares of B… are repurchased by D… at € 1.38 per share and, in that same year, is recognized a loss for impairment that reduces the cost of acquisition of the shares to € 0.66 per share;

g) In 2011, when the shares are sold by D… to A…, the same price was practiced, €0.66 per share.

In this framework, and considering that, in the case, there is no economic substance in the transaction, but solely a predominant fiscal motivation, which manifested itself in the forms adopted, and which made prevail the fiscal purpose of the transaction over the non-fiscal purpose, the conditions for application of article 38, no. 2 of the LGT and article 63 of the Tax Procedural and Process Code will be found to be met, which is why the artificial revaluation of the shares of B… from € 1.00 to € 1.38, in the period of 25-06-2008 to 05-07-2010, should be considered ineffective within the tax scope, insofar as such operation was carried out with abuse of legal forms and had as its essential objective the elimination of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or the obtaining of tax advantages that would not be achieved total or partially without use of such means.

The Tax Authority also understands that the Claimant had a direct intervention in the facts that support the application of the general anti-abuse clause, insofar as, on the one hand, it does not contest the facts contained in the Tax Inspection Report, on the other hand, it was the Claimant that decided to acquire 33.75% of C… through B…, furthermore, it was the Claimant that acquired stakes of the shareholders in July 2010, and finally, it was, still, the Claimant that suggested all the buy, sell and repurchase, and final sale operations of the shares of B…, holding all control in their management.

As for the subsidiary claim for declaration of partial illegality based on statute of limitations, the Tax Authority understands that only from the moment the shareholders sell their social stakes to D…, without repurchasing them at the same moment, as they had done previously, is it possible to consider the evasive scheme engineered by D… complete, since before the final sale, one cannot establish – without margin for doubt – that the operations do not result from the will of the individuals involved to invest in the companies in question, notwithstanding the weak operational results presented by them.

For the Tax Authority, only from the moment the shareholders sell their social stakes to D…, without repurchasing them at the same moment, is it possible to denote an attitude of disinterest in the investment in B…, a fact that allowed the Tax Authority to begin to investigate the true nature of the investment made, notably the contours of the operations, the holders of the corporate bodies of B…, unrelated to the shareholders, the receipt by such holders of corporate bodies of income from Category A paid by D…, and especially, the initiative and moral authorship of the entire scheme, and therefore, only from that moment of final sale can it be considered that the initial term of counting the statute of limitations period begins.

The Respondent further invokes, as set out in the administrative decision, taken in the context of Gracious Complaint, the step transaction doctrine, adopted in the Decision of the Court of Administrative Appeal-South, in case no. 4255/10, of 02-05-2011, as well as the understanding that the same result would be reached, by mere application of article 9 of the Civil Code, namely by way of the presumption of the reasonable legislator.

In this manner, and taking into account that within tax law, the statute of limitations on the right to assessment aims to ensure the performance of the action of the tax administration within a reasonable period, the Tax Authority understands that the applicability of the GAAC should be analyzed in view of the situation as a whole, that is, in the present case, from its beginning in 2008, to the final sale, in July 2010, because otherwise, if one were to understand that the initial term of the statute of limitations period occurs from a certain merely intermediate operation, we would fall into a situation of violation of the presumption of the reasonable legislator, insofar as before the final acts – which prove the evasive character of the entire scheme or the set of acts – are carried out, could not be required of the Tax Authority to act and investigate.

Before proceeding to the analysis and decision of the fundamental question that is presented for determination by this Arbitral Tribunal, it should be noted that, as the Tax Authority points out, the Claimant does not challenge the conclusion formulated by the Tax Authority in the inspection procedure, according to which there occurred an evasive scheme, proscribed by the legal system as a whole. The Claimant chooses to sustain its disagreement with the tax act sub iudice, in the circumstance that, within the framework of the legal-tax relationship defined by it, it occupies the position of tax substitute, and not of taxpayer.

Indeed, the situation of the Claimant in view of the factual framework outlined, is defined by the norms of article 71/2, of paragraph b) of article 101, no. 2, both of CIRS, combined with articles 20, 22 and 28 of the LGT.

Thus, the first of such norms provides that:

"Subject to final withholding tax, at the withholding tax rate of 21.5%, is income from securities paid or made available to their respective holders, resident in Portuguese territory, owed by entities that do not have a domicile here to which the payment may be attributed, through entities that are mandated by debtors or holders or act on behalf of one or the other."

Meanwhile, the second prescribes that:

"Where it is a question of income referred to in article 71, the withholding tax provided therein is the responsibility of: (…)

b) Entities that pay or make available the income referred to in nos. 2 and 13 of article 71."

In turn, article 20 of the LGT provides:

"1 - Tax substitution occurs when, by operation of law, the tax obligation is demanded from a person other than the taxpayer.

2 - Tax substitution is effected through the mechanism of withholding tax at the source of the tax due."

Meanwhile, article 22 of the same LGT, provides that:

"1 - Tax liability encompasses, under the terms set out in law, the entire tax debt, interest and other legal charges.

2 - Beyond the original taxpayers, tax liability may encompass solidarily or subsidiarily other persons.

3 - Tax liability for debts of others is, unless otherwise provided, only subsidiary."

It is this position of the Claimant, as a tax substitute, under the aforementioned article 20/2 of the LGT, resulting from the withholding tax obligation enshrined in articles 71/2, of paragraph b) of article 101, no. 2, both of CIRS, and, consequently, as a tax liable party, under article 22, nos. 1 to 3 of the LGT, that must be framed in light of article 38, no. 2 of the LGT, which provides that:

"Acts or legal transactions are ineffective within the tax scope if they are essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, toward the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or toward the obtaining of tax advantages that would not be achieved, total or partially, without use of such means, with taxation then being effected in accordance with the applicable norms in their absence and the tax advantages referred to not being produced."

The Claimant centers, as has already been seen, the legal position it defends in the present arbitral tax proceedings on the circumstance that, in its understanding, from the execution of the evasive scheme whose occurrence it does not contest, no "tax advantages" have resulted for it, which, and correctly, it understands to be a necessary prerequisite to the correct application of the referred norm of article 38/2 of the LGT.

Now, from the outset, this postulate of the legal position sustained by the Claimant before this Arbitral Tribunal cannot be subscribed. Indeed, throughout all the argument it makes, the Claimant seems to make "tax advantage" equivalent to "patrimonial advantage".

Now, if it is certain that from the factual framework that is outlined no conclusion can surely be drawn that for the Claimant has resulted, from the evasive scheme implemented, a patrimonial advantage – which is evident, insofar as the position of tax substitute is, by definition, patrimonially neutral – it is, however, considered that the concept of "tax advantage", employed by the norm under analysis, should not be confused with the concept of patrimonial advantage.

Thus, from the outset and by negative reasoning, the hermeneutical principles of the reasonable legislator, and that the legislator knew to express its thought in adequate terms, enshrined in article 9 of the Civil Code, lead to the conclusion that if the legislator had intended to make the concept of patrimonial advantage equivalent to the concept of "tax advantage", it would have employed the former, and not the latter, expression.

On the other hand, and already by positive reasoning, the systematic element significantly subsidizes what should be understood as the content of the referred concept. Indeed, Dispatch no. 14592/2008 of 27 May, which came to establish the interpretative guidelines in the matter of disclosure of tax planning schemes for prevention and combating of abusive and evasive actions, resulting from Decree-Law no. 29/2008, of 25 February, and Ordinance no. 364 A/2008, of 14 May, states in its section I.7.i) that it is considered "as tax advantage the reduction, elimination or temporal deferral of tax or the obtaining of tax benefit, which would not be achieved, in whole or in part, without the use of the scheme or the action".

Thus, and for what now matters, a tax advantage should be considered as verified, always when there is verified "the reduction, elimination or temporal deferral of tax".

Now, in the case, it is concluded that this is what is verified. Indeed, had the evasive scheme implemented not occurred, the Claimant – complying with legality as it would be its duty – would have proceeded to withhold the tax due and would have delivered it to the State. By force of that same scheme, the tax that should, at the proper time have been delivered to the State, was not, and what was delivered, as a consequence of that same scheme, was delivered in a lower amount. It is thus verified, in summary, that there actually occurred a temporal deferral and a reduction of tax, and therefore, under the terms and for the effects of article 38 of the LGT, duly interpreted, a tax advantage should be considered as verified to have occurred.

A distinct question from that of knowing whether, in the present case, there is verified, or not, the occurrence of tax advantages, is that of knowing whether such tax advantages must benefit the taxpayer to whom, in obedience to that enshrined in the GAAC (taxation in accordance with the norms applicable in the absence of the evasive scheme) the tax must be demanded.

In this respect, note that such does not result either from the text of the norm of article 38/2 of the LGT, nor from the formulation of the provision of section I.7.i) of Dispatch no. 14592/2008 of 27 May.

It is understood, thus, that the operation of verifying the pursuit of obtaining tax advantages with the abusive scheme (this operation relating to the determination of the prerequisites of the norm), must be disconnected from the operation of taxation in accordance with the norms applicable in the absence of such scheme (an operation relating to the enactment of the norm), that is, that what is relevant for verifying the prerequisites of application of the GAAC, insofar as the question of directing the abusive scheme to obtaining a tax advantage is concerned, is independent of the result of the definition of the taxation due in accordance with the norms applicable in the absence of such scheme.

That is: one thing is the operation of verifying the prerequisites of application of the norm, which postulates solely, for what now matters, the verification of the obtaining, or of the intention of obtaining, of tax advantages, underlying the fraudulent acts or legal transactions – regardless of their respective beneficiary – and another will be the operation of application of the enactment of the norm, which determines the ineffectiveness of such acts or legal transactions, and the application of the taxation that results from the norms applicable in the absence of these same acts or transactions.

The GAAC is thus envisaged from an objective point of view, that is, as directed to fraudulently practiced acts or legal transactions, and not to the subjects participating in them, or to those who, as a function of the ineffectiveness of such, will come to be burdened with the taxation imposed by the legal tax system.

Without prejudice to what has just been expounded, it will be said that, even if it were considered that the tax advantage sought (and concretized) must be verified in the tax sphere of that to whom, in view of taxation in accordance with the norms applicable in the absence of the fraudulent scheme, the tax must be demanded, one would always have to conclude that, in the case, this is what occurs.

Indeed, and from the outset, the deferred and reduced tax should, had the defrauding scheme not existed, be delivered to the State by the Claimant, while, under the terms seen above, a liable party. Thus, the waiver of the tax obligation of withholding tax, and of subsequent delivery of withheld tax cannot, it is judged, fail to be considered a tax advantage.

On the other hand, and even if this were not the case, in view of the applicable legal framework, it is verified that the situation of the Claimant, is that of principal liable party for delivery of the tax.

Indeed, article 71 of CIRS, in its nos. 6 and 7, provides that:

"6 - The income referred to in nos. 1 and 2 may be aggregated for purposes of taxation, by option of their respective holders, resident in national territory, provided they are obtained outside the scope of the exercise of business and professional activities.

7 - If the option referred to in the preceding number is made, the withholding effected has the nature of payment on account of the tax due finally."

Examined the facts established as proven, the prerequisites upon which the law makes dependent the possibility of the withholding in question having the nature of payment on account of the tax due finally, are not met, or even indicated, in particular the residence in national territory, its obtaining outside the scope of the exercise of business and professional activities and the option, to that effect, of the taxpayer subject to IRS.

Thus, there will remain no doubt, that the position of the Claimant within the framework of taxation in accordance with the norms applicable in the absence of the fraudulent scheme, will be that of original liable party for the tax not withheld, as results from article 28 of the LGT which provides that:

"1 - In case of tax substitution, the entity obligated to withhold is liable for the amounts withheld and not delivered to the State treasury, with the substituted party being relieved of any liability for its payment, without prejudice to the provision in the following numbers.

2 - When the withholding is effected merely as payment on account of the tax due finally, the liability for the original tax not withheld falls to the substituted party and to the substitute the subsidiary liability, with the latter still being subject to compensatory interest owed from the term of the delivery period to the term of the period for presentation of the declaration by the original liable party or to the date of delivery of the tax withheld, if earlier.

3 - In the remaining cases, the substituted party is only subsidiarily liable for payment of the difference between the amounts that should have been deducted and those actually were."

In this manner, always by this avenue one would conclude, in the same way, that, by means of the fraudulent scheme incontestably verified, there occurred the deferral and reduction of tax, for which, within the framework of taxation in accordance with the norms applicable in the absence of the fraudulent scheme, the Claimant was the principal debtor, and therefore, there would be no doubt, that from the implementation of such scheme, there resulted for the Claimant – independently of other taxable persons – a tax advantage.

Let it also be said, and finally, that in no case, it is judged, could one conclude that the Tax Authority should demand from the beneficiaries of the income from capital, the tax that it is demanding from the Claimant. Indeed, and as results from the norms transcribed above, in view of the applicable legal tax system within the framework of the ineffectiveness of the fraudulent acts and legal transactions, those beneficiaries are only subsidiarily liable for the tax that should have been deducted and was not, and therefore, in such circumstance, it would always be legally inadmissible to call upon them to respond in first line for such tax.

Passing, then, to the analysis of the Claimant's arguments, it is concluded that, contrary to what it alleges, it were not solely the taxable persons identified in its initial petition, the beneficiaries of the tax advantages resulting from the transaction at issue in these proceedings, nor should they be responsible for payment of the amounts corresponding to those same advantages, and therefore, it is not true that the tax advantage resulting from the evasive scheme of which the Claimant formed part, benefited solely others, and not the same Claimant.

It is likewise verified that, contrary to what the Claimant also alleges, upon the Tax Authority ascertaining the existence of abusive conduct, it would be competent to demand from the substituted party the tax abusively avoided by the taxpayer, since, in the case, the substitute assumes itself, in view of the applicable legal framework, as the principal debtor of the tax, such behaviour not corresponding to the complete transfer to the sphere of the substitute of the tax burden – obligation of the taxpayer, as, in the case of non-existence of abuse and in which there has been purely and simply an non-performance of the withholding tax obligation, the demand for tax from the substitute, as the already-analyzed norms impose, does not carry any complete transfer of the tax burden – obligation of the taxpayer – to the sphere of the substitute.

Indeed, the situation will, in this respect, be analogous to any other substitute by final withholding tax, who has not fulfilled the withholding obligation and who, like the Claimant, will find himself, by force of the applicable legal regime, in a situation in which, not having the amounts on which the withholding tax would have to occur, will have to bear in his sphere the missing tax, repercussing it, to the extent legally possible (possibly by way of unjust enrichment), in the sphere of the substituted party.

It is likewise not considered that the Claimant's argument is meritorious, according to which the behaviour of the Tax Authority would correspond to the complete transfer to the sphere of the substitute of the duty of tax inspection of fiscally abusive conduct – responsibility of the Tax Authority, and therefore such interpretation would obligate tax substitutes to face the highly complex (or even impossible) task of ascertaining and determining the intellectual motivations of its counterparties in the context of the normal conduct of business dealings, running the risk of the nature of their conduct and living in the contingency of respective liability, as this question, unless better advised, will be posed, in the same manner, in relation to any other situation in which taxable persons enter an evasive scheme from which tax advantages result for both, such as, for example, an evasive scheme that allows a taxpayer to deduct VAT borne in a transaction in which the other remains exempt from delivering it to the State. Here as there what is not at issue, contrary to what the Claimant alleges, is imposing the duty of tax inspection of fiscally abusive conduct, nor imposing on the participants the task of ascertaining and determining the intellectual motivations of its counterparties in the context of the normal conduct of business dealings, running the risk of the nature of their conduct and living in the contingency of respective liability, but rather restoring the tax situation that would exist, had the evasive scheme not been implemented, and dissuading taxable persons from incurring in the same, seeking, for themselves, and even though – concomitantly – for others, tax advantages.

Thus, and in this framework, it is considered that there is no violation of the principles of proportionality and the right to property (articles 18/2 and 62/1 of the Portuguese Constitution), and the allegation that it were the taxable persons identified in the initial petition that obtained tax advantages from the transaction carried out lacks merit, and therefore the result element will not be verified which is traditionally understood as essential to the application of the GAAC, having, in the case, the application of such clause had as its recipient one of the tax subjects who did in fact benefit from the abusive tax planning.

Neither is at issue, in the tax act that is the subject of the present arbitral action, imposing that the tax substitute, by its own free initiative, proceed to withholding tax when the law does not provide for it for the payment flow at issue. That is: it does not flow from the tax act in question, nor from the confirmation of its legality, that a participant active in a fraudulent scheme from which result, for itself and for third parties, tax advantages (even if differentiated), that should proceed, at the proper moment, to a withholding that would exist in the absence of such scheme, but rather that, being faced with the need for its intervention in one of such schemes, from which result, also for itself, tax advantages, it abstains from aligning itself with it, and that, aligning itself, the situation be restored, in compliance with the legal command, demanding from the liable parties, under the applicable legal framework, the taxation that would exist, had the evasive scheme not been implemented. That is: the taxation is demanded not for the withholding tax obligation not having been fulfilled, but because that is what results from application of the applicable legal framework, abstracting from the effects of the fraudulent acts or legal transactions.

Thus, one is not imposing that, understanding that the requirements of application of the general anti-abuse clause were met, at the moments in which the Claimant made the payments, the Claimant effect the withholding tax, but rather that, previously, it not align itself with the abusive scheme and, subsequently, that it fulfill the obligation that flows from the applicable legal framework, excluded such scheme, while principal liable party of the tax obligation, resulting from the quality of being obligated to withholding tax on a final basis, not being created withholding tax obligations that did not exist at the moment in which the acts or transactions deemed abusive were practiced from which emerged an undue tax advantage, in view of the factual and legal circumstances existing at that moment, but rather applying the law to such facts, disregarded those facts relating to acts and contracts abusively engineered.

Thus, and in view of the above, it is understood that the principal claim formulated by the Claimant should be judged to be without merit.

Subsidiarily, the Claimant understands that the Tax Authority could only proceed to assess the amount of tax of €211,872.17 concerning the birth of the tax obligation dated 05-07-2010, in view of the statute of limitations of the obligation arising on 02-07-2009, taking into account that the Claimant proceeded to make payments to the subscribers of the capital of B… on 02/07/2009 and on 05/07/2010.

As for this matter, the Tax Authority maintains that only from the moment the shareholders sell their social stakes to D…, without repurchasing them at the same moment, is it possible to denote an attitude of disinterest in the investment in B…, a fact that allowed the Tax Authority to begin to investigate the true nature of the investment made.

With all due respect, it is understood, in this part, that the Tax Authority is not in the right. Indeed, nothing, in the list of facts ascertained, permits the conclusion that we are faced with a continuous evasive scheme, and not, as everything indicates, a repeated evasive scheme. That is, from the facts established as proven it does not result that the evasive scheme devised and executed aimed and effected the realization of a payment in 2010.

Rather everything indicates that, not only, as the Tax Authority concludes, is it a question of the payment of interest, for the application of capital, and that, if such operation had occurred without resort to the fraudulent structure used, such interest would be taxed and would be covered by the withholding tax obligation, but also that such interest was paid annually, as is customary and usual.

Said in other words, being, as is concluded in the inspection procedure, the normal situation (non-evasive) an application of capital, nothing indicates that the real substance of the same would imply the payment of interest over two years, and therefore it must be considered that the corresponding interest was paid at the moment of the Claimant's payments to its clients.

The situation sub iudice is perfectly clear in the tables contained in section 40 of the facts established as proven, which are now repeated, noting that the Tax Authority itself, in the Tax Inspection Report, individualizes a non-taxed capital gain in the year 2009, in addition to the under-taxed capital gain in 2010:

Thus, and taking into account the period set forth in article 45/1, and the circumstance that the inspection procedure only began in the year 2014, it is verified that the assessment of 11 November 2014 occurred when the Tax Authority's right to assess tax for the payment of interest (in the form of non-taxed capital gain) in 2009 had already expired, and therefore, in that part, the assessment should be judged illegal, with the subsidiary arbitral claim formulated proceeding, this being not opposed either by the step transaction doctrine, invoked by the Tax Authority, insofar as it is not demonstrated that the evasive plan aimed a result consummated in 2010, nor the provision of article 9 of the Civil Code, noting that the circumstance invoked by the Tax Authority to justify the counting of the statute of limitations period from 2010 – the moment in which the "shareholders" sell their social stakes to D…, without repurchasing them at the same moment, as they had done previously – is not a fact declared nor declarable to the Tax Authority, and it being understood that the duty of investigation of such authority is generated, rather, with the formation of income in the sphere of the beneficiaries of the interest, a fact, this indeed, declarable and declared (in the form of non-taxed or under-taxed capital gain), timely, to the Tax Authority, whether regarding 2009, or regarding 2010.

It is understood, in summary, that the GAAC, as results from its own text, determines the ineffectiveness of acts or legal transactions, and therefore, unless better advised, it will not have the same the effect of "eliminating" facts, and, concretely for what now matters, tax facts.

Thus, verifying that the tax act in crisis, in part, assesses tax concerning a tax fact that, without doubt, occurred in the year 2009, since the capital increase that integrates the income which is the manifestation of the taxpayer's capacity to contribute legitimizing the power of the Tax Authority to tax, occurred, in part, in the year 2009, it is concluded that the assessment of tax in the year 2014, in that part, and in the absence of any fact that affects in a relevant manner the respective period, occurred when the Tax Authority's power to do so had already expired.

The Claimant accumulates, with the request for annulment of the tax acts that are the subject of these proceedings, the request for condemnation of the Tax Authority to pay compensatory interest.

In harmony with the provision of paragraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim of which no appeal or challenge lies binds the Tax Administration from the end of the period provided for appeal or challenge, with the latter, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of the judgments of tax tribunals, to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for such purpose", which is in line with the provision of article 100 of the LGT [applicable by force of the provision in paragraph a) of no. 1 of article 29 of RJAT] which establishes that "the tax administration is obliged, in case of total or partial merit of a complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation that is the subject of the dispute, comprising payment of compensatory interest, if applicable, from the end of the period for execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning at CAAD, making no reference to condemnatory decisions, it should be understood that the powers that are attributed to tax tribunals in judicial challenge proceedings are included in their competences, this being the interpretation that is in tune with the sense of the legislative authorization on which the Government based itself to approve RJAT and in which it proclaims, as a first directive, that "the tax arbitral process should constitute a procedural means alternative to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process of annulment of tax acts, admits the condemnation of the tax administration to payment of compensatory interest, as is inferred from article 43, no. 1, of the LGT, in which it is established that "compensatory interest is owed when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount higher than legally due" and from article 61, no. 4 of the Tax Procedural and Process Code (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which states that "if the decision recognizing the right to compensatory interest is a judicial one, the payment period is counted from the beginning of the period for spontaneous execution".

Thus, no. 5 of article 24 of RJAT in saying that "payment of interest is owed, regardless of its nature, under the terms provided in the general tax law and in the Tax Procedural and Process Code" should be understood as allowing the recognition of the right to compensatory interest in the arbitral process. In the present case, it is manifest that, following the declaration of illegality and consequent annulment, albeit partial, of the impugned assessment acts, there is place for reimbursement of the tax, by force of the aforementioned articles 24, no. 1, paragraph b), of RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been practiced", in the part corresponding to the correction that was considered illegal.

In the present case, it is manifest that the partial illegality of the assessment act, whose amount the Claimant paid, is attributable to the Respondent, which, by its own initiative, practiced it without legal support.

Consequently, the Claimant has the right to compensatory interest, under articles 43, no. 1, of the LGT and 61 of the Tax Procedural and Process Code. Compensatory interest is owed, from the date of the payments shown to have been made, and calculated on the basis of the respective amount, until its full reimbursement to the Claimant, at the legal rate, under the terms of the articles, articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, 61 of the Tax Procedural and Process Code and 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (without prejudice to any subsequent alterations of the legal rate).

By the foregoing, the Respondent should give execution to the present decision, under article 24, no. 1, of RJAT, determining the amount to be reimbursed to the Claimant and calculating the respective compensatory interest, at the legal rate for civil debts, under the terms of articles 35, no. 10, and 43, nos. 1 and 5, of the LGT, 61 of the Tax Procedural and Process Code, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (or statute or statutes that succeed it).

Compensatory interest is owed from the dates of the payments made until the date of processing of the credit note, in which it is included (article 61, no. 5, of the Tax Procedural and Process Code).

C. DECISION

It is therefore decided in this Arbitral Tribunal to judge the arbitral claim formulated partially meritorious and, in consequence,

a) To partially annul the withholding tax assessment of IR no. 2014…, of 11 November, and the respective assessment of compensatory interest no. 2014…;

b) To condemn the Tax Authority to the reimbursement of the tax improperly paid in the amount of €1,020,808.76 of the respective compensatory interest paid, in the amount of €33,272.64;

c) To condemn the Tax Authority to the payment of compensatory interest accrued on the amount of € 1,054,081.40, at the legal rate of 4% per annum, until the date of issuance of the credit note in which such compensatory interest is included.

D. Value of the Proceedings

The value of the proceedings is set at € 1,433,287.08, under article 97-A, no. 1, a), of the Tax Procedural and Process Code, applicable by force of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Notify parties.

Lisbon, 25 August 2016

The Presiding Arbitrator

(José Pedro Carvalho - Reporter)

The Arbitrator Vogal

(Jorge Carita – in dissent as to the subsidiary claim, as per dissenting opinion)

The Arbitrator Vogal

(José Poças Falcão – in dissent as to the principal claim, as per dissenting opinion)

DISSENTING OPINION

Although I am in perfect agreement with the way the principal claim is appreciated and decided, I cannot say the same regarding the subsidiary claim, which leads me to issue the present dissenting opinion.

And, beginning with the Tax Inspection Report, it contains the reference to two determining dates in the triggering of the entire process. Namely:

2.7.2009 – date on which a buy and resale operation of shares occurred, carried out by the 5 shareholders of B…;

5.7.2010 – date on which the total sale of the shares held by this group and acquired almost entirely on 25.06.2008 (subscription of shares in the capital increase for € 15,800,000.00, which occurred 7 days after the incorporation of the company) occurred.

From the first operation resulted a non-taxed capital gain, in view of the exclusion of taxation provided for in paragraph a) of article 10, no. 2 of CIRS.

The second was subject to taxation, in capital gains, because the exclusion of taxation provided for in paragraph c) no. 2 of article 10 of CIRS had meanwhile been repealed.

This in the context of IRS of the shareholders, considering their respective tax declarations Model 3.

Regarding D….

Following the first operation, on 2.7.2009, D… did nothing, regarding any possible withholdings at source.

Upon the second operation, it proceeded to withhold IRS at the source, at the rate of 20%, considering that it was income from Category G of IRS (capital gains).

Given that the Tax Authority considers we are not faced with income from capital gains, but rather income resulting from the application of capital (Category E of IRS), by application of the general anti-abuse clause provided for in article 38 of the LGT, such income would instead be taxed at the withholding tax rate of 21.5%, contrary to the 20% actually withheld by D….

Taking into account the arguments contained in the Report (see pages 42 and 43) and reinforced by the Tax Authority's Response in the context of the proceedings, it is important to note the manner in which the Tax Authority proceeded to assess the missing tax.

It considered the revaluation of the shares from their subscription (25.6.2008) to the date of their total alienation (5.7.2010), not taking into account the buy and resale operation that occurred on 2.7.2009.

The Tax Authority did not proceed with two new IRS assessments by withholding at source. One in substitution of a buy and resale operation that generated capital gains excluded from taxation. And another at the end that generated capital gains with withholding at 20%.

The Tax Authority, in view of the mechanisms and consequences inherent to the application of the GAAC, proceeded with a single assessment of the tax to be withheld by D….

That and only that assessment of tax can be appreciated by the Tribunal.

And only that can be considered as expired or not.

And having the assessment occurred on 11.11.2014, the Tax Authority's right to carry it out has not expired, because the sole tax-generating event occurred on 5.7.2010.

It was in relation to the taxable matter determined in the manner contained in the Report (see table page 43) that a single taxation rate by withholding at source was applied.

It was not applied the withholding rate to two tax-generating events at two distinct moments (see "Proposal for Correction" page 46 of the Report).

I highlight the manner in which the Tax Authority refers to the fact that we are faced with a single moment, all as is transcribed in the decision itself. Namely.

"Considering, then, that there is a set or succession of acts/transactions coordinated between them, the law enforcer should operate an integrated treatment, viewing them as a single transaction, tending toward a single and final result, which will refer, in the present case, to the receipt of capital increases with the final sale of the shares, which would be what would happen in the absence of the composite evasive operation, that is, on 05-07-2010, as only on that date was it made known to the investors what the value of their capital increase was, and only at that moment would they be in a position to demand it from D…, occurring at that moment, the date of vesting, which counts for determining the birth of the tax obligation for the tax substitute, which in the present case is D…, which should have withheld at the withholding tax rate of 21.5% the amount of € 1,260,147.78 when making the income available, under the provision of paragraph b) of article 101, no. 2 of CIRS.

… … …

On the other hand, it is important to note that, from the analysis of the acts and transactions practiced, it is evident that these moved away from the logic of normal business and market management, with revaluation of social stakes perfectly at odds with reality, that is, the trend of reduction in economic and commercial value of the held companies, such as sales with artificial gains, followed by repurchase at the same moment, at the same value, and from there to another equal temporal period, sell again with artificial gain. In this scheme, one witnesses an operation that involved a succession of transactions that occurred at different temporal moments, between the same negotiating parties, and under the planning and execution in charge solely of D…, which had as common objective the obtaining of tax advantages.

We are in the presence of an actual set of complex acts that only emerge in a global architecture, planned and composed of preparatory, intermediate and final acts or legal transactions that permits detecting the evasive design of the operations.

There is thus verified the existence of a predominant fiscal motivation that manifested itself in the forms adopted and which makes prevail the fiscal purpose of the transactions over the non-fiscal purpose, particularly because there is no finding of any existence of valid economic reasons, which leads to the conclusion that the entire set of operations had as its main objective, indeed even sole, the obtaining of tax advantages, in clear abuse of law.

We repeat:

A complex set of acts that only emerge in a global architecture, planned and composed of preparatory, intermediate and final acts of legal transactions that permits detecting the evasive design of the operations and this reality was not taken into account in the appreciation of the subsidiary claim.

Hence my respectful disagreement with the decision as to the appreciation and judgment of the subsidiary claim and the sense of my vote as to this part of the decision.

Lisbon, 25 August 2016

Jorge Carita

DISSENTING OPINION OF CO-ARBITRATOR JOSÉ POÇAS FALCÃO

(article 22-5 of RJAT)

I do not concur with the decision regarding the judgment of the principal claim formulated by the Claimant, A…, SA, that is, and to the contrary of what was decided, I would judge the principal claim entirely meritorious for declaration of illegality and annulment of the withholding tax assessment of IRS no. 2014…, of 11 November and the respective assessment of compensatory interest no. 2014…, concerning the year 2010, in the amounts of € 1,232,680.93 and € 200,606.15, respectively, by violation of the provision of article 38-2 of the LGT.

The essential reason is clear: I consider that the norms and mechanisms of the so-called general anti-abuse clause (GAAC), with provision in articles 38 of the LGT and 63 of the Tax Procedural and Process Code, are not susceptible to application in the context of tax substitution.

[The dissenting opinion continues with extensive legal arguments...]

Frequently Asked Questions

Automatically Created

What is the general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) and how was it applied in CAAD case 671/2015-T?

The general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) contains five cumulative elements that must be verified: (a) means element; (b) result element - obtaining tax advantages; (c) intellectual element - acts motivated essentially or mainly by fiscal concerns; (d) normative element; and (e) sanctioning element. In CAAD case 671/2015-T, the Tax Authority applied this clause to a share revaluation transaction where shares were revalued from €1.00 to €1,380.214, characterizing it as a fictitious and artificial scheme designed to distribute investment returns as capital gains (taxed at 20% in 2010) rather than as capital income subject to withholding tax under Article 71(1)(a) CIRS at 21.5%. The consequence of applying the anti-abuse clause is that the abusive act or transaction becomes ineffective solely for tax purposes while maintaining all other legal effects, without altering the legal classification of the transaction itself for non-tax purposes.

Can the Portuguese Tax Authority hold a tax substitute liable for IRS withholding tax when the substitute did not benefit from the abusive tax arrangement?

The Portuguese Tax Authority's ability to hold a tax substitute liable for IRS withholding tax when the substitute did not benefit from the abusive arrangement was the central contested issue in case 671/2015-T. The claimant company strongly contested this approach, arguing that: (1) the shareholders were the actual beneficiaries of tax advantages (avoiding 21.5% withholding and obtaining 20% capital gains taxation), not the company; (2) the anti-abuse clause under Article 38(2) LGT lacks the 'result element' when applied to the tax substitute since the company obtained no tax advantage; (3) imposing such liability requires tax substitutes to assess counterparties' fiscal motivations in normal business dealings, which is highly complex or impossible; (4) this interpretation transfers both inspection duties and tax burdens from taxpayers to substitutes who no longer possess funds for withholding; and (5) such liability violates constitutional principles of proportionality and property rights under Articles 18(2) and 62(1) of the Portuguese Constitution. The claimant cited supporting precedent from CAAD decision 379/2014-T. The case highlighted fundamental tensions in applying anti-abuse provisions to intermediary parties.

What is the difference between a substituto tributário (tax substitute) and a devedor originário (original debtor) in Portuguese IRS withholding tax disputes?

In Portuguese IRS withholding tax disputes, a 'substituto tributário' (tax substitute) is an entity legally obligated to withhold and remit tax on behalf of the actual taxpayer, replacing the taxpayer in the tax payment relationship with the State. The substitute withholds tax from payments made to the beneficial owner and remits it to tax authorities. A 'devedor originário' (original debtor) is the person who actually receives the taxable income and bears the economic burden of the tax - the beneficial owner with actual tax liability. In case 671/2015-T, the claimant company was characterized as the tax substitute responsible for withholding IRS on payments to shareholders, while the shareholders who received the benefit from the share revaluation scheme were the original debtors who actually obtained tax advantages. The critical legal question was whether anti-abuse provisions can impose withholding obligations on substitutes for transactions they must retrospectively recharacterize, when only the original debtors (shareholders) benefited from the abusive tax planning. This distinction determines who ultimately bears liability when the anti-abuse clause applies to complex transactions.

How does CAAD arbitration address the reclassification of capital gains as capital income under the anti-abuse clause for IRS purposes?

CAAD arbitration in case 671/2015-T addressed the reclassification of capital gains as capital income under the anti-abuse clause by examining whether the Tax Authority could reconstruct a hypothetical alternative transaction. The Tax Authority argued that share revaluation from €1.00 to €1,380.214 was artificial, and the subsequent disposal should be reclassified from capital gains (taxed at 20% in 2010 under capital gains rules) to capital income distributions subject to withholding tax under Article 71(1)(a) CIRS at 21.5%. The claimant contested this approach, arguing that Article 38(2) LGT only permits declaring abusive transactions ineffective for tax purposes, not authorizing the Tax Authority to construct alternative hypothetical realities. The company argued that anti-abuse provisions cannot require tax substitutes to perform such reclassifications prospectively, as this would demand assessing counterparties' subjective fiscal motivations in real-time business dealings. The arbitration examined whether the five cumulative elements of the anti-abuse clause were satisfied, particularly the 'result element' - whether the tax substitute or the shareholders obtained the tax advantage - which determined whether reclassification and withholding obligations could properly apply to the substitute company.

What are the legal consequences of applying the anti-abuse clause on the validity of transactions and withholding tax obligations in Portugal?

The legal consequences of applying the anti-abuse clause on transaction validity and withholding tax obligations in Portugal, as examined in case 671/2015-T, involve several critical distinctions. Under Article 38(2) LGT, when the anti-abuse clause applies, the consequence is that the abusive act or legal transaction becomes ineffective solely and exclusively for tax purposes, while maintaining all other effects produced by such acts or transactions, with the legal classification remaining unaffected for non-tax purposes. However, the case revealed profound disagreement about whether this permits the Tax Authority to: (1) reconstruct hypothetical alternative transactions that would have occurred absent the abuse; (2) impose withholding tax obligations on tax substitutes based on such reconstructed realities; and (3) hold substitutes liable for taxes on advantages they never received. The claimant argued that converting the anti-abuse clause into a withholding obligation on substitutes would transfer inspection duties and tax burdens entirely to intermediaries who no longer possess the funds for withholding, effectively placing the missing tax burden on the substitute. This raised constitutional concerns regarding proportionality and property rights. The case also addressed temporal consequences, with the claimant arguing that even if anti-abuse applied, statute of limitations would limit liability to €211,872.17 rather than the full €1,232,680.93 assessed.

IRS Anti-Abuse Clause: Tax Substitute vs Original Debtor Liability in CAAD Case 671/2015-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I – REPORT

II. DECISION

A. FACTUAL MATTER

A.1. Facts Established as Proven

A.2. Facts Established as Not Proven

A.3. Reasoning of the Factual Matter Proven and Not Proven

B. LAW

C. DECISION

D. Value of the Proceedings

DISSENTING OPINION

DISSENTING OPINION OF CO-ARBITRATOR JOSÉ POÇAS FALCÃO

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Table of Contents

IRS Anti-Abuse Clause: Tax Substitute vs Original Debtor Liability in CAAD Case 671/2015-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I – REPORT

II. DECISION

A. FACTUAL MATTER

A.1. Facts Established as Proven

A.2. Facts Established as Not Proven

A.3. Reasoning of the Factual Matter Proven and Not Proven

B. LAW

C. DECISION

D. Value of the Proceedings

DISSENTING OPINION

DISSENTING OPINION OF CO-ARBITRATOR JOSÉ POÇAS FALCÃO

Frequently Asked Questions

Tags

FRESH Legal Group

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Table of Contents