CAAD 679/2015-T: Deductibility of Financial Charges by SGPS Companies Under IRC Tax Benefits

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), Nuno de Oliveira Garcia and Luís Janeiro, all designated by the Deontological Council of the Center for Administrative Arbitration (CAAD) to form the present Arbitral Tribunal (AT), constituted on 22 January 2016, agree to the following:

I. Report

1. The company 'A..., SGPS, S.A.', NIPC..., presented, on 17 November 2015, a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2, no. 1, subparagraph a), and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority (hereinafter also AT) is the respondent.

2. The claim subject to the request for arbitral decision consists of the assessment of the legality of the additional corporate income tax (IRC) assessment for 2011, issued by the Revenue Collection Services of the AT with no. 2015... and dated 2 July, which gave rise to the account reconciliation statement no. 2015..., and compensation note 2015..., in the amount of € 509,164.58.

3. The Claimant requests, following the success of the application, that the assessment sub judice be declared illegal and annulled insofar as it concerns the correction to taxable profit (in the amount of € 2,745,372.59), change in local business tax (to € 34,591.69) and compensatory interest (of € 45,033.11).

4. On 20 November 2015, the request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

5. The Claimants did not proceed with the nomination of an arbitrator, and therefore, pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of RJAT, the President of the Deontological Council designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the designation within the deadline.

6. On 7 January 2015, the parties were notified of the designation of the arbitrators and raised no objection.

7. In accordance with what is provided in subparagraph c) of no. 11 of RJAT, the collective arbitral tribunal was constituted on 22 January 2016.

8. In these terms, the Arbitral Tribunal is regularly constituted to assess and decide on the subject matter of the proceedings.

9. The main issues to be decided concern the meaning and scope of article 32, no. 2, of the Tax Incentives Statute (hereinafter also EBF), making it necessary to determine:

(i) The moment at which financial charges should be disregarded; and,

(ii) The methodology for determining the quantum of charges to be disregarded.

(i) Regarding the question of the moment at which charges should be disregarded:

To substantiate the request for arbitral decision, the Claimant (which attaches various documents and an opinion from Prof. Doctor D…) alleges, in summary:

a) That in point I.4 of the Inspection Report under the item Brief Description of Corrections Made, the following is stated:

"In accordance with no. 2 of article 32 of the EBFR, the total amount of € 2,829,441.61, relating to financial charges borne in the 2011 tax year in connection with the acquisition of equity interests – see III.1.1, does not count towards the determination of taxable income. This correction was rectified in favor of the taxpayer, rising to € 2,745,372.25, following the right of response, as stated in point IX – Right of Response – Substantiation" of this report".

b) The aforementioned correction, in the amount of € 2,745,372.25, results from an erroneous and illegal interpretation made by the AT, conveyed by Circular no. 7/2004, of 30 March of the Corporate Income Tax Services Directorate, both regarding the meaning and scope of article 32, no. 2 of the Tax Incentives Statute, and regarding the methodology for determining the quantum of financial charges to be disregarded, through the definition of an indirect method of imputation of financial charges to equity interests;

c) An SGPS must accept the tax deductibility of those financial charges in the year in which it bore them, assessing any potential increase, for purposes of determining its taxable profit, only at the moment of disposal of the equity interest held and provided that the requirements underlying the application of the regime are met;

d) Given the practical difficulty of relating capital gains (which are generated at a particular point in time) with financial charges (which may be ongoing over time), the AT, without any legal support or basis, provides the solution that best suits it, namely, a priori it always disregards financial charges and, a posteriori, it verifies, based on the treatment given to capital gains, whether such charges will have to be considered and accepted as cost.

e) This procedure has no minimum basis or support in law, so financial charges should be considered as cost or tax expense and only if and when capital gains resulting from the disposal of equity interests are realized and are, in accordance with article 32, no. 2, of the EBF, disregarded.

For its part, regarding this same issue, the AT presented a response and attached the investigative file, invoking, in summary, the following:

a) The solution adopted by Circular no. 7/2004, in the part concerning the year in which the tax corrections of financial charges now in question should be made, reflects the legislator's concern not to influence the taxable profit of the year in which financial charges are borne in connection with the acquisition of equity interests likely to benefit from no. 2 of article 32 of the EBF, without first knowing whether they may or may not contribute to the formation of the taxable profit of the company;

b) That circular determines that should it be concluded at the moment of disposal of the equity interests that not all requirements are met for application of that regime, such year shall see the consideration as a tax cost of financial charges that were not considered as cost in the fiscal years in which they were borne;

c) Charges that may contribute to the formation of taxable profit shall, at most, be recognized in the period immediately following that in which they were borne, and those that cannot be recognized in that immediately posterior period simply do not meet the prerequisites to contribute to the formation of taxable profit;

d) The solution advocated by that circular is satisfied in addressing the legislator's concerns regarding the periodization of taxable profit, especially when combined with the provisions of article 23 of CIRC, preventing its recognition in the year in which, although borne, it is not yet possible to ascertain its indispensability for the formation of taxable profit;

e) The Administrative Court of Appeal (STA) Decision no. 269/2012 states:

"For MANUEL H. F. PEREIRA (cf. 'The Periodization of Taxable Profit', Science and Tax Technique, 1988, no. 349, pp. 80-81) referring to the importance and reason for the principle of specialization of fiscal years, he considers that "the temporal specialization of profit components is even more important for tax purposes than for accounting purposes, given the conditions in which the determination of the tax to be paid is conducted, so as to avoid shifts in results between different years with purposes of minimizing tax burden, (…). Indeed, this temporal imputation can be an instrument of result manipulation, in order to, namely:

a) Defer profits over time;

b) Fragment profits, distributing them across different years, with the objective of avoiding, in a progressive rate tax, taxation at higher rates;

c) Concentrate profit in a year where more substantial deductions can be effectuated (e.g. through loss carryforward or tax incentives)."

f) The legal obligation to quantify non-deductible financial charges resulting from the articulation of this regime with article 32 of the EBF fell on the Claimant within the scope of determining taxable profit and filling in the annual return where it self-assessed IRC;

g) The financial charges borne in the year in question, in the amount which it understands to be related to the acquisition of all equity interests, do not, consequently, contribute to the formation of the Claimant's taxable profit, regardless of whether the Claimant, regarding those equity interests, realized capital gains with their disposal;

h) The tax cost of financial charges borne with the acquisition of equity interests, regardless of whether capital gains were generated, should not be considered, as there is no nexus between one thing and the other.

(ii) Regarding the methodology for determining the quantum of charges to be disregarded:

The Claimant alleges that:

a) Beyond the divergence of understanding regarding the meaning and scope of article 32, no. 2 of the EBF, disagreeing with what is attributed to it by the Circular and inherent to the AT's procedure, it also does not conform with the methodology for determining the quantum of financial charges to be disregarded, through the definition of an indirect imputation method of those charges to equity interests pursued by the Circular and the AT;

b) The AT does not question beforehand – as it would be imperative – whether the financing obtained was contracted for the acquisition of equity interests or whether it was used in financing to supply the treasury needs of its subsidiaries or whether it was even used to pay workers' salaries;

c) The AT made no inquiries to ascertain whether the loans obtained were intended for the acquisition of the equity interests which the company held;

d) The AT ignores even the time factor, disregarding the dates of acquisition of equity interests and the dates of contraction of loans, limiting itself to presuming that loans must have something to do with those acquisitions and, based on that wrong and illegal induction, it applies formulas and establishes proportions;

e) "[The AT] not only failed to develop any strategy that would mitigate the identified risks, but proposed a method that clearly exceeds the spirit of the legislator underlying the provision of article 32, no. 2 of the EBF, in violation of the principle of legality and typicality constitutionally enshrined";

f) The Circular completely deviates from the law, since it starts from a concern that a method of direct or specific allocation would be avoided due to "[…] the possibility of manipulation that it would allow […]", always imposing an indirect or pro rata method;

g) The direct allocation method appears to be the only one which, besides being more just and rigorous, finds support in the proper and correct interpretation of the wording of the law;

h) The legislator only intends the tax disregard of financial charges incurred with financing actually related to the acquisition of equity interests, and only these;

i) The letter and teleology of the norm in question rule out the admissibility of using a pro rata method, and the actual allocation of the destination of the loans obtained must be respected, and only after that determination would the use of an indirect method be admissible, in light of what occurs, for example, in the context of Value Added Tax;

j) By resorting to indirect methods to presume financial charges supposedly incurred with the acquisition of equity interests, the AT incurs another grave and frontal illegality – the undue recourse to indirect assessment;

k) The AT ended up presuming that, given the existence of financial charges and, simultaneously, financial equity interests, there were financings for the acquisition of equity interests and, based on the formulas and doctrine of 'guessing' contained in the Circular, it further presumes the amount of financial charges attributed to the acquisition of equity interests, thus determining, at its pleasure, the taxable matter;

l) The indirect method advocated by the Circular is manifestly fragile and inconsistent;

m) The amount of equity interests held by the Claimant during the year 2011 considered by the AT in the quantitative method for calculating financial charges that it uses (maps "Equity Interests" and "Map for Determining Financial Charges Attributable to Equity Interests" which constitute annexes to the individual report) is, throughout the different months of the year, as follows:

• January to September 2011: € 277,719,140.71

• October to December: € 277,519,140.71;

n) It constitutes, therefore, a sophism, because completely removed from reality, to consider, as the AT does incorrectly and illegally, that the Claimant bore financial charges in connection with the acquisition of the aforementioned equity interests or equity interests;

o) The AT should have, accordingly, attended to the concrete reality of the Claimant, which demonstrates the non-existence of debt contraction on account of the acquisition of the aforementioned equity interests and not, based on the illegal, fragile and wrong methodology contained in the Circular, presumed through the illegal recourse to indirect methods, which putative charges were borne by the Claimant with such acquisition;

p) In summary, for the Claimant "[the] assessment act sub judice is manifestly illegal due to erroneous qualification and quantification of profits, absence or defect of legal required substantiation and omission of other legal formalities, embodied, moreover, in the violation of articles 32, no. 2, of the EBF, 8, 74, no. 1, 85, no. 2, 87 and 90 of the LGT, 13, 103, nos. 2 and 3 and 104, nos. 2 and 3 of the CRP, of the principles of tax legality, specialization of fiscal years and contributory capacity, imposing its respective annulment, in accordance with the provisions of articles 2, no. 1, subparagraph a) of RJAT, 99, subparagraphs a), c) and d) of CPPT and 135 of CPA" (cf. Conclusion 36 of the Request).

Regarding that same issue, the AT invoked, in summary, the following:

a) Having transcribed the text of the applicable legal norm, as well as of the Circular whose illegality/unconstitutionality is invoked, it is furthermore necessary to clarify that, despite what is alleged by the Claimant, the method used in the present case, regardless of being advocated by Circular no. 7/2004, of 30/03, is adopted by the generality of equity interest management companies, which employ it based on the extreme complexity and subjectivity of the direct allocation of these charges to various assets;

b) Given the intrinsic characteristics of currency, this method is a necessary tool for SGPS, so as to allow them to effect the imputation of these charges to equity interests and to determine the taxable profit of the year in accordance with applicable legislation;

d) It is evident that the reason presiding over the use of the method of imputation of financial charges to equity interests used in the present case is that of taxation closest to actual profit possible, respecting the provision of no. 2 of article 32 of the EBF;

e) Note that the norm contained in no. 2 of article 31 of the EBF, as worded by Law no. 32-B/2002, of 30/12, by determining that financial charges borne with the acquisition of equity interests do not contribute to the formation of the taxable profit of SGPS, did not establish the method to use for purposes of allocation of financial charges to equity interests;

f) In truth, Circular no. 7/2004, in respect of the ratio legis implemented with the legislative alteration to no. 2 of article 32 of the EBF, intends nothing more than to give effect to the law, determining the method and form of calculation of financial charges borne with its acquisition of equity interests;

g) The Arbitral Tribunal pronounced itself on the legality and constitutional compliance of that Circular. It was decided, in fact, in Case no. 21/2012-T:

"In fact, we consider that the adequate hermeneutics of the special regime applicable to SGPS's, provided in no. 2 of article 31 of the EBF, above explained with development, leads us to consider that the legislator's purpose when it put that regime into effect was precisely to prevent (under the assumption that potentially the SGPS could come to benefit from the exclusion of taxation applicable to capital gains income realized with the disposal of equity interests) the relevant costs that are related to the obtaining of such income can have relevance in terms of determining the taxable profit of the taxpayer who obtained them.

Except as regards the imposition, in no. 7 of Circular 7/2004, of the use of the indirect method of allocation of financial charges (we considered above that nothing prevented, on the assumption that direct allocation were possible, that it could be undertaken, thus contravening the imposition of the indirect method of allocation of financial charges), we do not see how that administrative doctrine can contain norms of incidence, rate determination and assessment, thus violating the principle of fiscal legality provided in nos. 2 and 3 of article 103 of the CRP."

h) The disregard of financial charges results solely from the normative framework in effect and not from the possible application of the criteria contained in the aforementioned Circular no. 7/2004, of 30/03;

i) Resorting to the doctrine of Freitas Pereira, the importance of the aforementioned guidelines results precisely from the fact that "[tax] activity [is] today a massive activity, which involves the treatment of thousands of cases, generally translated into taxpayers' tax returns and in that context it is an important element of legal certainty the prior knowledge of the organization implemented to deal with those cases, the criteria and procedures it adopts, given that, namely, it allows individuals faced with a problem or question to know, if there is internal regulation on that matter, how, in principle, that case will be solved by the officials tasked with applying the law";

j) Furthermore, the explanation, in the circular in question, of the method to be used for purposes of financial charges to equity interests, in addition to promoting legal certainty, contributes to the effective realization of the extrafiscal purposes mentioned above (and which presided over the very creation of the special regime for SGPS) and has the virtue, no less important, of preventing taxpayers from using the normative in question to pursue purposes completely unrelated to the purposes envisaged in the law and which subvert the justice of the entire tax system;

k) The understanding contained in Circular no. 7/2004, of 30/03, is limited to attempting to clarify the emerging doubts about the tax regime applicable to SGPS and SCR, provided in article 31 of the EBF, as worded by Law 32-B/2002, of 30/12 (State Budget for 2003);

l) For the Respondent, in summary, "the understanding propounded by the Claimant is manifestly unfounded, the assessment act relating to the application of Circular no. 7/2004 of the DSIRC not suffering from any unconstitutionality or illegality".

By order of 5 March 2016, the request for production of testimonial evidence was dismissed, as the articles indicated by the Taxpayer correspond to matters of law or matters of fact requiring documentary evidence. In that same order, the holding of the meeting provided for in article 18 of RJAT was dispensed with, and 22 July 2016 was designated as the deadline for rendering the arbitral decision.

By order of 28 March 2016, the Claimant's request to join to the file the Decision of CAAD rendered in case no. 269/2015-T was granted.

The Claimant dispensed with submissions and the AT likewise presented no submissions.

II. Procedural Matters

In accordance with what has been set forth, it is declared that the Tribunal is regularly constituted and materially competent to rule on the present action, in declaratory proceedings.

The parties have legal standing and capacity, are legitimate and are regularly represented (articles 4 and 10, no. 2, of RJAT and article 1 of Administrative Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

No circumstances exist that would prevent the Tribunal from ruling on the merits of the case.

III. Merits

III.1. Factual Matters

Proven Facts

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

• The Claimant is a Joint Stock Company Managing Equity Interests ('SGPS'), constituted under Decree-Law no. 495/88, of 30 December, which heads Group B... and which leads the three business areas of the Group: construction, concessions and real estate;

• The Claimant's corporate purpose is the holding and management of equity interests in the Group's companies, as an indirect form of exercise of economic activities, as well as the provision of technical services of administration and management, communication and social, legal and tax responsibility to the subsidiary companies;

• The Claimant is the dominant company of a group of companies subject to IRC taxation under the special regime for taxation of groups of companies – 'RETGS' (cf. articles 69 et seq. of the IRC Code);

• In compliance with Service Order no. OI2014..., an internal inspection action was conducted on the group of which the Claimant is the dominant company, with reference to the 2011 fiscal year, with the objective of verifying compliance with the accounting and tax obligations inherent to the application of the special taxation regime of the group of companies, and to reflect in the taxable profit of the group, in accordance with the cited legislation, and in the tax payable by the group, the corrections made by the Tax Administration, as a result of inspection procedures relating to companies forming part of the group;

• According to the Report that culminated in the aforementioned inspection action:

"Corrections made to the dominant company Group C... SGPS, SA

In compliance with Service Order number OI2013... the inspection procedure was conducted on the company Group C... SGPS, SA (NIPC...).

As a result of the aforementioned inspection action, a correction was made to the declared tax result, which was set at the total amount of € 2,759,990.59, as set forth below:

Financial charges not tax deductible (no. 2 of article 32 of the EBF)

The total correction made to the company Group C... SGPS, SA, to the taxable matter amounts to € 2,745,372.25 and results from the fact that it was considered by the taxpayer, in determining the taxable result, the total amount of financial charges borne in the 2011 fiscal year, without regard to the limitation on the deductibility of such charges provided in the final part of no. 2 of article 32 of the Tax Incentives Statute (EBF)" - cf. pages 5/15 of the Inspection Report;

• It was concluded in that inspection procedure that the Claimant did not increase the net result of the year by the totality of financial charges attributable to equity interests, being in default the increase of the amount of € 2,745,372.25, the corresponding correction having been made of a purely arithmetical nature to the taxable matter – cf. Inspection Report, especially pages 7/15;

• As a result of the increase made in correction, the amount payable by the Claimant resulted in € 509,164.58, relating to the 2011 fiscal year, which concretized the additional IRC assessment act no. 2015... – cf. documents nos. 1 and 2 attached to the Arbitral Request;

• In order to be able to have the tax enforcement proceedings suspended resulting from the non-voluntary payment of the assessment in question, the Claimant offered a guarantee to the AT, in the form of a mortgage, for which it spent the sum of € 4,773.01.

• Following notification of the IRC assessment act no. 2015..., the Claimant presented the request for arbitral decision sub judice.

17.2. Substantiation of Factual Matters

The proven factuality was based on the position taken by each of the Parties and not contradicted by the opposing party, the critical analysis of the documents attached to the file by the Claimant (documents 1 to 9, attached with the Request for arbitral decision), whose authenticity and veracity were not disputed, as well as the content of the investigative file.

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

III.2. Legal Matters

1. Moment at which financial charges should be disregarded

18.1. The tax law applicable to the case under analysis is no. 2 of article 32 of the EBF as worded on the date of the occurrence of the fact for which there is conflict regarding the methodology for quantification of financial charges to be disregarded as a tax expense under IRC.

18.2. That wording of no. 2 of article 32 of the EBF was as follows:

"2 - Capital gains and capital losses realized by SGPS, SCR and ICR from equity interests of which they are holders, provided they have been held for a period of not less than one year, as well as financial charges borne with their acquisition do not contribute to the formation of the taxable profit of these companies."

18.3. As appears from the argument of each of the parties, reference was also made to Circular no. 7/2004. Regarding the question of the moment of consideration/disregard of financial charges, we must analyze its number six:

"6. Regarding the fiscal year in which financial charges should be disregarded as costs for tax purposes, the tax correction of those borne with the acquisition of equity interests likely to benefit from the special regime established in no. 2 of article 31 of the EBF should be made in the year to which the same apply, regardless of whether all conditions for application of the special taxation regime of capital gains have already been met. Should it be concluded at the moment of disposal of the equity interests that not all requirements for application of that regime are met, such year shall proceed with the consideration as a tax cost of financial charges that were not considered as cost in previous years."

18.4. In order to make a decision on this matter, we clarify at the outset that we do not consider that there is a "circulatory right," that is, we do not attribute the force of law to AT circulars, admitting only that their binding effect is limited to AT officials. It is unnecessary, even, to refer to the learned opinions of the generality of tax experts on this matter. What we mean by this is that only provisions of an AT circular that do not contradict tax law should be accepted – in the present case, no. 2 of article 32 of the EBF associated with the IRC Code itself in its version applicable to the case under analysis (2011).

18.5. We will construct a small example to attempt to ascertain what the legislator intended to say with the expression contained in the EBF article transcribed above: "charges borne with its acquisition".

Suppose that an SGPS acquired, on 1 January of year N, € 500 thousand in financial equity interests using paid-up debt at an annual rate of 5%. Regardless of whether that company paid the interest borne that year in that year (€ 500 thousand x 5% = € 25 thousand), in accordance with the so-called accrual basis (also known as economic periodization), which is common to both accounting and tax treatment of corporate income (cf. Article 18 of CIRC), it is indisputable that the financial charges borne with that acquisition would have been € 25 thousand. And if in year N+1 the company had amortized € 100 thousand of that loan and the interest borne in N+1 had been € 20 thousand (5% x € 400 thousand)? It is our understanding that, in the logic of IRC, those expenses continue to relate to the financial equity interest acquired in the previous year, that is, they result from its acquisition having been made through paid-up debt at the initial moment. The same reasoning would also apply, moreover, if instead of a financial equity interest we were talking about tangible fixed assets. The only difference would be at the tax level: while the tax legislator did not impose (specific) limitations in the case of financial charges relating to tangible fixed assets, it did so regarding equity interests acquired by SGPS – it is true that not in the IRC Code, but rather in the EBF. To conclude this example, let us now consider two possible outcomes facing a hypothetical sale with a tax capital gain on 1 January of N+2:

i) The capital gain was disregarded for meeting the legal requirements. In this case, the financial charges relating to the acquisition had already been disregarded over the previous years and there would be nothing more to correct when determining the company's taxable matter;

ii) The capital gain was not disregarded for not meeting the legal requirements. Since the financial charges had not previously been accepted as costs for tax purposes, there would be no other option than to consider them costs for tax purposes in year N+2 to reverse the previous correction.

18.6. Let us now consider the main arguments of each of the parties. While the Claimant considers that the disregard of financial charges should remain suspended until the possible realization of a capital gain with a financial equity interest that would not be relevant for determining the taxable matter of IRC relating to the year of realization of the capital gain so as to have temporal matching between "non-taxable gain/non-taxable cost", the Respondent considers that the provision conveyed by no. 6 of Circular no. 7/2004 should be followed, also using as justification for this fact the accrual basis regime (or economic periodization).

18.7. In order to pronounce ourselves on this point, we will begin by attending to the purpose of the special regime for capital gains on the sale of equity interests by SGPS that was in effect at the time. It seems clear to us that the regime was intended to benefit that type of company regarding the majority of its income/gains. Let us not forget that SGPS are prohibited from a series of operations (cf. Decree-Law no. 495/88, of 30 December, with all subsequent amendments), and their main income/gains are precisely those derived from the disposal of equity interests, to which this more favorable tax regime applied. Accordingly, it would be normal for the disregard of capital gains, on the one hand, and financial charges, on the other. Meanwhile, it is not provided in IRC legislation or related to it that the financial charges of SGPS be accounted for or considered/disregarded for tax purposes in a manner different from the usual, that is, year by year. We will also make a parallel regarding financial charges related to tangible fixed assets (except for those relating to the period prior to the asset coming into operation under the conditions of the previous no. 5 of regulatory decree no. 25/2009: "Included, also, in the cost of acquisition or production, in accordance with the accounting standards specifically applicable, are the costs of borrowed funds that are directly attributable to the acquisition or production of elements referred to in no. 1 of the preceding article, insofar as they relate to the period prior to its being put into operation or use, provided that this is longer than one year."). With nothing to the contrary, the financial costs of borrowed funds for its acquisition will be accepted year by year. If, perchance, for some extraordinary reason in a particular fiscal year it were concluded that they could not be accepted (for example, because a certain objective contained in a clause of a hypothetical contractual tax benefit for large investment projects had not been achieved), there would be only one solution, which would be their complete non-acceptance as cost in that period. This situation would be symmetric to the one we are analyzing: over various fiscal years, the financial cost would be accepted since it was associated with a situation of normal acceptance of that cost; however, if the most likely occurrence did not take place in the future (fulfillment of contractual objectives), there would be a one-time correction of the amount previously considered as expense. And we could multiply analogous examples that lead us to consider that financial charges related to acquisitions of financial equity interests by SGPS should be disregarded on an annual basis and not all at once should there be disposal of the equity interest with the non-taxation of any capital gain obtained on that sale.

18.8. On this point, we agree with the position of the Respondent and accept the application of the content of no. 6 of Circular no. 7/2004 because it does not contradict the tax law applicable to the tax event and not because we recognize it as having the force of law. We further consider that no other alternative would be viable in light of the accounting regime of accrual basis (or economic periodization) that guides both accounting and tax treatment relating to IRC. We can never lose sight of the fact that accounting principles are naturally and necessarily applicable to IRC, except where there is a contrary tax provision. And in this particular respect we find no provision contrary to the normal accounting procedure, which is to record financial charges on an annual basis depending on their occurrence.

1. Methodology for determining the quantum of charges to be considered

19.1. Also on this issue, the tax law applicable to the case under analysis is no. 2 of article 32 of the EBF as worded on the date of the occurrence of the situation in dispute.

19.2. As appears from the argument of each of the parties, reference was also made to Circular no. 7/2004, only this time its number seven, which we transcribe:

"7. As to the method to be used for purposes of allocation of financial charges borne in connection with the acquisition of equity interests, given the extreme difficulty of using a direct or specific allocation method in this matter, and the possibility of manipulation that it would permit, such imputation should be effected based on a formula that takes into account the following: the paid-up liabilities of SGPS and SCR should be imputed, in the first place, to paid-up loans made by them to subsidiary companies and to other investments generating interest, with the remainder being allocated to the remaining assets, namely equity interests, proportionally to their respective acquisition cost."

19.3. It has also been proven that the AT made the correction contained in this Case by applying the methodology advocated by number seven of Circular no. 7/2004 for the reasons explained above, which seemed to us to be its most relevant aspects. On the other hand, the Claimant does not accept that methodology for the reasons also already stated, briefly, previously.

19.4. We will construct some examples to attempt to apply what the tax legislator intended in elaborating no. 2 of article 32 of the EBF and which consists, essentially, in disregarding financial charges related to the acquisition of equity interests by SGPS that come to benefit from the favorable tax regime consisting of the non-taxation of capital gains upon their sale. It seems legitimate for us to infer from this that, if there are no charges related to the acquisition of those equity interests, there will be nothing to disregard, as they are non-existent. It is what the most elementary common sense would dictate – in this case, at the tax level.

19.5. Suppose that the SGPS is constituted at the end of year N, with shareholder contributions of € 500 thousand which were used for the acquisition of € 500 thousand in financial equity interests in companies. In N+1, it acquired no other equity interests but contracted, on 1 January of N+1, a bank loan at an annual interest rate of 5% for full financing of a property for its headquarters, which it acquired at the beginning of the year for € 500 thousand. The financial charges borne with that loan in N+1 will be € 25 thousand. Question: what should be, in this year, the amount of financial charges to be disregarded as relating to the acquisition of equity interests in other companies? We have no doubt that the legislator of article 32 of the EBF would not hesitate to answer that no value should be disregarded on that basis since the acquisition of those equity interests had been fully made with equity capital in the previous year. And if, instead of the shareholders contributing € 500 thousand in cash, they had contributed the capital in kind, precisely through those financial equity interests? It seems to us that the answer would be the same: since there was no paid-up liability associated with the acquisition of those equity interests, nor can any financial charges be imputed to them.

And what would have been the position of the AT had it followed what is provided in no. 7 of Circular no. 7/2004, bearing in mind that at the end of N+1, the only assets of the SGPS would be the financial equity interests acquired in the previous year for € 500 thousand and the property that cost € 500 thousand at the beginning of N+1? To simplify this example, but without removing its coherence, we will assume that other assets at the end of N+1 would equal the amount of depreciation of N+1 (and, consequently, accumulated depreciation of that year). Now, since there would be no paid-up loans to subsidiaries and/or other investments generating interest at the end of N+1, 50% of the interest borne (€ 12.5 thousand) would be disregarded in that year as tax costs.

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

19.6. It could be argued that the examples given in the previous point are very simple and that the reality of SGPS is much more complex, which leads to the "… extreme difficulty of using a direct or specific allocation method in this matter, and the possibility of manipulation that it would permit…" and that the AT had to adopt an indirect method that is even generous to taxpayers in compensating, in an initial phase of the calculation process, paid-up liabilities with paid-up loans to subsidiary companies and/or other assets generating interest. We agree regarding the first point (that the reality of SGPS is quite complex); as to the methodology advocated by the AT, we in no way consider that its "blind" adoption be permitted since it is evident that it fails resoundingly in some cases. Indeed, what prevents its more generalized possible application is the expression "…such imputation should be effected based on a formula that takes into account the following…". If the circular referred to "…may…" and added something like "… or any other duly substantiated criterion…" and "…provided that it is completely impossible to make a direct allocation of those financial charges to the SGPS's equity interests…" we would have no problem in accepting such provisions since they would not harm article 32 of the EBF.

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

Suppose that a company that, through the end of N-1 was not a SGPS and whose assets were, at the end of that year, € 100 million, with paid-up debt of € 20 million, the remainder of asset financing being split between equity capital and non-paid-up liabilities. At the beginning of N, it transformed itself into a SGPS, and at the end of this year the assets were € 150 million, of which € 30 million corresponded to the acquisition value of financial equity interests. At the end of the year, the paid-up debt was € 40 million, with an annual interest rate of 5% (this debt having been contracted on 1 January of N). Adopting an incremental logic, it would not shock us as a criterion for allocation of financial charges to be disregarded the increase in paid-up debt in the proportion imputable to financial equity interests (30/50 x 20) multiplied by the annual interest rate. Calculations made, it would yield € 0.6 million to be disregarded and € 1.4 million would be accepted as tax expenses. Should the method of Circular no. 7/2004 be applied, the financial charges disregarded would be 30/150 x 2 = € 0.4 million.

And if at the end of year N+1 the assets increased to € 210 million, of which € 30 million corresponded to the acquisition value of the same financial equity interests, no new acquisitions of that type having occurred, and the paid-up debt increased to € 80 million, with an annual interest rate again of 5% (this new debt having been contracted on 1 January of N+1), the interest corresponding to the increase in paid-up debt should be fully accepted since, clearly, it was not attributable to new equity interests. Accordingly, the same € 0.6 million of the previous year would have to be disregarded and € 3.4 million would be fiscally deductible (€ 1.4 million, as in the previous year, plus 5% x € 40 million, which would correspond to the year's increase in debt in N+1). Now if we followed the criterion advocated by Circular no. 7/2004, the financial charges disregarded would be 30/210 x 4 = € 0.57 million.

We therefore contend that, in case it is not possible to undertake direct allocation, a method based on incremental assets and paid-up liabilities would be more appropriate than that contained in Circular no. 7/2004. Understand, however, these examples as a source of reflection to assess the generalized adequacy of the criterion proposed by the AT. And the conclusion is that it is not adequate, especially for situations where it is evident that the acquisition of equity interests was made through equity capital.

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

"As determined by article 74, no. 1 of the LGT, the burden of proof of facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them. This was the wording in force of no. 1, which was also the initial wording. The provision was amended by Law no. 55-B/2004 of 30/12 to the following wording: The burden of proof of facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them, except in situations of non-subjection, in which it always falls on taxpayers. However, Law no. 50/2005, of 30 August restored the initial wording, which has been maintained to the present.

Knowing that the burden of proof of facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them, what does that mean? What does that rule mean in practical terms? Very simply, as has been peacefully understood, it means that in the 'absence of special rules, that is, except for legally established presumption, it is thus to the tax administration that the task falls of demonstrating the factual prerequisites of its action, namely the existence of tax facts which it is based not having been declared by the taxpayer' (António Lima Guerreiro, 'LGT Annotated', Kings of Books, 2001, pp. 329).

Or, in other words, It is the responsibility of the Tax Administration to demonstrate the legal (binding) prerequisites of its action, namely if aggressive (positive and unfavorable), with the burden, in turn, falling on the administered to present sufficient evidence of the illegitimacy of the act, when such prerequisites are shown to be verified. (Administrative Court of Appeal decision no. 00624/05.0BEPRT of 12-01-2012, Reporter: Catarina Almeida e Sousa)

This rule, although part of the set of rules relating to procedure, also applies to judicial proceedings, and its content is moreover not different from the general criterion for distribution of the burden of proof provided in article 342 of the Civil Code.

In such a way that, if the ATA intends to disregard costs recorded by the recurrent based on violation of article 31, no. 2 of the EBF, it should demonstrate the prerequisites of its right to taxation, that is, it should prove that those costs were not legally deductible either because capital losses were realized with the paid disposal of equity interests held for less than one year, or because financial charges were borne and recorded in connection with their acquisition.

But instead of this proof, the ATA proceeded to the disregard of costs recorded by the recurrent (dominant company) in the amount of € 3,237,838.62, taking as given that this amount related to financial charges borne with the acquisition of equity interests and that were improperly considered as tax costs. With the same basis the € 56,081.74 relating to the subsidiary S... SGPS, SA were disregarded, which resulted in corrections to the taxable profit of the group in the amount of € 3,293,920.36, whereby the tax results stated in the group model 22 return moved from 14,017,394.34 € declared to 17,311,314.70 corrected.

The ATA took as given that a certain amount of recorded financial charges were borne with the acquisition of equity interests, but demonstrated nothing to that effect. It did not identify the financing used for that purpose, nor the equity interests that would have been acquired with them, completely failing to discharge its burden of proof.

We can say that the ATA failed in the prerequisites of taxation and in the method quantifier used.

It failed in the prerequisites of taxation because it failed to demonstrate the legal factual requirements of its action, as mentioned above.

And it failed in the method quantifier because it divorced itself from the need to ascertain whether there was disposal of equity interests and what amount of financing was used in their acquisition.

But only before these two requirements – disposal of equity interests and respective financing used in their acquisition – could the ATA have disregarded financing costs.

Ignorant of both, the ATA resorted to correction and taxation by resorting to three (at least) presumptions: one, that equity interests were disposed of; another, that costs with financing for the acquisition of those equity interests were recorded; and the third constituted by calculation operations: (1) it imputed the paid-up liabilities of the SGPS to paid-up loans made by it to subsidiary companies and other investments generating interest and (2) it allocated the remainder to the remaining assets, namely equity interests, proportionally to their respective acquisition cost (3) after obtaining the value of paid-up liabilities attributable to the remaining non-paid assets, it determined proportionally the value of paid-up liabilities attributable to equity interests.

With this set of presumptions, the ATA concluded that the taxpayer bore in the year, by way of financial charges with the acquisition of equity interests, the sum of € 3,237,838.62.

The fact that in its methodology it used the criteria advocated in circular no. 7/2004, of 30 March, particularly in its nos. 7 and 8 does not save the legality of the operation, since the criteria and prerequisites for allocation of paid-up liabilities of SGPS clearly exceed the content of article 31, no. 2 of the EBF, creating presumptions and proportional determinations that the legislator manifestly did not assume nor consent to.

As pointed out by Júlio Tormenta (in Management Companies of Equity Interests as an Instrument of Tax Planning and Its Limits, Coimbra Publisher, pp. 145) 'A question that arises regarding what is established in article 32 of the EBF in its nos. 2 and 3 is how to determine or what are the financial charges directly related with acquisition of equity interests (mostly consisting of current service interest on a debt relating to a loan or other form of credit used by the SGPS for acquisition of equity interests) from those used by the SGPS in pursuit of its purpose that has nothing to do with acquisition of equity interests.

The tax administration has been arguing that this allocation should be made in respect of the "principle of financial balance" (cf. the Notice of 1 September 2003 from the Director-General of IRC Services), which advises that an asset be financed with capital of maturity compatible with that asset's economic life and its ability to generate monetary means.

According to the tax administration, financial charges should be allocated based on a formula that takes into account the following: paid-up liabilities of SGPS should be imputed, in the first place, to paid-up loans made by them to subsidiary companies and other investments generating interest, with the remainder being allocated directly and automatically to the remaining assets, namely equity interests, proportionally to their respective acquisition cost.

In Portugal the principle of legality prevails, having as a corollary, according to classical doctrine, the principle of closed typicality, with the subject matter of tax incidence being a matter of relative reserve of law of the Assembly of the Republic. In the present case, the law does not establish criteria for allocation of financial resources to the acquisition of equity interests and the tax administration cannot, via administrative procedures create norms of incidence (through the so-called "circulatory right"), under penalty of being faced with a material unconstitutionality, since such norms must emanate from law (of the Assembly of the Republic) or Decree-Law (of the Government) duly authorized.

Taxpayers are not obliged to follow the procedures contained in Circular 7/2004 of 30.3.2004 (hereinafter referred to as circular 7/2004) since only the tax officials are bound by them under their supervision and nothing more.

We cannot agree with what is stated in Circular 7/2004 at its point 7 where it states 'given the extreme difficulty of using, in this matter, a direct or specific allocation method, and the possibility of manipulation that it would permit': due to the development and sophistication of management information systems available in the market, the direct allocation method should be privileged and only in the impossibility of using the same; is that it would be advanced as alternative method the one advocated in Circular 7/2004'

If the legislator did not institute any criterion that permits distinguishing within the total financial costs of SGPS those owing to the purchase of equity interests and those that were used for other purposes, the ATA could only move within the scope of a method that respected direct or specific allocation, because only that would be compatible with the principle of legality and impartiality to which it is subject (article 55 LGT) and which results from the wording of article 31, no. 2 EBF by excluding from the formation of taxable profit the financial charges borne with the acquisition of the disposed equity interests.

Admitting however that it is not possible from the company's books to know what purpose the financing obtained was intended for, this may call into question the legal review by the ATA. But even if that is the case, the ATA cannot complete the norm through a circular that institutes a proportional, indirect or presumptive determination regime, creating conditions more onerous for the taxpayer than those provided in law, disrespecting the normative framework in effect. With such interpretation, circular 7/2004 proposes to complete the norm of article 31, no. 2 EBF by creating a calculation method different from the direct and specific allocation of paid-up liabilities of SGPS that the legislator did not contemplate and that drastically exceeds mere interpretation of the norm.

As stated in the decision of this TCAN no. 00997/12.8BEPRT of 14-03-2013 (Reporter: Pedro Marchão Marques) VIII – Given the primacy of law over administrative guidelines (principle of legality), the rules established in the circulars of the Tax Administration must respect the legislative normative framework of reference – primary legal norms – which prevail over them. And when those establish a normative sense that finds no reception in the legislative norm that it purports to interpret, they are instead derogate from it and create invalid innovative legal norm.

Thus, either because the ATA failed to discharge its burden of proof, or because it went beyond what article 31, no. 2 of the EBF required, it is not in a position to sustain the legality of the assessment attacked. And neither can it shift to the recurrent the burden of proving that financial charges do not result from the acquisition of equity interests, because nowhere in the law is it provided – for this case - the reversal of the burden of proof (article 344, no. 1 of the Civil Code). Add further that, the ATA not having called into question the reliability of the accounting, the recurrent's tax return benefits from the presumption of truthfulness and good faith under article 75 of the LGT, whereby also by force of this statute the ATA was burdened with overcoming that presumption".

The documentary proof attached to the file shows that, in the case we are analyzing, the AT did not attend to the concrete situation, in which an absence of connection between equity interests and debt was visible, as that connection appears in Circular no. 7/2004.

19.8. Analyzing now the question of the disregard of financial charges effected by the AT which implied a correction to taxable profit relating to the 2011 fiscal year in the amount of € 2,745,372.59, we consider that we are clearly before a situation in which the AT had the obligation to have made a history of what had happened with the financial equity interests of this SGPS, thus avoiding a correction to taxable profit without legal substantiation. In fact, it was proven that the vast majority of financial equity interests held by this company on 31 December 2011 had entered its assets via contributions in kind for realization of capital. Accordingly, their financing was indubitably made by equity capital. Consequently, any subsequent paid-up liabilities cannot be imputed to those financial equity interests. Reference should be made, lastly, that this conclusion, which seems evident to us by the force of the facts and figures, is coherent with the differential analysis we suggested in our examples: in 2011, the increase in equity interests was practically nil, so any financial charges resulting from increases in paid-up liabilities would not be disregarded. And this has already been happening since the startup, in 2002, of this SGPS, year in which, without margin for doubt, that asset had as its counterpart the capital stock.

19.9. Regarding one of the arguments presented by the Claimant in which it invokes the possible consequences (in the sense of non-disregard of financial charges) for sales of financial equity interests from 1 January 2014, the date of entry into force of the so-called "participation exemption" regime, it is our opinion that it does not hold since we could have analyzed this issue before 1 January 2014 and we are inclined to believe that the conclusion we would have reached on that date should be the same as the one we are reaching today. Indeed, as of today, as is known, that regime has even undergone amendments (although not undertaken in the context of the subject we are treating, which would, however, be irrelevant to the case).

19.10. Finally, reference should be made that this arbitral decision is in line with the one rendered in Case no. 269/2015 – T, in a similar case of "A..., SGPS, S.A.", only relating to the 2010 fiscal year.

We transcribe part of the arbitral decision then rendered:

"In order to reach a decision on this point in dispute, the tribunal considers it of particular relevance to clarify the question of whether the formula contained in Circular 7/2004 would have to be applied (as argued by the AT), or whether a direct method of allocation of financial charges would be (as argued by the Claimant) capable of use and would lead to a result more sustainable on the plane of tax legality.

Before addressing such question, it is essential that the calculation process be known (in the context of using the allocation form contained in the Circular) used by the AT, which is summarized below, from the elements of the Inspection Report.

• the formula used is based on a methodology, expressed in Circular 7/2004, which consists of 'imputing the paid-up liabilities of SGPS to paid-up loans made by them to their subsidiaries and other investments generating interest', and (…) 'Allocating the remainder to the remaining assets, namely to equity interests, proportionally to their respective acquisition cost';

• the inspection was based on an analysis period relating to the 'month' and used as data source the monthly trial balances of 2010, provided by the taxpayer, as well as the balances reported for the same period, which were constructed from the trial balances;

• in this way, and in accordance with calculations presented in annex 5 of the inspection report, the amount of financial charges identified, and which were considered non-deductible, was 2,865,681.94 euro.

Having the Claimant, in the right of response proceedings, contested the application of the aforementioned formula, on the grounds that, in its opinion, given the existence of a direct relationship between certain equity capital and the acquisition of equity interests, the automatic application of the formula would be set aside, the AT responded as follows:

• the taxpayer would argue a hypothetical 'base exemption' in the application of the method proposed by the Circular, by virtue of the fact that there had been contributions of capital in kind related to the equity interests held by the claimant;

• such interpretation could not be accepted because it would imply, in the case at hand and in others, a determination of 'non-deductible financial charges' (…) 'almost insignificant', which would not be in accordance with the factual reality at hand;

• the notion of financial charges related to the acquisition of equity interests would not be exhausted in charges derived from debt, but also in other types of financial charges provided in article 23, no. 1 of CIRC;

• the argument that equity interests would have an origin prior to the entry into force of the regime contained in article 32 of the EBF would in no way affect the AT's analysis, since that regime would apply to capital gains realized after 1 January 2003.

The Respondent's argument does not merit acceptance, as we will now demonstrate, through detailed and careful analysis.

To do so, suppose that a certain entity ALFA begins its activity in year N, and that, via contributions of capital in kind, receives patrimonial elements that configure financial investments in the amount of 1000. Its initial balance will be as follows:

ALFA Initial Balance

Financial investments – equity interests 1000 Capital stock 1000

If, a year later, entity ALFA incurs debt of 500 to buy tangible assets (computers, vehicles, etc.), it is judged clear that the formula of that Circular should not be applied, since it is possible to show that the subsequent debt was not used to acquire equity interests.

However, suppose that, the temporal origin of the various means of financing of another entity BETA being unknown, nor the sequence of application of those funds in the acquisition of assets, this entity presents the following balance, at a certain moment.

BETA Balance

Financial investments 1200 Capital stock 1000
Tangible assets 100
Loans to subsidiaries 850 Loans obtained 1200
Disponibilities/monetary means 50

TOTAL 2200 TOTAL 2200

Here it would make sense, having exhausted the hypotheses of directly imputing equity capital to the acquisition of equity interests in subsidiaries, to apply the formula inherent in the Circular.

But it is judged clear that, in this latter case, should the AT show that there would not exist, in the concrete situation, a more just way, more economically rational or more in accordance with the specific allocation of financial charges to equity interests, than that mentioned formula. That is, the formula constitutes an expedient, understandable, useful and sometimes appropriate to apply quantitatively the norm of article 32 of the EBF. But it is not always so, since in cases where it is proven that equity interests have specific financing, by equity capital, the AT should, before applying the formula, ask itself whether direct allocation will be the fairest course of action.

We are now in position to address the response to the problem that is posed.

Indeed, it is judged that the case at hand is subsumed in this latter situation, in which the AT, before applying the formula, should have considered whether this was the correct solution, given the meaning and scope of article 32 of the EBF."

Returning to the case we are analyzing, the documentary proof attached to the file of this process proves that the equity interests in question were not acquired through recourse to debt, so, in light of the provision of the law, it is judged illegal the correction effected by the AT, since it did not attend to the concrete situation, in which an absence of connection between equity interests and debt was visible. Accordingly, a method of allocation with a more sustainable, just and law-text-adapted economic-financial logic should have been used.

The interpretation now supported regarding the meaning and scope of article 32, no. 2, of the EBF is that which results, moreover, contrary to the thesis of the Respondent, in accordance with the constitutional principles of tax equality, contributory capacity, and taxation of actual income.

In this manner, in light of what has been set forth, the breach of law alleged by the Claimant is well-founded, regarding the manner in which the financial charges relevant in the context of article 32, no. 2, of the Tax Incentives Statute were calculated.

In such terms, the present Request should be granted and, in this sequence, the additional assessment no. 2015... dated 2 July, which gave rise to the account reconciliation statement no. 2015..., and compensation note 2015..., in the amount of € 509,164.58, relating to the IRC for the 2011 fiscal year, should be annulled.

1. Prejudiced Issues

The request for arbitral decision being granted based on the breach of illegality due to error of law regarding the meaning and scope of article 32, no. 2, of the EBF, which assures effective and stable protection of the Claimant's rights, knowledge of the other breaches attributed to the tax act in question is prejudiced.

In fact, it follows from the establishment of an order of review of breaches, in article 124 of CPPT, that if one breach is judged to be well-founded that prevents the renewal of the attacked act, there is no need to review the others attributed to it. If it were always necessary to know of all breaches it would be immaterial the order in which their review was made.

1. Indemnification for Undue Guarantee

To the issues already addressed is added the fact that the Claimant constituted, in accordance with and for the purposes of the provisions of article 169 of CPPT, a mortgage on a property of which it is the owner. And to that extent the Claimant understands, inexorably, that in case the request for annulment of the additional tax assessment is granted, it will have to receive the sum it spent for the constitution of that mortgage.

It is necessary to assess, this being an issue that has been addressed in previous decisions of CAAD, namely in the decisions rendered in cases 48/2013-T and 239-T which established jurisprudence that we see no reason to contradict.

Let us see: the regime of the right to indemnification for undue guarantee is contained in article 53 of the LGT, which establishes in its no. 1 the following: "The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the prejudices resulting from its provision, should it have been maintained for a period exceeding three years in proportion to the time of resolution in administrative recourse, impugnation or opposition to execution that have as their object the guaranteed debt."

As can be seen, article 53, no. 1, of the LGT refers to "bank guarantee or equivalent" and not to mortgage... Now, in the words of JORGE DE SOUSA, "Equivalent to bank guarantee," for purposes of article 171 of CPPT, "shall be all forms of guarantee that imply for the interested party bearing an expense whose amount increases based on the period of time during which it is maintained." And the same author points out, next, as an example, the "surety bond." In the same sense, see the already referred decisions of CAAD rendered in cases no. 48/2013-T and 239/2015-T.

Now, in the case, as we have seen, it results from the proven facts that the Claimant constituted a mortgage on property of which it is the owner to suspend fiscal execution, which means the unsuccessfulness of the request for indemnification for guarantee unduly furnished.

In this sense, see further the decision of the Supreme Administrative Court, of 24 October 2012, rendered in case no. 0528/12, thus summarized: "I - In the concrete case of the file, in which the guarantee furnished to suspend execution was a mortgage, this real guarantee cannot be understood as a guarantee equivalent to bank guarantee for purposes of article 171 of CPPT. II - In fact, this voluntary mortgage, in principle will only have emolument costs, of constitution and registration. Accordingly, it cannot be said that we are before a guarantee equivalent to bank guarantee. III - Neither could the fixing of indemnification be requested under the rule quantifying article 53, no. 3, of the LGT since it is inapplicable to the case at hand. IV - It is nonetheless certain that the respondent may have other damages besides the prejudices resulting from payment of emoluments. Thus it is to be admitted the possibility of the indemnification request being made in autonomous proceedings where the damages the interested party may have suffered can be ascertained with greater accuracy (it must specify the concrete prejudices) similarly to what is stipulated in article 53, no. 3 of the LGT for bank guarantee and surety bond."

IV. Decision

We hereby accord this Arbitral Tribunal to:

1. Judge well-founded the request for declaration of illegality of the additional corporate income tax (IRC) assessment for 2011, issued by the Revenue Collection Services of the AT with no. 2015... and dated 2 July, which gave rise to the account reconciliation statement no. 2015..., and compensation note 2015..., in the amount of € 509,164.58, and, in this sequence, to annul the attacked assessment, including that relating to the compensatory interest integrated therein (cf. no. 8 of article 35 of the LGT), with all legal consequences.

2. Judge without merit the request for indemnification for guarantee unduly furnished, absolving the Respondent thereof.

V. Case Value

In accordance with the provisions of articles 306, no. 2, and 297, no. 2, of the C.P.C., article 97-A, no. 1, subparagraph a), of the C.P.P.T., and article 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the case value is set at € 509,164.58.

VI. Costs

Costs, to be borne by the Tax and Customs Authority, in the amount of € 7,956, in accordance with the provisions of articles 22, no. 4, and 12, no. 2, of the Legal Framework for Arbitration, in article 2, in no. 1 of article 3 and in nos. 1 to 4 of article 4 of the Regulation on Costs in Tax Arbitration Proceedings, as well as in Table I attached to this instrument.

Lisbon, 6 May 2016.

The arbitrators,

Fernanda Maçãs

Nuno de Oliveira Garcia

Luís Janeiro