IRC Deductible Expenses: CAAD Arbitration on €3.7M Additional Assessment (680/2016-T)

ARBITRAL DECISION

The arbitrators Cons. Jorge Manuel Lopes de Sousa (presiding arbitrator), Dr. Luís M. S. Oliveira and Prof. Dr. Diogo Feio (member arbitrators), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 03-02-2017, hereby agree as follows:

1. Report

A…, LDA., with the single registration and tax identification number …, with registered office at …, n.º…, …, …, …, …-… …, (hereinafter referred to as "A…" or "Applicant"), has, pursuant to Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters - RJAT), submitted a request for arbitral pronouncement, aiming at the annulment of the additional assessment notice for Corporate Income Tax (IRC) No. 2016…, and the respective account settlement statement No. 2016…, relating to IRC for 2012 and respective compensatory interest, with the total amount of € 3,746,317.22.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The application for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax Authority and Customs Authority on 02-12-2016.

Pursuant to the provisions of item a) of paragraph 2 of article 6 and item b) of paragraph 1 of article 11 of the RJAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.

On 19-01-2017 the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, items a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provisions of item c) of paragraph 1 of article 11 of the RJAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 03-02-2017.

The Tax Authority and Customs Authority responded arguing that the request should be dismissed as unfounded.

On 21-03-2017 a hearing was held in which witness evidence was produced and it was decided that the proceedings would continue with written arguments.

The parties submitted arguments.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, paragraph 1, item a), and 10, paragraph 1, of DL No. 10/2011, of 20 January, and is competent.

The parties are duly represented and have legal personality and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same decree-law and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not subject to any nullities and there are no exceptions nor any obstacle to the appreciation of the merits of the case.

2. Facts

2.1. Proven facts

The following facts are deemed proven:

A. The Applicant A… is a limited liability company (single shareholder) that has as its corporate purpose the purchase and sale of the real property of the shopping centre designated as …, as well as the lease, operation and management of the …, as well as any other acts or transactions directly related to the aforementioned activity;

B. The Applicant was incorporated by public deed on 29 May 2000 and commenced operations (for tax purposes) on 19-06-2000;

C. At the date of incorporation of the company, it was held by the sole shareholder B…, currently C…, with registered office in Germany;

D. On 31-07-2007 the taxpayer came to be held 100% by the company D… (sole shareholder), with registered office in Luxembourg, which, in July 2015 changed its corporate name to C...;

E. According to what is stated in the transfer pricing file for the fiscal year 2012, F… is "(…) a sub-fund of G…, a common open investment fund specialized in the placement of investments in funds, launched by H… on 4 June 2007", the said fund is "(…) a contractual form of collective investment that operates under the laws of the Grand Duchy of Luxembourg and which approved a structure designed to manage different sets of assets and liabilities, in the interests of its co-owners, by a common management company, I….» and «The following diagram illustrates the structure implemented for the management of the funds:"

F. In the transfer pricing file it is also stated that, "Currently, the only sub-fund in existence is F… . This is directed at European institutional investors and aims at the creation of a diversified pan-European retail portfolio, possessing regional shopping centres, located in major cities or in peripheral areas of great potential.

The Sub-fund has invested in real estate assets in Spain and Portugal, through its subsidiaries, although the aim is to invest throughout Europe: current and future candidate countries for EU accession.

F… invests in shopping centres located in the most relevant regions, which, as a differentiating characteristic, have potential to generate stable revenues in the long term even in periods of market imbalances. The current real estate portfolio consists of three shopping centres, two of which are located in Lisbon (Portugal) and the third located in León (Spain)."

G. As from I..., the fund management company, investments are organized as follows:

H. J…, hereinafter referred to as J…, NIPC …, was incorporated as a joint-stock company on 05-03-1997, with the business name "K…, S. A.", having been transformed, on 18-09-2000, into a limited partnership, having then as limited partner the "B…", holder of a capital interest with nominal value of € 9,999,995.00, and as general partner the Applicant, holder of a capital interest with nominal value of € 5.00;

I. On 31-10-2007, the "B…", limited partner of "J…" proceeded to divide its capital interest in this company into two parts, one with nominal value of € 6,999,995.00, which it transferred to the Applicant, and another with nominal value of € 3,000,000.00, which it transferred to "L…";

J. "J…" is a company for simple administration of assets, subject to the tax transparency regime, pursuant to the provisions of article 6, paragraph 1, of the IRC Code, imputing to its partners the taxable matter it determines annually, namely, 70% of its taxable matter being imputed to the Applicant;

K. J… is owner of fractions C to AO of the Shopping Centre, composed of 216 stores, 34 restaurants, a cinema complex and a leisure space;

L. The Commercial Complex also includes a … Adjacent to the Shopping Centre, composed of 3 stores, a warehouse, a control centre and 204 parking spaces;

M. For the pursuit of its corporate purpose, the Applicant leased (on 01-11-2002, from J…, the commercial complex known as "…";

N. The lease agreement has been successively renewed and was amended in fiscal year 2012, presenting a suspension of clause six (Rent) for a period of 2 years, commencing on 01-03-2012 and ending on 28-02-2014, from which date the said clause resumed its previous wording (monthly rent amount of €1,400,000.00);

O. The activity carried out by the taxpayer in fiscal year 2012 was the operation and management of the Shopping Centre A… and the …, being the direct responsible for the daily administration of the Shopping Centre, developing the promotion and marketing of stores and their strategic promotion;

P. The Applicant enters into "store use contracts" with store chains or other types of users, usually called retailers, which enumerate the rights and obligations of both contracting parties, such contracts providing, among other obligations, that retailers commit to paying a monthly fee consisting of the sum of two components – one fixed (minimum remuneration) and one variable – and to participate in expenses and charges for operating and using the Shopping Centre;

Q. The values (fixed and variable monthly fee and other expenses), invoiced by the Applicant to each retailer are recorded in the statement of results by nature under the heading "Rents and services provided".

R. During fiscal year 2012, the Applicant recorded in the expense account "626111 – Rents A…" the amount of € 11,100,000.00, of Shopping Centre rents, and in the account "626112 – Rents…" the amount of € 480,000.00 relating to rents of the …;

S. The value of rents paid in the year 2012 to J…, for the lease of the Commercial Complex, thus totalled the amount of € 11,580,000.00;

T. To finance the operation of acquisition of the capital interest in J…, in the amount of approximately € 175.3 million, the Applicant resorted to three financing operations: one with "D…", in the amount of € 96,844,069.52; another with M… – Branch in Portugal, in the amount of € 35,800,000.00; and another with N…, Ltd., in the amount of € 42,663,800.00;

U. The financing obtained from D… was made on 31-10-2007, for a period of 10 years, with the parties agreeing on an annual fixed interest rate of 7.25%;

V. The financing obtained from M… – Branch in Portugal was made on 31-1-2017, for a period of 10 years, with the parties agreeing on an interest rate corresponding to the 7-year Euro swap rate, plus a spread of 50 basis points (0.5%);

W. The financing obtained from N…, Ltd. was made on 31-10-2017, for a period of 10 years, and the financing conditions in force until the end of the 1st half of 2009 provided for payment of a variable interest rate determined on the basis of the 6-month Euribor rate, plus a spread of 0.15%; from the 2nd half of 2009 onwards, the interest rate became fixed, with the parties establishing that the interest rate would be determined on the basis of the 8-year swap rate, dated 01-07-2009, published by Bloomberg, which stood at 3.40%, plus a spread of 1.6%, that is a rate of 5% per annum;

X. Financial charges (interest and stamp duty) related to these loans were recorded in expense accounts, namely in accounts "681291 Stamp Duty Supported – Interest on Loans", "681292 Stamp Duty Supported – Banking Commissions", "6911 – Interest on financing obtained" (M… loan), "691391 – Other interest – N…, Ltd." (N… loan), "691392 – Other Interest – D…" (D… loan) and "6982 – Other financing fees";

Y. According to data taken from the Simplified Business Information (IES), the values of interest supported and financing obtained by A… Unipessoal presented the following chronological evolution:

Z. In fiscal year 2012 the interest supported by the Applicant with the financing loans for the acquisition of the capital interest in J…, in the amount of € 11,155,180.93, are broken down by loan/account as follows:

AA. By reference to fiscal year 2012, the Applicant was subject to a tax inspection, in compliance with Service Order No. OI2016…, of 16-03-2016, in the course of which the AT altered by € 11,297,848.73 the taxable matter declared by the Applicant, an alteration which was based on the non-acceptance "of the tax deductibility of financial charges relating to financing obtained for the acquisition of a capital interest, by reason of the requirements set out in article 23 of the CIRC not being met" (Opinion of the Team Chief, which appears in Document No. 4 attached with the request for arbitral pronouncement, the content of which is hereby reproduced);

BB. In the Tax Inspection Report, whose content is hereby reproduced, the following is stated, among other matters:

3. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS

3.1. CORRECTIONS MADE REGARDING CORPORATE INCOME TAX (IRC)

In the course of previous inspection procedures, which aimed to control the tax situation of the taxpayer, with reference to fiscal years 2010 and 2011, incorrectness were identified related to the non-acceptance of the tax deductibility of charges supported relating to financing expenses of loans contracted in 2007.

In the analysis made of the taxpayer's accounting, we found that in 2012, there were no changes either in the form of accounting for the said charges or as to their nature, such that the facts and grounds invoked in the following points. Will be coincident with those referred to in previous reports, with the necessary adjustments.

3.1.1. Ascertained facts

A… was incorporated by public deed on 29 May 2000 and commenced its activity on 19 June 2000. In the inspection procedure conducted for the year 2012, it was verified that the activity carried out by the taxpayer was the operation and management of the Shopping Centre … and the …, hereinafter referred to as the Commercial Complex. The Commercial Complex is held by J… which, through a lease agreement, leases it to A… . The agreement was first entered into on 01 November 2002 and has undergone successive renewals. The said agreement was amended in fiscal year 2012, presenting a suspension of clause six (Rent) for a period of 2 years, commencing on 01 March 2012 and ending on 28 February 2014. From that latter date the said clause will resume its previous wording (monthly rent amount of €1,400,000.00).

During fiscal year 2012 the monthly rent for the 35 autonomous fractions leased in the Shopping Centre was € 830,000.00 (monthly rent in 2011: € 1,400,000.00), while for the … the rent was € 40,000.00.

There is recorded in the expense account "828111 – Rents A…" the amount of € 11,100,000.00, of Shopping Centre rents, and in the account "626112 – Rents …" the amount of € 480,000.00, relating to rents of the …. The value of rents paid in the year 2012 to J…, for the lease of the Commercial Complex, thus totalled the amount of € 11,580,000.00.

It was verified that A… is the direct responsible for the daily administration of the Shopping Centre A… . It develops the promotion and marketing of stores as well as the strategic promotion of the Shopping Centre. The company under analysis is responsible for the attraction and conclusion of "store use contracts" with customers. These customers generally form part of brands that possess national and international store chains, although there are also other types of individual users. These "store use contracts" enumerate the rights and obligations of both contracting parties. Among other obligations, they establish the values to be paid by retailers. These remunerations are generally monthly and consist of the sum of two components, one fixed (minimum remuneration) and one variable. In addition to this remuneration is participation in expenses and charges for operating and using the Shopping Centre. These values (fixed monthly fee, variable and other expenses), invoiced by A… to each retailer, are recorded in the statement of results by nature under the heading of "rents and services provided".

From the analysis of the heading of Financial Investments it was possible to verify that on 31 December 2012 A… held a 70% interest in the company J…, acquired on 31 October 2007. As this company is covered by the tax transparency regime, pursuant to article 6 of the CIRC, it imputes to its partners the taxable matter it determines annually. In this case 70% of its taxable matter is imputed to A… .

To finance this operation of acquisition of the capital interest, in the amount of approximately € 175.3 million, the taxpayer resorted to three financing operations with three companies of the Group where it is inserted:

• D… (parent company);

• N…;

• M….

According to the information taken from the transfer pricing file (Annex 1) it is stated that "In October 2007 the Group decided that A… would acquire the interest in J… held by C…", for approximately € 175.3 million. It is thus established that this acquisition had only the "Group strategy" as its foundation. With this decision, the taxpayer came to hold a 70% interest in the share capital of J…, a company with which it holds a lease agreement of the Shopping Centre A…, with the remaining 30% remaining in the possession of the company L…, a company equally integrated in the same Group.

It is also established that the company J… was already held 100% by the Group. Group where A… is also inserted. Thus, it is concluded that this transfer of capital did not bring about any changes, neither in terms of composition/structure of the Group nor in terms of activity of its companies.

With regard to the financing, to which the company resorted with the Group, we find that they are evidenced through contracts.

Following the analysis of these contracts, below is presented a diagram/summary illustrative of the financing obtained:

In the result of the analysis of the contracts (Annex 3), and regarding the conditions agreed between the parties, below are presented summaries of the conditions of each of the financing operations:

• Financing obtained from D…;

The loan obtained from D… was in the amount of approximately € 96.8 million. The financing contract was entered into on 31 October 2007 and the loan has a term of 10 years, that is, maturing on 31 October 2017. The parties agreed on payment of an annual fixed interest rate of 7.25%, calculated on a daily basis and on a 360-day/year basis. The average daily amount to be paid is € 19,828.38. Interest is due quarterly.

Financing obtained from N…:

The loan obtained from N… was € 42.6 million, for a term of 10 years. The financing contract was entered into on 31 October 2007. The financing conditions in force until the end of the 1st half of 2009 provided for payment of a variable interest rate determined on the basis of the 6-month Euribor rate plus a spread of 0.15%. From the 2nd half of 2009 the interest rate became fixed. It was established between the parties that the interest rate would be determined on the basis of the 8-year swap rate, dated 01 July 2009 published by Bloomberg, which stood at 3.40%, plus a spread of 1.6%, that is a rate of 5% per annum. As in the previous case, interest is calculated on a daily basis and on a 360-day/year basis. The average daily amount to be paid is € 6,024.29. Its payment is due monthly.

• Financing obtained from M…:

The loan obtained from M… was in the amount of € 35.8 million. The said financing was made on 25 October 2007 for a term of 10 years. In order to remunerate the capital ceded by M… the parties agreed on payment of an interest rate corresponding to the 7-year Euro swap rate plus a spread of 50 basis points (0.5%). In the year 2012 the loan accrued interest at the rate of 5.078%. Interest is calculated on a daily basis and on a 360-day/year basis. The average daily amount to be paid is € 5,049.78. Its payment is due quarterly.

In the analysis of the accounting we verified that financial charges (interest and stamp duty) related to these loans were recorded in expense accounts, more specifically in accounts "681291 Stamp Duty Supported – Interest on Loans". "681292 Stamp Duty Supported – Banking Commissions", "6911 – Interest on financing obtained" (M… Loan), "691391 – Other interest – N… ." (N… loan), "691392 – Other Interest – D…" (D… loan) and "6982 – Other financing fees".

According to data taken from the Simplified Business Information (IES), the values of interest supported and financing obtained by A… presented the following chronological evolution:

In fiscal year 2012 the interest supported by A… with the financing loans for the acquisition of the capital interest in J…, in the amount of € 11,155,180.93, are broken down by loan/account as follows:

The taxpayer was requested, with respect to interest supported with the loans, and associated expenses, to provide the respective supporting documents (invoices, receipts, debit notes, etc.), as well as their means of payment.

From the analysis of the documents provided (Annex 4), it was verified that there are no documents in the accounting issued by the holders of income (invoice and/or debit notes) relating to the loans made by the companies D… and N….

With regard to the loan made by the company M…, the following debit notes were issued by this company:

• No. … – Interest for the period from 02 January 2012 to 01 April 2012, and respective stamp duty;

• No. … – Interest for the period from 02 April 2012 to 01 July 2012, and respective stamp duty;

• No. … – Interest for the period from 02 July 2012 to 30 September 2012, and respective stamp duty.

It is verified that no document was issued for the last tranche of interest for the year 2012 (period from 01 October 2012 to 30 December 2012).

For the three loans, payment schedules/plans were presented with the scheduling of interest due by the taxpayer.

With regard to the payments of interest on the loans, we found that regarding the:

• M… – the 4 tranches of interest due in the year were paid, with the respective bank transfer order documents being presented;

• D… – due to cash shortage, during fiscal year 2012, only one payment was made to this entity, in the amount of € 1,704,590.12, for payment of interest for the period between 31 March 2011 and 30 June 2011. Supporting documents for the bank transfer order were presented;

• N… – interest was paid for the period from 27 June 2011 to 26 December 2011 in the total amount of € 905,450.27 (relating to fiscal year 2011 which for reasons of cash shortage was not paid in the year 2011). Interest was also paid for the period between 27 December 2011 to 26 December 2012, in accordance with the financial plan. Supporting documents of the transfer order were presented.

Through the analysis of the values declared by A… to the AT through its tax returns, namely in the Simplified Business Information (IES) and in the Income Return Form Model 22, regarding its activity, the loans granted and obtained and the results net and fiscal, we can verify that its evolution over the past 6 years was as summarized in the following table:

From the analysis of the table it is concluded that from the year 2007 onwards A… supports high financial charges, recorded in its financial statements under the heading of interest supported, resulting from the financing contracted for the purchase of (approximately) 70% of the capital interest in J… . During the same period it is verified that the acquisition of the capital interest has not added anything to its business volume, given that this suffers minimal fluctuations over these past 8 years, both positive and negative. In a direct manner, and as a result of what was pointed out, we find that its fiscal results changed from a quite significant taxable profit in 2007, the year in which financial charges referred only to approximately 2 months, to a situation of tax loss, a situation that was only broken in the years 2011 and 2012.

It is noted that the Management Report for fiscal year 2012 states that "the expenses with interest, in the amount of € 11,155,180.93, essentially relating to interest on bank loans and with companies of the group, as well as impairment losses in the amount of € 3,666,950.51. relating to the interest in the company J…, contributed significantly to the total expenses in the fiscal year and consequently to the loss incurred in the fiscal year".

From the analysis of the data collected in the IES of the taxpayer J…, it was possible to verify that this company also presents high financial charges, resulting from financing contracted for the construction/acquisition of the Commercial Complex designated by "…", of which it is the owner.

By virtue of J… being a company for simple administration of assets and being framed in the tax transparency regime, pursuant to the provisions of article 6, paragraph 1 of the CIRC, the taxable matter is imputed to the two companies present in its share capital, namely:

a) L…- 30%

b) A…- 70%

It should be noted that the taxable matter imputed by J… to the taxpayer, in the scope of the tax transparency regime, is absorbed by the losses that the company under analysis determines in its activity.

3.1.2. Analysis of the operation and conclusions

The analysis conducted to the company's accounting determined the necessity of proceeding to a more in-depth verification of the financing operation underlying the acquisition, by the taxpayer, of (approximately) 70% of the share capital of company J… .

Thus, it is important to break down the said operation and verify its merit, with respect to deductibility regarding compliance with the provisions of article 23 of the CIRC, which we now proceed to do, giving special emphasis to the following aspects:

1. Operation of acquisition of the financial interest;

2. Duplication of charges relating to interest;

3. Criterion of Indispensability;

4. Compliance with formal requirements;

5. Economic rationality of the operation;

6. Conclusions.

1) Operation of acquisition of the financial interest

For the analysis of the acquisition operation it is necessary to take into account the organizational chart of the Group. In this respect we deem reproduced the organizational chart which appears in the annex to the company's accounts report:"

Analyzing the concrete case in light of the organizational chart, objectively, we can verify that:

• The company P… is the holder of 100% of the Group, either directly or indirectly;

• H… dominates 100% the companies held by its holding I…;

• H… dominates 94.90% the companies held by B…;

• J…, was initially held 99.99995% by B…, in a direct manner;

• In 2007, by decision of the Group, the company B… sells its total interest to A… (69.99995%), which came to hold a total share of 70%, and to L… (30%),

• That is, notwithstanding the sale of approximately 100% of interest by B… to A… and L…, the "parent company" P…, or, if we prefer a reference further downstream, H… continues to be, and ultimately, the holder of control of company J…, indirectly;

• With respect to the loans, it should be noted that the contracting companies are related entities, namely.

a) M… is an International Bank, which is owned/held by P…;

b) The company N… belongs to the Group, being held 100% by L…, which, in turn, is held 100% by O…;

c) The company D…, holds 100% of A…, being that, held 100% by O….

No less important, it is to be observed that the loan obtained from D… is concluded and granted between two companies, having the same a relationship of dependency of 100%, that is, in a simplistic manner, it will always be stated that this loan is granted to itself, with the risk of Default reduced to 0%.

As easily inferred from table 1, presented previously, the heading of interest supported, has a very significant weight in the cost structure of the company, being responsible in large part for the losses that it presents over the years, with no clear vision of what the immediate and/or mediate benefits are that result to it from the operation carried out.

It is noted that being J… subject to the tax transparency regime, it imputes to its partners its taxable matter (70% to A… and 30% to L…). From this it follows that, the partner L…, a non-resident company, has submitted a return and paid the respective Tax to which it was subject, and that the partner A…, due to the loans obtained and their inherent costs, completely dilutes the taxable matter imputed by the company in which it holds an interest.

And, here one will always question whether the operation in question, if we see it thus:

a) The company A… obtains from related companies loans to acquire 69.99995% of the company J…;

b) A company that already belonged to the Group;

c) There is a lease agreement for the operation of stores between them, such that A… pays J… a monthly rent;

d) The values of rents are effectively paid.

2) "Duplication" of charges relating to interest

As already referred to earlier the company A… contracted the three financings to acquire approximately 70% of the financial interest in J… . It was also verified that it records the financial charges resulting from these loans, which in fiscal year 2012 reached the amount of € 11,155,180.93, in interest, and € 142,667.80, in stamp duty, as expenses in its financial statements.

On the other hand, and at an earlier moment, J…, the company owning the Commercial Complex called "…", resorted to a bank loan in the amount of € 135.175 million for payment of the real property, recording financial charges as expenses in its financial statements, affecting the result determined in each fiscal year.

If we analyze the operations and their impact on results, combining with the framework for taxation purposes for IRC purposes of each entity, we conclude that, indirectly, there is a duplication of financial charges in the sphere of A….

The singular characteristics of the tax situation of A… reside from the combination of the following facts (i) ownership of an interest representing 70% of the capital of a company covered by the tax transparency regime – J…, (ii) such interest having been acquired from a Group entity with recourse to indebtedness; and (iii) being the only "customer" of the transparent company, as a party to the lease/operation contract of the real property of company J….

In this context, it then falls to be determined what legal basis legitimizes the tax deductibility of financial charges supported by the taxpayer with loans contracted to finance the acquisition of the interest in the capital of the transparent company. In light of article 23 of the CIRC, expenses are deemed deductible if they are demonstrably indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source. In the concrete situation under analysis, it is possible to raise doubt about the existence of a direct connection between the financial charges supported by the taxpayer and the realization of income or gains subject to tax, since, by virtue of the application of the tax transparency regime to the investee company, the income that contributed to the determination of the taxable matter imputed is offset with the expenses supported by the taxpayer with the rents paid for the lease of the real property.

However, in order to better resolve this question it is important to establish a comparison between two situations that configure different forms of exercise of the same activity but which, by force of tax transparency, should achieve equivalent fiscal results in order to be fiscally neutral: on the one hand, one in which the real property (leased) is property of the lessor company, by effect of an acquisitive act or of self-construction; and on the other hand, the situation at issue, in which the leased real property is property of an investee company (lessor) qualified fiscally as "companies for simple administration of assets" and, therefore, covered by the tax transparency regime.

It is to be concluded, then, that in the first of the situations envisaged, the company that uses the real property, as if it were the owner thereof, would only have to support the financial charges inherent in loans contracted to finance the acquisition/construction of the real property and the other charges associated.

In the second case, now sub judice, the same company (lessee) is supporting not only its share of the charges with the real property, which also include financial charges, incorporated either in the value of the rent or in the result imputed through tax transparency, but also the financial charges associated with loans contracted to finance the acquisition of the interest in the capital of the investee company.

We are, therefore, faced with a duplication of financial charges related to the leased real property: those that are deducted in the determination of the taxable matter of the taxpayer and those that are recorded and deducted in the determination of the taxable matter of the transparent company".

Now, the singular element that characterizes the situation under analysis and which propiciates the dual deduction of financial charges has to do with the concentration, in the same company - the taxpayer - of the position of lessee and of partner of the lessor company covered by the tax transparency regime, which causes to accumulate, in the first company, a set of expenses disproportionate and which, in a certain sense, almost subverts the objectives, namely that of neutrality and of the fight against tax evasion, pursued by the tax transparency regime.

3) Criterion of indispensability

The criterion of indispensability, determinant in the evaluation of the deductibility of expenses for tax purposes, is found in article 23 of the CIRC which provides:

"Article 23. Expenses

1 – Expenses are deemed to be those demonstrably indispensable for the realization of income subject to tax or for maintenance of the productive source, in particular:

c) Of a financial nature, such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issue of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;

It is thus important, in view of the provisions of article 23 of the CIRC, to verify in concrete terms whether the expenses incurred with the loans that allowed the acquisition of approximately 70% of J…, are demonstrably indispensable for the realization of profits or gains subject to Tax or for the maintenance of the productive source of the company.

Now, from the reading of the said article, one does not objectively derive a definition of the concept of indispensability, it having been defined by jurisprudence and doctrine as one of the fundamental requirements for expenses to be accepted fiscally. Thus we are faced with a criterion apparently indeterminate and complex.

The Supreme Administrative Court declared, as to the sense and operation of the requirement of indispensability of costs for tax purposes, the following: '...the requirement of indispensability of a cost has to be interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis of an economic business perspective, in the perception of a relationship of economic causality between the assumption of a cost and its realization in the Interest of the company, given the corporate purpose of the commercial entity in question..."'.

In this respect, see also the sense of the Judgment of the Central Administrative Court South, «Only costs that do not have causal and justified relationship with the productive activity of the company are not Indispensable", that is, the indispensability, of fiscal expenses, has to be understood 'as referring to the connection of costs to the activity carried out by the taxpayer'.

Now, viewing the case at hand and, comparing it with the above, it is concluded that the elements required are not verified.

Thus, we must bear in mind that the criterion of indispensability was created to prevent that "certain" expenses recorded by companies, which are considered inappropriate, are tax deductible.

From this it will follow that expenses essential to the productive process and the obtaining of profits will be accepted, with indispensable expenses being considered those that are incurred in the interest of the company and that contribute to obtaining the profit in a direct or indirect manner", however, this requirement should not be seen "per si", but rather assisted with criteria of economic rationality, that is, it should be interpreted in accordance with essentially economic criteria.

It will not be sufficient to consider certain expense indispensable, it will always be necessary for the taxpayers to promote proof of the indispensability of the expense incurred and its connection with the profits obtained", with the tax deductibility of expenses not being recognized that are not related to the business of the company or the economic purpose thereof, even if recorded in the accounting.

That is, it is to define the group of negative elements that article 23 of the CIRC enumerates, by way of example, the situations that can integrate them by establishing a general criterion defining which expenses or losses, those duly proven, will be considered indispensable for the realization of profits or gains subject to tax and for the maintenance of the respective productive source.

The fiscal relevance of a cost, and in line with the TCA South judgment, depends on its proof and on the proof of its necessity, adequacy, normality or of the production of the result (connection to a profitable business), and that the lack of these characteristics raises the question of whether the causation is or is not business.

This understanding finds complete acceptance in the judgment of the TCA South of 24 February 2012, case No. 05251/11, where the indispensability of costs for tax purposes is questioned, noting that "(...) there is thus no "balancing or matching" between the costs supported with financial charges and the respective profits (...)"

In the case at hand, one may always question what the economic interest is in the operation of acquisition of approximately 70% of the capital of J…, since the mere possibility that gains resulting from the application of such capital could occur in the future does not by itself determine that the financial charges underlying it can fit within the concept of fiscal expenses.

The manifest verification of the non-existence of economic interest in the operation is evident in the fact that nothing was changed with respect to the commercial relations established between the two companies, or with respect to the activity carried out by each.

That is, A… paid and (continues to pay) a rent for the operation of the Commercial Complex …, to J…, whose activity consists exclusively in the ceding of this space, which constitutes its only property.

In view of the above, no "profit" resulting from the operation emerges from the facts ascertained, within the company A…;

And it is noted here that the company has as its corporate purpose "the purchase and sale of Real Property, as well as simple or mere administration of its own real property maintained for enjoyment and intended for the Shopping Centre "…", in this including in particular its lease, as well as any other acts or transactions directly related to the above-mentioned activity", that is, no reason is seen for the business of purchasing the capital interest in J… nor the connection with its corporate purpose, fleeing from its "scope". The activity of the taxpayer is not the purchase and sale of capital interests.

In this sense, see the recent Judgment of the Supreme Administrative Court, case 0164/12, of 04/09/2013, specifically, "in truth, after an ample and participated debate, we can today consider accepted by doctrine and by jurisprudence a concept of indispensability that, definitively moving away from the idea of causality between expenses and income, places emphasis on the relationship of expenses with the activity pursued by the taxpayer, that is, considering that the said concept of indispensability is verified whenever expenses are incurred in the interest of the company, in the pursuit of its respective [activities].

4) Compliance with formal requirements

The analysis conducted to the accounting records relating to financial charges allowed to verify that the same, with the exception of those relating to interest on the 1st, 2nd and 3rd quarters of M…, were supported and recorded only on the basis of the financial plans established in the contracts.

There is thus a manifest insufficiency of compliance with formal requirements by the fact that the documents issued by the beneficiaries of the income are not known, at the date.

This formal requirement, in the perspective of fiscal interests, finds its basis in a dual justification, that is, in the necessity of proving the effective nature of the cost, its existence and, to assess the nature of the expense and respective proof of the indispensability of the cost in relation to the activity of the taxpayer.

Now, we can state that, although jurisprudence does not accept as a sole rule the principle of equivalence between invoice and documentary proof of the cost, it is no less true to state that the grounds that motivated the establishment of the strict formal requirements under VAT, are completely transposable to the domain of IRC;

It is to be noted that, by the fact that we are in the presence of companies with special relationships, that is, "(...) such relationships exist when there are situations of dependency, in particular in the case of relationships between the company and the partners, between associated companies or between companies with common partners or also between parent and subsidiary companies"", a situation, all too evident, there being relationships of domination, it will not be too misaligned to demand formal proof, under penalty of the Impossibility of control by the Tax Authority, losing in this way, the useful effect, of this controlling criterion and guarantee of equality among taxpayers, in Portuguese society.

5) Economic rationality of the operation

The analysis conducted to the financing operation to which the company A… resorted to acquire an interest of approximately 70% of the capital of J…, merited special attention, given the high charges arising from it and which very negatively affect its results.

As was previously extensively demonstrated, the rationality/reasonableness underlying the financing operation in case of acquisition of a company by another of the same Group is questioned, when the same was already held 100% by the Group. There is no type of advantage for the pursuit of activity, or maintenance of the productive source of A…, given that the acquired company was already in a situation of domination of the Group (operations between both were already related), quite the opposite, as by supporting high charges with loans the company passed to a delicate economic situation, as demonstrated by accumulated losses, negative equity and lack of liquidity, lack of liquidity that is translated in the impossibility of paying all interest due in the fiscal year under analysis.

It is also added the fact that the acquired company has as its sole activity the lease to the acquiring company, of a Real Property of which it is owner, with A… coming to pay rent of a real property of which (although indirectly) it is owner in 70%. That is, the situation of the lease did not change by virtue of the acquisition. Nor would it be foreseeable that such would happen, given that operations between both were already related and decided within the Group.

These points cannot be viewed individually, but as a whole, and the concrete case should be assessed with rigorous criteria that prevent tax planning, which would put in question the principle of equality between taxpayers.

The requirement of indispensability of costs, for evaluation of their deductibility for tax purposes, assumes here special relevance, such that it cannot be limited to simplistic causality of the type " (...) expenses are deemed to be those demonstrably indispensable for the realization of profits (...)" It should instead be here assessed by criteria of economic rationality, that is, it should be determined in accordance with what is considered useful and unavoidable for the realization of profits or maintenance of the productive source of the company, that is, in an essentially economic perspective, which entails a clear and objective definition of the principles that guide management decisions and the guiding lines underlying the businesses developed by companies, within the scope of their activity, in order to assess their correct framework for tax purposes.

As a conclusion, it is verified that:

Regarding the charges supported (interest and stamp duty) with the financing operation for acquisition of approximately 70% of the capital of company J…, the criterion of indispensability of costs is not deemed to be met, such that its deductibility for tax purposes is compromised, by virtue of not seeing the economic interest, or the necessity for the pursuit of activity or maintenance of the productive source of the company, of the operation underlying them.

The documents supporting the accounting of the said financial charges do not meet the formally required requirements, assisted by the fact that we are in the presence of companies with special relationships.

We are faced with acquisitions and financing operations that occur "within" the Group itself, reason why they merit special attention, in the sense of averting any situations of tax planning, which would distort the normal relations between taxpayers and equality of treatment.

In the case at hand, by virtue of the operations carried out "intra group", it is verified that the company A… contracts a financing, from which it supports high financial charges, to acquire an interest in the capital of J…. In turn, company J… supports financial charges from financing obtained for the construction of the "Commercial Complex", deductible in the determination of taxable profit.

This situation thus embodies a duplication of charges, resulting from the legal framework for taxation purposes for IRC purposes of company J…, by virtue of this being covered by the tax transparency regime, as referred to above.

Thus, notwithstanding the costs being effective, as the veracity of the acquisition operation and consequent loans is not questioned, with the same being recorded as such, it is certain that the A.T. does not consider them as demonstrably indispensable and incurred for obtaining profits or gains subject to tax, by the above stated, and the respective amount should be added to the declared taxable profit.

3.1.3. Corrections to taxable profit

In view of the above, and to the extent that these expenses do not contribute to the formation of taxable profit, in light of paragraph 1 of article 23 of the CIRC, the amount of € 11,297,848.73 is corrected, corresponding to financial charges with loans contracted for the acquisition of the financial interest.

The correction discriminated by account and amount is as follows:

3.1.4. Corrections to loss carryforward

Following the corrections made to fiscal year 2010, the taxpayer was left without any value to carry forward losses for the following years. In this conformity, the amount of € 261,815.57, relating to the deduction of fiscal losses, is disregarded in the determination of the taxable matter of the year under analysis.

3.2. DETERMINATION OF TAXABLE PROFIT

As a result of the corrections made in the amount of € 11,297,848.73, explained and substantiated in the above point, the taxpayer's taxable profit moved from an amount of € 349,087.43 to corrected profit of € 11,646,936.16, as described in the following table:

CC. Following the inspection, the Applicant was notified of the IRC assessment statement No. 2016 …, of the compensatory interest assessment statement Nos. 2016 … and 2016 … and, as well as, the account settlement statement No. 2016…, in which the amount to be paid of € 3,746,317.22 was determined (Documents Nos. 1, 2 and 3 attached with the request for arbitral pronouncement, whose contents are hereby reproduced);

DD. In the said account settlement statement, a reversal of assessment relating to fiscal year 2012 was cancelled in the amount of € 2,028,946.37, an assessment adjustment relating to the same fiscal year was made in the amount of € 1,328,623.98, and compensatory interest was included in the amount of € 159,726.08 and € 229,020.79, the latter having as their foundation undue receipt of the amount of € 2,028,946.37;

EE. The said financing was guaranteed with operational profits resulting from the operation of the Shopping Centre A… (uncontrolled variable) and with the pledge of the interest corresponding to 70% of the share capital of J… (controlled variable, but subject to fluctuations in the value of the interest, which is directly related to variations in the market value of the real property owned by J…);

FF. The recourse to financing to carry out that operation was decided by the investors of the "F…" fund who understood that it would be the most advantageous and rational decision (testimony of witness Q…);

GG. Essential conditions for the granting of financing under the conditions that were agreed was that this be as close as possible to the asset and the source of income (release of cash-flow necessary for compliance with financial obligations), such that the same had to be concretized through companies resident in Portugal, that is, the Applicant or J… (testimony of witness Q…);

HH. J… already had financing secured with mortgage of the said real property of which it is owner, such that only the Applicant was in conditions to contract such financing, since it could provide additional guarantees, namely the pledge of the shares of J… and the operational profits resulting from the operation of the Shopping Centre A… (testimony of witness Q…);

II. The Applicant had interest in concentrating the ownership and management and ownership of A… (testimony of witness Q…);

JJ. The purchase was made under normal market conditions (testimony of witness Q…);

KK. It was a good business the acquisition of the capital interest in terms of the rents, which remained stabilized despite the crisis and then recovered; the asset was devalued as a result of the economic crisis, but, as it was not sold this devaluation was not materialized (testimony of witness Q…);

LL. An appraisal of the building A…, dated 15-09-2007, was conducted by an independent entity, in the course of which it was assigned the value of approximately € 381,297,000.00 (letter of … attached to the request for arbitral pronouncement as document No. 7, whose content is hereby reproduced);

MM. There was no duplication of financial charges paid by the Applicant and by J…, as from the acquisition value of the capital interest the value of its debt was deducted (testimony of witness Q…, value referred to in the above paragraph and value of the financing);

NN. Following the request made to the Applicant for supporting documents of interest supported with the loans and associated expenses and their means of payment, the Applicant presented only, with respect to fiscal year 2012, the documents appearing on page 26 of the Tax Inspection Report, which above is reproduced;

OO. The Applicant paid the amount of € 3,746,317.22 corresponding to IRC and compensatory interest assessed (document No. 11 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

PP. On 26-01-2016, the Applicant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Non-proven facts and reasoning for the setting of the facts

There are no facts relevant to the decision of the case that have not been proven.

The proven facts are based on the documents submitted by the Applicant with the request for arbitral pronouncement and on the administrative proceedings.

In the points indicated it was relevant the testimony of witness Q…, consultant who accompanied the financing operation, who appeared to testify with impartiality and showed to have deep knowledge of the facts of the case.

Specifically regarding the costs supported with the financing, despite the reference that the Tax Authority and Customs Authority makes to the deficiency of documentation, they are to be considered proven since on page 41 of the Tax Inspection Report the acceptance is explicitly stated that they occurred, saying:

"Thus notwithstanding the costs being effective, as the veracity of the acquisition operation and consequent loans is not questioned, with the same being recorded as such, it is certain that the A.T. does not consider them as demonstrably indispensable and incurred for obtaining profits or gains subject to tax, by the above stated, and the respective amount should be added to the declared taxable profit."

3. Matter of Law

The Tax Authority and Customs Authority made a correction to the taxable matter of the Applicant by understanding that for the purposes of determining taxable profit for IRC, the expenses corresponding to interest supported by the Applicant with loans contracted to acquire 70% of J…, should not be considered, because, in summary, they cannot be considered indispensable for the realization of profits subject to tax or for the maintenance of the productive source, pursuant to article 23 of the CIRC, in the wording in force in 2012.

Additionally, the Tax Authority and Customs Authority understood that expenses with interest were not sufficiently documented.

3.1. Issue of indispensability of expenses

Article 23 of the CIRC, in the wording in force in 2012, established the following, as far as is relevant here:

Article 23

Expenses

1 – Expenses are deemed to be those demonstrably indispensable for the realization of income subject to tax or for maintenance of the productive source, in particular:

(...)

c) Of a financial nature, such as interest on foreign capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issue of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;

This subject matter of the indispensability of costs, for purposes of article 23, paragraph 1, of the CIRC, has been dealt with in several arbitral judgments, as is the case of those of 15-06-2012, delivered in case No. 29/2012-T and of 02-12-2013, delivered in case No. 101/2013-T, in terms which are here essentially accepted and hereinafter closely followed, adapted to the situation at issue.

Expenses indispensable for realization of profits are those without which the company could not carry out its activity or obtain the profits or gains it obtained.

The eventuality that the company could pursue its activity without carrying out certain expenses does not reject a conclusion to the effect of that indispensability, but only a judgment to the effect that the expenses in question do not have the potential to positively influence the obtaining of profits.

A conclusion to the effect of the dispensability of expenses for obtaining taxable profit will have to rest on a demonstration that even if the expenses in question had not been made, the profits or gains that were actually obtained could be obtained.

What means that a conclusion to the effect of the indispensability of expenses for obtaining profits or gains is only to be rejected if it can be stated that those expenses did not have the potential to positively influence them.

Thus, it is not necessary in order to give tax relevance to financial charges to demonstrate that they effectively produced a positive result.

It is sufficient that they be acts that can be accepted as acts of management, acts of the type that a company carries out with the objective of increasing profits and with potential tendency to make such increase possible.

In truth, the concept of indispensability of costs that appears in article 23, paragraph 1, of the CIRC, does not require a causal link between costs and profits, it being sufficient that expenses have a relationship with the object of the company, are incurred within the scope of its activity or evidence a business purpose. It is for companies to decide which business options they consider preferable to assure their interests.

There is no legal support for the Tax Authority and Customs Authority to set aside the deductibility of expenses by considering that the business options of the companies do not correspond to the acts of management that the Tax Authority and Customs Authority considers preferable.

In this matter, the control of the Tax Administration must be a control by the negative, rejecting as costs only those that clearly do not have the potential to generate increase in gains, and the administrative agent competent to determine the taxable matter cannot "set itself up as manager and qualify indispensability at the level of good and bad management, according to its feeling or personal sense; it is sufficient that it be an operation carried out as an act of management, without entering into the appreciation of its effects, positive or negative, of the expense or charge assumed for the results of the realization of profits or for the maintenance of the productive source" .

The taxpayer, in the exercise of the freedom of economic initiative within the frameworks defined in the Constitution and in the Law that is recognized by the Constitution of the Portuguese Republic [articles 61, paragraph 1, and 80, item c)], has, in principle, the right to define with tax relevance the business strategies it considers appropriate and to choose the means to achieve the results it aims, provided that there is no limitation provided for by the necessity to assure the concurrent realization of other values with constitutional consecration. Included in the essential nucleus of such right will be the freedom of economic agents to formulate and concretize their management options, when these do not affect any of the constitutional interests that are intended to be assured. Being certain that the demands of taxation, necessary to assure the general functioning of the State, can justify limitations to costs relevant for tax purposes, these have to flow from the Constitution or the Law, as those constitutional norms require.

In this light, being the rule the freedom of economic initiative and taxation of companies having to incide fundamentally on their real income (article 104, paragraph 2, of the CRP), the norm of paragraph 1 of article 23 of the CIRC, in the wording in force in 2012, by limiting the relevance of expenses to "those demonstrably indispensable for the realization of profits or gains subject to tax or for the maintenance of the productive source" has to be understood as allowing tax relevance of all expenses effectively carried out that are potentially adequate to provide profits or gains, regardless of the success or lack of success that in concrete they provided.

Thus, it is a wrong understanding adopted by the Tax Authority and Customs Authority in making the correction at issue, by understanding that the requirement of indispensability "should be determined in accordance with what is considered useful and unavoidable for the realization of profits or maintenance of the productive source of the company". In truth, risk is an element inherent in business activity, with realization of investments normally being carried out on the basis of mere expectations of obtaining future income, whose concretization depends on multiple factors, which, in a globalized world, can only in small part be controlled by an isolated company and, for that reason, cannot foresee with exactitude what will come to be revealed as useless or avoidable for the realization of profits or maintenance of the productive source.

In the case at hand, as was explained by witness Q…, there were economic reasons that justified, in 2007, the acquisition by the Applicant of 70% of the capital of J…, decided by the investors of the fund F….

The Applicant was in conditions to obtain the financing under favorable conditions and its managers of the said fund understood that it was in its interest to concentrate the ownership and management of A…. With the purchase, made under normal market conditions, the Applicant came to benefit from the rents and could come to earn profits resulting from the appreciation of the real property.

It is a normal act of management to contract a loan to obtain income and possible profits and clearly inserted in the corporate purpose of the Applicant which is "the purchase and sale of the real property of the shopping centre designated as …, as well as the lease, operation and management of the A…, as well as any other acts or transactions directly related to the above-mentioned activity" (Permanent Certificate which appears in part II of the administrative proceedings).

In fact, in the case at hand, as referred by witness Q…, the acquisition even came to reveal itself as a good business, despite the economic crisis that affected the real estate sector from 2008 onwards (which was not foreseeable in 2007), since the rents remained stabilized despite the crisis and then recovered and no losses resulted from devaluation of the real property, since it was not sold.

Therefore, it has to be concluded, as was already concluded in arbitral case No. 614/2015-T, that the financing referred to was contracted in the interest of the Applicant, such that the requirement of indispensability required by article 23, paragraph 1, of the CIRC for the deductibility of the financial charges supported in fiscal year 2012 attributable to the acquisition of 70% of the share capital of J… is verified, there existing nexus between those charges and the pursuit of the economic activity of the Applicant itself, including with potential to generate patrimonial increments in the legal sphere of this, which would not be generated without the acquisition of the capital interest in question.

On the other hand, the evidence produced shows that there was not the "duplication of charges relating to interest" that the Tax Authority and Customs Authority invokes as support for the correction made.

In truth, the interest supported by J… with the financing intended for the acquisition of the real property (with use of a loan of € 135.175 million), which are imputed to the Applicant by way of the imputation of the taxable matter of that company pursuant to the tax transparency regime, are distinct from the interest supported by the Applicant with the acquisition of the capital interest, since in the price of this the liability of that company was considered, as is seen from the value of the appraisal conducted by an independent entity (€ 381,297,000.00, as appears from document No. 7 attached with the request for arbitral pronouncement, having the Applicant acquired 70% of that value, that is, € 266,907,900) and the value of the financing obtained by the Applicant (approximately € 175,200,000).

Regarding the "insufficiency of compliance with formal requirements by the fact that the documents issued by the beneficiaries of the income are not known, at the date" that the Tax Authority and Customs Authority refers in the Tax Inspection Report, it ceases to have relevance when it refers "the costs being effective, as the veracity of the acquisition operation and consequent loans is not questioned, with the same being recorded as such" (page 41 of the Tax Inspection Report).

In truth, in 2012, article 23 of the CIRC did not make the formal requirements that came to be introduced in its paragraph 4, by Law No. 2/2014, of 16 January, such that expenses could be proven by any means of proof, as understood by the Supreme Administrative Court in the judgment of 09-09-2015, delivered in case No. 028/15.

Being so, the fact that the Tax Authority and Customs Authority has considered proven that the expenses were supported, prevents that any formal insufficiency be given relevance for purposes of deductibility of the charges in question. Moreover, in the present proceedings, numerous documents were presented, within the scope of documents Nos. 8 to 10 attached with the request for arbitral pronouncement, evidencing the expenses supported, whose falsity or irrelevance was not questioned in the Response. If even in that situation it had left in doubt as to the realization of the expenses referred, such doubt would have to be valued procedurally in favor of the Applicant, pursuant to paragraph 1 of article 100 of the CPPT, applicable to arbitral tax proceedings by force of the provisions of article 29, paragraph 1, item c), of the RJAT.

On the other hand, the circumstance that the obtaining of loans is inserted in the business strategy of related entities and may be aimed at obtaining tax advantages does not affect the judgment on the deductibility of charges in light of article 23, paragraph 1, of the CIRC, it being certain that any tax planning was not censured in the tax procedure by the Tax Authority and Customs Authority by any of the procedurally appropriate routes, namely demonstration of violation of rules on transfer pricing or verification of the requirements for application of the general anti-abuse clause.

It is concluded, thus, that none of the grounds invoked by the Tax Authority and Customs Authority in the Tax Inspection Report, justifies that expenses derived from the said financing not be considered deductible.

Thus, the correction made pursuant to paragraph 1 of article 23 of the CIRC and the IRC assessments and compensatory interest assessments made on its basis, suffer from vices of error in the factual and legal assumptions, which justify their annulment [article 163, paragraph 1, of the Code of Administrative Procedure subsidiarily applicable pursuant to article 2, item c), of the LGT].

4. Reimbursement of the amount paid and compensatory interest

The Applicant paid the amount assessed and requests its reimbursement, with compensatory interest.

In accordance with the provisions of item b) of article 24 of the RJAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of judicial tax tribunal judgments, "restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for the effect", which is in harmony with the provisions of article 100 of the LGT [applicable by force of the provisions of item a) of paragraph 1 of article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, understanding the payment of compensatory interest, if the case, from the end of the period of execution of the decision".

Although article 2, paragraph 1, items a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals operating in the CAAD, making no reference to condemnatory decisions, it should be understood that the jurisdictions are understood to comprise the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the arbitral tax proceedings should constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The process of judicial challenge, although being essentially a process of annulment of tax acts, admits condemnation of the Tax Administration in payment of compensatory interest, as is inferred from article 43, paragraph 1, of the LGT, in which it is established that "compensatory interest is due when it is determined, in amicable adjustment or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in amount superior to that legally due" and from article 61, paragraph 4 of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds paragraph 2 in the original wording), which "if the decision that recognized the right to compensatory interest is judicial, the period for payment is counted from the beginning of the period of voluntary execution".

Thus, paragraph 5 of article 24 of the RJAT, by saying that "payment is due of interest, regardless of its nature, pursuant to the provisions established in the general tax law and in the Code of Tax Procedure and Processes", should be understood as allowing recognition of the right to compensatory interest in the arbitral process, as well as the reimbursement of the amount paid, which is the basis of calculation of interest.

It is thus incumbent to appreciate the request for reimbursement of the amount unduly paid, plus compensatory interest.

In the case at hand, it is manifest that, following the illegality of the assessment act, there is place for reimbursement of the tax paid, by force of the said articles 24, paragraph 1, item b), of the RJAT and 100 of the LGT, since such is essential to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced".

As concerns compensatory interest, it is also clear that the illegality of the assessment act is attributable to the Tax Administration, which, by its own initiative, practiced it without legal support.

Consequently, the Applicant has the right to compensatory interest, pursuant to article 43, paragraph 1, of the LGT and 61 of the CPPT.

Compensatory interest will be paid from the date on which the Applicant made the payment until the complete reimbursement of the amount paid, at the legal suppletive rate, pursuant to articles 43, paragraph 4, and 35, paragraph 10, of the LGT, article 61 of the CPPT, article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

5. Decision

In these terms, the arbitrators of this Arbitral Tribunal hereby agree to:

a) Judge the request for arbitral pronouncement of IRC No. 2016 … and respective account settlement statement No. 2016…, in which the global amount of tax and respective compensatory interest is determined, to be well-founded;

b) Condemn the Tax Authority and Customs Authority to reimburse the Applicant the amount of € 3,746,317.22, plus compensatory interest from the date of payment until the date on which reimbursement is made.

6. Value of the proceeding

In accordance with the provisions of article 306, paragraph 2, of the CPC and 97-A, paragraph 1, item a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at € 3,746,317.22.

7. Costs

Pursuant to article 22, paragraph 4, of the RJAT, the amount of costs is set at € 47,430.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Lisbon, 09-05-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Luís M. S. Oliveira)

(Diogo Feio)