Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Cristina Aragão Seia and Fernando de Jesus Amado dos Santos, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:
I – REPORT
On 17 November 2016, A…, S.A., NIPC…, with registered office at …, n.º…, …, …-… Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law n.º 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the tax assessment notice n.º 2015…, of 14-05-2015, for Corporate Income Tax (IRC) relating to the fiscal year 2013, and of the rejection of the administrative complaint he filed concerning the same matter, in the amount of € 411,279.98.
The Claimant, in summary, alleges that the tax assessment notice at issue in this arbitral action is illegal, insofar as it concerns the taxation imposed on dividends received from shareholdings held in the company with tax residence in Tunisia and in the company with tax residence in Lebanon, in the fiscal year 2013, since the dividends in question could not benefit from the rules for the elimination of economic double taxation provided for in domestic law.
On 18-11-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Portuguese Tax Authority (AT).
The Claimant did not appoint an arbitrator. Therefore, pursuant to paragraph a) of article 6(2) and paragraph a) of article 11(1) of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.
On 17-01-2017, the parties were notified of these designations and did not express any intention to challenge any of them.
In accordance with the provisions of paragraph c) of article 11(1) of the RJAT, the collective Arbitral Tribunal was constituted on 01-02-2017.
On 08-03-2017, the Respondent, duly notified for this purpose, filed its defence raising both exceptions and challenging the merits.
Pursuant to paragraphs c) and e) of article 16 and article 29(2), both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.
A period was granted for the submission of written arguments, which were presented by the parties, addressing the evidence produced and reiterating and developing their respective legal positions.
A period of 30 days was set for the issuance of the final decision, following the submission of arguments by the Respondent.
Taking into account the summer judicial recess period and the provisions of article 17-A of the RJAT, pursuant to article 21(2) of the RJAT, on 31-07-2017 the period for issuing and notifying the decision referred to in article 21(1) of the same regulation was extended by two months.
The Arbitral Tribunal has material jurisdiction and is regularly constituted, in accordance with articles 2(1)(a), 5 and 6(1) of the RJAT.
The parties have legal personality and capacity, are properly authorized and legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance n.º 112-A/2011, of 22 March.
The proceedings are free from defects of nullity.
Thus, there is no obstacle to the determination of the case.
Having considered all matters, it is appropriate to issue the following
II. DECISION
A. FACTS
A.1. Facts Established as Proven
The Claimant was in 2013 the parent company of a group of companies (the B… Group) subject to the special tax regime for groups of companies (RETGS) provided for and regulated in article 69 et seq. of the Corporate Income Tax Code.
During the fiscal year 2013, the Claimant held a shareholding in the subsidiary in Tunisia – C… – of 98.72%.
This shareholding had been held since 2000.
This shareholding yielded dividends of €638,205.22 in the year 2013.
In the fiscal year in question – 2013 – this Tunisian subsidiary recorded a turnover of 135 million Tunisian dinars (approximately 67.1 million Euros) and employed 283 workers.
In relation to the fiscal year 2013, the aforementioned Tunisian subsidiary declared for tax purposes an accounting loss of 1,377,590.149 Tunisian dinars and a tax loss of 241,461.764 Tunisian dinars, having determined a tax liability of 289,651.672 Tunisian dinars.
In the same fiscal year 2013, the Claimant also held shareholdings in its subsidiary in Lebanon – D… – corresponding to a total of 50.67% of its capital, with 28.64% held directly and 22.03% held indirectly, that is, through other companies controlled by the Claimant.
The aforementioned shareholdings were held by the Claimant at approximately the same percentages since 2007 and generated a dividend of €1,320,270.87 in the year 2013.
The Lebanese subsidiary recorded a turnover of 169 million Lebanese pounds (approximately 90.4 million Euros) in the fiscal year 2013 and had 436 employees at that date.
In relation to the fiscal year 2013, the aforementioned Lebanese subsidiary declared for tax purposes a profit of 41,471,256.318 Lebanese pounds, of which 26,901,193.786 Lebanese pounds were subject to tax, having determined a tax liability of 4,276,902.000 Lebanese pounds.
The aforementioned Tunisian and Lebanese subsidiaries were engaged, as was the Claimant, in the production and marketing of ….
Both the dividends distributed by the Tunisian company and by the Lebanese company were subject to taxation in Portugal at the normal Corporate Income Tax rate, and accordingly contributed to the determination of the Claimant's taxable profit.
The Claimant received a total of € 17,808,476.09 in dividends in 2013, and benefited from the elimination of economic double taxation in the amount of €15,850,000.00.
The difference between the dividends that benefited from the elimination of economic double taxation and the total dividends received by A… in that fiscal year, in the amount of €1,958,476.09, corresponds to the dividends received from the Tunisian and Lebanese companies.
On 30-05-2016, the Claimant submitted a request for administrative complaint regarding the Corporate Income Tax assessment notice n.º 2015…, of 14-05-2015, relating to the tax period corresponding to the calendar year 2013.
By Official Letter n.º…, of 27-07-2016, the Claimant was notified of the draft rejection of the administrative complaint request.
A final rejection decision was issued by dispatch, dated 18-08-2016, from the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit.
The rejection dispatch contained, inter alia, the following:
"the requirements are not met for the Claimant to benefit from the application of article 51 of the CIRC, since by providing in these terms, the national legislation directly opposes the application of the same regime when the entity distributing profits is resident in a third country";
"the legislator's intention becomes clearer when this regime was extended to the EFTA States; Norway, Iceland and Liechtenstein, which took place in 2010 [...] when it further added that in these cases it only applies if the State in question is bound by administrative cooperation in the field of taxation equivalent to that established within the European Union and provided that both the participating entity and the participated entity meet conditions comparable to those established in article 2 of Directive n.º 90/435/CEE [...] thus reinforcing the idea that the legislator intended to impose safeguard clauses so as to restrict the application of this regime even to these States, whose application is specifically provided for in the law, and, incongruously, in the Claimant's view, this same regime should be completely open to third countries, such as Tunisia and Lebanon, with no provision or classification in Portuguese tax law, but with direct application without any safeguard clauses or restrictions. [...]
Neither are the prerequisites met for the application of article 42 of the Tax Benefits Statute (EBF) to the case at hand, since neither Tunisia nor Lebanon are included in the scope of said regulation, which provides for the elimination of economic double taxation of profits distributed by companies resident in African countries with Portuguese as an official language and in the Democratic Republic of Timor-Leste.
Furthermore, in this matter the AT enjoys no margin of freedom or discretion in exercising its supervisory competence regarding the compliance of taxpayers' actions with the law (article 133 of the CIRC), and at the time of the tax facts, articles 51 of the CIRC and 42 of the EBF regulate in all respects what the AT must do, binding it in light of criteria exclusively of a fiscal nature in compliance with the fundamental principles provided for in article 266(2) of the Portuguese Constitution and by virtue of the principle of legality enshrined in article 55 of the General Tax Law (LGT), whose legal provisions impose on administrative bodies and agents conduct subordinate to the Constitution and to the law.
Therefore, even if by pure hypothesis it could be admitted that in the tax situation at hand the typical circumstances of a "legislative omission" regarding the elimination of economic double taxation of profits received by a Portuguese company from companies in which it held shareholdings with tax residence in Tunisia and in Lebanon existed, translated into a violation by the State of a general, and therefore non-specific, duty to legislate on that matter, the recognition of a subjective right to "A…" embodied in the deduction from the net result of Corporate Income Tax of the value of the dividends in question that the Portuguese tax-legal order does not contemplate is not subject to review either in tax inspection procedures or in official revision procedures, and it is not incumbent upon this Unit, as interpreter-applicator of the law, to resolve such a matter.";
"In sum, in light of the factual and legal framework at the time in force regarding the elimination of economic double taxation of distributed profits resulting from articles 51 of the CIRC and 42 of the EBF as well as the administrative doctrine established in the aforementioned Opinion n.º 79/09, whose content is hereby fully reproduced, it appears that the present administrative complaint filed by the taxpayer "A…" with reference to the Corporate Income Tax for the fiscal year 2013 should be rejected".
By Official Letter sent "via CTT", the Claimant was notified on 19-08-2016 of this final decision rejecting the administrative complaint.
A.2. Facts Established as Not Proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Grounds for the Established and Non-Established Facts
With respect to the facts, the Tribunal is not required to pronounce on everything that was alleged by the parties; rather, it has a duty to select the facts that matter for the decision and distinguish the proven from the non-proven matter (see article 123(2) of the Tax Court Procedure Code and article 607(3) of the Code of Civil Procedure, applicable ex vi article 29(1)(a) and (e) of the RJAT).
In this way, the facts relevant to the judgment of the case are chosen and delineated based on their legal relevance, which is established with regard to the various plausible solutions to the legal question(s) (see former article 511(1) of the Code of Civil Procedure, corresponding to the current article 596, applicable ex vi article 29(1)(e) of the RJAT).
Thus, taking into account the positions assumed by the parties, in light of article 110(7) of the Tax Court Procedure Code, the documentary evidence and the administrative procedure file attached to the record, the facts listed above were considered proven, with relevance to the decision.
In particular, with respect to the facts established as proven in points 6 and 10, the documentation submitted by the Claimant with its initial request and, subsequently, in the course of this arbitral action was taken into account.
The Respondent argued for the insufficiency of proof of such facts, essentially on the grounds that no "document issued by the respective tax authorities of those countries" was presented, that there is "lack of correspondence between the number of pages of the original documents and the translation in which they appear in Portuguese (from English and French)", and that no "direct translation into Portuguese, duly certified and apostilled" was provided, as well as that to "private documents, being unilateral, can only be recognized limited probative value", and that, in its view, "the appropriate means for such proof – of the subjection to tax and of the effective taxation of the profits distributed by the Tunisian and Lebanese companies – must necessarily correspond to a document issued and certified by the tax authorities of the respective countries of residence of those companies".
The Claimant, for its part, argues, in summary, in addition to the view that the documentation it presented properly proves the aforementioned facts, that "it was never a disputed matter for the AT", and that this is "subsequent reasoning that the Tax and Customs Authority came to present in its Defence".
With respect to these two arguments, it should be noted immediately that they will be irrelevant to the determination of facts, where the Tribunal is under an obligation to rule on the proof or lack of proof of all facts alleged by the parties, with relevance in light of the various possible legal solutions, and in the present case the Claimant alleged – certainly understanding them to be relevant – the facts in question, and the Respondent contested – making disputed – these same facts.
As for whether or not there was subsequent reasoning, this should be a matter to be analyzed in the legal examination of the case, and such circumstance is irrelevant from the perspective of the factual assessment.
Notwithstanding the foregoing, it is considered that the evidence presented by the Claimant is sufficient for the Tribunal to conclude, with the necessary certainty, that the facts in question are proven.
In fact, contrary to what the Respondent argues, there is no legal rule requiring proof by a specific means, so the principle of freedom of proof and free judicial assessment applies in this matter. It is certain, on the one hand, that the Respondent itself concedes that the evidence presented is "abstractly admissible" (point 82 of its arguments), and, on the other hand, that there are no well-founded doubts about the suitability of the translations presented by the Claimant.
Furthermore, the Respondent's view that "the appropriate means for such proof (…) must necessarily correspond to a document issued and certified by the tax authorities of the respective countries of residence of those companies" presupposes the undemonstrated circumstance that it would be possible in a timely manner, given the legal systems in question and the administrative practices instituted there, to obtain the type of document postulated.
In this way, it is considered that the documentation presented by the Claimant is sufficient, in concrete terms, to establish as proven the facts in question, since it reports directly to such facts as stated.
The circumstance of whether such documentation was or was not subject to confirmation with foreign tax authorities, or whether confirmation is or is not possible, should not affect the evidentiary judgment made.
Indeed, in the first place, such judgment is based on the reasoned conviction of the judge, in light of a judgment of normalcy.
Second, confirmation with foreign tax authorities is not mandatory, and the AT can, in light of the proof presented by the taxpayer, consider the subjection to effective taxation sufficiently proven, and the option to seek such confirmation only arises if the taxpayer presents documents that indicate at least that such taxation occurred.
Finally, in any case, keeping in mind that the doubts raised by the Respondent concern the form and not the content of the documentation in question, if it were to be found that the documentation presented was false, the possibility afforded by article 696 of the Code of Civil Procedure would still subsist, namely the remedy of revision, if "it is found that [a] document (…) that could (…) have determined the decision to be revised is false".
Facts presented by the parties as allegations and presented as facts, consisting of strictly conclusive assertions, insusceptible of proof, and whose veracity must be determined in relation to the concrete facts established above, were not established as either proven or not proven, in particular those referred to in points 105 and 106 of the Initial Request, which must be determined in light of points 6 and 10 of the facts.
B. LAW
i. Exceptions
The Respondent begins by raising the exception of material incompetence of the arbitral tribunal to rule on the legal claim formulated by the Claimant, and also raising, on the same grounds, the exception of inappropriateness of the procedural remedy, considering that what is at issue is the following:
The Respondent contends that "the Claimant seeks to obtain recognition of a right which, in accordance with the provisions of current legislation in the national legal order, does not belong to it", that is, what is at issue is "the recognition of a subjective right to "A…" embodied in the deduction from the net result of Corporate Income Tax of the value of the dividends in question".
From this the Respondent concludes that "the claim formulated by the Claimant falls outside the material scope of tax arbitration and the scope of binding established in the terms shaped by the legislator" and that "the appropriate remedy to obtain recognition of such right would always be the action to obtain recognition of a right or legally protected interest in tax matters provided for in article 145 of the Tax Court Procedure Code".
Contrary to what the Respondent contends, what is at issue in the present proceedings is not "a case in which the taxpayer is in a factual situation where successive similar relationships are generated with the tax administration and seeks to define its content not only for the past but also for the future", but rather the examination of the legality of a tax assessment act, the tax assessment notice n.º 2015…, of 14-05-2015, for Corporate Income Tax relating to the fiscal year 2013 of the Claimant, and of the rejection of the administrative complaint that it filed concerning the same matter.
As stated in the Decision of the Southern Administrative Court of 09-06-2016, handed down in case 09156/15, "The law does not restrict the grounds on which the request for annulment of the assessments in question is based, with a view to delineating the material jurisdiction of the arbitral tribunal. Hence it follows that the assertion contained in the decision at issue of the vigence of a tax exemption that prevents the taxation in question corresponds to the application of the legality parameter, a task that was assigned by law (article 2(2) of the RJAT) to arbitral tribunals".
In this way, pursuant to article 2(1)(a) of the RJAT, this Tribunal has jurisdiction to determine the (il)legality of the aforementioned tax assessment notice n.º 2015…, of 14-05-2015, for Corporate Income Tax relating to the fiscal year 2013 of the Claimant, and the rejection of the administrative complaint that it filed concerning the same matter, a purpose for which the present action is an appropriate remedy.
The exceptions at issue should therefore be dismissed.
The Respondent further raises the incompetence of this Tribunal to rule on matters requested in paragraphs (iv) and (v) of the arbitral claim, which state:
"(iv) order the correction of the taxable profit determined by the AT for the fiscal year 2013 by the Claimant on an individual basis and, as a consequence, if a tax loss is to be determined, order the annulment of the additional state surtax assessment (€1,308.73) and municipal surtax assessment (€23,154.36) determined by the AT and the refund of the amounts paid on that account, increased by compensatory interest;
(v) as well as order the correction of the tax loss determined by the AT for the fiscal year 2013 of the B… tax group of which the Claimant is the Dominant Company, with the other consequent legal consequences."
With respect to this matter, it must be acknowledged that the Respondent is correct.
In fact, following from the foregoing, the subject matter of this arbitral action is the examination of the legality of the tax assessment notice n.º 2015…, of 14-05-2015, for Corporate Income Tax relating to the fiscal year 2013 of the Claimant, and the rejection of the administrative complaint that it filed concerning the same matter, and the consequences of such declaration should be effected, if necessary, in the execution of the decision to be handed down.
As stated in the Decision of the Southern Administrative Court of 28-04-2016, handed down in case 09286/16, cited by the Respondent:
"In the absence of a legal provision allowing a contrary conclusion, the scope of the judicial review process and arbitral proceedings is restricted to questions regarding the legality of acts of the types referred to in article 2 that are covered by the arbitration mandate established in Ordinance n.º 112-A/2011, and it is not within the competence of arbitral tribunals to define the terms in which annulatory judgments that are handed down should be executed."
In this way, the exception at issue should be granted.
ii. On the Merits
Before proceeding to the examination of the merits of the case, it is appropriate, as it is relevant in light of the procedural positions of the parties, to clarify some essential features of the present disputed material relationship.
At issue in the present arbitral proceedings, as seen, is the examination of the legality of the self-assessment act n.º 2015…, of 14-05-2015, for Corporate Income Tax relating to the fiscal year 2013 of the Claimant, and of the rejection of the administrative complaint that had this act as its subject matter.
As follows from article 2(1)(a) of the RJAT, cited above, the arbitral tribunal is competent, in the first instance, to examine the legality of the self-assessment act, without whose existence, pending the dispute, the material competence for the intervention of that tribunal would be lacking.
Additionally, and following from what has been consistently understood in tax courts with respect to the scope of judicial review proceedings, it has been consistently understood that, in addition to that self-assessment act, the arbitral tribunal is competent to examine the legality of second and third-instance acts (administrative complaint, official revision, hierarchical appeal) that pronounce on the legality of the self-assessment act, to the extent of such pronouncement.
In this way, since these are distinct acts, existing simultaneously, at the time of filing and pending the present arbitral action, it is appropriate to examine the (il)legality of each of the aforementioned acts.
Beginning with the decision on the administrative complaint request, the sole issue is whether the differentiation, established by national legislation, between the treatment of profits when these are distributed by a company not resident in Portugal or in a Member State of the European Union is (in)compatible with the freedom of movement of capital provided for in article 63 of the Treaty on the Functioning of the European Union (TFEU), as this results in a less favorable tax regime for non-residents.
In fact, the AT, in the act in question, understood that there would be no incompatibility, and therefore the said legislation would not be applicable, since companies resident in Tunisia and Lebanon are involved.
Given the depth and thoroughness of the analysis conducted, the following will be followed, with due respect, very closely to what was argued in arbitral case no. 577/2016-T of CAAD, regarding this question, and which is transcribed below:
"3.1.2.1.1. Framework
In accordance with Portuguese legislation applicable to the assessment being questioned, generally speaking, whenever a company holds a stake in another company and, in that context, benefits from a distribution of profits by the company in which it holds a stake, those profits are included in its tax base. That is, they are considered as forming part of the income of the company that receives them. The inclusion of those profits in the taxable profit of the beneficiary company generates economic double taxation, since the same profit is taxed in the tax sphere of two distinct legal persons. In order to avoid this double taxation and the negative effects it has on economic activity, the tax legislator has created some mechanisms.
The mechanism of article 51(1) of the Corporate Income Tax Code (CIRC), which the claimant seeks to have applied to itself, eliminates economic double taxation by allowing the deduction from income included in the tax base of distributed profits, provided that various requirements are met. It requires for this that (i) the company distributing the profits has its seat and effective place of management in Portugal or in a Member State of the European Union (51(5)), (ii) is subject to income tax; (iii) the beneficiary company is not covered by the fiscal transparency regime and (iv) holds directly a stake in the capital of the company distributing the profits not less than 10%, and this has remained in the ownership of the beneficiary, without interruption, during the year prior to the date of the distribution of the profits, or if held for a shorter time, provided that the stake is maintained for the time necessary to complete that period.
The mechanism described and of which the claimant seeks to benefit, as results from the letter of the law, can only be applied to companies that meet the requirements described, namely (i) the one concerning the amount and duration of the stake held in the companies that distribute the profits, (ii) the one relating to the subjection to taxation of the companies: B… (hereinafter Tunisian company) and E… (hereinafter Lebanese company)] and (iii) the one concerning the fact that the Claimant is not subject to fiscal transparency ─ the Tunisian company and the Lebanese company do not have residence in Portugal or in a Member State.
3.1.2.1.2. European Union Law
Notwithstanding the limitation resulting from the letter of the law, it is possible to conceive that, through European Union Law, one could broaden, in the abstract, without inquiring whether the requirements of article 51 of the CIRC are or are not met, the scope of application of the mechanism of article 51 of the CIRC. For, as is well known, although only Member States have competence in the matter of direct taxes, the Court of Justice (CJEU) has maintained, through its decisions, that these States must exercise that competence in compliance with European Union law. Thus avoiding violations of the five fundamental economic freedoms, namely: (i) the free movement of goods (articles 28 et seq. of the TFEU); (ii) the free movement of workers (articles 45 et seq. of the TFEU); (iii) freedom of establishment (article 49 et seq. of the TFEU); (iv) freedom to provide services (article 56 et seq. of the TFEU) and (v) the free movement of capital (article 63 et seq. of the TFEU). Now, it is precisely through the protection of each of these freedoms, directly applicable, that there occurs a true harmonization via judicial construction that translates into the obligation for national legislation to conform to each of these freedoms.
3.1.2.1.3. Freedom of Movement of Capital
Based on the circumstances of the situation under analysis, particularly the structure of the mechanism for the elimination of double taxation contained in article 51 of the CIRC, it is found that the application of that article solely to companies with residence in the European Union or in Portugal that distribute profits represents, at first sight, a violation of the freedom of movement of capital (article 63 of the TFEU). This freedom is, moreover, the only one that also applies vis-à-vis third countries, and it is currently settled that its content is exactly the same when Member States and third countries are involved. Consequently, restrictions on this freedom are prohibited regardless of whether Member States or third countries are involved, exactly in the same way, and the situations are perfectly comparable. In other words, all restrictions relating to the movement of capital and payments between Member States and between them and third countries are prohibited.
The assertion that, in fact, the non-application of the regime of article 51(1) of the CIRC to dividends distributed by the Tunisian and Lebanese companies corresponds to a situation of intolerable discrimination vis-à-vis the free movement of capital (as it discourages taxpayers taxed in Portugal from investing their capital in Tunisia and Lebanon) presupposes, consequently, on the one hand that article 63 of the TFEU is applicable to these situations and on the other that, if this is the case, and there is therefore discrimination, the safeguard clause does not apply or there is no valid justification for that discrimination.
To answer the first question, that is, to determine whether article 51 is or is not covered by the scope of the freedom of movement of capital (article 63 of the TFEU), it is necessary to clarify from the outset whether both the acquisition of shares in a company and the payment of dividends resulting from that transaction are consistent or not with this freedom.
There is no definition of "movement of capital" in the Treaty. It is important to note, however, that the CJEU confirmed in several decisions, when listing non-exhaustively movements of capital, that the terminology applied to such movements in Annex I of Council Directive 88/361/EEC of 24 June 1988, for the implementation of the former article 67 of the EC Treaty, now repealed, still has some relevance. In this context the CJEU decided that movements of capital within the meaning of article 63 can include, namely, so-called "direct" investments, that is, investments in the form of participation in an undertaking through the holding of shares that gives the possibility of effectively participating in its management and control, as well as so-called "portfolio" investments, that is, investments in the form of acquisition of securities on the capital market with the sole objective of making a financial investment without any intention of influencing the management and control of the undertaking.
According to the CJEU, restrictions on movements of capital referred to include "not only national measures which, when applied to movements of capital to or from third countries, restrict establishment or investments, but also those which restrict payments of dividends resulting from them".
It follows, as a consequence of the foregoing, in the words of the CJEU itself that "a company resident in a Member State and which holds a stake in a company resident in a third country that gives it a certain influence in the decisions of the latter company and enables it to determine its activities can invoke article 63 TFEU to challenge the compatibility with this provision of the legislation of the said Member State relating to the tax treatment of dividends originating from the said third country, not exclusively applicable to situations where the parent company exercises a decisive influence in the company proceeding to distribute the dividends".
With respect to the last part of the extract transcribed, it should be emphasized that although in historical terms, partly by its relationship with the Parent-Subsidiary Directive, the idea that article 51(1) of the CIRC was originally intended to address situations of control or effective influence is conceivable, today, however, notwithstanding that there may be such preponderance, it is clear that it does not refer exclusively to these situations. Starting with the fact that 10% of capital, depending on the greater or lesser dispersal of such capital, does not guarantee effective control. One cannot therefore say in any way that article 51(1) of the CIRC applies exclusively to situations where the parent company exercises a decisive influence in the company proceeding to distribute the dividends. Indeed, the CJEU has already held that a stake of this magnitude does not necessarily imply that the holder of such stake exercises effective influence in the decisions of the company of which it is a shareholder.
It is therefore clear that article 51 of the CIRC is clearly covered by the freedom of movement of capital, and therefore a State's refusal to grant elimination of double taxation to dividends originating in Tunisia and Lebanon, when such elimination is allowed in favor of dividends of domestic origin, constitutes discrimination. For, as is obvious, this provision limits the acquisition of shares in companies in these countries, which cannot be permitted. In this sense the CJEU stated: "Legislation such as that at issue in the main proceedings, under which a company resident in a Member State can effect a full or partial deduction of dividends from its tax base when these are distributed by a company resident in the same Member State, but cannot effect such deduction when the distributing company is resident in a third country, constitutes a restriction on movements of capital between Member States and third countries, which is in principle prohibited by article 63° TFEU".
The Advocate General emphasizes in this respect that "…Portuguese legislation at issue in the main proceedings does not distinguish dividends received by a company resident on the basis of a stake that gives it a certain influence on the decisions of the company proceeding to distribute such dividends and that enables it to determine the activities of this company, from dividends received on the basis of a stake that does not give it such influence" and that "consequently, with respect to the Treaty on the Functioning of the European Union, the present case is covered by the free movement of capital". Ideas corroborated by the CJEU in stating:
"Since the legislation at issue in the main proceedings does not aim to apply exclusively to situations where the beneficiary company exercises a decisive influence in the company distributing the dividends, a situation such as that at issue in the main proceedings must be considered to be covered by article 63° TFEU, relating to the free movement of capital".
"Therefore, in a situation such as that at issue in the main proceedings, a company established in Portugal that receives dividends from companies established, respectively, in Tunisia and Lebanon can invoke article 63° TFEU to challenge the tax treatment reserved for these dividends in the said Member State on the basis of legislation that does not aim to apply exclusively to situations where the beneficiary company exercises a decisive influence over the distributing company".
3.1.2.1.4. Safeguard Clause
Once the potential applicability of article 63 of the TFEU is established, it is necessary, however, before drawing full consequences therefrom, to verify whether the safeguard clause of article 64 of the TFEU is capable of being applied. This article permits that, where restrictions in force on 31 December 1993 under national legislation or Union legislation exist in relation to certain movements of capital with third countries involving, inter alia, direct investment (the situation we are concerned with), it is possible to prevent the free movement of capital. This is because "the objective and legal context of the liberalization of movements of capital are different depending on whether it concerns relations between Member States and third countries or the free movement of capital between Member States, [so] these considered it necessary to provide for safeguard clauses and exceptions that apply specifically to movements of capital to or from third countries". The safeguard clause aims, in short, to allow some control by States, given that the freedom of movement of capital is normally ensured unilaterally and without reciprocity.
Regardless of whether the Portuguese rule excluding dividends distributed by companies from third countries from the mechanism for double taxation elimination constitutes a provision in compliance with the requirements of article 64 of the TFEU, the existence and content of the Euro-Mediterranean Agreements concluded with Tunisia and Lebanon would always prevent the application of that safeguard clause to situations involving Tunisian and Lebanese companies. It should be recalled that Portuguese law enshrines a clause of full automatic incorporation of international conventional law, once the formalities of approval, ratification and publication are satisfied (article 8(2) of the Portuguese Constitution). It follows from this that treaties are immediate sources of rights and obligations for their addressees and can be invoked before the courts.
Treaties are hierarchically superior to ordinary law. This superiority follows not only from articles 26 and 27 of the Vienna Convention on the Law of Treaties, but also from article 8(1) and (2) of the Portuguese Constitution. It is therefore clear that, for the convention to be in force in the domestic legal order, subsequent ordinary law cannot revoke it. That is, international conventional law cannot be superseded by ordinary laws, and is superior to these. Whether such subsequent laws, which would be materially unconstitutional if they contravene it; or prior ones, which will have to be suspended if they conflict with that international conventional law, only resuming force in case of suspension or termination of the international convention involved.
Indeed, the agreements concluded with Tunisia and Lebanon, as mixed treaties, that is, treaties concluded jointly by the European Union (then the European Community) and the Member States, are a source of Law in two ways, as European Union Law and as International Law automatically incorporated into our legal system.
Although these agreements essentially aim at liberalization at the level of fundamental economic freedoms and the avoidance of discrimination, they inherently contain, given the breadth of these freedoms, the fiscal question by the impact it has on them. The fact that the agreements with Tunisia and Lebanon incorporate clauses that specifically refer to taxes attests to this. Examples are those that permit the parties, in particular, the right to distinguish residents and non-residents for tax purposes. Now, it only obviously makes sense to include clauses of this type if agreements such as those concluded with Tunisia and Lebanon have an impact on the tax legislation of the signatory States. The fact that they have been signed by the various Member States, and therefore also by Portugal, ensures that underlying them is the exercise of an indisputable and full fiscal sovereignty, which reinforces their direct effect.
It is important to emphasize that, prior to the signing of these agreements, the free movement of capital from Tunisia and Lebanon to Portugal and other Member States was already assured; with the possible application of the safeguard clause, it is true, but it already existed. We are therefore forced to conclude that the objective of the agreements with Tunisia and Lebanon, like what happened with other countries with respect to which the same model of agreement was followed, was essentially to ensure the reciprocity of this freedom. Specifically, with respect to direct investments from the European Union.
Article 34 of the agreement with Tunisia, contained in Chapter I, entitled "Current payments and movement of capital", of the respective Title IV, entitled "Payments, capital, competition and other matters of an economic nature", provides:
"1. With respect to transactions in the capital account, [the Union] and Tunisia shall ensure, from the date of entry into force of this agreement, the free movement of capital relating to direct investments in Tunisia, made in companies constituted in accordance with the applicable law, as well as the liquidation or repatriation of such investments and any profits therefrom.
- The parties shall consult in order to facilitate the movement of capital between [the Union] and Tunisia and to fully liberalize it when the necessary conditions are met."
The provision transcribed was not limited, it should be emphasized, to referring to direct investments in Tunisia, ensuring as to them the freedom of movement. It further provided, expressly, that "[the Union] and Tunisia shall ensure...the liquidation or repatriation of such [direct] investments and any profits therefrom".
For its part, article 31 of the EC-Lebanon agreement, contained in Chapter 1, entitled "Current payments and movement of capital", of the respective Title IV, entitled "Payments, capital, competition and other matters of an economic nature", provides:
"Within the scope of this agreement and subject to the provisions of articles 33 and 34, no restrictions shall be imposed on the movement of capital between [the Union], on the one hand, and Lebanon, on the other, nor shall any discrimination based on the nationality or place of residence of their respective nationals or the place of investment of the said capital be made."
Article 33, contained in the same Chapter 1 of that agreement, provides:
"1. Without prejudice to other provisions of this agreement and other international obligations of [the Union] and Lebanon, the provisions of articles 31 and 32 shall not prejudice the application of any restriction existing between the parties on the date of entry into force of this agreement, with respect to the movement of capital between them involving direct investment, including in real estate, establishment, provision of financial services or admission of securities to capital markets.
- However, the transfer abroad of investments made in Lebanon by residents [of the Union] or in [the Union] by Lebanese residents or of profits therefrom shall not be affected."
Despite there being differences in the wording of the provisions governing direct investments and the repatriation of profits therefrom, the solution they advocate is the same. This is because, although article 31 of the EC-Lebanon Agreement ensures the free movement of capital "subject to [article] 33 […]", which provides, in its para. 1, that:
"[article] 31 […] shall not prejudice the application of any restriction existing between the parties on the date of entry into force of this agreement, with respect to the movement of capital between them involving direct investment, including in real estate, establishment, provision of financial services or admission of securities to capital markets".
Para. 2 of said article adds:
"however, the transfer abroad of investments made in Lebanon by residents [of the Union] or in [the Union] by Lebanese residents or of profits therefrom shall not be affected".
Now, taking into account that the solution that results from the provisions transcribed already followed, in the abstract, from the free movement of capital assured to third countries (without prejudice to the application of legislation that can be framed within the safeguard clause or other accepted restrictions), it must be inferred from this reference, proceeding from the presumption that agreements are not normally redundant, the following conclusion. At least with respect to the movement of capital relating to direct investments involving Tunisia and Lebanon, the provisions susceptible of being validated by the safeguard clause, that is, those that were in force on 31 December 1993, cease to be applied. It is clear that one of the implications that follows from either article 34(1) of the agreement with Tunisia, which entered into force on 1 March 1998, or from article 31 of the agreement with Lebanon, which entered into force on 1 April 2006, must be this, representing these articles suggestive clarifications in that respect. As provisions subsequent to the norms in force in 1993, which are of superior nature and which furthermore assume a special nature, necessarily override them, and therefore exclude any safeguard clause that could prevent the full application of the freedom of movement of capital relating to direct investments in Tunisia and Lebanon.
The Advocate General stated in this respect that "[i]n fact, article 64° TFEU permits, but does not impose, the application between Member States and third countries of restrictions on movements of capital in force on 31 December 1993. Therefore, nothing prevents Member States from waiving such restrictions unilaterally or ... within the framework of an international agreement, in whole (as in the EC-Tunisia Agreement) or in part (as in the EC-Lebanon agreement)". A position entirely confirmed by the CJEU in the decision of the case in stating that "a Member State waives the faculty provided for in article 64(1) TFEU when, without formally revoking or amending existing legislation, it concludes an international agreement, such as an association agreement, which provides, in a provision with direct effect, the liberalization of a category of capital referred to in that article 64(1); therefore, this change in the legal framework should be treated, in terms of its effects on the possibility of invoking article 64(1) TFEU, as equivalent to the introduction of new legislation, which is based on a different logic from existing legislation".
Indeed, it could not be otherwise, under pain of the agreements with Tunisia and Lebanon seeing their objectives that they clearly intend to achieve with respect to the freedom of movement of capital when direct investments are involved completely frustrated. It should not be forgotten that one of the reasons for the establishment of the safeguard clause contained in article 64 of the TFEU was certainly the absence of reciprocity on the part of third countries with respect to the freedom of movement of capital. Now, being this assured with respect to Tunisia and Lebanon, the application of the safeguard clause in relations with these countries no longer makes sense. This interpretation is, moreover, the only one consistent with the observance of the principle of good faith, unavoidable in the interpretation of treaties, and which certainly prevents one of the parties to the agreement from putting it in question by maintaining a provision incompatible with it.
The solution conveyed presupposes, however, that article 34(1) of the agreement with Tunisia and article 31 of the agreement with Lebanon, after having regard to their nature, context, clarity and precision of the wording of each of them, can be applied directly without the need for the adoption of any subsequent measure. Considering all these requirements, with emphasis on the objectives and context in which the agreements were concluded, we are led to conclude that the articles in question can be applied directly. In line, moreover, with what the Advocate General expressly stated: – "I consider that articles 34 of the EC-Tunisia Agreement and 31 of the EC-Lebanon Agreement have a direct effect that can be invoked by A...". This is also consistent with what was decided by the CJEU.
With respect to the question of whether the creation of a specific fiscal benefits regime for dividends from countries with Portuguese as an official language and Timor-Leste, pursuant to article 42 of the EBF, would imply the impossibility of invoking the safeguard clause contained in article 64 TFEU, we consider that it would not. Creating an exception to the rule, in a specific framework such as that of relations between Portugal and these countries, certainly does not imply a change in the rule that remains the same as contained in article 46 of the CIRC. Only if this article were to assume a different logic, instituting new procedures, breaking with prior law, would it be conceivable that the safeguard clause could not be invoked, which manifestly does not appear to be the case. In line, moreover, with the Advocate General who states that "[i]t cannot be concluded that, in adopting these specific regimes, the Portuguese Republic decided to abandon the possibility of invoking the safeguard clause provided for in article 64° TFEU, whose scope can be limited", this positioning having been seconded by the CJEU.
3.1.2.1.5. Implications of article 89 of the agreement concluded with Tunisia and article 85 of the agreement concluded with Lebanon (Carve-out clauses)
It is now appropriate to determine whether article 89 of the agreement with Tunisia and article 85 of the agreement with Lebanon puts in question the exclusion of the discriminatory regime of article 46 of the CIRC, possibly preventing article 34(1) of the agreement with Tunisia and article 31 of the agreement with Lebanon from being interpreted in the sense that we have just given them.
Article 89 of the agreement with Tunisia, contained in Chapter I of the respective Title VIII, entitled "Institutional, general and final provisions", provides:
"No provision of this agreement may have the effect of:
– increasing the advantages granted by a party in the field of taxation under any international agreement or convention binding that same party,
– preventing a party from adopting or applying any measure designed to prevent tax fraud or evasion,
– preventing the right of a party to apply the relevant provisions of its tax legislation to taxpayers who are not in an identical situation with respect to their place of residence."
Article 85 of the aforesaid agreement with Lebanon, contained in Title VIII, entitled "Institutional, general and final provisions", provides:
"With respect to direct taxation, nothing in this agreement may have the effect of:
a) Increasing the tax advantages granted by one of the parties under any international agreement or convention binding it;
b) Preventing a party from adopting or applying any measure designed to prevent tax fraud or evasion;
c) Preventing either party from applying the relevant provisions of its tax legislation to taxpayers not in an identical situation, in particular with respect to their place of residence."
Given the identity of the two provisions, we will analyze their effects jointly.
The first effect that the transcribed articles wish to prevent is solely that through the agreement the tax advantages granted by any of the parties (European Union, Member States, Tunisia and Lebanon) under any agreement or convention they have concluded are increased. That is, what is intended is to circumscribe the tax advantages that follow from the agreements with Tunisia and Lebanon to the relations between the parties and not extend it to other States with which they have concluded conventions or agreements. The aim is therefore to prevent that at the fiscal level and as a result of a treaty the application of the principle of the most-favored-nation status is admitted. This effect does not therefore have as much in view the conventions that bind the contracting parties between themselves, but conventions with third States, and therefore no impediment to the non-application of any possible safeguard clause to situations of direct investment in Tunisia and Lebanon is inferred therefrom.
In this sense, the Advocate General pronounced, saying "with respect to article 89°, first dash, of the EC-Tunisia Agreement …I consider, like the Commission, that the purpose of this provision is to prevent a norm provided in a convention designed to prevent double taxation concluded by the Portuguese Republic with a State other than the Republic of Tunisia from being extended to a Tunisia resident whose State of residence is not party to that convention. Now, A… does not seek to obtain an advantage granted by a convention on double taxation that the Portuguese Republic has concluded with a State other than the Republic of Tunisia. The same applies to article 85°, paragraph a), of the EC-Lebanon Agreement". A positioning corroborated by the CJEU.
The second effect that it intends to prevent that the agreements with Tunisia and with Lebanon put in question the application of measures that counter fraud or tax evasion is not capable of fitting with the situation we are dealing with, not having even raised this question or verified the existence of indications of any situation of evasion or fraud.
Even if any such situation were to occur, the articles under analysis would never have as an effect to prevent measures in response being taken, transcending the ultimate sense and framing of each of them any understanding with that content. The Advocate General also confirmed this understanding by saying that: "Articles 89°, second dash, of the EC-Tunisia Agreement and 85°, paragraph b), of the EC-Lebanon Agreement permit the parties to those agreements to adopt or apply any measure designed to prevent tax fraud or evasion. However, as there is no allegation of fraud or tax evasion in the present case, the said provisions do not apply". In the same sense, the CJEU decided.
The third effect, finally, also raises no obstacle to the interpretation advocated with respect to the effects of article 34(1) of the agreement with Tunisia and article 31 of the agreement with Lebanon. For, although it is permitted for the parties to distinguish taxpayers based on the condition of resident, this distinction can never be arbitrary or result in discriminatory treatment of comparable situations in objective terms, on pain of, against the spirit of the very agreements, making dead letter of the aforementioned articles 34(1) and 31. Not to mention the flagrant violation of European Union law itself, which prohibits both direct and indirect discrimination. The first is made on the basis of nationality and the second normally rests on a criterion that leads to the same result. Interestingly, the CJEU held in this respect that when distinctions based on residence deprive non-residents of certain benefits that are guaranteed to residents, they can constitute indirect discrimination based on nationality, which is especially relevant for the case being tried, insofar as different treatment of Tunisian companies would have precisely these effects.
The same type of reasoning can be applied with respect to A…, as the Advocate General did.
"[A… is a company resident in Portugal and the provisions in question do not permit that, in that capacity, it be the victim of discrimination based on the place of residence of its affiliates. In this respect, I recall the settled case-law of the Court of Justice to the effect that 'the situation of a shareholder company that receives dividends of foreign origin is comparable to that of a shareholder company that receives dividends of domestic origin, insofar as, in both cases, profits realized can, in principle, be subject to taxation in cascade'. Moreover, there is no doubt that A… is in a situation objectively comparable to that of a Portuguese taxpayer who receives dividends of Portuguese origin or from a Member State of the Union or the EEA. Consequently, a difference in treatment such as that resulting from the Portuguese legislation at issue in the main proceedings constitutes a restriction prohibited by articles 34° of the EC-Tunisia Agreement and 31° of the EC-Lebanon Agreement".
Article 89 of the agreement with Tunisia and article 85 of the agreement with Lebanon do not therefore put in question the freedom of movement of capital when direct investments are concerned, and instead ensure reciprocity in the protection of this freedom, in accordance with the spirit of the very agreements.
In accordance with this understanding, the Advocate General expressed the following opinion: "Consequently, I propose that the Court of Justice respond… that a national law such as that at issue in the main proceedings, which does not permit the full or partial deduction, as appropriate, of dividends received from companies whose seat or effective place of management is situated outside the Union or the EEA, cannot be based on either article 89° of the EC-Tunisia Agreement or on article 85° of the EC-Lebanon Agreement".
An opinion entirely seconded by the CJEU in the decision of the case.
3.1.3. Other Justifications
Having established that neither the safeguard clause contained in article 64 of the TFEU nor articles 89 of the agreement with Tunisia and 85 of the agreement with Lebanon have the effect of putting in question the freedom of movement of capital relating to direct investments made in Tunisia and Lebanon, it remains to determine whether the reason invoked by the Tax Authority to justify the restriction on the freedom of movement of capital based on reasons of general interest (article 65 of the TFEU) – specifically, facilitating tax controls – can or cannot be accepted. This justification has already been accepted in relations between Member States in the celebrated Futura participations case. However, whenever the argument regarding tax controls essentially aims at the difficulty in obtaining information and Member States are involved, this justification does not succeed, since the Directive on the exchange of information 2011/16/EU obligates these States to cooperate with one another.
When third countries are involved, the situation has a different nature, if only because they are not bound by that directive, and therefore, as has already happened in a case with many similarities to the one being decided, the justification was accepted. In the decision Skatteverket v A, the CJEU decided "that, when a Member State's legislation makes a tax advantage [exemption from income tax on dividends distributed in the form of shares of a subsidiary] dependent on requirements whose compliance can only be verified by obtaining information from the competent authorities of a third country, that Member State may, in principle, refuse to grant this advantage if it is impossible to obtain such information from that third country, in particular because there is no conventional obligation for that country to provide information".
In this respect, the Advocate General emphasizes that "given that it seems to me highly unlikely that the drafters of the EC-Tunisia and EC-Lebanon Agreements intended to grant complete freedom for movements of capital between the Union and these two countries, while certain restrictions could be imposed on movements of capital between Member States or between Member States and third countries, I consider that a restriction on the free movement of capital would not violate the EC-Tunisia and EC-Lebanon Agreements if it were justified by one of the overriding reasons of general interest, more precisely those to which the referring court refers [effectiveness of tax controls and the fight against tax fraud and evasion]".
With respect to at least Tunisia, the problem of obtaining such information would not arise, however, given that Portugal has concluded with it a convention that provides for the exchange of information. Which is moreover clearly assumed by the CJEU in stating: "It is for the referring court to analyze whether the obligations resulting from the Portugal-Tunisia Convention are capable of permitting Portuguese tax authorities to obtain from the Republic of Tunisia information that would permit them to verify whether the requirement relating to the subjection of the company distributing dividends to tax is met. If so, the restriction resulting from the refusal to grant the full or partial deduction, provided respectively in para. 1 and para. 8 of article 46 of the CIRC, cannot be justified by the need to ensure the effectiveness of tax controls".
With respect to Lebanon, in the absence of proof of that requirement by the taxpayer, it would indeed not be possible to obtain such information directly from its tax authorities, given the absence of any mechanism providing for mutual assistance. Consequently, there would be, on a purely abstract level, grounds for refusing the deduction of dividends distributed by the Lebanese subsidiary.
[Footnotes 13-54 preserved as in original]
The understanding of the arbitral decision transcribed was reiterated by the Supreme Administrative Court in its decision of 31-05-2017, handed down in case 0738/17, where it can be read that:
"If, as a result of the interpretation of national legislation, a company resident in a Member State is permitted to effect a full or partial deduction of dividends received from its tax base when these are distributed by a company resident in the same Member State, but cannot effect this deduction when the distributing company is resident in a third country, such interpretation constitutes a restriction on movements of capital between Member States and third countries, which is in principle prohibited by article 63° TFEU."
It is concluded, from the grounds transcribed, that the differentiation, established by national legislation, between the treatment of profits when these are distributed by a company not resident or in Portugal or in a Member State of the European Union is incompatible with the freedom of movement of capital provided for in article 63 of the Treaty on the Functioning of the European Union (TFEU), as this results in a less favorable tax regime for non-residents, and therefore, as the interpretation is contrary to the aforementioned, the decision on the administrative complaint request should be annulled, in light of the error of law.
Having reached this point, it is appropriate to examine the arbitral request for annulment (partial) of the self-assessment act.
In the above-cited decision in arbitral case no. 577/2016-T, regarding this matter, it was ultimately understood that:
"In cases where, as a result of a self-assessment, a decision was handed down rejecting an express request for official revision, it is this decision that remains in the legal order as the act that defines the position of the Tax and Customs Authority before the taxpayer.
As stated in the Arbitral Decision handed down in case n.º 628/2014-T, "the issue placed before the Arbitral Tribunal in contentious proceedings of mere annulment where a decision on an administrative complaint has been handed down, which examined the legality of a self-assessment act, is whether or not the grounds invoked in that decision ensure such legality.
"Indeed, as established jurisprudence, subsequent reasoning is irrelevant."
"In contentious proceedings of mere annulment, as is that which applies in judicial review proceedings and in arbitral proceedings, which are their alternative (article 124(2) of Law n.º 3-B/2010, of 28 April), the legality of the challenged act as it occurred must be ascertained, with the reasoning used in it, with other possible reasoning that could serve to support other acts, of decisional content totally or partially coincident with the act practiced, being irrelevant.
Thus, the Tribunal cannot, when faced with finding that an illegal ground was invoked as support for the decision rejecting the administrative complaint, examine whether it should have been rejected for other reasons, although the Tax Administration is not prevented from, in a new act, being able to invoke other grounds.
Therefore, it is in light of the reasoning of the administrative complaint decision that the question of its legality must be examined and, indirectly, of its self-assessment, which in the case at hand is reconditioned to whether the grounds invoked in that decision justify that the self-assessment was effected in the way it was".(…)
It is, therefore, in light of the reasoning that accompanies it that the legality of the challenged tax act must be examined, making irrelevant, for this purpose, the subsequent reasoning that the Tax and Customs Authority came to place in its Defence.
And further:
With respect to Lebanon, in the absence of proof of that requirement by the taxpayer, it would indeed not be possible to obtain such information directly from its tax authorities, given the absence of any mechanism providing for mutual assistance. Consequently, there would be, on a purely abstract level, grounds for refusing the deduction of dividends distributed by the Lebanese subsidiary.
In practice, however, as was established as proven, the AT never even raised the question. Consequently, it is required that this tribunal restrict itself to the grounds presented to justify the rejection act of the official revision, and therefore cannot consider reasoning presented after the fact."
With all due respect, we do not subscribe to the conclusions of that decision in this respect.
As was noted above, the self-assessment act and the rejection of the administrative complaint are distinct and autonomous acts, practiced at distinct times by distinct entities, and with distinct grounds.
Indeed, while the self-assessment act is an act practiced by the taxpayer, grounded, by operation of law, in its own declaration (which is presumed, in principle, to be true – see article 75(1) of the General Tax Law), and it is the taxpayer who wishes to challenge it who bears the burden of proof of its illegality, the decision act on the administrative complaint is an act practiced by the AT, with the grounds that form part of its reasoning, and it is "the responsibility of the AT to prove the verification of the legal prerequisites (binding) of its action, in particular if aggressive (positive and unfavorable)".
Therefore, we do not consider that the reasoning of the self-assessment act is integrated by the grounds of the administrative complaint decision, nor that the defence that the AT offers in arbitral proceedings to the burden of demonstration of illegality of the self-assessment that the taxpayer bears constitutes reasoning – in any way, including subsequent – of that act, which, as stated, is grounded, exclusively and by force of law, in the taxpayer's declaration.
As stated in the Decision of the Supreme Administrative Court of 03-06-2015, handed down in case 0793/14, "In judicial review following a Tax Authority decision on an administrative complaint or request for official revision of the tax act, the judicial bodies may and must know of all substantive illegalities affecting the tax act in issue".
And further down in the same decision:
"the actual subject matter of the challenge is the assessment act and not the act that decided the complaint, and therefore it is the vices of that and not of this dispatch that are truly in question (in the same sense, among others, the decision of this Supreme Court dated 18/06/2014, rec. n.º 01942/13), also here it makes no sense that the scope of the judicial review of the act deciding the request for official revision is limited by the official revision decision itself, rather it is required that this judicial challenge be able to have as its grounds any substantive illegality (in the present case only this type of illegality is in question) of the tax assessment act, see decision of this Supreme Court dated 08/07/2009, resource n.º 0306/09 [What is at issue, therefore, is mediately the legality of the tax assessment act: to examine the appealed act - to know whether the appellant's claim, that the act be revised, deserved to be rejected or not (albeit presumedly) - implies examining the legality of the assessment]."
It is concluded, therefore, that regardless of the content and outcome of the second and third-instance acts that may have the self-assessment as their object, the validity, in the first instance, of the self-assessment act is based on its conformity with the taxpayer's declaration, and it will be to the taxpayer, in case it wishes recognition of its illegality, that will, in principle, bear the burden of proving such illegality, as follows from article 74(1) of the General Tax Law.
Thus, and summarizing what was developed in the arbitral decision that has just been cited, considering that the differentiation, established by national legislation, between the treatment of profits when these are distributed by a company not resident or in Portugal or in a Member State of the European Union is incompatible with the freedom of movement of capital provided for in article 63 of the Treaty on the Functioning of the European Union (TFEU), as this results in a less favorable tax regime for non-residents, and that therefore the same rules provided for the rest must be applied to them, it is necessary, in order to ascertain the legality of the Claimant's self-assessment, the object of this arbitral action, to verify compliance, or lack thereof, with what is established by national legislation, with respect to the treatment of profits distributed by a company resident or in Portugal or in a Member State of the European Union.
In this respect, article 51 of the Corporate Income Tax Code provides, in the applicable version:
"1 — In determining the taxable profit of commercial or civil companies organized as commercial entities, cooperatives and public enterprises with registered office or effective place of management in Portuguese territory, the following income included in the tax base shall be deducted, corresponding to distributed profits, provided that the following requirements are met:
a) The company distributing the profits has its registered office or effective place of management in the same territory and is subject to and not exempt from Corporate Income Tax or is subject to the tax referred to in article 7;
b) The beneficiary entity is not covered by the fiscal transparency regime provided for in article 6;
c) The beneficiary entity directly holds a stake in the capital of the company distributing the profits not less than 10% and this has remained in its ownership, without interruption, during the year prior to the date when the profits are made available or, if held for a shorter time, provided that the stake is maintained for the time necessary to complete that period.
2 — The provision of the previous number shall apply, regardless of the percentage of stake and the period during which it has remained in ownership, to the income of shares in which the technical reserves of insurance companies and mutual insurance companies have been applied and, equally, to the income from the following companies:
a) Regional development companies;
b) Investment companies;
c) Financial brokerage companies.
3 - Notwithstanding the provision in n.º 1, the regime established there is applicable, on the terms prescribed in the previous number, to general agencies of foreign insurance companies, as well as to permanent establishments of companies resident in another Member State of the European Union and of the European Economic Area that are equivalent to those referred to in the previous number. (Amendment by Law n.º 3-B/2010-28/04)
4 — The provision in n.º 1 is equally applicable, once the conditions referred to therein are verified, to the value attributed in the joint venture to the associate constituted as a commercial or civil company organized as commercial entity, cooperative or public enterprise, with registered office or effective place of management in Portuguese territory, regardless of the value of its contribution in relation to the income that has been effectively taxed and distributed by associates resident in the same territory.
5 - The provision in n.ºs 1 and 2 is equally applicable when an entity resident in Portuguese territory holds a stake, on the terms and conditions referred to therein, in an entity resident in another Member State of the European Union, provided that both entities meet the requirements established in article 2 of Directive n.º 2011/96/EU, of the Council, of 30 November. (Amendment of Law n.º 66-B/2012 - 31/12)
6 - The provision in n.ºs 1 and 5 is equally applicable to income, included in the tax base, corresponding to distributed profits that are attributable to a permanent establishment, located in Portuguese territory, of an entity resident in another Member State of the European Union or of the European Economic Area, in the latter case provided that there is an obligation of administrative cooperation in the field of taxation equivalent to that established within the framework of the European Union, which holds a stake, on the terms and conditions referred to therein, in an entity resident in a Member State, provided that both such entities meet the requirements and conditions established in article 2 of Directive n.º 2011/96/EU, of the Council, of 30 November, or, in the case of entities of the European Economic Area, equivalent requirements and conditions. (Amendment of Law n.º 66-B/2012 - 31/12)
7 — For purposes of the provision in n.ºs 5 and 6:
a) The definition of resident entity is that resulting from the tax legislation of the Member State in question, without prejudice to what is established in the conventions designed to prevent double taxation;
b) The participation criterion in capital referred to in n.º 1 is replaced by that of holding voting rights when this is established in a bilateral agreement.
8 — (Repealed)
9 - If the holding of the minimum stake referred to in n.º 1 ceases to exist before the end of the one-year period, the deduction that may have been effected must be corrected, without prejudice to the consideration of the credit for international double taxation to which there may be entitlement, under the terms of the provision in article 91.
10 - The deduction referred to in n.º 1 is only applicable when the income comes from profits that have been subject to effective taxation.
11 - The provision in n.ºs 1 and 2 is equally applicable when an entity resident in Portuguese territory holds a st[ake]..."
[Document ends abruptly in the original]
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