Transfer Pricing in Intercompany Loans (IRC) – Right of Action Expiry | CAAD 687/2016-T

ARBITRAL DECISION

A…, S.A., legal entity no. …, with registered office at …, Plot…, …, …, …-… … (hereinafter briefly referred to as the "Claimant"), hereby, in accordance with the terms and for the purposes of article 2(1)(a), article 3(1), article 6(2)(b), and article 10(1)(a), all of Decree-Law no. 10/2011, of 20 January (RJAT), and articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, requests the constitution of an Arbitral Tribunal and submits a petition for arbitral ruling, with the grounds that shall be detailed hereinafter.

I – THE PETITION

I.1. Historical Background and Subject Matter of the Petition

On 17 June 2016, the present Claimant filed a gracious complaint (the "Complaint", of which a copy is attached under the designation Doc. 0) challenging the additional assessments of Corporate Income Tax (IRC), municipal surcharge, and compensatory interest contained in the statements of account settlement nos. 2015 … and 2015 … (of which copies are attached, together with the respective statements of IRC assessment and compensatory interest, under designations Docs. nos. 1 and 2), relating to the tax years 2012 and 2013.

The additional assessments of IRC and municipal surcharge for the aforementioned tax years 2012 and 2013, as well as the associated compensatory interest, are summarized in the following table:

Given that the Claimant did not proceed to pay the required IRC and accrued amounts referred to above, the respective enforcement proceedings were instituted, as detailed in the following table:

The Claimant chose to appoint Prof. Dr. António Martins as its arbitrator, while the Respondent designated Dr. José Rodrigo de Castro as its arbitrator, both of whom were accepted by CAAD, and they jointly proposed Counsellor José Baeta de Queiroz as president arbitrator, also accepted by CAAD.

Pursuant to article 11(7) of RJAT, the President of CAAD informed the parties of this appointment on 23/01/2017.

Thus, in accordance with article 11(7) of RJAT, having the time period specified in article 13(1) of RJAT elapsed without the parties objecting, the Collective Arbitral Tribunal was constituted on 07/02/2017.

The Tax and Customs Authority (AT) filed an answer in which, by way of objection, it argued for the rejection of the petition for arbitral ruling. In a separate motion, it subsequently raised the exception of lapse of the right of action—in the terms to be described below—a motion which remained on the record given that the issue would always be reviewed ex officio—and to which the Claimant was able to respond, thereby respecting the principle of contradiction.

By order of 14/03/2017, it was decided to dispense with the meeting provided for in article 18 of RJAT and that the proceedings continue with successive written submissions within a period of 10 days.

The parties submitted their arguments on 24/03/2017 and 07/04/2017, respectively, by the Claimant and the Respondent.

I.2 – Timeliness of the Petition

On 17/06/2016, the aforementioned gracious complaint was filed against the Director of Finance of …, challenging the additional assessments of Corporate Income Tax (IRC), municipal surcharge, and compensatory interest contained in the statements of account settlement nos. …, relating to the tax years 2012 and 2013.

The said assessments were summarized by the Claimant in the following table:

The said gracious complaint against the said assessment acts, filed on 17/06/2016, was not decided within the 4-month period required by article 57(1) of the General Tax Law (LGT), which ended on 18/10/2016, which, in general terms, creates a presumption of implicit rejection thereof, in accordance with article 57(5) of the said LGT.

Given this situation and considering that the petition of objection was filed with CAAD—Arbitral Tribunal on 18/11/2016, it could be concluded to be timely, as it was presented within the 90-day period counted from said date of the presumption of implicit rejection occurring on 15/10/2016, as required by article 10(1)(a) of RJAT, approved by Decree-Law no. 10/2011, of 20/11, in its currently applicable version.

However, the Respondent contends, regarding the Corporate Income Tax assessment for 2012, no. 2015…, of 22/12/2015, notified to the Claimant (ID. DOC. FFCC – 2015…) via electronic postal box through CTT, through a document sent on 26/12/2015, pursuant to doc. 1 attached to this petition, that, considering the notification to have been made on 20/01/2016, at the date of presentation of the complaint on 17/06/2016, the legal period of 3 months provided for this purpose had already expired, in accordance with articles 70 and 102 of CPPT.

The Respondent further contends that even counting the period from the final payment date that ended on 19/02/2016, at the said date when the gracious complaint was filed, the period for presentation thereof had also already expired.

And further that, regarding the Corporate Income Tax assessment for 2013, no. 2015…, of 22/12/2015, notified to the Claimant (ID. DOC. FFCC – 2015…) via electronic postal box through CTT, through a document sent on 29/12/2015, pursuant to doc. 2 attached to this petition, the notification is considered to have been made on 23/01/2016, such that at the date of presentation of the complaint on 17/06/2016, the period for filing a complaint was equally barred.

The Respondent further contends that even counting the period from the final payment date that ended on 24/02/2016, at the said date when the Gracious Complaint was filed, the period for presentation thereof had also already expired.

For its part, the Claimant, in its arguments, contends against the position of AT with the grounds that "A gracious complaint may be filed with the same grounds provided for judicial objection and shall be presented within the period of 120 days counted from the facts provided for in article 102(1)".

And concludes by emphasizing that the period for filing a gracious complaint is 120 days and not 3 months and that these 120 days are counted from the facts provided for in article 102(1) of CPPT, namely the termination of the voluntary payment period (art. 102(1)(a)).

And the Claimant further notes that "the period for presentation of gracious complaint (120 days) no longer coincides with the period for presentation of judicial objection (currently 3 months, but previously 90 days, since the entry into force of Law no. 60-A/2005, of 30 December".

And further emphasizes that:

"(a) The tax act embodied in the Additional Assessment of Corporate Income Tax ("IRC") no. 2015…, in the Statement of Interest Assessment no. 2015 …, and in the Statement of Account Settlement no. 2015…, all relating to the 2012 tax year, which determined the amount of € 84,526.51 to be paid, had as the final payment date 19 February 2016 (see Doc. no. 1-1 attached to the petition for constitution of tribunal and arbitral ruling);

(b) The tax act embodied in the Additional Assessment of IRC no. 2015…, in the Statement of Interest Assessment no. 2015 …, and in the Statement of Account Settlement no. 2015…, all relating to the 2013 tax year, which determined the amount of € 684,657.90 to be paid, had as the final payment date 24 February 2016 (see Doc. no. 2-1 attached to the petition for constitution of tribunal and arbitral ruling);

(c) The period for presentation of gracious complaint is 120 days counting from the termination of the voluntary payment period;

Therefore

(d) The period for presentation of gracious complaint (relating to the 2012 IRC) began on 20 February 2016 and would only end on 18 June 2016, but, as this is a non-working day (Saturday), the termination of the period is transferred to the following working day, i.e., 20 June 2016 (cf. article 279 of the Civil Code)"

Therefore, having the gracious complaint been filed on 17 June 2016—a fact which AT does not contest, it is clearly demonstrated that the complaint was timely filed".

The Respondent AT, in its Arguments, acknowledges that the legal period for filing a gracious complaint is not 3 months as it erroneously indicated, but maintains the "lapse of the right of action invoked, which the Claimant did not address...".

And its position is based on the fact that there exists a "distinction between the tax act of additional assessment, which is reflected in the note demonstrating the assessment of the tax, containing the breakdown of the various items underlying the calculation of the tax/refund due, and the statement of compensation, a mere material operation of account settlement resulting from the necessary movements of compensation between assessments, the cancelled and the additional one,

Such that the gracious complaint challenged is filed against the notes demonstrating the assessment and not against the respective notes demonstrating the compensation, from which it results that the legal period for its presentation is counted in accordance with article 102(b) of CPPT".

And further that "The notification to the Claimant of the additional Corporate Income Tax assessment has a constitutive effect on its tax-legal situation, whereas the account settlement has the nature of a mere material act of compensation between the assessment now being challenged and the assessment that preceded it, with the determination of a final balance to be paid or received, in no way affecting its tax-legal situation already established by the assessment act that preceded it".

From which it concludes, "it remains to apply the law by counting the period of 120 days from the notification to the Claimant of the aforementioned additional assessments, resulting in the period for filing a gracious complaint having expired prior to the presentation of the gracious complaint, which was received by AT services on 17/06/2016".

And that, thus, regarding the notification of the additional assessment for the year 2012, notified to the Claimant "via electronic postal box through CTT, through a document sent on 26/12/2016, from which it results that the Claimant is considered notified on the 25th day following such sending or, if earlier, on the date on which it accessed its postal box, and in the case of these proceedings the Claimant is considered notified on 20/01/2016".

And that, in this manner, counting the period of 120 days for filing a complaint "from the date of notification, this ended on 19/05/2016, prior to the date of presentation of the gracious complaint...".

And further that the same occurred regarding the additional Corporate Income Tax assessment for 2013, notified to the Claimant "via electronic postal box through CTT, through a document sent on 29/12/2016, from which it results that the Claimant is considered notified on the 25th day following such sending or, if earlier, on the date on which it accessed its postal box, and in the case of these proceedings the Claimant is considered notified on 23/01/2016".

And that, in this manner, counting the period of 120 days for filing a complaint "from the date of notification, this ended on 23/05/2016, prior to the date of presentation of the gracious complaint...".

I.3 – Grounds of the Arbitral Objection

Because the Claimant disagrees with the alleged violation invoked by AT of transfer pricing rules in Corporate Income Tax, in the establishment of the financing conditions between the Claimant (as borrower) and B… ("B…"), as parent company, tax resident in the Netherlands, which holds all of its share capital (as lender).

The Claimant considers that the grounds of the alleged violation of transfer pricing rules are "incorrect and legally wrong", as it has already demonstrated in the gracious complaint duly filed and which was not duly decided.

The Claimant further alleges that there are no material disagreements regarding the essential facts.

What is at issue is the set of conditions, and particularly the interest rates that would have been agreed between independent entities that found themselves in circumstances equivalent to those of the Claimant and its parent company, in the context of a loan from the latter to the former.

Therefore, according to the Claimant, regarding the interpretation and application of Law, AT incurs in "several and glaring errors, inevitably leading to an intrinsically contradictory result and completely devoid of support".

The Claimant further emphasizes the incongruence of AT's analysis and its illogic, which "goes so far as to argue that a parent company never incurs any risk when financing a subsidiary because, if the latter's activity does not produce sufficient results to allow reimbursement of the financing obtained, the parent company can always put more of its own money...whereby allegedly it never runs the risk of not recovering what it initially loaned".

II – FACTS PRESENTED BY THE CLAIMANT

1. The Claimant identified above, A…, S.A., (hereinafter A…), legal entity no. …, with registered office at …, …, …, …, …-… … (hereinafter briefly referred to as the "Claimant"), is held 100% by B…, (hereinafter B…), a non-resident entity, with registered office in the Netherlands.

2. The directors of the Claimant are non-resident taxpayers and are also responsible for other group companies.

3. A… had acquired on 30/09/2011[1], through a merger process by incorporation, which occurred on 29/12/2011, the companies C… ("C…") and D… ("D…"), which at that time were part of the E… Group, and developed its activity in the photovoltaic parks sector.

4. B… is, in turn, part of the F… Investment Fund (the "Fund").

5. The said group companies were holders of the necessary administrative licenses and lessees of land that permitted the development of a solar energy production project through the installation of photovoltaic parks.

6. This Group proceeded at the time with divestment in the photovoltaic parks sector, cf. docs. 8 and 9 attached to the petition, alleging that this decision was due to the economic-financial crisis that the country was experiencing, from the 2nd half of 2011, confirmed by the Financial Assistance Programme agreed in May 2011 between the Portuguese authorities, the European Union, and the International Monetary Fund.

7. This economic-financial situation of the country and the high interest rate on Portuguese government bonds, which peaked in January 2012 (17.36%), led to the resort to two loans contracted with the parent company, one in the amount of € 42,898,950.00 and another of € 4,766,550.00, for a total of € 47,665,500.00.

8. And because, as it contends, given the country's financial crisis which restricted access to credit, the Claimant had to resort to the parent company, B…, which, in turn, resorted to the "Fund", also belonging to the Group, for obtaining the loan.

9. The loan to the Claimant subsidiary was granted under the following conditions:

a) Amount: € 47,665,500.00 (forty-seven million, six hundred sixty-five thousand, five hundred euros);

b) Term: 10 (ten) years;

c) Possibility of early repayment, but only at the borrower's discretion and without any penalty;

d) Interest rate: 13% per annum, fixed;

e) Interest calculation: daily accrual on the remaining balance[2]

1. The Claimant emphasizes that, "using real average data, derived from data provided by the Simplified Business Information and from records of loans granted by five Portuguese banking groups, it appears that the average rates were situated in a range between 7.3 and 7.35, with the upper threshold of rates being even higher in the case of loans with guarantees for large companies (7.54%)".

2. It emphasizes that the indicated rates relate to bank loans and therefore are not comparable with loans, and that being average data, there will be cases where, depending on the magnitude of the loan, risks, guarantees, longevity, and other circumstances, the interest rates practiced will necessarily be higher than those average values.

III – FACTS PRESENTED BY THE RESPONDENT IN ITS ANSWER

1. Regarding the characterization of the Group, the Respondent provides nothing new, except the fact that the directors of the Claimant are non-resident taxpayers, who are also responsible for other entities that are part of the group, but which are not specified.

2. Regarding the loans obtained by the parent company, the Respondent only emphasizes the fact that the parent company is part of a Fund, to which it resorted for obtaining the loan, which would have been for a greater amount than indicated, in order to finance other group companies.

3. It further emphasizes that the negotiation of the loan to the Claimant and its conditions were not decided by it, limiting itself to accepting the conditions imposed on it by the parent company.

4. According to the Respondent, the interest rate breaks down as follows:

a) swap interest rate considered at 2.63%;

b) loan spread which was 3%;

c) risk premium for mezzanine antiquity of 7.4%;

1. It emphasizes that the financing costs obtained under these conditions transforms the Claimant's positive operating result into a negative net result, for the fiscal years in question 2012 and 2013, following the beginning of activity, in which it obtained no income.

2. From which the following results:

1. The Respondent emphasizes the existence of a domination relationship between the financing entity and the financed entity, which reveals a strong dependence regarding the negotiation of loans, leaving the latter without capacity to negotiate loan conditions that would be more favorable to it—which puts into question the principle of full competition in financial operations between B… and A….

2. It is not stated, however, whether the financed entity could have obtained the loan it needed in Portugal under more favorable conditions.

3. The Respondent highlights that the central issue lies in the risk premium associated with the loan, of 7.4%, justified according to the Claimant as being a mezzanine loan, long-term and with a high risk profile.

4. Now, this circumstance, the Respondent emphasizes, leads to the fact that "the information contained in the transfer pricing file does not accord with reality, since from the outset it is entirely impracticable the possibility of conversion of the loan into a property right, since that already exists"[3].

5. But the Respondent contends that this classification given to the loan, justifying the associated risk rate, makes no sense, since the financing entity is from the outset, at the start, the holder of 100% of the capital of the financed subsidiary.

6. On the other hand, the attribution of a risk rating would only make sense when the financed entity is an independent entity to which a probability of insolvency (default) can be assigned, which also would never be the case of the financed entity, as it is held 100% by the parent company and the latter would not permit it.

7. Therefore, in a Group of companies as the one being analyzed, the insolvency risk of the Claimant subsidiary does not exist, the Respondent argues, particularly because investors are only willing to finance B… if the Group assumes the debts of that entity, even if that guarantee is only implicit, in case of insolvency of its subsidiary.

8. Therefore, the Respondent understands that "the annual rate of 13% incorporates a margin that proves entirely unwarranted, as it is intended to remunerate the credit risk which, in fact, does not exist, since B… is the holder of 100% of the capital of the present Claimant".

9. It further states that "if this risk component is expunged, there remains an annual fixed rate of 5.63%, which breaks down into two aspects that seem entirely legitimate, specifically the swap interest rate of 2.63% and the loan spread of 3%".

10. It emphasizes that the remuneration of 5.63% is equal to the interest rate expressed by the Bank of Portugal, as stated on p. 21 of the Final Report of Tax Inspection, and is compatible with the most appropriate method in light of the characteristics of the operations under analysis and the information available, in accordance with article 4(2) of Ordinance no. 146-2001, of 21/12.

IV – CASE MANAGEMENT

The Arbitral Tribunal is competent and is duly constituted.

The parties have legal personality and capacity and have standing (articles 4 and 10(2) of RJAT and 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

Regarding the Dilatory Exception Raised by the Respondent

1. What is at issue in this controversy is the interpretation and joint application of legal provisions contained in article 137 of the Corporate Income Tax Code ("CIRC") and articles 70(1) and 102(1), both of the Code of Tax Procedure and Process (CPPT), which are transcribed below, that is, specifically, whether the gracious complaint and, consequently, the arbitral objection were presented outside the prescribed period.

Let us examine:

Corporate Income Tax Code:

"CHAPTER VIII

Guarantees of Taxpayers

Article 137

Complaints and Objections

1 — Corporate Income Tax taxpayers, their representatives, and persons jointly or subsidiarily liable for payment of the tax may complain or object to the respective assessment, made by the tax administration services, with the grounds and in the manner established in the Code of Tax Procedure and Process.

2 — The right referred to in the preceding number is equally granted with respect to self-assessment, withholding at source, and payments on account, in the manner and periods provided for in articles 131 to 133 of the Code of Tax Procedure and Process, without prejudice to the provisions of the following numbers.

3 — Complaint by the holder of income or his representative regarding withholding at source of amounts wholly or partially wrongly withheld takes place only when such withholding has a definitive character and shall be filed within the period of two years counting from the termination of the period for delivery, by the withholding agent, of the tax withheld at source or from the date of payment or placing at the disposal of the income, if later.

4 — Objection to the acts mentioned in no. 2 is necessarily preceded by a complaint to the competent director of finances, in the cases provided for in the Code of Tax Procedure and Process.

5 — The entities referred to in no. 1 may also complain and object to the taxable matter determined which does not give rise to assessment of Corporate Income Tax, with the grounds and in the manner established in the Code of Tax Procedure and Process for complaint and objection of tax acts.

6 — Whenever, with the tax paid, it is determined, in gracious or judicial proceedings, that there was error attributable to the services in the assessment, indemnifying interest is assessed in accordance with article 43 of the General Tax Law.

7 — The right referred to in no. 1 is equally applicable to the special payment on account provided for in article 106, in the manner and with the grounds established in article 133 of the Code of Tax Procedure and Process.

Note — The CIRC was republished by Law no. 2/2014 - 16/01, maintaining the wording of this article"

CPPT - Code of Tax Procedure and Process

"Article 70

Presentation, Grounds and Period for Gracious Complaint

1 - A gracious complaint may be filed with the same grounds provided for judicial objection and shall be filed within the period of 120 days counted from the facts provided for in article 102(1) (Wording given by Law no. 60-A/2005, of 30 December)

2 - (Repealed by Law no. 60-A/2005, of 30 December)

3 - (Repealed by Law no. 60-A/2005, of 30 December)

4 - In case of subsequent document or judgment, as well as any other fact that could not have been invoked in the period provided for in no. 1, this is counted from the date on which it became possible for the complainant to obtain the document or learn of the fact.
(Wording given by Decree-Law no. 238/2006, of 20/12)

5 - If the grounds of the gracious complaint consist of a public document or judgment, the period referred to in the preceding number is suspended between the request and issuance of the document and the filing and decision of the judicial action.

6 - The gracious complaint is presented in writing at the local peripheral service in the area of the taxpayer's domicile or registered office, the situation of the assets, or the assessment, and may be presented orally through reduction to minutes in case of manifest simplicity.
(Wording given by Decree-Law no. 238/2006, of 20/12)

7 - The gracious complaint may also be sent by electronic data transmission, in the manner defined in an ordinance of the Minister of Finance.
(Added by Decree-Law no. 238/2006, of 20/12)

(former wording)

Note: Art. 58 no. 2 of Law 60-A/2005-30/12 - The new period for complaint established in article 70 of CPPT is only applicable to periods that begin after the entry into force of said law.

"SECTION II

Of the Petition

Article 102

Judicial Objection. Period for Presentation

1 - Objection shall be filed within the period of three months counted from the following facts: (Wording of law no. 66-B/2012, of 31 December)

a) Termination of the period for voluntary payment of tax obligations legally notified to the taxpayer;

b) Notification of other tax acts, even when they do not give rise to any assessment;

c) Service of summons on subsidiary liable parties in enforcement proceedings;

d) Formation of the presumption of implicit rejection;

e) Notification of other acts that may be the subject of independent objection in accordance with this Code;

f) Knowledge of acts injurious to legally protected interests not covered in the preceding paragraphs.

2 - (Repealed by article 16(d) of Law no. 82-E/2014, of 31 December)

3 - If the ground is nullity, objection may be filed at any time.

4 - The provisions of this article do not prejudice other special periods established in this Code or other tax laws".

1. It is therefore the joint application of the transcribed legal provisions that must be appreciated regarding the alleged dilatory exception.

2. To that end, it is important to note, taking into account the facts previously referred to, that the Respondent, as Tax and Customs Authority ("AT"), has created, whenever there are additional assessments of Corporate Income Tax, three types of documents, which are notified to taxpayers, namely:

a) - Statement of IRC Assessment, which serves as the basis for the amount determined in the additional assessment and the amount to be paid, including in that same document a standard notification text informing the taxpayer "You may complain or object in accordance with the terms and periods established in articles 137 of CIRC and 70 and 102 of CPPT, counted continuously after the date of this notification, which is considered made at the moment the recipient accesses the electronic postal box or, in the case of failure to access it, on the 25th day following its sending".

b) - Statement of Compensatory Interest Assessment, whenever applicable, as was the case—it is therefore merely an informational document.

c) - Statement of Account Settlement, where the balance of the assessment of the tax and interest is determined and which also contains a second notification with the following text: "You are hereby notified to, by the indicated deadline, make payment of the balance determined, in accordance with the attached statement.

The notification is considered made at the moment of access to the electronic postal box or, in case of non-opening, on the 25th day following its sending, in accordance with numbers 9 and 10 of article 39 of the Code of Tax Procedure and Process (CPPT).

If payment is not made within the aforementioned period, enforcement proceedings shall follow".

This is followed by a Reference to the Payment Code (with information on the means—Multibanco, CTT, Internet, Credit Institution, or Collection Sections of the Finance Services), as well as the Amount to Be Paid and the Final Payment Date.

1. From what has just been referred to, it seems to be concluded:

a) That the notification of the Statement of Assessment is the fundamental document to contest the legality of the assessment in question and that the period is counted in accordance with the provisions therein, "considered made at the moment the recipient accesses the electronic postal box or, in the case of failure to access it, on the 25th day following its sending".

b) That the notification contained in the Statement of Account Settlement is intended to notify the taxpayer of the amount to be paid, the means, the reference to use, and the final payment date.

1. However, this manner of proceeding conflicts with the taxpayer guarantees embodied in articles 137, no. of CIRC, in article 70(1) of CPPT, combined with article 102(1)(a) of CPPT.

2. In fact, if one were to attend exclusively to the tenor of the notification in the Note of Assessment—as the Respondent does—it could occur, in the extreme, that in case of delay in notification of the Statement of Account Settlement, the period for complaint counted in the manner the AT advocates could even expire before the taxpayer is notified of the final payment date.

3. On the other hand, AT cannot fail to respect, for purposes of beginning to count the period for complaining about the assessment, the provisions of article 102(1)(a) of CPPT—which, in the case at hand—is the final payment date contained in the Statement of Account Settlement and not from the moment the recipient accesses the electronic postal box, or in the absence of access to it, on the 25th day following its sending—which, obviously, can rarely coincide with the final payment date.

4. This type of notification may be correct for other situations, particularly in situations where there is no tax to be paid and, in that case, given the provisions of article 102(1)(b) of CPPT, the manner of counting the period for complaint or objection is already counted in accordance with the text of the notification made.

5. The same does not occur in the case under analysis, as it is not possible to disregard the provisions of article 102(1)(a) of CPPT.

6. In order for AT to comply with the legal requirements contained in articles 137 of CIRC, 70(1), and 102(1)(a), both of CTT, it would have to add to the notification of the Note of Assessment the following:

You may complain or object in accordance with the terms and periods established in articles 137 of CIRC and 70 and 102 of CPPT, counted continuously after the date of this notification, which is considered made at the moment the recipient accesses the electronic postal box or, in the case of failure to access it, on the 25th day following its sending, except if this date is prior to that which appears in article 102(1)(a) of CPPT, when applicable, in which case the period shall begin on the date referred to in this legal provision.

1. As this does not occur, this Collective Arbitral Tribunal understands and decides as follows:

a) - That the manner and effects of the notification contained in the Notes of Assessment of IRC for the years 2012 and 2013 in question, respectively nos. 2015 …, of 22-12-2015, in the amount of € 84,526.51 and 2015 …, of 22-12-2015, in the amount of 684,657.90, are inadequate to the guarantees of the taxpayer, in the situation under analysis, as they are in conflict with the legal provisions cited, particularly article 102(1)(a) of CPPT; and

b) - Consequently, they cannot be taken into account for purposes of beginning the counting of periods for presentation of the gracious complaint, such that

c) - The extemporaneousness of the presentation of the petition of complaint in question lacks legal foundation, which determines,

d) - Therefore, that this Tribunal considers the dilatory exception not to be verified, as it lacks, as has been demonstrated, legal foundation.

It should further be stated that it is not the terms of the communications made by AT that establish the periods for reaction by taxpayers, as those periods are established by law, and cannot be reduced by the manner in which AT effects the notifications.

In the present case, taking into account the period for voluntary payment (19 and 24/2/2016), and the date of presentation of the complaint (17/6/2016), the Claimant was within the period to file it, in accordance with article 102(1)(a) of CPPT.

V – THE FACTS

V.1 - Proven Facts

From the critical analysis of the documents on file, and as they have not been objected to by the parties, the following facts are taken as proven, having relevance to the decision:

• A… is a public limited company, with registered office in Portuguese territory, held 100% by B…, with registered office in the Netherlands, (B…) and has as directors non-resident taxpayers who are also responsible for other entities that are part of the group.

• A… obtained from B… two loans in an amount of approximately 48 million euros on which they bear a financing cost at a fixed annual rate of 13%, as detailed in the following table:

• B… is part of a Fund, for obtaining financing from international capital markets, for financing the Group in which it is inserted.

• The fixed annual interest rate of 13%, now in dispute, breaks down into the following components:

• swap interest rates considered at 2.63%

• loan spread which was 3%;

• risk premium considered for the type of financing, which the claimant designated as "mezzanine" of 7.4%.

• The loans have the following structure:

• amount: 47,665 million euros;

• term: 10 years

• possibility of early repayment at the discretion of the borrower, without penalty

• annual fixed interest rate: 13%

• Payment of interest: at the end of 10 years; or with some early repayment, at the discretion of the borrower

• The financing costs borne by the Claimant transformed a positive operating result into a negative net result, in the fiscal years 2012 and 2013.

• The Tax Inspection Report (RIT) analyzed the application to the described case of the principle of full competition (cf. article 63 of CIRC) in the financial operations that have been carried out between B… and A…, regarding the remuneration of financing received by B…—composed of the three items previously quantified—and concluded that:

i) The swap interest rates of 2.63% contracted in the loans granted by the Dutch company to A…, correspond to a medium/long-term rate for different periods with the characteristic of a fixed interest rate as a reference for the interbank market.

ii) The loan spread component is intended to remunerate the entities that grant financing, for their gain, for the expenses underlying the financing, and also for the risk associated, from which it results that the parent company arranged to be remunerated at 3% for the spread it considered to add to the interest rate. The set of the 2.63% interest rate plus the 3% spread determines an effective remuneration rate of 5.63%.

• The RIT expresses that this comparable is made with an interest rate obtained from the Bank of Portugal, at the date on which interest payments began, 2012-09-30, which was 5.63%.

• Regarding the component of remuneration received by B… for the credit risk premium incurred in intra-group operations, on the order of 7.4%, AT raised the question of whether B… actually incurs this credit risk in such a way as to justify the existence of compensation of this nature.

• According to the RIT, such a risk premium, with these characteristics, would only be justified between an external financing entity and B…, since there would be no domination relationship.

• A mezzanine loan is a more expensive source of financing for a company than other guaranteed credit or privileged credit due to its lower classification and allows the lender the right to convert the loan into a property right or equity participation (of the company) if the loan is not repaid within the period and in full.

• The inspection understood that the information contained in the transfer pricing file regarding the mezzanine loan does not accord with reality; since, from the outset, it is impracticable for the possibility of conversion of the loan into a property right to exist because it already exists. The Inspection Report considered that such a prerogative that the financing entity, in case of non-compliance, could convert the loan into a property right or equity participation, does not apply in this case, since the financing entity is already and from the start the holder of the property right and equity participation.

• The component called risk premium (7.4%) is intended to remunerate the entity that grants the financing for the additional risk it incurs. The main factor that determines the definition of that risk premium is, normally, the credit rating of the financed entities (creditworthiness), since this is merely a notation assigned based on the probability of insolvency (default) of the entity in question.

• AT considered that, typically, the attribution of that risk notation is made on the assumption that the financed entity is an independent entity. But regarding the remuneration of the entity that centralizes the Group's financing, AT evaluated whether the credit risk it assumes (and the corresponding remuneration) should be estimated considering normal market conditions or whether the default risk is implicitly reduced due to membership, and the membership of financed entities, in the same Group of companies, since its parent company would not permit a situation of insolvency of a subsidiary with strategic importance to the Group. Thus, such risk would not be present.

• Having thus expunged this component (risk premium for mezzanine antiquity of 7.4%), there remains a fixed annual rate of 5.63%, which breaks down into two elements, specifically the swap interest rate of 2.63% and the loan spread of 3%.

• The effective remuneration of 5.63% is, for AT, equal to the interest rate expressed by the Bank of Portugal, which places this remuneration as remuneration compatible with the method of comparable market price, the most appropriate method in light of the characteristics of the operations under analysis and in light of the information available, in accordance with article 4(2) of 1446-C/2001, of 21/12.

• The adjustment made to the taxable income for the fiscal years 2012 and 2013, resulted from the exclusion from the 13% fixed interest rate of the risk component of 7.4%, as detailed in the following table:

• As a result of the understanding expressed by the tax inspection, assessments nos. 2015…, relating to IRC, municipal surcharge, and compensatory interest for the 2012 fiscal year, in the total of 84,526.51, and 2015…, relating to IRC, municipal surcharge, and compensatory interest for the 2013 fiscal year, in the total of 684,657.90, corresponding to the 2013 fiscal year, were issued on 22/12/2015.

• The final periods for voluntary payment occurred on 19/2/2016 (year 2012) and 24/2/2016 (year 2013).

• The Claimant did not voluntarily make the said payments, coming to do so in enforcement proceedings.

• The Claimant filed against the identified assessments a gracious complaint, on 17/6/2016, which did not receive a ruling.

V.2 - Unproven Facts

With relevance to the decision of the case, no other facts were proven.

VI. THE LAW

A - Rationale and Decision on Transfer Pricing

1. The Applicable Legal Framework

The parties agree that there is a question to be resolved regarding the application of transfer pricing rules. At the time of the facts, and for what is relevant here, the essential elements of the applicable legal framework were article 63 of CIRC and articles 5 and 6 of Ordinance 1446-C/2001, which are transcribed below (emphasis of the tribunal).

Article 63
Transfer Pricing

1 — In commercial transactions, including, in particular, transactions or series of transactions relating to goods, rights, or services, as well as in financial transactions, carried out between a taxpayer and any other entity, subject or not to Corporate Income Tax, with which it is in a situation of special relationships, terms or conditions substantially identical to those that would normally be agreed, accepted, and practiced between independent entities in comparable transactions must be agreed, accepted, and practiced.

2 — The taxpayer must adopt, for determining the terms and conditions that would normally be agreed, accepted, or practiced between independent entities, the method or methods capable of ensuring the highest degree of comparability between the transactions or series of transactions it carries out and others substantially identical, in normal market situations or in the absence of special relationships, taking into account, in particular, the characteristics of the goods, rights, or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions they perform, the assets used, and the allocation of risk.

3 — The methods used must be:

a) The method of comparable market price, the resale price method reduced, or the cost plus method;

b) The profit split method, the net margin method of the transaction, or another method, when the methods referred to in the preceding paragraph cannot be applied or, being applicable, do not allow obtaining the most reliable measure of the terms and conditions that independent entities would normally agree, accept, or practice.

Article 63 of CIRC establishes, in line with the OECD Model Convention on Double Taxation and its respective Transfer Pricing Guidelines, the so-called principle of full competition, requiring that, for tax purposes, transactions between related parties be carried out in the terms and conditions that would be established between independent entities in comparable transactions.

That is, and in the case at hand, the interest rate to be considered would be the one that an independent entity (e.g., a national bank or other) would charge the claimant in a comparable transaction, taking into account the comparability factors provided for in the law, cited above.

The practical application of such principle is not an easy task, in light of questions emerging from the comparability of transactions and even the fact that some real and financial transactions carried out within groups do not have characteristics comparable to those realized between independent entities.

The assessment of comparability must take into account the factors listed, by way of example, in article 63(2), namely: "the characteristics of the goods, rights, or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions they perform, the assets used, and the allocation of risk."

Additionally, Ordinance 1446-C/2001 elaborates on some of the concepts that article 63 of CIRC establishes. For the specific case, articles 5 and 6 of said Ordinance are important, which provide:

"Article 5

Comparability Factors

For the purposes of the preceding article, the degree of comparability between a related transaction and an unrelated transaction shall be evaluated, taking into account, in particular, the following factors:

a) The specific characteristics of the goods, rights, or services that, being the subject of each transaction, are capable of influencing the price of the transactions, in particular the physical characteristics, quality, quantity, reliability, availability, and volume of supply of goods, the form of negotiation, the type, duration, degree of protection, and benefits anticipated from use of the right, and the nature and extent of services;

b) The functions performed by the entities involved in the transactions, taking into account the assets used and risks assumed;

c) The contractual terms and conditions that define, explicitly or implicitly, the manner in which responsibility, risks, and profits are allocated among the parties involved in the transaction;

d) The economic circumstances prevailing in the markets in which the respective parties operate, including their geographical location and size, the cost of labor and capital in the markets, the competitive position of buyers and sellers, the phase of the marketing circuit, the existence of substitute goods and services, the level of supply and demand, and the degree of general development of the markets;

e) The strategy of the companies, considering, among the aspects capable of influencing its functioning and normal conduct, the pursuit of research and development activities for new products, the degree of diversification of activity, risk control, market penetration schemes or maintenance or strengthening of market share, and as well the life cycles of products or rights;

f) Other characteristics relevant to the transaction in question or to the companies involved.

Article 6

Comparable Market Price Method

1 - The adoption of the comparable market price method requires the highest degree of comparability with emphasis both on the subject and other terms and conditions of the transaction as well as on the functional analysis of the entities involved.

2 - This method can be used, in particular, in the following situations:

a) When the taxpayer or an entity belonging to the same group carries out a transaction of the same nature having as its subject a service or identical or similar product, in quantity or value analogous, and in terms and conditions substantially identical, with an independent entity in the same or similar markets;

b) When an independent entity carries out a transaction of the same nature having as its subject a service or identical or similar product, in quantity or value analogous, and in terms and conditions substantially identical, in the same market or in similar markets.

3 - Whenever a related transaction and an unrelated transaction are not substantially comparable, the taxpayer must identify and quantify the effects caused by the differences existing in transfer prices, which must be of a secondary nature, proceeding with the necessary adjustments to eliminate them, in order to determine an adjusted price corresponding to that of a comparable unrelated transaction."

2. The General Problem of Transfer Pricing in Intra-Group Loans: A First Conceptual Perspective

The question of intra-group loans, when analyzed from a transfer pricing perspective, does not appear to be one of the simplest. The fungibility of financing means, the contractual flexibility existing within a group, the relationships between companies and their impact on risk, all of this and much more leads to, for example, Matt Courtnage, in "Important Considerations in the Pricing of Intercompany Loans and Financial Guarantees", Insights, 2015, p. 19, stating the following (translation of the tribunal):

"Over the past years, tax authorities have devoted increasing attention to intra-group loans and financial guarantees in terms of tax treatment and considerations regarding their respective pricing. This attention is especially evident in the international arena, where cross-border financial transactions, involving loan rates and guarantee values, can lead to erosion of the taxable base. For these financial transactions between companies there is great complexity, both for the taxpayer and for tax authorities in determining a reasonable transfer price."

The same author emphasizes that the American tax authority (Internal Revenue Service- IRS), relies on the principle of full competition to calculate the comparable interest rate to apply in a financial transaction between related entities. And mentions:

"Whatever methodology is used to price a related-party loan or financial guarantee, an appropriate arm's-length rate of interest for an uncontrolled, comparable transaction should be the guiding benchmark. (p.20)

Finally, the author emphasizes that in financing transactions between related entities, it is important to ascertain the benefit that an entity can obtain from its association with the parent company, which can assume various modalities, among them the implicit or the explicit support. He does so in the following terms:

"A subsidiary generally receives some level of implicit benefit from its relationship with the parent company. This benefit is referred to as a "passive association benefit."

As an example, a subsidiary is likely to have easier access to credit markets than a stand-alone entity, even without any explicit backing from the parent. This type of association and related benefit is deemed passive in nature and is increasingly recognized in transfer pricing cases."

The existing OECD guidance on intra-group loans and financial guarantees is somewhat vague and open to interpretation. It is, in fact, the OECD itself, in its Guidelines, in §1.65, which acknowledges the complexity in the tax treatment of intra-group loans, even drawing attention to questions of substance regarding the economic nature of such transactions.

In said paragraph, the distinction between loans and equity contributions is emphasized, in the case where, in the economic-financial conditions of the debtor as an independent entity, it would not have access to a loan from another independent entity, and the tax administration may recharacterize the eventual loan as capital entry.

It does so in the following terms:

"1.65 The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterize it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital."

It should be noted that, because of its conceptual relevance, in specialized literature, and as will be explored further below, the rating of the debtor entity as a stand-alone entity—or unrelated independent entity—is regularly cited as an important element in the analysis of transfer pricing in intra-group loans.

In fact, since rating, or scoring, are essential for assessing the level of risk, and since interest rate spreads are derived, among other elements, from the degree of debtor risk, it is understood why this is so.

In the publication "Transfer Pricing Methodology for Intra-Group Lending & Treasury Transactions", by FTI Treasury International House[4], 2015, p.6, this principle is referred to as follows (emphasis of the tribunal):

"When deploying any transfer pricing methodology, it is necessary to apply a credit rating score to each individual subsidiary so that a comparable price can be assigned, the main elements of which are:

Or in free translation by the tribunal, what is made explicit here is the necessity of taking into account the degree of risk that the related entity (debtor) would have if it were rated, regarding risk, as an independent entity. The factors to be considered are both of an economic-financial nature (e.g., profitability, financial policy) and of another kind (e.g., country risk).

Finally, further reinforcing the idea of complexity in dealing with the question of comparability of loans and rates, let us take as reference the following range of situations, taken from SingaporeLawDocs.com, 2015[5]:

For the authors of this analytical scheme, what is intended is to calculate the interest rate, on the basis of the principle of full competition, of a loan between X (parent company) and Y (subsidiary). Thus, the comparables would be:

• if there is a loan from X to an independent entity, in comparable conditions, then the rate of the "A" type loan (see chart above) would be the one to use as a comparable in the mutual agreement of X to Y;

• if a Type A loan is not available, but a Type "B" is available, that is, if the rate at which Y obtains funds from an independent entity is known, such rate can be used as a reference;

• the Type "C" loan can also be used, using as a basis for constructing the comparable rate the loan that X obtains from an independent party under comparable conditions.

As is apparent, the situations described can be of varying degrees of complexity, in light of the functions performed, the guarantees, credit risk, market risk, etc., that present themselves in each situation.

In any case, the assessment of the principle of full competition, based on the comparability of transactions, is one of the complex and vast areas in the context of transfer pricing, when applied to intra-group loans.

Let us now, in summary, see how the claimant and AT treated these issues and, subsequently, by comparing the methods applied, the law, doctrine, and jurisprudence (national and international) the tribunal arrives at a reasoned decision.

3. The Treatment the Claimant Gave to Compliance with the Principle of Full Competition

The claimant presents a transfer pricing file, prepared by company G…, which, in summary, follows the following steps and uses the grounds set out below, to calculate the 13% rate to apply to the loans here at issue.

a) It describes the functions of the claimant and groups them into "investment management", "project management", and "loan origination and management".

b) It describes the risks to which the claimant is subject and which would be:

• credit risk, in light of the eventual non-collectability of debt from its ordinary activity, in light of financial difficulties of customers. The risk that this could result in difficulties in payment of the loans obtained from the parent company is on the side of the parent company (B…), given the contractual terms,

• market risk, in light of the fluctuations that the solar energy market may face,

• operational risk, resulting from the management of projects being able to face unforeseen cost constraints,

• strategic and reputational risk, if investments are systematically not profitable.

c) It selects the transfer pricing method most appropriate to the case at hand, which it considers to be the comparable market price method. As there are no bank loans (independent entities) to the claimant, the analysis of the file moves to the search for a sample of external comparable transactions. Thus, on p. 17 and following of the file, the method of calculation of the spread of senior loans is described, that is, those with the lowest risk and highest level of guarantees. The median obtained for the spread of the interest rate for this type of loans was 3%.

d) It then takes into account the nature of "mezzanine" loans of the loans entered into between A… and B.... Such loans are subordinated in nature, convertible to capital in case of debtor difficulties, and in case of liquidation, are at the lowest level of recoverability. Thus, it was understood that there is an additional risk compared to senior loans. Such additional risk, obtained by resorting to a database with interest rates of transactions considered comparable, was calculated at 7.4%.

e) Finally, the base rate in a fixed-rate loan (the equivalent to Euribor in a variable-rate loan) was determined at 2.63%.

f) Adding these components: 2.6%+3%+7.4% = 13%, which indicates the fixed rate used in the loans at issue.

As will be seen below, AT did not agree with this methodology and calculated another interest rate to use in these transactions.

4. AT's Adjustment: Summary of Its Rationale

In the RIT, p.21, it is stated that:

"3.9.2 – Evaluation of Prices Practiced

In these circumstances we first have a domination relationship between the financing entity and the financed entity, which therefore immediately reveals a strong dependence regarding the negotiation of loans. Thus, the financed entity does not possess capacity to negotiate loan conditions that would be more favorable to it. This situation puts into question the principle of full competition in the financial transactions that have taken place between B… and A…, regarding the remuneration of financing received by B…, as follows.

• swap interest rates considered at 2.63%

• loan spread which was 3%;

• risk premium for mezzanine antiquity of 7.4%;

1. The swap interest rates contracted in the loans granted by the Dutch company to A…, correspond to a medium / long-term rate for different periods with the characteristic of a fixed interest rate as a reference for the interbank market.

2. Knowing that the component of the loan spread is intended to remunerate the entities that grant financing, for their gain, for the expenses underlying the financing, and also for the associated risk, then we have that the parent company arranged to be remunerated at 3% for the spread it considered to add to the interest rate. The set of the 2.63% interest rate plus the 3% spread determines an effective remuneration rate of 5.63%, which is equal to the interest rate expressed by the Bank of Portugal and referred to above.

3. The Claimant understands that these loans are comparable to mezzanine loans, considering that they have a relatively high risk profile, from which it also arranges to be remunerated by a risk premium. Regarding the component of remuneration received by B… for the credit risk premium incurred in intra-group operations, on the order of 7.4%, the question is raised whether B… actually incurs this credit risk in such a way as to justify the existence of compensation of this nature. Such risk premium with these characteristics would only be justified between the external financing entity and B…, since there would be no domination relationship.

In the first place "A mezzanine loan is a more expensive source of financing for a company than other guaranteed credit or privileged credit due to its lower classification and allows the lender the right to convert the loan into a property right or equity participation (of the company) if the loan is not repaid within the period and in full". Thus, the information contained in the transfer pricing file does not accord with reality since from the outset it is entirely impracticable the possibility of conversion of the loan into a property right since that already exists.

This prerogative that the financing entity, in case of non-compliance, could come to convert the loan into a property right or equity participation, does not apply in this case, since the financing entity is already and from the start the holder of the property right and equity participation. Therefore, classifying this loan as being a high-risk mezzanine loan is not justified because credit risk is more about business risk. If any risk still exists, it is already contemplated in the spread previously referred to.

This component called risk premium is intended to remunerate the entity that grants the financing for the credit risk it incurs. The main factor that determines the definition of this risk premium is, normally, the credit rating of the financed entities (creditworthiness), since this is merely a notation attributed based on the probability of insolvency (default) of the entity in question.

Usually, the attribution of this risk notation is made on the assumption that the financed entity is an independent entity. However, a question that is important to analyze regarding the remuneration of the entity that centralizes the Group's financing is whether the credit risk it assumes (and the corresponding remuneration) should be estimated considering normal market conditions or whether the default risk is implicitly reduced due to membership, and the membership of financed entities, in the same Group of companies, since its parent company would not permit a situation of insolvency of a subsidiary with strategic importance to the Group. For that reason, it is to be expected that the credit risk of the various subsidiaries of the Group, both the one that finances and those that are financed, is not evaluated on a basis of independence of those entities, but rather in a Group perspective, i.e., that it is similar to that of the parent company, in this case the Fund.

Thus, whenever the Fund resorts to the market, investors know that they are financing a set of companies that are part of the group and make their decisions based on that reality.

Furthermore, another question that arises concerns the need to determine which entity, within the Group, assumes and controls positions of risk, concentrating the definition of policies, decision-making, and the actual execution of operations. However, such control, understood as the capacity to make decisions about assuming or not a certain level of risk and about the management of that risk, will only be possible if the functional allocation associated with the allocation of risk among the various entities of the Group is invested with economic substance, as is moreover referred to in paragraph 1.49 of the OECD Guidelines.

However, as we saw in the preceding point, although it can be admitted that B… develops some tasks at the level of assembly and management of the Group's financial operations, it will not at all be admissible the idea that it is the Dutch entity that defines the strategies and policies of financing of the Group. In that sense, it is the Fund that assumes and manages the risk, taking into account the strategies and policies of management defined for the Group. In these terms, although there are no formal guarantees, it can be assumed that investors are only willing to finance B… if the Group assumes the debts of that entity, even if that guarantee is only implicit, and there is a reasonable expectation that, in case of insolvency on the part of the issuing entity, investors will, still, be compensated for the capitals invested.

The rates practiced incorporate, for all the reasons listed, a margin that proved to be unwarranted, insofar as it is intended to remunerate B… for a credit risk which that entity does not truly incur."

What the tribunal has to decide is therefore whether the interest rate that AT used (5.6%) can be considered an interest rate of full competition in the transactions in question, taking into account the legal provisions of article 63 of CIRC and Ordinance 1446-C/2001, referred to above. This analysis is what will be carried out below.

5. Appreciation of the Legal and Economic Aspects of the Case

5.1 Rating, Spread and Interest Rate: General Aspects

It was previously considered that if transfer prices must take into account the comparability of related transactions with transactions carried out between independent entities, in similar circumstances. Thus, the analysis of an interest rate practiced in a financing transaction between related parties must begin with an assessment of the rating of the debtor as an independent entity.

Subsequently, it will be important to consider the impact of belonging to a group, the guarantees possibly provided or received, the economic and market circumstances, the contractual structure of the transaction, and how all of this can influence the interest rate to be charged.

Let us see, for now, what variables influence the rating. A banking entity, or other lender, when analyzing a company for purposes of granting loans, will be particularly interested in ascertaining the probability of satisfactory service of the debt of such loans (repayments and interest).

Financial theory and practice have developed models for risk assessment (scoring or rating) that assign to companies requesting credit a given risk score or notation. These models normally use the following variables as potentially associated with repayment capacity: liquidity (current assets/current liabilities), solvency (equity/liabilities), asset turnover (sales/assets), profitability (operating result/assets or operating result/sales). In summary, indicators that show efficiency or economic profitability and also financial balance in the short and long term.

In international financial literature[6], studies on "financial distress," or corporate financial risk and its consequences, are known. A. Damodaran presents what he calls long-term solvency and default risk ratios; that is, financial ratios that indicate capacity or incapacity to meet corporate obligations. Of these ratios the author highlights:

• Operating result/Interest paid

• EBITDA / Disbursements relating to fixed expenses

• Financial debt/Equity

• Debt / (Liabilities + equity)

At the national level, it is important to mention the study by NEVES[7] which, seeking to determine the variables that would best serve to analyze the probability of insolvency, found the following:

• Retained earnings/Assets

• Current assets/Total assets

• Gross self-financing margin/Assets

• State debts/Sales

• Short-term loans/Assets

In summary: both in international literature and in national theoretical and empirical literature, there are common denominators in the variables that best predict the financial deterioration of a company. The relationships between equity and assets, the proportion between current assets and current liabilities, results and profitability of invested capital emerge regularly as statistically significant. Beyond this, banking models for risk assessment include qualitative variables such as, for example, the quality of management, the perception of sectoral risk of activity, the potential market the company faces, or competition. Additionally, the decision to grant loans passes, as is well known, through the type of guarantees provided: real or personal. In real guarantees the amount and type of assets the company presents stands out, or exiguous personal guarantees to partners.

Finally, it should be emphasized that, after the decision to grant loans, banking contracts include the so-called "safety clauses". These impose on companies, as a rule, that during the life of the loan, certain indicators (e.g., results/sales; solvency) do not fall below contractualized values, which allows periodic monitoring by banks of the economic-financial situation of companies and, being the case, the termination of the contract if such situation deteriorates.

In summary: the rating of an entity depends on economic-financial variables contained in the balance sheet and the income statement, and on qualitative variables such as management capacity, history of good compliance with banks, sector risk, the quality of accounting information, among others.[8]

5.2. Interest Rate, Rating, Special Relationships, and Implicit Support: Law, Doctrine and Jurisprudence

A) The Law

It was already mentioned that article 63 of CIRC establishes that:

"The taxpayer must adopt, for determining the terms and conditions that would normally be agreed, accepted, or practiced between independent entities, the method or methods capable of ensuring the highest degree of comparability between the transactions or series of transactions it carries out and others substantially identical, in normal market situations or in the absence of special relationships, taking into account, in particular, the characteristics of the goods, rights, or services, market position, economic and financial situation, business strategy, and other relevant characteristics of the taxpayers involved, the functions they perform, the assets used, and the allocation of risk."

There is therefore a legal obligation to take into account, whenever applicable, the set of comparability factors that may determine adjustments to the conditions practiced between related parties by comparison with those that would be realized between unrelated entities.

B) Doctrine

The OECD Guidelines, a reference doctrine, are poorly developed in the treatment of intra-group loans. However, it is of special interest the manner in which they address the question of the effects of belonging to a group. Let us see.

"7.13 Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from the group's reputation deriving from global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profitmaking potential of particular members of the group. Each case must be determined according to its own facts and circumstances."

Translating synthetically, the cited § 7.13 distinguishes implicit (or passive) support from explicit support, emphasizing that an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member. That is, that a guarantee provided by one member of a group to another can have a price, in light of the better credit conditions it brings to the entity that obtains it.

In the doctrine relating to the application of transfer pricing in intra-group loans in the jurisdiction of Singapore[9], it is mentioned that:

"The Singapore loan guidelines provide nine nonexclusive comparability factors to determine the arm's-length rate:

1. the nature and purpose of the loan

2. the market conditions at the time the loan is granted

3. the principal amount of the loan, the duration of the loan and the terms of the loan

4. the currency in which the loan is denominated

5. the exchange risks that the lender or borrower bears

6. the security that the borrower offers

7. the guarantees connected with the loan

8. the borrower's credit standing

9. the interest rate prevailing at the situs of the lender or at the situs of the borrower for comparable loans between unrelated parties"

That is, the rating of the debtor and the guarantees are again emphasized, in addition to many other aspects.

C.1) National Case Law and Loans Between Related Parties

In the Case decided in CAAD, no. 733/2015-T, it was decided that, citing with proper deference:

"Another factor to be taken into account, as it may constitute a relevant economic element in the exercise of comparability regarding the risks assumed, is implicit support, that is, a characteristic that is assumed to be inherent to domination or group relationships and which translates into the expectation of one entity (the capital holder or parent company) providing some type of aid, particularly financial, to the other (the entity held or subsidiary) even if there is no legal obligation to do so. This element presupposes a non-isolated analysis, but rather one that frames the relevant entity in the context of a group, since, from the creditor's point of view, this domination or group relationship and the inherent capacity of the parent company to provide assistance can influence positively the rating of the subsidiary, which, being higher, will have correspondence in a reduction of the interest rate.

Now, in the case at hand the banking syndicate required guarantees on its credits that are not, in any way, comparable with those of the partners regarding the loans they made to the company, namely: pledge and promise of pledge of equity interests, pledge on the balance of bank accounts, pledge of movable property (industrial, administrative, and hospital equipment) and immovable property to be acquired, pledge of trademarks and patents, pledge of establishments, pledge of credits (including the partners' loans used by AT as comparables for the transaction in question) and mortgage and promise of mortgage on immovable property. Differently, it was already mentioned above the absence of specific guarantees in the granting of loans, in the form of loans, by the partners.

From a perspective of implicit support, it was essential that AT not only ascertained its existence but, in case of affirmation, identified what it translated into the advantage of the Claimant being held majority (and then totally) by A... II, S.à.r.L., quantified that advantage and, finally, but no less importantly, determined its concrete impact in determining the price of the related transaction under analysis. But from the RIT no extraction is made, not even indirectly, of any allusion to the possible relevance, in terms of implicit support, of the Claimant's belonging to a group of companies in the determination, in terms of full competition, of the price (interest rate) of the related transaction, but only the reference that it is the administrators and/or capital holders of the companies "who hold the real knowledge of the state they are in, whether at the financial level or at the technical, commercial, competitive level, among others, being able to make decisions that limit the guarantees of their creditors or that maximize the opportunities to settle the loans made to the company by themselves or third parties", which is insufficient to legitimize the disregard of the specific guarantees present in the bank financing that influence its respective remuneration.

The risk assumed is, evidently, determined by the existence of collateral, which subsequently influences the interest rate fixed as remuneration for the availability of the loaned funds. Therefore, the bank mutual agreement could not serve as an internal comparable, not allowing the assessment of the principle of full competition, because its terms and conditions..."

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