IRC Financial Charges Disallowed for SGPS Holding Company – CAAD Case 69/2016-T

ARBITRAL AWARD

The arbitrators, Councillor Jorge Manuel Lopes de Sousa (presiding arbitrator), (appointed by the other Arbitrators), Dr. António Moura Portugal and Dr. Maria Manuela do Nascimento Roseiro, appointed, respectively, by the Claimant and the Respondent, to constitute the Arbitral Tribunal, constituted on 11-05-2016, hereby agree as follows:

1. Report

A…, S.A., legal entity no.…, with registered office at Rua …, no.…, Floor…, …, …-… … (hereinafter referred to as "Claimant" or "A…"), subject to the status of parent company under the special tax regime for groups of companies, filed a petition for establishment of a Collective Arbitral Tribunal, Articles 2, no. 1, paragraph a), 3, no. 1, 6, no. 2, paragraph b) and 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to the declaration of illegality of the IRC assessments no. 2015…, corresponding to the tax year 2011, in the part relating to the disallowance of the financial charges of B… – SGPS, SA (hereinafter "B…"), to which corresponds tax payable in the amount of €979,877.54, and no. 2015…, corresponding to the tax year 2012, in the part relating to the disallowance of the financial charges of B…, to which corresponds tax payable in the amount of €959,218.64.

The Claimant further requests indemnification for the costs incurred and to be incurred by the Claimant in connection with the provision of undue guarantees, under the provisions of Articles 53 of the LGT and 171 of the CPPT.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant appointed Dr. António Moura Portugal as Arbitrator, pursuant to Article 6, no. 2, paragraph b), of the RJAT.

The petition for establishment of the Arbitral Tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 26-02-2016.

Pursuant to paragraph b) of no. 2 of Article 6 and no. 3 of the RJAT, and within the period provided in no. 1 of Article 13 of the RJAT, the highest-ranking official of the Tax Administration service appointed Dr. Maria Manuela do Nascimento Roseiro as Arbitrator.

The Arbitrators appointed by the Parties agreed to appoint Councillor Jorge Lopes de Sousa as presiding arbitrator, who accepted the appointment.

Pursuant to and for the purposes of no. 7 of Article 11 of the RJAT, the President of the CAAD informed the Parties of this appointment on 26-04-2016.

Thus, in accordance with the provision of no. 7 of Article 11 of the RJAT, after the period provided in no. 1 of Article 13 of the RJAT had expired without the Parties raising any objection, the Collective Arbitral Tribunal was constituted on 11-05-2016.

The Tax and Customs Authority raised the preliminary issue of lack of jurisdiction of this Arbitral Tribunal and argued that the petition for arbitral pronouncement should be ruled inadmissible, with its discharge from the proceeding.

By order of 20-06-2016, the meeting provided for in Article 18 of the RJAT was dispensed with and it was determined that the proceedings would continue with written submissions.

The Parties submitted their arguments.

The Arbitral Tribunal was duly constituted.

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

The proceedings do not suffer from any nullities.

The preliminary issue of partial lack of jurisdiction of this Arbitral Tribunal ratione materiae was raised, which must be assessed in advance.

2. Question of Material Jurisdiction of the Arbitral Tribunal

The Claimant seeks to have the illegality declared of the additional IRC assessments relating to the years 2011 and 2012, only in the parts in which each one is based on the disallowance of the financial charges of B…, indicating the amount of tax that it believes should be annulled in relation to each assessment.

The Tax and Customs Authority argues, in summary, that the arbitral tribunal lacks jurisdiction "to condemn the ATA in the request for correction of fiscal results to the values sought by the Claimant", which it understands constitutes a "request for recognition of rights".

In the petition presented by the Claimant, there is no request for condemnation of the Tax and Customs Authority, nor is there a request for correction of fiscal results; only the following requests are formulated:

i. To annul the IRC assessment no. 2015…, corresponding to the tax year 2011, in the part relating to the disallowance of the financial charges of B…, to which corresponds tax payable in the amount of €979,877.54;

ii. To annul the IRC assessment no. 2015…, corresponding to the tax year 2012, in the part relating to the disallowance of the financial charges of B…, to which corresponds tax payable in the amount of €959,218.64; and

iii. To order payment of indemnification for the costs incurred and to be incurred by the Claimant in connection with the provision of undue guarantees, under the provisions of Articles 53 of the LGT and 171 of the CPPT.

The arbitral process is an alternative means to the judicial challenge procedure (Article 124, no. 2, of Law no. 3-B/2010, of 28 April).

The annulment or declaration of nullity or non-existence of assessment acts is a corollary of the assertion of their illegality and the purpose of the judicial challenge procedure (Article 124 of the CPPT), being in harmony with the right to challenge unlawful acts constitutionally recognized (Article 268, no. 4, of the CRP), which recurs to the right to obtain judicial elimination of such acts.

Thus, although Article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning within the CAAD, making no reference to condemnatory decisions, it should be understood that the jurisdiction includes the powers attributed to tax tribunals in judicial challenge proceedings, which is the interpretation that harmonizes with the right to challenge unlawful acts constitutionally assured and with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge procedure and to the action for recognition of a right or legitimate interest in tax matters".

As seen from Article 2 of the RJAT, the jurisdiction of arbitral tribunals functioning within the CAAD was defined by the RJAT only with regard to the type of acts that are the subject of the claims of taxpayers and not based on the type of questions that must be assessed to decide whether the acts are legal or illegal.

Therefore, the requests for annulment referred to fall within the jurisdiction of arbitral tribunals functioning within the CAAD.

With regard to the indication of the tax amount of each assessment that the Claimant seeks to have annulled, this is necessary to define the scope of the requests and to define the value of the case, since the annulment of the assessments in full is not requested and the value of the case is "when a assessment is challenged, the amount whose annulment is sought" [Article 97-A, no. 1, paragraph a), of the CPPT, applicable to tax arbitral proceedings by virtue of the provision of Article 29, no. 1, paragraph c), of the RJAT and Article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings].

With regard to the request for indemnification for undue guarantee, this must be formulated in "the proceeding in which the legality of the enforceable debt is contested" (Article 171, no. 1, of the CPPT), so it is also clear that jurisdiction to assess this falls within the jurisdiction of arbitral tribunals functioning within the CAAD, which is not even questioned by the Tax and Customs Authority.

On the other hand, with regard to a hypothetical request for "correction of fiscal results", to which the Tax and Customs Authority alludes but has not been formulated, the Arbitral Tribunal need not rule on it and, therefore, need not rule on the question, which would be subject to prior examination in relation to that, which is whether it would have jurisdiction to assess it if it had been formulated.

Thus, there is no ground to question the jurisdiction of this Arbitral Tribunal to assess the requests formulated by the Claimant, which are those that shall be assessed.

Therefore, the exception raised by the Tax and Customs Authority is inadmissible.

3. Matter of Fact

3.1. Proven Facts

The following facts are considered proven:

· In the tax years 2011 and 2012, the Claimant was the parent company of a group of companies subject to the special tax regime for groups of companies, Group C…;

· In the tax years 2011 and 2012 the group comprised the following companies:

[Table structure indicated but contents redacted with "…"]

· The Tax and Customs Authority conducted an internal inspection of the Claimant, for IRC purposes, following the issuance of service orders no.… and …, and made corrections to the income declaration presented by the parent company, regarding the group's results;

· In the Tax Inspection Report, the contents of which are reproduced, the following is stated, inter alia:

II.3.3.4. – Analysis of individual results

Within the scope of this inspection procedure, verification was also carried out of the individual results of A… (tax years 2011 and 2012). Through contact via electronic mail, various requests for clarification were made to the TOC [Tax and Accounting Technician], which were promptly answered. As a result of the analysis of the responses, no situations requiring correction were detected.

III – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

III.1 — Corrections to the results of subsidiary companies

III.1.1 — B… – SGPS, SA

As a result of the inspection procedure carried out at the subsidiary B… – SGPS, SA, NIF…, pursuant to Service Orders no.… and …, corrections to the taxable matter were made in the amounts of €3,251,837.59 and €3,497,301.00, corresponding, respectively, to the tax years 2011 and 2012 (Inspection Report attached as Annex II).

The corrections made, pursuant to the aforementioned Service Orders, had the following grounds:

"III — Description of Facts and Grounds for Purely Arithmetic Corrections to Taxable Matter.

(...)

Regarding financial charges attributable to capital contributions and application of Article 32, no. 2 of the EBF

Financial Costs and Losses/Applicable Legislation

On 01/01/2003, no. 2 of Article 31 of the EBF (current 32) entered into force, added by Article 38 of Law no. 32-B/2002, of 30 December (State Budget Law of 2003), which provides that "capital gains and capital losses realized by SGPS and SCR through onerous transfer, whatever the title under which it operates, of capital contributions of which they are holders, provided they have been held for a period of not less than one year, and likewise, the financial charges borne with their acquisition, do not contribute to the formation of taxable profit of these companies".

Financial charges should be disregarded as costs, for tax purposes, in the tax year to which they refer, and correction must be made for those borne with the acquisition (whether derived or original, that is, resulting from the purchase of shares in companies or the subscription of new shares) of participations that may be eligible to benefit from the special regime established in no. 2 of Article 32 of the EBF regardless of whether all conditions for application of the special regime for taxation of capital gains have already been met.

In the case in question, the shareholdings acquired became part of the assets of B… as a result of contributions in kind for capital increase described above. From the excess of the valuation value of these contributions over the value of the capital increase effected, there resulted a share premium later used in part – €210,000,000.00 – for reimbursement of the supplementary contributions made by A… – €102,515,869.22 and the remainder recorded as a loan from A… €107,484,130.78.

Given the fungible nature of money and the consequent difficulty of direct attribution of charges, the attribution of financial charges was effected based on the following criteria: remunerated liabilities were attributed, in the first place, to remunerated loans granted by the SP [significant person/shareholder] to subsidiary companies and to other investments generating interest, with the remainder being allocated to other assets, namely shareholdings, proportionally to their respective cost of acquisition.[1]

Regarding financial charges attributable to capital contributions

It was found that the SP did not determine the value of the financial charges attributable to capital contributions in accordance with the method described above.

From the analytical trial balances, account extracts and other elements provided by the SP, the following information was extracted:

a) In the tax years under examination, the company shows the following interest borne:

[Table structure indicated but contents redacted with "…"]

b) In the tax years under examination, the company granted the following remunerated loans:

[Table structure indicated but contents redacted with "…"]

c) In the tax years under examination, the company obtained the following remunerated loans:

[Table structure indicated but contents redacted with "…"]

d) From the correction of the situations detected, the following financial charges attributable to capital contributions and the consequent corrections to taxable profit for the tax years 2011 and 2012 result (Annex I – calculation maps of non-deductible financial charges):"

[Table structure indicated but contents redacted with "…"]

It should be recalled that the group result, in accordance with the provisions of no. 1 of Article 70 of the CIRC, is calculated through the algebraic sum of taxable profits and fiscal losses determined in the individual periodic declarations of each of the companies belonging to the group.

III.2 — Corrections to fiscal losses of the group

In accordance with Article 71 of the CIRC, fiscal losses determined in the group declaration may be deducted from the group's taxable profits determined during the validity of RETGS [Special Tax Regime for Groups].

The deduction from the group's taxable profit of losses of subsidiary companies that have been determined in tax years prior to the beginning of application of the regime may only be effected up to the limit of the taxable profit of the company to which they relate.

In the tax years 2011 and 2012, the value of the algebraic sum of the individual profits and losses of the subsidiary companies, pursuant to Article 70 of the CIRC, results in a declared fiscal result of the group that is positive in the amount of €13,873,975.88 and €15,218,380.03, respectively.

As a result of the corrections made to the tax years 2011 and 2012 at the group company B… – SGPS, SA in the amount of €3,251,837.59 and €3,497,301.00, respectively, the value of the fiscal results of the group for these tax years were substantially altered to €17,125,813.47 and €18,715,681.03.

· In the Tax Inspection Report of the inspection at B… – SGPS, SA (Annex II to the Tax Inspection Report concerning the Claimant), the contents of which are reproduced, the following is stated, inter alia:

Regarding the capital increase

For the capital increase from €50,000.00 to €5,000,000.00 (corresponding to an increase of €4,950,000.00), contributions in kind valued at €246,672,572.40 were made on 2008/11/22 by the sole shareholder of B… (a report was drawn up by a Statutory Auditor to verify these contributions, pursuant to Article 28 of the Commercial Companies Code).

The contributions in kind corresponded to shareholdings held by the aforementioned shareholder, company A…, under the conditions summarized below:

[Table structure indicated but contents redacted with "…"]

As can be seen, the value of the contributions exceeded by €241,722,572.40 the value of the capital increase to be effected, giving rise to a share premium (agio) of the same amount.

It was as a result of the contributions in kind for the capital increase described above that the shareholdings became part of the assets of B…. From the disparity between the value of these contributions and the value of the capital increase effected, the aforementioned share premium resulted.

Subsequently, on 2009/06/01, with virtually the entire share premium, a simultaneous capital increase was made in the amount of €240,000,000.00 with subsequent capital reduction of the same amount (justified by the release of excess capital), converted into free reserves.

These were then used in part – €210,000,000.00 – for reimbursement of the supplementary contributions made by A… – €102,515,869.22 and the remainder recorded as a loan from A… – €107,484,130.78.

From these contributions resulted financial obligations for B… of a value much higher than the value of the acquisition of capital contributions attributed by A… accounting-wise.

The company participated as of 2011/12/31 in the capital of the following company:

(...)

IX — Right to a Hearing

The taxpayer exercised, on 2015/08/18, the right to a hearing, within the period established by the notification contained in office no.… of 2015/08/03 in compliance with the provisions of Articles 60 of the General Tax Law (LGT) and 60 of the Supplementary Regime for Tax and Customs Inspection Procedures (RCPITA).

Regarding the arguments raised

In the petition presented, the claimant presented various grounds which, in its understanding, lead to the following conclusions (in summary):

• The claimant alleges that "...ATA proposes corrections (...) based on (i) an incorrect assessment of the facts, (ii) an incorrect interpretation of the law and (...) an improper application of the applicable rule".

• It also alleges that "no. 2 of Article 32 of the EBF is inapplicable to the claimant's situation (...) with the only acquisition of shareholdings (...) having been effected through a capital increase in kind, without having contracted any financing for that purpose."

• Regarding 2013, the claimant alleges that 'There was an increase (...) in strict compliance with the provisions of no. 1 of Article 67 of the CIRC, in the amount of €5,812,237.99".

Assessment of the arguments raised

The arguments raised by the claimant merit the following assessment:

1 – The facts that formed the basis for the proposed corrections are confirmed by the claimant in the petition.

2 – The claimant states (points 8 to 10 of the petition) that the inapplicability of no. 2 of Article 32 stems from the fact that it did not resort to any financing for the acquisition of shareholdings, however, the claimant received a contribution in kind consisting of shareholdings and supplementary contributions in the total amount of €246,672,572.40 having only a capital of €5,000,000.00.

3 – The facts are therefore these (see page 11 of the Project Report): (i) On 2009/06/01, with virtually the entire share premium, a simultaneous capital increase was made in the amount of €240,000,000.00 with subsequent capital reduction of the same amount (justified by the release of excess capital), converted into free reserves. These were then used in part – €210,000,000.00 – for reimbursement of the supplementary contributions made by A… – €102,515,869.22 and the remainder recorded as a loan from A…– €107,484,130.78. (ii) It was this amount that generated the remunerated liability payable to shareholder A… (since the values of the supplementary contributions/loans referred to above are only valuation values, not corresponding to cash). (iii) It is verified that it was the acquisition of the shareholdings, via contribution in kind, that originated the need for financing of the claimant. (iv) The shareholdings did not become part of the claimant's assets for free; on the contrary, they required substantial financing needs from the claimant in order to meet the obligations necessary for their acquisition.

4 – In light of the facts listed above, the claimant's statement is not understood: "...without having contracted any financing for that purpose". What then motivated the financing obtained (with a balance of €104,308,685.25 in 2009, €103,606,153.15 in 2010, €108,008,857.81 in 2011, €108,008,857.81 in 2012 and €117,929,900.00 in 2013) generating the financial charges in question, if the company did not acquire other shareholdings? It is clear that it was the acquisition of the shareholdings referred to in point 2.

5 – No. 2 of Article 32 of the EBF provides that "...the financial charges borne with their acquisition (of capital contributions), do not contribute to the formation of taxable profit of these companies".

6 – Finding that there were financial charges attributable to the capital contributions held by the claimant, it was verified that no attribution of these charges to the capital contributions was made in the tax years 2011 and 2012.

7 – On the contrary, as the claimant correctly notes, in the tax year 2013, a correction was made regarding the deductibility of interest borne pursuant to the provisions of no. 1 of Article 67 of the CIRC, specified in field 748 of Form 22 of the respective tax year and not in the field relating to the increase in non-deductible financial charges (SGPS), and was therefore not taken into account in the project report.

8 – The claimant is therefore correct regarding the corrections proposed for the tax year 2013.

9 – However, for the tax years 2011 and 2012, since no information was provided by the claimant regarding the quantification of the financial charges attributable to capital contributions, we calculated the same (as per the Project Report): "...taking into account the fungible nature of money and the consequent difficulty of direct attribution of charges, the attribution of financial charges was effected based on the following criteria: remunerated liabilities were attributed, in the first place, to remunerated loans granted by the SP to subsidiary companies and to other investments generating interest, with the remainder being allocated to other assets, namely shareholdings, proportionally to their respective cost of acquisition."

10 – The method described above is, independently of being recommended by Circular 7/2004, used by the vast majority of capital management companies, which use it because of the extreme complexity and subjectivity of the direct allocation of these charges to various assets. Due to the intrinsic characteristics of money, this method is a useful and necessary tool for capital management companies in order to effect the attribution of these charges to capital contributions and determine the taxable profit of the tax year in accordance with applicable legislation.

11 – As stated in the arbitral decision of Proceeding no. 12/2013-T of the CAAD (arbitrator Tomás Maria Cantista de Castro Tavares), the quantification of the financial charges borne, attributable to capital contributions, is a complex matter, "... the data of the question do not have this linearity or simplicity: there is no direct factual relationship between the funds obtained (with payment of interest) and the funds granted (without interest) – but only the application of an approximate formula described in Circular 7/2004 (also because of the fungibility of money), in order to determine, in the application of Article 32, no. 2, of the EBF, which "financial charges borne" with the acquisition of capital contributions."

12 – We are thus faced with a question, which in the case in question is a consequence of the non-attribution by the claimant of any financial charges borne with the acquisition of capital contributions (in the tax years 2011 and 2012), that is, while the SP referred to in proceeding no. 12/2013-T uses the method recommended by Circular 7 (not rejecting it, on the contrary), in the case in question the claimant does not quantify, in any way, the financial charges attributable to the capital contributions held.

13 – It is also stated in this arbitral decision (Proceeding no.: 12/2013-T of the CAAD) regarding the tax disregard of costs that "...tax law contains no specific rule or specific principle of tax disregard of costs, if the funds obtained from them do not generate any taxable income. And it does not contain one for reasons of simplicity and adherence to truth. Simplicity is anchored in the difficulty of establishing a direct causal relationship between a cost and a financial return, in an organization, such as a commercial company, whose grants of financing are intended, as a rule, for the whole of its activity and which indiscriminately avails itself of own and third-party funds to pursue its purpose – and it is impossible to determine, therefore, whether the funds of the interest-free grants given to the subsidiaries come from third-party or own financing and in what proportion each occurred... it is this reason that presides, moreover, over Circular 7/2004, for SGPS..."

14 – It is therefore evident that the reason underlying the use of the method of attribution of financial charges to capital contributions used in the case in question is that of taxation closer to real profit as possible, respecting the provisions of no. 2 of Article 32 of the EBF.

Conclusion

Having considered and weighed the elements raised in the prior hearing, it is verified that the reasoning supporting the conclusions of the Project Report for the tax years 2011 and 2012 should be maintained, so the corrections proposed therein regarding IRC are confirmed and now form part of this Final Report.

· Following the inspection of the Claimant, the Tax and Customs Authority issued the following additional IRC assessments, which took into account the corrections referred to regarding the disallowance of financial charges of B…:

– no. 2015…, corresponding to the tax year 2011, in the amount of €2,848,234.07, which includes €350,789.33 of compensatory interest;

– no. 2015…, corresponding to the tax year 2012, in the amount of €4,797,777.78, which includes €424,616.03 of compensatory interest;

· The Claimant was constituted in October 2008 and in November of the same year company B… was constituted, held 100% by A…;

· As of 01-01-2009, A… (parent company) and B… (subsidiary company) opt for taxation in accordance with RETGS, with the latter being a subsidiary company;

· The company D… – PRODUCTION SOLE-PROPRIETOR COMPANY LTD, NIF… (D…), was parent company of a group of companies taxed under RETGS in the tax years 2006 to 2009;

· Until August 2009, D… adopted the corporate name of E…, SOLE-PROPRIETOR COMPANY LTD;

· Company D… was held, until tax year 2007, 100% by company F… HOLDINGS SARL (Luxembourg);

· In 2008, company D… is held 100% by A…;

· As of December 2008, through contributions in kind for the capital increase effected by A… in B…, the shareholdings of D… became part of the assets of B…;

· As of 01-01-2010, D… entered the fiscal scope of Group C… together with the remaining companies of the former D… group (with the exception of entities meanwhile incorporated by merger, both in the sphere of D… and A…), so there came to exist a single group, with A… as parent company;

· The Claimant provided a bank guarantee in the amount of €1,224,846.93 to prevent the execution of the fiscal part of the amount assessed that is the subject of challenge in this proceeding relating to assessment no. 2015… (document no. 6 attached with the petition for arbitral pronouncement, the contents of which are reproduced);

· The Claimant provided a bank guarantee in the amount of €1,999,023.30 to prevent the execution of the fiscal part of the amount assessed that is the subject of challenge in this proceeding relating to assessment no. 2015… (document no. 7 attached with the petition for arbitral pronouncement, the contents of which are reproduced);

· On 04-02-2016, the Claimant filed the petition for establishment of the arbitral tribunal that gave rise to the present proceeding.

3.2. Unproven Facts and Reasoning of the Decision on Matter of Fact

The facts were considered proven based on the documents attached with the petition for arbitral pronouncement and those which form part of the administrative proceeding.

It was not proven which financings are at the origin of the interest borne by B… in the years 2011 and 2012, specifically, it was not proven that they are wholly or partially related to the amount of €107,484,130.78 which was, in 2009, "recorded as a loan from A…".

The Tax and Customs Authority understood, in the Tax Inspection Report to B…, that the value of the contributions from A… exceeded by €241,722,572.40 the value of the capital increase to be effected in 2008 and that, in 2009, part of this amount was reimbursed to A…, with the remaining part, in the amount of €107,484,130.78, "recorded as a loan from A…", being, in the understanding of the Tax and Customs Authority, "this amount generating the remunerated liability payable to shareholder A…" and that "it was the acquisition of the shareholdings, via contribution in kind, that originated the need for financing of the claimant. (iv) The shareholdings did not become part of the claimant's assets for free; on the contrary, they required substantial financing needs from the claimant in order to meet the obligations necessary for their acquisition".

However, in addition to not proving what fact or document supports a debt of interest related to this loan, the amount referred to does not coincide with any of those which the Tax and Customs Authority itself refers to as being the balances existing in the years 2009 to 2013: €104,308,685.25 in 2009, €103,606,153.15 in 2010, €108,008,857.81 in 2011, €108,008,857.81 in 2012 and €117,929,900.00 in 2013, which suggests that it was not that loan, which remained, the basis of the interest paid for financings of varying amounts.

On the other hand, given that the contributions of the shareholdings to the sphere of B… were effected without any payment by this company to A…, there is no ground to believe that any financing was effected to acquire them, since there was no payment by B… of the amount of €107,484,130.78, with only a loan of that amount recorded in accounting terms in its favor, as of the capital increase of 2009. As the Tax and Customs Authority states in the Tax Inspection Report to B…, "the values of the supplementary contributions/loans referred to above are only valuation values, not corresponding to cash".

Therefore, one must remain, at least, in doubt as to whether the acquisition of the shareholdings by B… gave rise to any debt generating interest for this company and its amount, as well as whether the interest borne in 2011 and 2012 was related to this hypothetical debt.

4. Matter of Law

The Claimant only questions in the present proceeding the legality of the assessments, in the parts in which the disallowance of financial charges borne by B… – SGPS, SA is underlying.

The position of the Tax and Customs Authority was based on Article 32, no. 2, of the Fiscal Benefits Statute (EBF), which established the following, in the versions applicable in 2011 and 2012:

2 – Capital gains and capital losses realized by SGPS and SCR through onerous transfer, whatever the title under which it operates, of capital contributions of which they are holders, provided they have been held for a period of not less than one year, and likewise the financial charges borne with their acquisition, do not contribute to the formation of taxable profit of these companies (version resulting from the republication effected by Decree-Law no. 108/2008, of 26 June, applicable in 2011, which corresponds to Article 31, no. 2, in the version of Law no. 32-B/2002, of 30 December).

2 – Capital gains and capital losses realized by SGPS of capital contributions of which they are holders, provided they have been held for a period of not less than one year, and likewise, the financial charges borne with their acquisition, do not contribute to the formation of taxable profit of these companies. (version of Law no. 64-B/2011, of 30 December, applicable in 2012)

In this no. 2 of Article 32 of the EBF, it is established that "financial charges borne with their acquisition" do not contribute to the formation of taxable profit, referring to "capital contributions", so it is manifest that its literal content indicates that only the financial charges that are connected with the acquisition of shareholdings are covered by the non-deductibility that is established there.

In addition to this being the interpretation that results from the literal content, it is corroborated by the explanation for its introduction into the EBF that was given in the State Budget Report for 2003 (Law no. 32-B/2002, of 30 December).

In fact, this regime was introduced into the EBF by Law no. 32-B/2002, of 30 December, which approved the State Budget for 2003, then in Article 31, with a regime that passed to Article 32 after the renumbering effected by Decree-Law no. 108/2008, of 26 June.

In Bill no. 28-IX, which came to give rise to the Budget Law for 2003, this Article 31, no. 2, was included, with wording identical to that applicable in 2011 (in Article 32, no. 2), with the only difference being the addition of the reference to "ICR" (abbreviation for "venture capital investors"), which is irrelevant for the interpretation of the rule.

In the aforementioned State Budget Report for 2003, the introduction of this rule is announced, with a view to "broadening the tax base and measures for moralization and neutrality", in the following terms:

"The disregard of deductibility, for purposes of determining taxable profit, of financial charges of a financial nature directly associated with the acquisition of social shares by SGPS is established";

It is clear, therefore, that it was intended that only financial charges directly associated with the acquisition of social shares would be covered by non-deductibility.

By that express reference in the Report to the necessity for financial charges to be directly associated with the acquisition of social shares (which is also expressed in the text of the rule through the reference to "financial charges with their acquisition"), it is concluded that it is not sufficient to determine the non-deductibility of financial charges for a SGPS to be a holder of shareholdings; it is necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of particular shareholdings.

It is a corollary of this interpretation, imposed by the literal content of Article 32, no. 2, that, if certain shareholdings were not acquired with liabilities generating financial charges, they are irrelevant for the purposes of application of that rule, in the part concerning non-deductibility of financial charges.

In the case in question, as referred to in the decision on matter of fact, it was not proven that B… had contracted any debt generating interest related to the acquisition of shareholdings, nor that the interest borne in 2011 and 2012 have any relationship with that hypothetical debt.

It is true that, as the Tax and Customs Authority states, the fact that the shareholdings were acquired through contributions in kind (the shares held by A… were transferred in exchange for participation in the capital of B… by whoever held them) does not prevent the creation of a debt of this company towards that one, because the value of the contributions was higher than the value of the capital acquired by the transferees, as occurred in the case in question, since the value of the contributions exceeded by €241,722,572.40 the value of the capital increase to be effected in 2008. In 2009, part of this amount was reimbursed to A…, with the remaining part, in the amount of €107,484,130.78, "recorded as a loan from A…", being, in the understanding of the Tax and Customs Authority, "this amount generating the remunerated liability payable to shareholder A…".

However, this is a debt that the Claimant states has not generated any obligation of interest, which is not surprising, given that these are companies in the same group, since, as the Tax and Customs Authority states, "these are only valuation values, not corresponding to cash".

On the other hand, although the Tax and Customs Authority has determined nothing in concrete about other financings, of a pecuniary nature, it is to be concluded that they existed, since B… granted loans in the amounts of €63,741,036.97, in the years 2011 and 2012, and these were not effected on the basis of that amount of €107,484,130.78 of loans, which did not correspond to any transfer of pecuniary means.

It is thus not to be ruled out that, as the Claimant states, the indebtedness of B… to it, the parent company, has resulted from the acquisition of credits arising from loans that the latter had granted to subsidiaries and the contracting of additional loans that enabled B… to make loans to subsidiaries.

If it is true that no proof of these facts was presented, it is also true that the proof brought to the proceedings cannot fail to remain in doubt on this matter, since it was not established that the accounting debt of €107,484,130.78 was associated with an obligation to pay interest, in addition to the fact that that amount does not correspond to any of the amounts in debt at the end of the years 2009 to 2013, suggesting that it was not that debt that generated the interest paid in the years 2011 and 2012.

Indeed, corroborating the murkiness of the matter of fact on this point, the Tax and Customs Authority itself, in its Reply, states that "it seems to be an established fact that it is not possible to obtain information on the specific or direct allocation of financial charges to shareholdings", which suggests that, after all, it itself is not sure of the allocation it presented as proven in the Tax Inspection Report to B….

Thus, it is concluded that it was not proven that there is a direct relationship between the financial charges borne by B… in 2011 and 2012 and the acquisition of shareholdings.

On the other hand, if it is true that it is abstractly admissible that "in the impossibility confessedly of specific or direct allocation, it is legitimate for ATA, in the face of the letter and spirit of no. 2 of Article 32 of the EBF, to apply a method of indirect or non-specific allocation", as it recurs to a situation of "impossibility of proof and direct and exact quantification of the taxable matter", for purposes of no. 1 of Article 90 of the LGT, it is also true that the use of any indirect method to determine the taxable matter depends on the satisfaction of legal requirements, foreseen in Articles 85 and 87 of the LGT, and only methods foreseen in the law may be used, namely in that Article 90 of the LGT, among which the method used by the Tax and Customs Authority does not fit. Moreover, in the case in question, the impossibility of allocation of the financial charges borne is not even demonstrated, since, in light of what appears in the Tax Inspection Report to B…, the Tax and Customs Authority did not even carry out any measure in order to seek to determine that allocation.

With regard to the burden of proof, invoked by the Tax and Customs Authority, it is true that in the matter of fiscal benefits there are special rules from which it is inferred that the burden of proof of the facts necessary to benefit from them falls to those who invoke them (Articles 14, no. 2, and 74, no. 1, of the LGT).

However, in the specific situation in question, one is not faced with the invocation of prerequisites of fiscal benefits, since the part of Article 32, no. 2, of the EBF that provides for non-deductibility of financial charges borne with the acquisition of capital shares does not establish a fiscal benefit, but rather a limitation on the deductibility of financial charges, unfavorable to the taxpayer, established with the purpose of attenuating the fiscally favorable regime enjoyed by SGPS in relation to companies in general.

Therefore, in determining the non-deductibility of financial charges, the Tax and Customs Authority is carrying out an activity of a nature unfavorable to the taxpayer, so it bears the burden of proof of the facts it invokes to justify its action, designedly, when opting for the use of an indirect method to determine the taxable matter, of proving that one or more of the legal prerequisites of its application, indicated in Article 87 of the LGT, were verified, as follows from no. 3 of Article 74 of the LGT. This shall be the special rule of burden of proof applicable to cases of use of indirect methods to determine the taxable matter and not the general rule of Article 74, no. 1, invoked by the Claimant.

Thus, given that it is a prerequisite of assessment acts that financial charges have been borne with the acquisition of shareholdings, doubts as to whether they were borne concern the existence or quantification of the taxable fact, so they must be valued procedurally in favor of the taxpayer and justify the annulment of the challenged act, by virtue of the provisions of Article 100, no. 1, of the CPPT applicable to tax arbitral proceedings by virtue of the provisions of Article 29, no. 1, paragraph c), of the RJAT.

5. Question of Unconstitutionality of the Claimant's Interpretation

The Tax and Customs Authority alleges that the Claimant's interpretation violates the principles of equality, proportionality, taxable capacity and taxation of real income, but this position is based on the mistaken understanding that, for purposes of Article 32, no. 2, of the EBF, indirect allocation is relevant.

The allocation of financings to the acquisition of capital contributions, when it occurs, is necessarily direct.

The "indirect allocation" created by the Tax and Customs Authority through Circular no. 7/2004, which constitutes the prediction of an indirect method, is a mere fiction, based on presumptions whose foundation is not explained therein, in order to conclude that there was an allocation (necessarily direct) of financings to the acquisition of shareholdings without determining whether it occurred and to what extent.

However, as is obvious, taxpayers in relation to whom it has not been proven that they allocated financings to the acquisition of capital shares cannot be given the legal treatment that is given to those in whom such allocation has been proven, for the purposes of Article 32, no. 2, of the EBF, since allocation is the necessary prerequisite of its enactment.

Moreover, it is not seen how such a regime, requiring verification of the connection of certain financial charges with the acquisition of certain shareholdings, discriminates positively or negatively any SGPS, since it is applicable to SGPS companies of all types: whatever the type of SGPS, if it bears charges with the acquisition of shareholdings it cannot deduct them; whatever the type of SGPS, if it has other financial charges related to other assets or activities it can deduct them; if a SGPS, of any type, has no financial charges, then it cannot deduct them, since none can deduct what they have not borne; it is not constitutive of positive discrimination, certainly, for a company of any type that bore more financial charges than another to be able to deduct more charges than this one, since there is a difference between both that justifies the different deductibility.

With regard to the alleged unconstitutionality of Article 32, no. 2, of the EBF, for violation of the principle of taxable capacity, enunciated in Article 104 of the CRP, when interpreted in the sense that, if the method provided for in point 7 of Circular no. 7/2004 is inapplicable, all and any financial charges borne with financing related to acquisitions of shareholdings are deductible, independently of proof promoted by that taxpayer to that effect, it is not perceived the relevance of its raising in the case in question, since the interpretation adopted here is precisely the contrary: Article 32, no. 2, of the EBF requires proof that financial charges borne are not related to the acquisition of shareholdings and those are the ones that are deductible and if that relationship is proven those charges are not deductible. The interpretation of that rule adopted by the Tax and Customs Authority, in preventing that proof, if it were the one provided for in the law, could generate difficulty in its compatibility with that constitutional principle, beyond others. But, as is obvious, in case of doubt about allocation of financial charges, the rules of burden of proof apply, so the procedurally relevant reality is that which results from them, with its corollary at the level of deductibility.

With regard to the principle of taxation fundamentally based on real income, provided for in Article 104, no. 2, of the CRP, it is not seen how it is affected, benefiting SGPS, by a rule that provides, precisely, for the irrelevance of financial costs borne, contrary to the general rule of Article 23, no. 1, paragraph c), of the CIRC.

The non-deductibility of financial costs provided for in the final part of Article 32, no. 2, of the EBF embodies a departure from the rule of taxation according to real income, which is materialized in Article 23, no. 1, paragraph c), of the CIRC, which provides for the deductibility of financial charges.

Therefore, the departure from the application of an exception to that rule, provided for in the final part of Article 32, no. 2, of the EBF, can only favor the rule of taxation according to real income.

With regard to the principle of proportionality, it is also not seen how it can be violated by the interpretation referred to: if proof is made of the existence of a situation provided for in the final part of the rule of Article 32, no. 2, of the EBF, its enactment is applied; if that proof is not made, the rule does not apply. Certainly, what would be incompatible with the principle of proportionality would be to apply the rule to situations in which proof is not made of the existence of a situation that falls within the normative hypothesis.

It is concluded, therefore, that the non-applicability of the rule of the final part of no. 2 of Article 32 of the EBF to situations in which it is not proven that financial charges were borne with the acquisition of shareholdings by SGPS is not incompatible with any of the constitutional principles invoked by the Tax and Customs Authority.

6. Indemnification for Undue Guarantee

The Claimant also formulates a request for indemnification for undue guarantee.

In accordance with the provisions of paragraph b) of Article 24 of the RJAT, the arbitral decision on the merit of the claim in which no appeal or challenge may lie binds the tax administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the finding of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the judgments of the tax courts, "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose".

In the legislative authorization on which the Government based itself to approve the RJAT, granted by Article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as the primordial directive of the institution of arbitration as an alternative form of jurisdictional resolution of disputes in tax matters, that "the tax arbitral process must constitute an alternative procedural means to the judicial challenge procedure and to the action for recognition of a right or legitimate interest in tax matters".

Although Article 2, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning within the CAAD and makes no reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the aforementioned legislative authorization, that the jurisdiction includes the powers attributed in judicial challenge proceedings to tax courts in relation to the acts whose assessment of legality falls within their jurisdiction.

Although the judicial challenge process is essentially a process of mere annulment (Articles 99 and 124 of the CPPT), condemnation of the tax administration to payment of indemnificatory interest and indemnification for undue guarantee may be pronounced therein.

In fact, although there is no express rule to that effect, it has been consistently understood in the tax courts, since the entry into force of the tax reform codes of 1958-1965, that condemnation requests for payment of indemnificatory interest may be combined in judicial challenge proceedings with requests for annulment or declaration of nullity or non-existence of the act, since in those codes it is stated that the right to indemnificatory interest arises when, in administrative reclamation or judicial proceedings, the administration is convinced that there was an error of fact attributable to the services. This regime was subsequently generalized in the Tax Procedural Code, which established in no. 1 of its Article 24 that "indemnificatory interest shall be due in favor of the taxpayer when, in administrative reclamation or judicial proceedings, it is determined that there was an error attributable to the services", later, in the LGT, in whose Article 43, no. 1, it is established that "indemnificatory interest shall be due when it is determined, in administrative reclamation or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than legally owed" and, finally, in the CPPT in which it was established, in no. 2 of Article 61 (which corresponds to no. 4 in the version given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to indemnificatory interest is judicial, the payment period begins to count from the beginning of the period of its spontaneous execution".

Regarding the request for condemnation for payment of indemnification for provision of undue guarantee, Article 171 of the CPPT establishes that "indemnification in the case of a bank guarantee or equivalent unduly provided shall be requested in the proceedings in which the legality of the enforceable debt is contested" and that "the indemnification must be requested in the administrative reclamation, challenge or appeal or, if its grounds are supervenient, within 30 days after its occurrence".

Thus, it is clear that the judicial challenge proceedings encompasses the possibility of condemnation to payment of undue guarantee and is even, in principle, the appropriate procedural means to formulate such a request, which is justified by obvious reasons of procedural economy, since the right to indemnification for undue guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The petition for establishment of the arbitral tribunal has as a corollary that it shall be in the arbitral proceedings that the "legality of the enforceable debt" shall be discussed, so, as results from the express wording of that no. 1 of the referred Article 171 of the CPPT, it is also the arbitral proceedings that are appropriate to assess the request for indemnification for undue guarantee.

Moreover, the cumulation of requests relating to the same tax act is implicitly assumed in Article 3 of the RJAT, when it refers to "cumulation of requests even if relating to different acts", which suggests that the cumulation of requests is also possible in relation to the same tax act and the requests for indemnification for indemnificatory interest and condemnation for undue guarantee are susceptible of being covered by that formula, so an interpretation in this sense has, at least, the minimum verbal correspondence required by no. 2 of Article 9 of the Civil Code.

The regime of the right to indemnification for undue guarantee is contained in Article 53 of the LGT, which establishes the following:

Article 53

Guarantee in case of undue provision

1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified, in whole or in part, for the damages resulting from its provision, if it has been held for a period exceeding three years in proportion to the success in administrative appeal, challenge or opposition to execution that have as their object the guaranteed debt.

2. The period referred to in the previous number does not apply when it is verified, in administrative reclamation or judicial challenge, that there was an error attributable to the services in the assessment of the tax.

3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided for in this law and may be requested in the administrative reclamation or judicial challenge proceedings itself, or independently.

4. Indemnification for provision of undue guarantee shall be paid through setoff against the tax revenue of the year in which the payment was made.

In the case in question, the errors underlying the assessment acts are attributable to the Tax and Customs Authority, since the corrections it made were of its own initiative and the Claimant in no way contributed to that error being made.

Therefore, the Claimant is entitled to be indemnified for the damages that have resulted from the guarantees provided to suspend the fiscal executions.

Given the absence of elements that would allow determination of the amount of indemnification, the condemnation must be effected with reference to what shall be assessed in execution of the present award (Article 609 of the Code of Civil Procedure and Article 565 of the Civil Code).

7. Decision

In accordance with what is set out above, this Arbitral Tribunal hereby agrees:

a) To rule the petition for arbitral pronouncement admissible:

b) To annul the IRC assessments nos. 2015… and 2015…, in the parts in which they had as their premise the disallowance of financial charges borne by B… in the years 2011 and 2012, respectively;

c) To rule admissible the request for indemnification for undue guarantees and to condemn the Tax and Customs Authority to pay to the Claimant the indemnification that shall be assessed in execution of the present award.

8. Value of the Case

In accordance with the provisions of Article 306, no. 2, of the 2013 CPC, Article 97-A, no. 1, paragraph a), of the CPPT and Article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €1,939,096.18.

Lisbon, 26-09-2016

The Arbitrators

(Jorge Lopes de Sousa)

(António Moura Portugal)

(Maria Manuela do Nascimento Roseiro)
(dissenting, as stated in the annexed dissenting opinion)

Dissenting Opinion

Given my considerable doubts regarding some of the positions that formed the majority in this award, I present the following dissenting opinion.

Given the manner in which A…, SA (A…) entered the capital of B…, SGPS, SA (B…) – only the shareholdings that constituted part of the contributions in kind have a value much higher than the amount of the capital increase – it does not appear that one can invoke the gratuitousness of the manner of integration of the shareholdings into the assets of the respondent to erase the supposition that the transfer[3] implied financial charges.

Regarding the fact that ATA did not demonstrate what fact or document supports a debt, this is connected to the question of burden of proof, and it is my understanding that it was incumbent upon the Claimant to prove the relationship of these charges with other facts than the acquisition of shareholdings, even if by capital increase in kind, made by the parent company.

The fact that the inclusion of the shareholdings in the sphere of B… was effected without any payment in cash by this company to A…, which thus would not have to obtain financing, does not imply that the acquiring company does not have to bear the costs of financing the acquisition of said shareholdings, previously (2008) directly borne by A…, which became the indirect holder thereof. The proof that these charges existed, or not, and whether they were passed on, or not, to B…, should have been evidenced by this company, proceeding to the allocation of the indebtedness by the assets to which it is associated and presenting supporting documentation.

On the other hand, I also do not agree with the reasoning for the refusal of the methodology proposed by ATA in Circular no. 7/2004, regarding the disregard of financial charges borne by SGPS, on the grounds of the defense that the letter of no. 2 of Article 32 of the EBF, because it manifestly means that only financial charges that are connected with the acquisition of shareholdings are covered by the non-deductibility that is established there, implies the necessity for ATA to demonstrate that there is a "direct" relationship between certain financial charges and the acquisition of particular shareholdings.

In fact, even taking into account the reference cited, contained in the State Budget Report for 2004 ("financial charges of a financial nature directly associated with the acquisition"), it seems to us difficult to understand that the legislator, who intended with the provision enshrined in no. 2 of Article 31 of the EBF to obviate the consideration as costs of amounts that did not contribute to obtaining results subject to taxation, would accept charges presented by the taxpayer itself as having no relationship with the acquisition of shareholdings, without requiring adequate proof of the cause of the charges. What seems fitting to understand is that the legislator intended to take into account the real allocation of financial charges and their distribution for the acquisition of shareholdings and other assets, which would justify the possible non-acceptance of the qualification given by the taxpayer if it is not founded on adequate proof[4].

It is for this reason that we consider legitimate the definition by ATA, in administrative guidance, of criteria, considered rational and usual in the practice of SGPS, which may, if nothing else results evident from the accounting of the taxpayer[5], serve as a basis for an apportionment of charges, with the understanding that the taxpayer may rebut such apportionment by amply demonstrating its lack of truth[6].

Neither does the argument of the respondent in the proceedings, invoking that the fact that the shareholdings were acquired through contributions in kind does not prevent the creation of a debt of B… towards A… due to the fact that the value of the contributions was higher than the value of the capital increase, seem to us to be destroyed by the allegation of the Claimant that no obligation of interest was generated, as everything passes among companies of the same group, being only valuation values that do not correspond to cash. This is because the relationships among group companies must be accounted for in the same manner as among independent companies and give rise to autonomous calculation of results[7].

As for other existing financings generating charges, we believe that, within the interpretation we have been sustaining, it was incumbent upon the Claimant to have properly differentiated and proven them, separating the financings according to their respective allocation, in accordance with the provision of Article 17, no. 3, paragraph b) of the CIRC.

That is to say, the fact that the Claimant invokes that the indebtedness of B… to it, the parent company, resulted from the acquisition of credits arising from loans (which the latter had granted to subsidiaries and the contracting of additional loans that enabled B… to make loans to subsidiaries) seems wholly insufficient to explain all that should have been clarified, by the same Claimant, in a very complex situation in which the shareholdings were acquired within the context of the realization of capital contributions but overvalued in such a manner that the acquiring company came to return part of the initial value/price, for which it certainly had to go into debt, in addition to assuming a debt (loans) before A…. This situation seems to indicate and not to contradict that financial charges would be associated with the acquisition of shareholdings.

Thus, I do not subscribe to the position that "if it is true that no proof of these facts was presented, it is also true that the proof brought to the proceedings cannot fail to remain in doubt on this matter" and that the murkiness of the matter of fact (specifically by having not established that the accounting debt of €107,484,130.78 was associated with an obligation to pay interest), generates doubts as to the existence or quantification of the taxable fact, which must be valued procedurally in favor of the taxpayer, leading to the annulment of the assessment, for not having proven a direct relationship between the financial charges borne by B… in 2011 and 2012 and the acquisition of shareholdings.

As to the fact that the respondent does not seem to be sure of the real allocation of financial charges, by stating that it was not possible to obtain information on "the specific or direct allocation of financial charges to shareholdings", this is precisely the type of difficulty that justifies, according to no. 7 of Circular 7/2004, that ATA has indicated a method (formula) for purposes of allocation of financial charges borne with the acquisition of shareholdings. This allocation does not consist in an inexorable imposition (which, in that case, we would not hesitate to consider violating the law and constitutionally enshrined principles) but in a presentation of a proposed criterion for interpretation/apportionment of financial charges borne, which taxpayers will rebut, if the case, by proving in a well-reasoned manner the real allocation[8].

What does not seem to be in harmony with the ratio legis of no. 2 of Article 32 of the EBF is that, in the case of our considering acceptable the presentation by ATA, in a generic and uniform manner, of guidelines for interpretation of methods of allocation of financial charges borne by SGPS, applicable to cases in which other attribution is not evidenced in the accounting[9], the taxpayer may limit itself to reacting against the application of the method, denying its applicability without having to carry out the due proof.

This question is connected to the burden of proof, and here too we depart from the learned position that formed the majority when it concludes that "one is not faced with the invocation of prerequisites of fiscal benefits" because "the part of Article 32, no. 2, of the EBF that provides for non-deductibility of financial charges borne with the acquisition of capital shares does not establish a fiscal benefit, but rather a limitation on the deductibility of financial charges (...)".

It is my understanding that no. 2 of Article 32 of the EBF enshrines a fiscal benefit – the non-consideration of capital gains for the formation of taxable profit – being inseparable from its application the disregard of capital losses and financial charges directly associated with the acquisition of the corresponding shareholdings[10], so that the assessment of the allocation of charges is a component of the very application of the benefit in its entirety, applying to it the rule of burden of proof in accordance with Articles 14, no. 2, and 74, no. 1, of the LGT.[11]

Thus, not holding positions entirely coinciding with those adopted by the majority in this Award regarding the interpretation of the law and the factual situation, I would have delved deeper into the question of the possibly deficient reasoning of the corrections effected by the respondent, particularly as to justification of insufficiency of elements to proceed to a direct calculation of financial charges.

[1] In accordance with Circular 7/2004 of 30 March of DSIRC.

[2] Available at:
http://www.dgo.pt/politicaorcamental/Paginas/OEpagina.aspx?Ano=2003&TipoOE=Or%u00e7amento+Estado+Aprovado&TipoDocumentos=Lei+%2F+Mapas+Lei+%2F+Relat%u00f3rio

[3] The transferor received a counterpart (shares) and the acquirer increased capital.

[4] In this sense we interpret the position of Manuel Pires, in proceeding 663/2015, dissenting opinion.

[5] Because, it is agreed, the method of direct allocation should be favored and, in the impossibility of its use, proceed as an alternative method the one recommended in Circular 7/2004 (cf. Júlio Tormenta, in SGPS as an Instrument of Tax Planning and Its Limits, Coimbra Editora, p. 145).

[6] In the sense of that admissibility, the arbitral decision delivered in proceeding no. 258/2015-T is cited, whose considerations on Circular 7/2004 we subscribe to, specifically the conclusion that: "The truth is that nothing, in the letter of no. 2 of Article 32 of the EBF, detracted any legitimacy from any method, direct or indirect, of allocation of financial charges from SGPS to achieve the objectives pursued by that rule. The pro rata allocation provided for in point 7 of Circular no. 7/2004, indirect method of allocation, was therefore as legitimate and as compatible with the ratio legis of the rule as any other method – being that, in contrast, it cannot be sustained that the objectives of that rule (of any rule) could be achieved in the absence, pure and simple, of any method." And, despite the cited decision emphasizing the danger of ATA feeling "tempted to ease its burden of proof through mere invocation of a Circular, as if it, more than providing a probative procedure, constituted already the very proof itself", admits, after recalling that the taxpayer will only accept the results of that application if it suits him, nonetheless: "For all that we have just seen, to the first question raised by Circular 7/2004 – could a simple Circular resolve the ambiguities raised by the interpretation of a legal provision? – we answer affirmatively". Also in this sense, e.g., the arbitral decision in proceeding 21/2012-T.

[7] "(…) until the moment of determination of taxable profit by the parent company, each of the subsidiary companies maintains its own legal personality and tax capacity, which is not affected by the relationship of control with the parent company, so that the taxable profit of each of the members is determined in its periodic declaration in accordance with the general rules provided in the CIRC" (TCAS, Award of 24 April 2012, proceeding no. 05251/11).

[8] Admitting the method proposed in the Circular, while emphasizing that "adoption of the formula recommended by the Circular does not bind the taxpayer to the consequences derived from it when these result against law", arbitral award in proceeding 780/2014-T. It is stated: "for the calculation of non-deductible financial charges, because associated with the acquisition of shareholdings, any method (direct or indirect) is acceptable provided it ensures that costs associated with non-taxable income are not fiscally deductible. It is therefore perfectly legitimate to use the formula contained in the Circular, but this must be "corrected" as necessary so that the ratio legis of no. 2 of Article 32 of the EBF is fully respected."

[9] Which it should do. Cf. recommendations of Tiago Caiado Guerreiro in his texts on the new regime of SGPS.

[10] All seeking to constitute measures conducive to preventing abusive tax planning, as is also recalled in the aforementioned dissenting opinion of Manuel Pires (p. 663/2015-T). It should be noted that a restrictive interpretation of no. 2 of Article 32 could lead to the non-application of the deductibility restriction of financial charges to SGPS which, in addition to the holding of social shares, develop other activities directed to companies of the group, which seems to contradict the ratio of the rule (granting of benefit to SGPS with certain prerequisites and without abuses).

[11] Adapting to the application of no. 2 of Article 32, the final paragraph of the Award of the STA of 13-07-2015, in proceeding 0144/14, concerning no. 3 of the same article, we would say that an SGPS would be the target of positive tax discrimination compared to companies that are not, if it could benefit, in this case, from exemption from tax on capital gains realized with the disposal of capital shares without ceasing to deduct charges really originated with their acquisition (even if formally attributed to another cause).