IRC Tax Deductibility of Financial Charges and Business Expense Necessity – CAAD Arbitration 690/2016-T

ARBITRAL AWARD

I – Report

The taxpayer A..., Lda., with the NIPC ... (hereinafter "Claimant" or "A... Unipessoal"), filed, on 21 November 2016, a request for the establishment of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "LRATM"), against which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is named.

The Claimant seeks an arbitral decision on the illegality of the supplementary corporate income tax (IRC) assessment relating to fiscal year 2011 No. 2015..., and the corresponding tax reconciliation statement No. 2015..., in which a total amount of tax and compensatory interest of €3,629,566.03 was determined. The Claimant seeks annulment of such tax acts and reimbursement of the sums improperly paid, plus compensatory interest. As a secondary matter, it requests annulment of the presumed implicit rejection of the Gracious Complaint filed against those tax acts. It lists one witness.

The request for establishment of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TA on 7 December 2016.

Pursuant to the provisions of Article 6(2)(a) and Article 11(1)(b) of the LRATM, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance within the applicable timeframe, and notified the parties of this appointment on 23 January 2017.

The Collective Arbitral Tribunal was constituted on 7 February 2017; it was properly and is materially competent, in accordance with Articles 2(1)(a), 5, 6(1), and 11(1) of the LRATM (as amended by Article 228 of Law No. 66-B/2012, of 31 December).

Pursuant to Articles 17(1) and (2) of the LRATM, the TA was notified on 7 February 2017 to file its response.

The TA filed its response on 16 March 2017, accompanied by the Administrative File.

In that response, the TA alleges, in summary, the complete lack of merit of the Claimant's request.

The Arbitral Order of 16 March 2017 requested the Claimant to define the facts to which the witness evidence requested by it pertained.

By Motion of 28 March 2017, the Claimant identified the articles of its initial request that would be subject to proof by witness testimony: Articles 7 to 64, 66, 74, 80 to 92, 97 to 108, 114 to 121, 131, 136, 142 to 153, 178, 198 to 201, 205 and 206, and requested the presentation of written submissions after examination of the witness.

In that same Motion of 28 March 2017, the Claimant requested that the Award issued by the Supreme Administrative Court (STA) in the context of the Appeal for Uniformization of Jurisprudence filed by the TA against the decision issued in arbitral proceedings No. 614/2015-T be attached to the record.

The Arbitral Order of 2 April 2017 scheduled, pursuant to Article 18 of the LRATM, 28 April 2017 for the hearing, granting the attachment of the Award issued by the STA in the Appeal for Uniformization of Jurisprudence filed by the TA against the decision issued in arbitral proceedings No. 614/2015-T.

By Motion of 7 April 2017, the Claimant requested a change of the hearing date, indicating that it had previously obtained the Respondent's consent.

By Arbitral Order of 11 April 2017, 2 May 2017 was scheduled for the hearing.

By Motion of 27 April 2017, the Respondent requested the attachment of documents to the record, namely the Tax Inspection Report (hereinafter RIT) and its annexes, which complete the Administrative File (hereinafter AF) attached to its Response of 16 March 2017.

The hearing took place on 2 May 2017.

The Respondent waived examination of the witness that it had precautionarily listed in its Response.

At that hearing, the witness listed by the Claimant, B..., was examined.

At the end of the hearing, the Claimant and the Respondent were notified to file written submissions in successive periods of 20 days.

By Motion of 19 May 2017, the Claimant requested the attachment of a more legible version of a document, as well as a copy of the award issued in arbitral proceedings No. 680/2016-T, which was granted by Arbitral Order of 28.7.2017.

The Claimant filed its written submissions on 23 May 2017.

The Respondent filed its written counter-submissions on 16 June 2017.

Finally, by Arbitral Order of 4.12.2017, taking into account the complexity of the case, the conduct of the hearing, and the inclusion of the judicial recess period within the timeframe for issuing the Arbitral Decision, the arbitration period was extended, under Article 21(2) of the LRATM, with the deadline for issuing the arbitral decision being set as 7 February 2018.

The TA appointed its representatives in the record and the Claimant attached a power of attorney, with the Parties thus being duly represented.

The Parties have legal personality and legal capacity and have standing, pursuant to Articles 4 and 10(2) of the LRATM and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are not vitiated by nullities and no preliminary or subsequent questions, whether prejudicial or exceptions, that would preclude consideration of the merits of the case have been raised, with all conditions being met for a final decision to be issued.

II – Thema decidendum

1. The thema decidendum in the present proceedings concerns the legality of the supplementary corporate income tax (IRC) assessment for fiscal year 2011 No. 2015..., and the corresponding tax reconciliation statement No. 2015..., in which a total amount of tax and compensatory interest of €3,629,566.03 was determined, against which the Claimant filed a Gracious Complaint resulting in the presumption of implicit rejection.

2. The Claimant petitions for annulment of the aforesaid supplementary tax assessment, as well as the assessment of the respective compensatory interest, with consequent reimbursement of the sums improperly paid plus compensatory interest accrued and accruing, calculated at the legal rate, until full payment, on the grounds that the correction to the taxable matter of IRC for 2011, in the amount of €11,300,961.05, resulting from the disregard, for purposes of determining taxable profit for IRC, of expenses corresponding to interest borne on loans contracted for the acquisition of a shareholding, which forms the basis of those assessments, violates the law due to errors in the factual and legal premises regarding the application of Article 23 (in the version applicable ratione temporis) of the Corporate Income Tax Code (CIRC) and, specifically, regarding the determination that such charges are not demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of income.

3. In these terms, the core matter subject to the cognition of this Arbitral Tribunal is to verify whether the financial charges borne by the Claimant that are the subject of the aforesaid correction to the IRC taxable matter satisfy the requirement of proven indispensability for the realization of taxable income or for the maintenance of the source of income as enshrined in Article 23(1) of the CIRC.

4. Accordingly, it is for us to consider and decide.

III – Positions and arguments of the parties

III.A. Position of the Claimant

The Claimant begins by rebutting the argumentation that the TA presented in its Tax Inspection Report in support of the disregard of the charges with financing presented for purposes of correction of the taxable matter and supplementary IRC assessment.

Specifically, with regard to the main arguments advanced by the TA, the Claimant rebuts:

1. Financial participation acquisition operation. The TA does not perceive an advantage in the acquisition of 70% of "C...", given that such company already belonged to the group. The Claimant rebuts that this was not an operation carried out between companies of the same group, nor an operation intended to generate deductible expenses: it was an operation led by distinct investment funds and carried out at market prices – in accordance with the interests and legitimate expectations of the investors in the 2 distinct investment funds involved.

2. "Duplication" of charges relating to interest. The TA alerts to the duplication of financial charges resulting from there being a deduction in the Claimant's taxable matter and another in the determination of the taxable matter of the transparent entity, a confusion resulting from the Claimant being both lessee and shareholder of the lessor entity covered by the tax transparency regime. The Claimant sustains that, on the contrary, there was no duplication of financial charges, not only because the amount paid corresponded to the value of the debt of the acquired company, but also because, of all the financing necessary, only a fraction relates to bank financing (€35.8 million). Moreover, in the day-to-day operation of the Commercial Complex "..." the Claimant's income does not derive only from the taxable matter imputed to it by "C...", but also from rents it receives directly from the shopping center retailers, which are unrelated entities. The Claimant insists that, if it were not for the intermediation of "C...", the results would be equivalent: the profits received from "C..." would disappear but so would the rents paid to it, and the Claimant would have to bear directly all charges inherent to 70% of the property. On the other hand, the Claimant alleges that the transparency argument is not valid because the same result would be reached if the companies were covered by the Special Regime for Group Company Taxation (RETGS).

3. Indispensability criterion. The Claimant does not accept that the TA does not perceive the possibility of gains resulting from the application of capital that occurred (especially in the optimistic scenario of 2007), and that it holds to the appearance of "nothing having changed" in the relationship between the companies – the Claimant and "C...". It emphasizes the circumstance that, should a sale of the property occur in the future, the respective capital gains would be included in the taxable matter of "C...", which, under the terms of tax transparency, would be imputed to the Claimant and taxed to the Claimant. It adds that the reading of Article 23(1) of the CIRC, in the version in force at the time of the facts, must have the scope compatible with freedom of economic initiative, it not being appropriate (even in homage to the value of tax neutrality) for the TA to enter into the evaluation of the definition and convenience of business and management strategies – only those charges that manifestly do not have the potential to positively influence economic results should be excluded.

4. Compliance with formal requirements. The Claimant rebuts the TA's arguments that the formal requirements are not met, more demanding in the case of IRC and even more so when there are relationships of control (namely as regards the requirement of an invoice or debit note), countering that everything is properly documented and available for (re)verification by the TA.

5. Economic rationality of the operation. The Claimant sustains not only that the operation was conducted by funds that have absolute independence between them, with only a relationship existing between their respective management companies; but also that the TA itself, by previously granting the Claimant's request for maintenance of fiscal losses, had already analyzed, and already recognized, the economic interest of the operations, and therefore cannot now contradict itself.

More specifically with regard to points especially in dispute, the Claimant sustains that, in the transaction for the sale, by D.../V..." to E.../U...", of the entire shareholding of the Claimant and part of the Commercial Complex "...", including 70% of the shareholding of "C...", on 31 October 2007, D... and E..., notwithstanding being entirely held by "F..." and thus being related entities for transfer pricing purposes, acted with complete independence, exclusively as representatives of the funds they manage, respectively the "V..." and "U...", as was equally imposed upon them by the fact of being resident in two distinct countries, with distinct supervisory entities, and above all with different investors.

Being so, the transaction would have been free from any "group logic" of a business or multinational nature, namely that of the group headed by "F...": it would rather be the transfer of an asset occurring at market prices and using external financing, between investment funds with different types of investors, asset portfolios and risk profiles, in two distinct countries, Germany and Luxembourg.

It even emphasizes that only the entities managing the funds belong to the same economic group, but not the funds themselves – and that the managing entities only had to become involved in the transactions because the funds themselves could not do so alone.

At the same time, the economic logic of the transaction would be demonstrated, according to the Claimant, by the fact that the economic risks of the operation and the income flows were concentrated in a single entity, the Claimant itself. Moreover, the acquisition of 70% of the shareholding of "C..." came to allow the Claimant to act as majority owner, albeit indirect, of the property in which it exercises its activity, thus concentrating competencies and titles in a true business unit.

Excluded would thus be, in the Claimant's argumentation, any other motivation than the properly economic, namely the mere objective of obtaining tax savings; the Claimant expressly rejecting that this tax saving was aimed at in the circumstance of it paying rent to "C..." and this, because of the tax transparency regime, imputing 70% of its taxable matter to the Claimant itself.

The Claimant alleges that, if instead of the acquisition of a shareholding in "C...", the Claimant had opted for the direct acquisition of the property of the Commercial Complex "..." from it, there would be no rents to pay nor imputation of income by virtue of tax transparency, but there would be charges and financial liability resulting from the financing for property acquisition, and therefore the result would be equivalent in terms of taxation.

The Claimant equally rules out that there was duplication of charges, given that the loan it contracted to acquire its shareholding in "C..." cannot be confused with the loan that "C..." itself had to contract to acquire the property of the Commercial Complex "...".

Moreover, the Claimant notes that only in 2011 did it record taxable profit, as fiscal years 2008, 2009 and 2010 resulted in fiscal losses – but not as a result of any tax planning, rather because of the economic-financial crisis begun in 2008, combined with the extraordinary charges incurred with the acquisition of 70% of the shareholding of "C...".

It further notes that taxable profit has been increasing since 2011, contradicting the idea, conveyed by the tax inspection, that the tax planning had the purpose of, reinforcing the Claimant's control over all variables of the business, enabling nimble management of fiscal losses.

It further notes that the TA itself had already recognized the economic interest of the same operations, by granting the request for maintenance of fiscal losses, filed under Article 47 of the CIRC.

The Claimant draws attention to the fact that a similar issue, relating to fiscal year 2010, was the subject of a decision entirely favorable to the Claimant, in Proceedings No. 614/2015-T of CAAD.

Finally, the Claimant claims compensatory interest, pursuant to Article 43 of the General Tax Law (LGT).

In its Submissions, the Claimant restates the arguments expended in its Initial Request, in summary:

1. The acquisition of the financial participation of C... was not an operation carried out between companies of the same group, rather an operation between investment funds not related to each other, only managed by management companies belonging to the same group.

2. The operation had exclusively economic motivation, aiming at the obtaining of income, given that the Claimant was the beneficiary of operational activity, and therefore the most capable of ensuring the financing conditions for those operations.

3. There is venire contra factum proprium on the part of the TA, in that it created in the Claimant an expectation of compliance with the law when it granted the request for maintenance of fiscal losses as a result of the transfer of the shareholding of the Claimant.

In the Submissions, the Claimant adduces some new arguments, or gives them a new formulation (points 5.m), 5.bb), 5.o)):

1. That the indirect acquisition of part of the commercial complex would allow the Claimant to "reduce the uncertainty and dependence as to the updating of the rents of the ...";

2. That the recourse to indebtedness would allow the Claimant to "obtain a return on its investments higher than the value of the interest rate it had to bear from indebtedness";

3. That the concentration of indebtedness in the Claimant was justified because concentration in C... would have "the consequence of increasing the conditions of the loan to the detriment of the Claimant or even the unfeasibility of the operation";

4. That, if the Claimant had directly acquired 70% of the building..., instead of acquiring 70% of C..., "it would give rise to a result similar to that of the present corporate structure and respective operations carried out within the scope thereof".

In the Submissions, the Claimant further emphasizes the witness evidence and the arbitral awards issued in Proceedings 614/2015-T and 680/2016-T.

III.B. Position of the Respondent

In its response, the TA maintains the understanding that the controversial assessments constitute a correct application of the Law, not suffering from any defect.

The TA reiterates the conclusions contained in the Tax Inspection Report that led to the disregard of certain charges presented, and specifically:

1. That the indispensability criterion for costs is not met, as the economic interest of the underlying operation is not perceived;

2. That the accounting is imperfect, which is serious in situations of companies with special relationships;

3. They are operations developed within a group, in which the presence of tax planning is more probable – the TA therefore raises reservations regarding the duplication of charges that results from the fact that the Claimant bears charges to acquire "C..." and this in turn bears charges with the construction of the "Commercial Complex", which are deductible in determining its taxable profit;

4. In summary, these are not, for the TA, proven, indispensable charges or incurred for the obtaining of taxable income.

The Respondent stresses that the integration in a single group of all participants in the transactions is very clear, belying the allegations of "independence" in which the Claimant takes refuge – questioning where is the independence of funds that are managed by two companies dominated 100% by the same parent company.

Recalling the relevant provision, Article 23 CIRC, in the version in force at the time:

"1 - Charges are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of income, namely:

a) Those related to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, conservation and repair expenses;

b) Those relating to distribution and sale, covering transportation, advertising and placement of goods and products;

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

The TA concludes that the charges presented are not "demonstrably" "indispensable for the realization of income subject to tax or for the maintenance of the source of income".

The TA notes that it is the Claimant itself who explains that the decision to acquire 70% of the shareholding of "C..." was not its decision, but a decision taken by the group, within its group strategy – and apparently initiated at the request of the investors of the E.../"U..." fund.

The arguments that seek to explain that it was the Claimant that was chosen to be the focus of the transaction are not convincing – if, for example, we take into account that one of the loans (the "..." loan) did not even have any associated guarantee.

On the other hand, the advantage of acquiring "C..." is not understood if it is the Claimant itself that admits that the acquired entity limited itself to operating the property "passively" ("bare walls").

In particular, the TA notes that the 2007 transaction of acquisition of 70% of the shareholding of "C..." generated high financial charges, recorded as "Interest Borne", which never again allowed the Claimant to return to the taxable profits it recorded until 2007.

The TA notes that there is no foundation for charging such high interest rates on the loan granted by G... to the Claimant, given that these are two companies with a 100% dependency relationship, and it is therefore, speaking simply, a loan granted to itself, with no risk of default.

It was not proven that the 70% shareholding of "C..." was acquired at market prices, there being no reference to any market valuation or revaluation procedure.

The acquisition of 70% of the shareholding of "C..." does not have a very clear economic explanation; but it has a very immediate and evident tax advantage: that of reduction of taxable profit at the expense of the deduction of financial charges, to the benefit of other group companies – such as those located in Luxembourg.

The idea that the formation of a "business center" in Portugal would be aimed at is belied by the Claimant itself, who admits that nothing changed in the operation of the Commercial Complex "..." – which obviously means that the Claimant remained in pure commercial center management functions, collecting from the stores and paying rent, and "C..." remained in its passive position of title ownership, receiving rents.

A bizarre situation is generated in which the same company occupies the position of both shareholder of the lessor and of lessee, reverting to its benefit 70% of the income it pays to the company of which it is a shareholder – and the lessor company is subject to the tax transparency regime, which results in there falling upon the lessee, and shareholder of the "transparent" lessor, charges doubled: those of payment of rents, on one hand, and those of depreciation, taxes and other expenses, on the other hand.

By virtue of the application of the tax transparency regime, the integration, in the taxable profit of the Claimant, of 70% of the taxable matter imputed by "C...", has the effect that 70% of the charges recorded under depreciation of the property, interest and other charges inherent thereto, as well as 70% of the income from rents, come to be assumed as expenses and income of the Claimant itself. Thus, the Claimant's taxable profit is influenced by the double deduction of financial charges, with different origin, certainly, but that have in common the fact that they respect directly and indirectly the same property – the property of the "...".

That is, the interest that, coming from two companies, contributes to the determination of the taxable profit of the Claimant, does not respect two distinct realities, but to a single economic reality: the property of the "...". The duplication of charges converts itself into a situation of double deduction that tax law attempts to avoid in all situations in which tax transparency allows overlaps of spheres between the company and its shareholders.

And so much so is this that if the group's decision had been different – that of direct acquisition, by the Claimant, of 70% of the property, making itself co-owner with "C...", the latter would see its financial charges with the property acquisition reduced from 100% to 30%, with totally different numerical results for purposes of imputation to the Claimant via tax transparency.

The presumed neutrality of the business arrangement drawn up in 2007 thus collapses, in the TA's view; economically equivalent solutions, but with less impact in terms of financially relevant costs, were not even considered.

Thus, the TA insists on the circumstance that the Claimant continues to lease the same space to "C..." as it did before, and that the commercial relationships between them remain, with only a duplication of charges, which allows concluding that the acquisition of the shareholding was not, nor is, an operation potentially generating income in the sphere of the Claimant, leaving thus unproven, as to the corresponding charges, their necessity, appropriateness, normality or connection to a profitable business of the Claimant – given that it is exclusively from the perspective of the Claimant that it is a question, the gains of others not being relevant here except to contrast them with the absence of gains of the Claimant itself.

Indeed, the TA stresses the frankness with which the Claimant admits, even in the transfer pricing report, that the idea of the transaction originated from the investment fund, and it is the interest of that E.../"U..." fund that was certainly pursued – to the detriment of the interest of the Claimant, which was merely instrumentalized in a result reshaping that relocated income and losses at the most convenient points within a multinational group.

We have thus, in the TA's conclusion, financial charges borne by the Claimant that are not directly related to its own activity or to its ability to generate taxable income, but are justified only within a group logic – that is transparently assumed by the Claimant itself, even when it purports to allege the presence of independent entities (the funds) that are not the Claimant itself.

Moreover, the TA alleges that it was incumbent on the Claimant to prove that the operations fall within its corporate purpose, which was not accomplished in its view.

The reference, by the Claimant, to future capital gains masks the legal implications: in the context of the tax transparency regime, income distributed by transparent companies to their shareholders is not treated tax-wise as investment income (Article 5(2)(h) of the PIT Code) and in the calculation of future capital gains resulting from alienation, to prevent the occurrence of double taxation, the income imputed to shareholders and not yet distributed must be purged (as indeed currently results from Article 20(5) of the PIT Code and Article 81(5) of the CIRC). Moreover, the singular lease with a transparent company leads to a 70% compensation between the values that contributed to the formation of the taxable matter imputed to the Claimant (via transparency) and the expenses with rents paid by the Claimant.

Thus, the sum of the Claimant's charges with the charges of "C..." borne by the Claimant have no counterbalance in the obtaining of present or future income that is tax-wise relevant.

On the other hand, the TA clarifies that the prior recognition of the economic interest of an operation implies nothing as to the recognition of the deductibility of financial charges presented in a given fiscal year – and beyond that, the Claimant does not make proof that the operation previously recognized is the same as that now sub iudice.

Finally, the Respondent sustains that there was no error attributable to the service that could serve as foundation for the attribution of compensatory interest.

And the Respondent concludes its Response by manifesting its opposition to the production of witness evidence, which it deems to be useless.

In Counter-Submissions, the Respondent begins by questioning the witness evidence produced, inquiring about the possibility of impartiality on the part of someone who, like the witness, provided services to F... and actively participated in the operations in question.

The Respondent insists that the 2007 intra-group operation changed nothing in terms of the respective positions of the Claimant and C..., merely generating a duplication of charges with the "financed" purchase of an asset that already belonged to group companies – and therefore, regardless of other considerations, it is concluded that it is not an operation potentially generating income in the sphere of the Claimant.

Although the aforesaid 2007 intra-group operation may generate income in the sphere of other group companies, particularly the controlling companies, the TA stresses that these are then foreign interests, and not that of the Claimant, which is instrumentalized to those – which violates the indispensability principle enshrined in Article 23 of the CIRC.

In fact, the TA sustains, the financial charges assumed and borne by the Claimant may have an economic purpose relating to the acquisition of shareholdings from the perspective of the group of companies; but that motivation is foreign to the business interest of the Claimant, has no relevance to its activity, which is the management of a shopping center.

Thus, the Respondent concludes, for purposes of application of Article 23 of the CIRC, the charges now in question:

1. Do not relate to the activity exercised by the Claimant;

2. Are not indispensable, were not contracted in its business interest, are not necessary to the pursuit of its corporate purpose;

3. Are not connected with any income or gains of the Claimant, in terms of normality, necessity, congruence and economic rationality.

By contrast, the Respondent recalls that it is the Claimant itself that admits, in its transfer pricing report, that the interest of the 2007 operations was that of the group of companies, and not the interest of the Claimant itself, which was burdened with a loan and with the management of a shareholding that it did not hold, and, given its practical irrelevance to current activity, did not need to hold.

The Respondent concludes the Counter-Submissions by restating its position as to insufficient documentation respecting the facts alleged by the Claimant.

IV – Grounds: the facts

IV.A. Facts found to be proven with relevance to the decision

1. The Claimant, A..., Lda, which has the legal form of a sole-member limited liability company, has as its corporate purpose the buying and selling of the property of the Shopping Center designated as "...", as well as the rental, operation and management of the Commercial Complex "..." and any other acts or transactions directly related to the above-mentioned activity (cfr. permanent certificate attached as Annex 2.1 to the RIT and Article 7 of the request for arbitral decision, hereinafter also abbreviated PI).

2. At the date of the Claimant's incorporation (2000), its share capital (€5,000.00) was held 100% by H... (subsequently called D...), with registered office in Germany, management company of the open German real estate investment fund "V..."; on 31.10.2007, the Claimant's share capital came to be held 100% by G... (subsequently called J..., SARL), with registered office in Luxembourg, a holding that was maintained in the year 2011 (cfr. permanent certificate attached as Annex 2.1 to the RIT; facts stated in the RIT, pp. 7 and 10; facts stated in Articles 15 and 16 of the PI and in point 5.c) of the Written Submissions of the Claimant filed on 23 May 2017).

3. The Shopping Center "..." (which, together with a "...", makes up the Commercial Complex of the same name) is owned by C..., NIPC..., abbreviated "C...", a limited partnership whose corporate purpose is "the buying and selling of real estate, as well as the simple or mere administration of its own property held for enjoyment and intended for the Shopping Center "...", this including specifically its leasing" (cfr. permanent certificate attached as Annex 2.2 to the RIT and facts stated in the RIT, pp. 8 and 10).

4. "C..." resorted to a bank loan in the amount of 135.175 million euros for the acquisition and construction of the property of the Commercial Complex "...", recording the respective financial charges as expenses in its financial statements (facts stated in the RIT, p. 26).

5. "C..." limits itself to operating the property "passively" ("bare walls") of the Commercial Complex "..." (fact acknowledged in Article 45 of the PI).

6. The Claimant is the sole lessee of the Shopping Center "..." space and the adjacent "...", by lease agreement "bare walls" concluded with C... on 1 November 2002, having paid in the year 2011 for the 35 autonomous units leased in the Shopping Center and for the "..." the total amount of rents of €17,314,838.71 (cfr. facts stated in the Transfer Pricing Study. Fiscal Year 2011, attached as Annex 1 to the RIT, pp. 54-55, 64, 70; facts stated in the RIT, pp. 8 and 18; facts stated in Article 24 of the PI and in point 5.h) of the Claimant's Submissions).

7. The Claimant administers the Commercial Complex "...", seeking out and concluding "shop use contracts" with merchants (cfr. facts stated in the RIT, p. 18, in Article 24 of the PI and in point 5.h) of the Claimant's Submissions).

8. "C..." initially had as commanding partner H... mbH (subsequently called D... mbH), holder of a share with nominal value €9,999,995.00, and as commanded partner the Claimant, holder of a share with nominal value €5.00 (cfr. permanent certificate attached as Annex 2.2 to the RIT; cfr. also RIT, p. 10).

9. Pursuant to the foregoing paragraphs 1), 2), 3) and 8), the initial corporate structure relating to the Shopping Center "..." was as follows: [organizational diagram]

10. On 31-10-2007, "D... mbH", commanding partner of "C...", divided its share in this company of €9,999,995.00 into two shares, one with nominal value €6,999,995.00, which it transferred to the Claimant, commanded partner, and another with nominal value €3,000,000.00, which it transferred to "K..." (subsequently called L...), commanding partner (cfr. permanent certificate attached as Annex 2.2 to the RIT; cfr. also RIT, p. 11).

11. In 2011, the Claimant, as commanded partner, held a shareholding of 70% (€7,000,000) in the company "C...", a shareholding acquired, as mentioned in the preceding paragraph, from D... (hereinafter also "D...") (cfr. permanent certificate attached as Annex 2.2 to the RIT).

12. "C..." is a company of simple property administration subject to the tax transparency regime, under the provisions of Article 6(1) of the IRC Code, imputing to its shareholders the taxable matter it determines annually, with specifically 70% of its taxable matter being imputed to the Claimant (cfr. facts stated in the RIT, pp. 11 and 18, as well as facts stated in Article 25 of the PI and in points 5.i) and 5.aa) of the Claimant's submissions; cfr. also the Financial Statements of the Claimant for 2011, its annex, no. 1, attached as Annex 6 to the RIT).

13. With the alienation on 31 October 2007 of its entire share capital, as mentioned in paragraph 2) above, the Claimant came to be held by "G..." (today "G..." is designated "J...), entity that belongs to E... (hereinafter also "E..."), company with tax residence in Luxembourg and manager of the Luxembourg real estate investment fund "U..." (cfr. permanent certificate attached as Annex 2.1 to the RIT; facts stated in Articles 15, 27, 28, 42 of the PI).

14. E... ("E...L"), management company of the real estate fund "U...", holds 100% of M..., which in turn holds 100% of G... and K.... G... holds 100% of the Claimant, which in turn holds 70% of "C..."; K... holds 30% of "C..." and 100% of I..., Lda", which in turn holds 100% of N..., SA, according to the following essential structure (cfr. facts and organization chart indicated in the Transfer Pricing Study. Fiscal Year 2011, attached as Annex 1 to the RIT, pp. 20, 37, on p. 11 of the PI and in point 5.x) of the Claimant's Submissions): [organizational diagram]

15. By this means, as a result of the transactions indicated in the preceding paragraphs, the Commercial Complex "..." was acquired by E... / "U...", albeit indirectly, through its subsidiaries (M..., G..., K..., the Claimant, C...).

16. The company G..., with registered office in Luxembourg, holder of the entire shareholding of the Claimant, presents consolidated accounts, which include the financial statements of the Claimant and its subsidiaries, in accordance with Luxembourg legislation (cfr. reference contained in the Financial Statements of the Claimant for 2011, its annex, nos. 1 and 5, attached as Annex 6 to the RIT).

17. D... and E..., the management companies respectively of the investment funds V..., open German real estate investment fund intended for the public, and U..., Luxembourg real estate investment fund intended for institutional investors, are both held 100% by the company "F...", with tax residence in Germany, being related entities for transfer pricing purposes (cfr. facts recognized in Articles 15 and 39 of the PI and in points 5.a), 5.b), 5.l) and 5.u), first part, of the Claimant's Written Submissions).

18. The O... (formerly P...) and "F..." are both related parties to the Claimant, given that both are held by F... (fact recognized in Article 200 of the PI; RIT, p. 23, note 8; testimony of witness B...).

19. F... is 100% holder of the group, of which the Claimant forms part and within which all the above-mentioned operations occurred, according to the following organizational chart: [organizational diagram showing F... as parent company]

20. The asset "A..." was valued on 15 September 2007, by an independent entity, in the amount of €381,297,000.00 (cfr. the letter dated 15.10.2007 from Q... sent to E... regarding the valuation of the properties of R... attached as document no. 8 to the PI and testimony of witness B...).

21. The Claimant paid €175.3 million for the acquisition of 70% of the shareholding of "C...", obtaining financing for that purpose of approximately €175.3 million, based on the following three financing operations: 1) €96,844,069.52 from the sole shareholder G...; 2) €42,663,800.00 from I..., Lda; and 3) €35,800,000.00 from bank P... – Branch in Portugal (now O... AG – Branch in Portugal), in accordance with financing contracts attached in annex 4 to the RIT, namely, respectively, i) "96,844,069.52 Loan Facility Agreement" dated 31-10-2007 (and "Amendment Agreement" of 29-09-2008) between the Claimant and G..., attached as Annex 4.2 to the RIT, ii) "Intra-group loan agreement" dated 31-10-2007 between the Claimant and I..., Lda, attached as annex 4.1 to the RIT, and iii) "Credit Opening with Mortgage and Extension of Credit Assignment", object of the deed of 25-10-2007 in which intervened as parties the Claimant and P... – Branch in Portugal, as well as N..., SA and I..., Lda, attached as Annex 4.3 to the RIT and also as document no. 1 to the Claimant's motion of 19 May 2017.

22. The financing of €96,844,069.52 obtained from the Claimant's sole shareholder G... was arranged on 31-10-2007, for a period of 10 years, with the parties having agreed on a fixed annual interest rate of 7.25% (cfr. the "96,844,069.52 Loan Facility Agreement" attached as annex 4.2 to the RIT; cfr. also Transfer Pricing Study. Fiscal Year 2011 attached as Annex 1 to the RIT, respective p. 12; RIT, p. 20).

23. The financing of €42,663,800.00 obtained from I..., Lda was arranged on 31-10-2007, for a period of 10 years, and the financing conditions that were in force until the end of the 1st half of 2009 provided for the payment of a variable interest rate determined on the basis of the Euribor rate at 6 months, plus a spread of 0.15%; from the 2nd half of 2009 onward, the interest rate became fixed, with it being established between the parties that the interest rate would be determined on the basis of the (fixed) swap rate at 8 years, of 01-07-2009, published by Bloomberg, which stood at 3.40%, plus a spread of 1.6%, that is an annual rate of 5% (cfr. the "Intra-group loan agreement" attached as annex 4.1 to the RIT; cfr. also Transfer Pricing Study. Fiscal Year 2011 attached as Annex 1 to the RIT, p. 14; RIT, p. 20).

24. The financing, in the form of a credit facility, of €35,800,000.00, contracted by the Claimant from P... – Branch in Portugal, was arranged, as per deed of 25-10-2007 of "Credit Opening with Mortgage and Extension of Credit Assignment", for a period of 10 years, with the parties having agreed on an interest rate corresponding to the Euro swap rate at 7 years, plus a spread of 50 p.b. (0.5%), whereby in the year 2011 the loan accrued interest at the rate of 5.078%; also by this deed of "Credit Opening with Mortgage and Extension of Credit Assignment", in which intervened as parties the Claimant, as Borrower, P... – Branch in Portugal, as Lender, N..., SA, as Guarantor, and I..., Lda, as Manager, it was verified that: i) N..., SA constituted in favor of the Lender, to guarantee the proper payment of all responsibilities assumed by the Borrower arising from the credit facility then contracted, a second-degree voluntary mortgage over the autonomous units designated by the letters B, C, D, E, F, G, H, I, J, K, L, M, N, O, P and Q of the urban property that comprises the project denominated "..."; ii) I..., Lda expanded the credit assignment, with the purpose of guarantee, emerging from the Shop Use Contracts relating to the Property ... constituted in favor of the Lender by letter of 26 September 2003, which came to guarantee equally the obligations emerging for the Borrower from the aforesaid deed, until payment of the guaranteed debt; iii) the Claimant expanded the credit assignment, with the purpose of guarantee, emerging from the Shop Use Contracts relating to the Properties ..., constituted in favor of the Lender by letter of 29 June 2001 and expanded on 19 October 2007, which came to guarantee the obligations emerging from the aforesaid deed for the Borrower, until payment of the guaranteed debt; iv) it was declared by the Borrower, Manager and Guarantor that they were "in a relationship of control or group whereby the present provision of guarantee is valid and legitimate pursuant to Article 6 of the Commercial Corporations Code") (cfr. the deed of "Credit Opening with Mortgage and Extension of Credit Assignment" attached as Annex 4.3 to the RIT and also as document no. 1 to the Claimant's motion of 19 May 2017, as well as RIT, p. 20).

25. The decision for acquisition by the Claimant of the share of €6,999,995.00 of the shareholding of "C..." with recourse to financing from entities of the group was taken by the group of companies, within a group strategy (cfr. Transfer Pricing Study. Fiscal Year 2011, respective pp. 45 and 55, attached as Annex 1 to the RIT, pp. 84 and 94 of the Administrative File, where the following can be read: "In October 2007 the Group decided that A... would acquire the shareholding in C... held by D.... For that purpose, A... resorted to financing from group entities"; "As previously mentioned, in October 2007 the Group decided that A... would acquire the shareholding in C... held by D.... For that purpose, A... resorted to financing from group entities").

26. In the aforesaid Transfer Pricing Study. Fiscal Year 2011, attached as Annex 1 to the RIT, the following is stated regarding the financing related to the acquisition by the Claimant of the shareholding in C... which, by reason of its relevance to the subject matter of the proceedings, merits transcription (see pp. 11, 12, 13, 14, 15, 16, 37, 45, 46, 47, 56, 57, 72 to 85 of the aforesaid Study):

[Detailed quotations from the Transfer Pricing Study...]

1. With the 2007 transaction "nothing changed in the structure of the commercial complex..." and, as regards the Claimant and "C...", "these entities continued to develop the same activity", "C... continued to operate passively ("bare walls") the property, specifically maintaining a lease agreement with the Claimant, and the latter continued to manage the commercial complex ... through the conclusion of shop use contracts" (facts recorded in Articles 44 and 47 of the PI and in points 5.y) and 5.z) of the Claimant's Submissions).

2. In fiscal year 2011, the Claimant bore €11,158,728.06 in interest on the loans mentioned, contracted for financing the acquisition of the shareholding in C...: €1,843,172.95 to P..., €2,196,842.97 to I... and €7,118,712.14 to G... (cfr. facts stated in the RIT, p. 21; Management Report of 20 February 2012, relating to the fiscal year ended 31 December 2011 attached as Annex 6 to the RIT, p. 3; Transfer Pricing Study. Fiscal Year 2011, respective p. 58, attached as Annex 1 to the RIT).

3. The financial charges (interest and stamp duty) related to these loans were recorded in expense accounts, specifically in the accounts "681291 Stamp Duty Borne – Loan Interest", "681292 Stamp Duty Borne – Bank Commissions", "6911 – Financing Interest Obtained" (loan from P...), "691391 - Other Interest - I..., Lda." (loan from I..., Lda), "691392 - Other Interest – G..." (loan from G...) and "6982 – Other Financing fees" (cfr. RIT, p. 20 and the documents attached in Annex 5 to the RIT "Supporting Documents for Recording of Financial Charges").

4. The Claimant possesses as supporting documentation of expenses with financial charges in the year 2011, apart from the loan agreements mentioned in the preceding paragraphs 21) to 24), bank statements evidencing the payment of interest and cost increases, schedules with the calculation of interest and withholding at source for accrual period, and transfer orders and bank statements mentioning the payment of interest, as per documents 9 to 11 attached to the PI.

5. There are not in the accounting invoices and/or debit notes issued by the holders of income relating to the loans made by G... and I..., with only, in the latter case, the issuance being verified of debit note no. 1, of 24.11.2011, which relates to an adjustment in the interest owed, in the amount of €33,580.91; as for the loan made by P..., the following statements of charge were issued: no. ... - interest relating to the period 31/03 to 29/06 of 2011, and respective stamp duty; no. ... – interest relating to the period 30/06 to 29/09 of 2011, and respective stamp duty; no. ... – interest relating to the period 30/09/2011 to 01/01/2012, and respective stamp duty, with no document having been issued for the first tranche of interest of the year 2011 (cfr. RIT, p. 21 and the documents attached in Annex 5 to the RIT "Supporting Documents for Recording of Financial Charges" and documents attached in documents nos. 9 and 11 attached to the PI).

6. The financial charges mentioned contributed to the reduction of the Claimant's taxable profit, as per the following table: [table showing profit reduction]

7. In its Management Report of 20 February 2012, relating to the fiscal year ended 31 December 2011 (attached as Annex 6 to the RIT and which here is reproduced), the Claimant indicates that, in fiscal year 2011, there was an increase in expenses of the order of 86.98%, with the fiscal year ending with €30,726,317.19 more in expenses than at the beginning, which was due above all to the recording of impairment losses on non-depreciable/non-amortizable assets, in the amount of €28,906,098.10 (impairment losses not previously recorded) – it is stated, in fact, in that Report: "The expenses with interest, in the amount of €11,180,434.17 essentially relating to interest on bank loans and with group companies, as well as impairment losses in the amount of €28,906,098.10 referring to the shareholding in company C..., contributed significantly to the total expenses in the fiscal year and consequently to the loss incurred in the fiscal year"; on its side, in the Financial Statements for 2011 (annex, no. 8), also attached in Annex 6 to the RIT, it is recorded that from the impairment test of the value of the Claimant's financial participation in C... carried out in fiscal year 2011 impairment losses resulted in the amount of €28,906,098.10.

8. In the Annex to the Financial Statements for 2011 of the Claimant attached as Annex 6 to the RIT, the following is indicated regarding financial participations (no. 13): [table showing financial participation details]

9. In the Annex to the Financial Statements for 2011 of the Claimant attached as Annex 6 to the RIT the following is indicated:

• regarding Borrowing Costs incurred in the fiscal year ended 31 December 2011 (no. 8): [table of borrowing costs]

• regarding Financing Obtained (no. 12): [table of financing details]

1. In the Legal Certification of Accounts, dated 2.3.2012, relating to fiscal year 2011, issued by S..., Lda (attached in Annex 6 to the RIT), in which it is stated that the Balance Sheet on 31 December 2011 "shows a total of 144,286,837.06 euros and a total negative own capital of 65,479,566.83 euros, including a negative net result of 28,974,46.88 euros", there appears, as an Emphasis, the following statement: "We draw attention to the fact that, as mentioned in the Legal Certifications of Accounts for fiscal years 2007 to 2010, in fiscal year 2011 the Company continued to present a total Negative Own Capital. However, this situation was addressed in General Meeting held on 18 December 2008, with the sole shareholder assuming that, should it prove necessary, will make cash contributions that will allow the Company to meet its commitments and remain solvent".

2. By Order of 17 May 2012 of the Deputy Director-General of Personal Income Tax, as per official communication attached as document no. 6 to the PI which is reproduced here, the Claimant's request regarding "deduction of fiscal losses, with the limitation provided for in no. 8 of Article 52 of the IRC Code not being applied" was granted.

3. In compliance with Service Order No. OI2015..., of 3 June 2015, the Claimant was subject to tax inspection that took place between 17 July 2015 and 5 October 2015, resulting therefrom an alteration to the taxable matter of IRC for 2011, in the amount of €11,300,961.05, for not accepting "the tax deductibility of financial charges relating to financing obtained for the acquisition of a shareholding, by reason of the requirements set forth in Article 23 of the CIRC not being met", as per Tax Inspection Report (attached both as document no. 4 to the PI and with all its annexes by the Respondent by motion of 27.4.2017).