CAAD 70/2018-T: IRC Financing Costs Deductibility Under Article 23 and Transfer Pricing Rules Article 63

ENGLISH TRANSLATION

The arbitrators Judge Counsellor Dr. Fernanda Maças (arbitrator-president), Prof. Doctor Tomás Cantista Tavares and Prof. Doctor Américo Brás Carlos (arbitrator-members), agree as follows:

I. Report

1. A..., S.A. (hereinafter referred to as "Claimant"), with registered office at Avenue ..., ...-... ..., holder of tax identification number..., filed a request for constitution of a collective arbitral tribunal pursuant to article 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter RJAT) and articles 1 and 2 of Ordinance No. 112A/2011, of 22 March, in which the Tax Authority and Customs Authority (hereinafter AT) is the Respondent, with a view to declaring the illegality of the assessment notice for Corporate Income Tax (IRC) No. 2016... relating to the period of 2012 and the corresponding statement of account adjustment No. 2016..., formalized by the decision to dismiss the Gracious Complaint Process with the number ...2017....

2. The request for constitution of the arbitral tribunal, in which the arbitrator to be appointed by the Claimant was identified (Prof. Doctor Tomás Cantista Tavares), was accepted by the President of CAAD and notified to the Tax Authority and Customs Authority (AT), which appointed Prof. Doctor Américo Brás Carlos as arbitrator.

3. The arbitrators appointed by the parties appointed by agreement Counsellor Maria Fernanda Maçãs as president arbitrator, having communicated acceptance of the appointment within the deadline.

4. The parties having been notified of this appointment, no objection was raised and, in accordance with the provision in subparagraph c) of article 11(1) and article 11(8) of RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Collective Arbitral Tribunal was constituted on 16 May 2018.

5. To support the request, the Claimant argues:

"the AT verified that the Claimant has recorded expenses with financial charges of diverse nature (banking commissions and Stamp Tax, essentially), having recorded as financial income 'only' interest";

And that "the other banking charges borne were not passed on to clients, namely stamp tax and banking commissions";

Understanding that the value of expenses incurred with the financings obtained should be equal, in proportion, to the value of income obtained with the financings granted, the AT did not accept part of the financial charges borne by the Claimant for the purposes of determining taxable profit "solely because the items of financial income in the trial balance do not present an exact correspondence to the items of financial expenses";

For "determining the amount of non-deductible financial charges, the AT used 'the annual ratio of loans granted / loans obtained, which was applied to the balance of expenses borne and not passed on', having determined a value of €132,104.50 on this account";

The AT's understanding is that "the requirement of indispensability of such expenses is not satisfied under the provisions of article 23 of the IRC Code, which is why part of the expenses borne should not contribute to the purposes of determining taxable profit";

It is the Claimant's understanding that "the argumentation set out in the IR, in addition to completely disregarding the economic substance underlying the facts in question, as well as the elements submitted to the AT, is based on an abusive interpretation of article 23 of the IRC Code";

On one hand, because the average interest rate borne by the Claimant is lower than that applied to the loans granted to B... (B...) and to C... (C...);

"Additionally, it is important to note that the repayment periods associated with the financings granted by the Claimant are shorter than the repayment periods associated with the financings obtained (...) representing a lower risk of uncollectibility which, naturally, should be reflected in the agreed remuneration".

Moreover, "based on the wording of article 23 of the IRC Code at the time, there were three requirements necessary for expenses to contribute to the determination of taxable profit: proof, indispensability and their connection to income subject to tax or the maintenance of the income-generating source";

The AT did not question the reality of the expenses, which are duly proven;

However, it considered that a part of the expenses incurred (calculated at €132,104.50) were not linked to the obtainment of income subject to IRC only because "while the Claimant has recorded expenses with banking commissions and stamp tax, it has recorded 'only' income with interest";

"Having the AT questioned the non-allocation of certain expenses in the context of financings borne in the financings granted, it would be, at minimum, prudent to analyze the criteria underlying the determination of remuneration associated with both the financings obtained and the financings granted".

Moreover "considering the AT that the remuneration associated with the financings granted by the Claimant is not adequate, it should have resorted to the provisions of article 63 of the IRC Code, instead of blindly disregarding part of the expenses borne, basing such reasoning on article 23 of the IRC Code";

That is, moreover, the position already established in previous CAAD jurisprudence, namely in "Arbitral Decision No. 695/2015, of 18 May 2016, in which it is emphasized, with regard to the disregard of financial expenses by the AT, that article 23 of the IRC Code 'should not be applied systematically as an anti-abuse clause; for it contains, first and foremost, a general condition to be respected for the deductibility of expenses", concluding that "if one wishes to question the differential of prices (interest rates) paid and charged, it would be the transfer pricing rules that should be applied, and not those of article 23 of the CIRC".

Similarly, "it has been the unanimous understanding of both Doctrine and Jurisprudence that the requirement of linking expenses to income subject to tax cannot be reduced to the requirement of a direct cause-and-effect nexus between a particular expense and the income obtained from it";

Thus, "ANTÓNIO MOURA PORTUGAL emphasizes that 'indispensable expenses are therefore equivalent to expenses incurred in the interest of the company. The tax deductibility of the cost should depend on a justified relationship with the company's productive activity and this indispensability is verified whenever (...) the corporate operations are subsumed to its capacity, by subsumption to its respective corporate purpose and, in particular, as long as they connect with the obtainment of profit even if in an indirect or mediate manner'";

And "TOMÁS TAVARES rejects a notion of indispensability based on a relationship of 'necessary and exclusive causality' between expenses and income, defending a concept based on the company's interest, 'by fulfillment, direct or indirect, of the ultimate motivation of contributing to the obtainment of profit'";

Just as "the dominant jurisprudence of the Supreme Administrative Court (STA), holds that the analysis of the fulfillment of the requirement of indispensability should be carried out from an economic-business perspective, within the scope of the profit-making purpose underlying commercial companies (by way of example, see the STA Judgment of 30 November 2011, delivered in the context of Process No. 0107/11)";

And "the STA Judgment of 28 June 2017, delivered in the context of Process No. 0627/16, according to which 'the verification of this requirement of indispensability must be by the negative, that is, the AT should only disregard as tax costs those that clearly do not have the potential to generate increase in gains, and the competent administrative agent for determining taxable income cannot 'set itself up as a manager and qualify indispensability at the level of good and bad management, according to its feeling or personal sense; it is sufficient that it is an operation carried out as an act of management, without entering into the appreciation of its effects, positive or negative, of the expense or charge assumed for the achievement of revenue or for the maintenance of the income-generating source'";

"Additionally, the STA has already rejected the interpretation of article 23 of the IRC Code as requiring a balancing between expenses and income, considering that the concept of indispensability will be verified whenever expenses are incurred in the interest of the company (see on this point the Judgment of 24 September 2014, issued in the context of Process No. 0779/12)";

"The STA states in the aforementioned Judgment that it considers 'definitively ruled out a teleological view of indispensability (as a requirement for costs to be accepted as tax costs), according to which a relationship of cause and effect would be required, of the type conditio sine qua non, between costs and revenues, so that only those costs in relation to which it is possible to establish an objective connection with revenues could be considered deductible'";

Also in arbitral jurisprudence, this "understanding has been equally endorsed by successive decisions (...) namely in the aforementioned Decision No. 695/2015";

"In this way, the reading that the AT intends to make of article 23 of the IRC Code in order to sustain the correction in question is abusive, since AT does not contest the nature of the operations in question nor their subsumption to the business purpose, with a view to obtaining profit";

"Rather, it contests the fact that the items of financial expenses are not identical to the items of financial income, regardless of the economic substrate inherent in the income and expenses recorded in them";

The Claimant concludes by requesting "the declaration of illegality of the tax acts under analysis, with the consequent annulment of the correction carried out by the AT in the amount of €132,104.50 (one hundred and thirty-two thousand, one hundred and four euros and fifty cents)".

1. The Respondent contested, arguing, in brief terms, the following:

According to the AT, "the Claimant granted remunerated loans without passing on to the beneficiary companies the totality of the charges borne with the loans obtained for this purpose from third parties, deducting these charges from its taxable profit even though they were borne with financings intended for the activity of other companies";

This is because in fixing the charges of the financing made available by the Claimant to B... and C... "the other banking charges borne were not passed on (...), namely stamp tax and banking commissions";

"Being, in this measure, expenses that do not appear indispensable under the terms set out in art. 23 of the CIRC, because they consist of expenses of a financial nature borne with the obtainment of financial available resources that are not applied in the exploitation or operational economic activity of the Claimant but rather in that of the beneficiary companies of such loans";

"The methodology for determining financial charges that are not eligible for tax purposes, in the total amount of €132,104.50, took the following into account":

• The relationship was determined between the amount of loans obtained by the Claimant (€63,667,679.44) and those granted by it to group companies (€29,781,747.75), concluding that these represented 0.467 of those;

• The totality of "charges recorded in accounts 68123 – stamp tax, 68125 – stamp tax – effective interest rate and 69881 – other financing expenses and losses" was determined, concluding that it totaled €282,879.02;

• "The annual ratio 'loans granted/loans obtained' was used, which was applied to the balance of charges borne and not passed on, for purposes of determining the amount of charges not accepted", determining the value of €132,104.50;

The AT considers that the Claimant "does not contest the facts determined in the Final Report as is evident from the content of its request for arbitral ruling", limiting itself to calling "into question the calculation methodology of the corrected amount without specifically identifying what it considers to not be in accordance with reality, to be incoherent or incomprehensible";

The AT adds that "it is not at all a question of knowing whether the remuneration associated with the financing in question complies with the market conditions practiced at the time, for transfer pricing purposes";

"But rather [...] whether the expenses deducted by the Claimant from its taxable income are eligible for tax purposes, in accordance with the provisions of art. 23 of the CIRC";

Since it is not a question of "the income obtained with the granting of financing, but the expenses borne upstream with the obtaining of financings channeled to other companies", that is, "financial expenses borne with stamp tax and other charges that were not debited to the beneficiary companies of the loans in question";

Even because "the constitution of the Claimant was intended to create an individualized center of interests, with personality and autonomous capacity", "Not being intended (...) to bear charges with financings obtained for subsequent granting of loans, whence it results that the granting of loans, which may be somewhat in the interest of the Claimant, does not however constitute an operational activity included in its corporate purpose";

"The Claimant cannot ignore the regime imposed by the legislator for tax purposes, subtracting from the results of the other Group companies the charges which, once the respective requirements are met, would be deductible in the legal sphere of those Group companies, even if, in the exercise of its free autonomy, the Claimant has decided to bear them, not debiting them to C... nor to B...";

"Thus, even if the financings now in question are, indirectly, in the interest of the Claimant, it is undisputable that these charges are not directly related to its economic activity, with its operational activity as results from its corporate purpose (...) but rather with the economic activity of the companies benefiting from the loans granted";

"In truth, it is not possible to avoid the evidence that the charges now in dispute were borne with financings that were applied in those companies, in whose legal sphere they will produce their normal effects, including the ability to generate profits and contribute to the income-generating source of C..., as well as of B..., which is why those charges, if they had been debited, would possibly be deductible from the taxable income of these companies";

This is because "under the terms of art. 23 of the CIRC only expenses relating to the activity developed by the taxpayer itself are deductible, with the STA maintaining that, even when there is a relationship of dependency or dominance, companies have distinct personality and tax capacity and that unless this were the case, how could the exercise of one company's activity be attributed to another with which it had some relationship (Judgment of 12 July 2006, Process No. 186/06; Judgment of 7 February 2007, Process No. 1046/05, the Judgment of 20 May 2009, Process No. 1077/08 and the Judgment of 24 April 2012, Process No. 05251 of the Central Administrative Court South)";

And because "it results from art. 23 of the CIRC, combined with the principle of taxation of actual income, that a company, merely because it is part of the same group as another company which is also part of it, cannot substitute itself for that company in assuming liabilities, resulting therefrom different fiscal effects than those that would be obtained if the financing were allocated to the company that needs it for the exercise of its economic activity";

This being also the logic underlying the regime for determining taxable profit of groups of companies, although the Claimant (and the companies it financed) is/are not subject to it;

And this being also the established jurisprudence, which, to guarantee the "principle of taxation of actual business income, set out in art. 104(2) of the CRP", has unanimously rejected "expenses borne to enhance the gains of third-party companies, even if a company held/dominated by the taxpayer", giving as examples the STA judgment of 30/05/2012, in proc. 0171/11, and the CAT South judgment, of 24/04/2012, in proc. 05251/11.

1. No exception having been raised and there being no evidence to produce, the meeting provided for in article 18 of RJAT was dispensed with, and the parties were notified to submit, if so desired, successive written arguments within a period of 15 days. 16 November was set as the deadline for delivery of the Arbitral Decision.

2. Only the Respondent submitted arguments maintaining substantially the same argumentation as the Defense.

II. Case Management

1. The arbitral tribunal was regularly constituted and is materially competent, as provided in art. 2(1)(a) and 4, both of RJAT.

9.1. The parties enjoy legal personality and capacity, are legitimate and are represented (arts. 4 and 10(2) of the same statute and art. 1 to 3 of Ordinance No. 112-A/2011, of 22 March).

9.2. The proceedings are not affected by nullities and there is no obstacle to the consideration of the merits of the case.

III. On the Merits

III.1. Facts

III.1.1. Proven Facts

The following facts relevant to the decision are considered proven:

The Claimant was constituted in 2001, within the scope of the organization in Portugal of the European Football Championship of 2004, with a view to the construction, holding and operation of the new ... (as came to pass), having as its corporate purpose the management, construction, organization, planning and economic exploitation of sports infrastructure;

It is registered for activities of management of sports facilities (principal CAE - 93110) and rental of real estate (secondary CAE - 068200);

The Claimant belongs to D...: B..., with the NIPC... (B...) holds the control of the capital of C..., with the NIPC... (C...), which in turn holds the control of the capital of the claimant (A... or claimant);

The amount of financings obtained by the Claimant from banking institutions as of 30/06/2013 totaled a total of €63,667,679.44;

The Claimant granted loans to B... and C... in the total amount of €29,781,747.75;

For these loans granted to those group companies, the Claimant charged interest to the debtors, in the amount of €2,115,323.25;

The Claimant passed downstream (in the loans to the parent companies) the interest it bore upstream (by contracting banking loans): but the other banking charges borne were not passed on, namely stamp tax and banking commissions;

The AT carried out an internal inspection action (service order OI2015...), of partial scope in the context of IRC, relating to the year 2012, intended to carry out control of the Claimant's financial charges;

On 17 October 2016 the Claimant was notified of the Draft Inspection Report relating to Process No. OI2015..., in which a correction of the IRC taxable income for the period of 2012 was proposed, under the provisions of article 23(1) of the CIRC, in the amount of €132,104.50, relating to banking commissions, stamp tax and other financing expenses and losses, charged to the Claimant in the financings it obtained, but not charged in the financings it granted and, thus, not deductible for the purposes of determining taxable profit.

In the year in question, the claimant bore €282,879.02 of stamp tax and other financing expenses (as a result of the banking loans obtained):

The AT calculated the annual ratio "loans granted in the group/loans obtained" (€29,781,747.75 / €63,667,679.44 = 0.467), which was applied to the balance of expenses borne and not passed on (€282,879.02), for purposes of determining the amount of expenses not accepted (€132,104.50);

The Claimant did not exercise the right to prior hearing and the Final Report (IR) maintained that correction;

On 28 November 2016 the Claimant was notified of the IRC assessment notice No. 2016... and the corresponding statement of account adjustment No. 2016...;

On 27 March 2017 the Claimant filed a gracious complaint of the assessment acts (gracious complaint No. ...2017...), having been notified of the draft decision for dismissal on 26 October 2017;

The Claimant did not exercise the right to prior hearing and was notified of the final dismissal decision on 30 November 2017.

III.1.2. Unproven Facts

It is not proven that the interest charged within the group (to C... and B...) was at the higher interest rate that the claimant was bearing, associated with the most recent banking financing obtained.

III.1.3. Justification for the Determination of Facts

With regard to the proven facts, the tribunal's conviction was based on the free evaluation of the positions taken by the parties and the documents attached to the proceedings, including the documentation contained in the administrative file.

In light of the matters to be decided and in light of the analysis of procedural documents, especially the IR, one can conclude:

a) The Claimant, in determining and quantifying the interest to charge on loans within the group, took into account the interest rate borne in banking loans, but did not take into account (nor passed on) the value of stamp tax and other charges inherent to those financings.

b) The method of calculation for determining the value of the correction (proven facts J and K) is not contradicted in the IR in a concrete and detailed manner. The Claimant defends itself with the indispensability of the expense and with the application before the institute of art. 63 of the CIRC, but does not explain or detail the existence of passing on of stamp tax and financial charges, nor that the AT's calculation would be manifestly wrong and with accounts out of step with reality. In other words: the claimant argues (but it is not proven) that the interest charged within the group was at the higher interest rate that it was bearing, associated with the most recent banking financing obtained.

III.2. Legal Issues

III.2.1. Questions to be Decided

In light of the proven facts, there are two questions to be decided in the present proceedings:

1. Are or are not the expenses borne by the claimant in the banking loans obtained (stamp tax and other financing expenses) fiscally deductible (by interpretation and application of art. 23 of the CIRC), insofar as the loans obtained were channeled to the group companies (C... and B...) without the passing on of stamp tax and other expenses borne with the upstream banking financing (despite the accrual of interest on the loan).

2. Any fiscal correction, if it exists, would have to be made under art. 23 of the CIRC or rather under the terms of art. 63 of the CIRC (institute of transfer pricing).

III.2.2. Decision

The two matters will be treated jointly, given the factual, logical and legal connection between them.

The relevant data for the decision are the following: a subsidiary company (claimant) lends money (a lot of money) to the parent company and grandparent company, and charges them an amount (as interest) less than the total amount it bore to obtain those funds (interest + stamp tax + other charges). That is, the Claimant bears stamp tax and other banking charges, but does not pass them on downstream in the remuneration of loans within the group.

Now, to the case of the proceedings does not apply any legal and fiscal reasoning of loans within the group without interest (or interest lower than borne) – a matter known as supplementary/accessory payments and interest-free advances and the subject of arbitral jurisprudence (see for all the CAAD Judgment in process 298/2017) and of the STA (cfr. for all the STA Judgment of 21/2/2018, proc. 0473/13) – for the simple reason that the loans in question are not subsumed to those legal institutes. In those cases it is a question of loans from the "parent" company to the "subsidiary" (descending connection), covered by express provisions of commercial law, which allow the absence of interest (art. 210 to 213, art. 243 to 245, all of the Commercial Companies Code) and the management of share participations by holding companies; here, by contrast, we are in the presence of loans from the "subsidiary" company to the "parent" and "grandparent" company (ascending connection), without specific regulating and legitimizing norms in commercial law – and, consequently, all tax rules must be applied to resolve the case.

On the other hand, whatever interpretation is given to art. 23 of the CIRC, the truth is that it always requires, from the perspective of the creditor (taxpayer), that there exists some causal relationship of indispensability (interest) with its revenues or maintenance of its income-generating source. That is, the interest of the creditor (taxpayer) does not dissolve purely and simply in the interest of the group; for the cost to be accepted in fiscal terms, the taxpayer (claimant) must have an "egocentric" interest in the operation and in the recording of the charges in question.

Now, in the case of the proceedings, the Claimant neither alleges nor proves what its own interest would be in financing C... and B... (nor the justification of the remuneration conditions, lower, in overall terms to those it bore with the obtaining of the funds later loaned within the group). In the abstract, it could have indicated and proven that this financing with revenues lower than those borne with the Banking would be necessary for the claimant, for the obtaining of rental income from the exploitation of the Stadium that were paid by the debtors of the group (C... and B...), which were at the same time the lessees of the stadium; and that, without it (without the loans and without their concrete conditions) it could happen that it would not obtain the rental income, especially if the lessees (and debtors) were passing, temporarily, through a more difficult situation, in economic and financial terms. Or, to give another example, that these loans of the claimant (and their conditions) would be necessary to ensure the prestige of the E... brand, and that with this it also ensured a direct and own interest for the claimant.

Furthermore, it also cannot be invoked that the claimant (because contrary to the terms of the financing operation of the present case), with this operation, aimed, in mediate terms, at the management of holdings, by obtaining dividends and possible capital gains with the sale of capital shares, with the appreciation of the other companies. This rhetoric is completely unfounded in the case of the proceedings. The loans are made by the subsidiary company (granddaughter) and this interest, if it exists, would be of the dominant entities (C... and B...), only in cases, as carved out by jurisprudence, when the loan is descending and, in that scenario, which is not that of the present case, can there always be some own interest of the creditor of advances and supplementary payments (beyond the general interest of the group).

Note that in the argumentation expounded we are using the concept of indispensability with a broad and comprehensive meaning, in the sense of acceptance of the expense if it is incurred in the interest of the company, in the obtaining, even if mediate, of its profits (or revenues) and/or in the preservation, in whatever form, of its income-generating source (effectiveness and legal maintenance of the claimant). But, in the case of the proceedings, none of this is verified: the claimant merely lends funds obtained from banking to the upper companies of its group, in more disadvantageous conditions (for itself) than those borne with the Banking. In short: it is not possible to see any interest of the claimant in the financing of the group companies, and in the establishment of remuneration conditions more disadvantageous than those borne for obtaining the loans, by not having passed on the totality of the financial charges borne. In other words: it is not proper to admit that it would have undertaken an operation with these characteristics if the borrower were a company outside the group. No company lends money to another in overall conditions worse than it bore to obtain those funds from Banking. It would not even go into debt for that.

From here it is also seen that the case of the proceedings is subsumed also in the institute of transfer pricing, regulated in art. 63 of the CIRC – and, hereafter, with the proper deference, we will follow closely the considerations and solution recommended by the Judgment 695/2015-T (proceeding with factual and legal contours similar to the case of the proceedings).

In the correction made by the AT it is found that the revenues obtained by the claimant with the loans granted are lower than the expenses in which it incurs to finance itself. The very justification suggests that nothing would be corrected if there were a total passing on downstream of the overall charges with the banking financings borne upstream – if in short, in addition to interest, it also required from C... and B... the value of stamp tax and other charges borne in the banking financings obtained.

Now, art. 63 of the CIRC, in force at the time of the facts, enshrined the following (emphasis by the Tribunal):

"Article 63

Transfer Pricing

1 — In commercial operations, including in particular operations or series of operations on goods, rights or services, as well as in financial operations, effected between a taxpayer and any other entity, subject or not to IRC, with which it is in a situation of special relationships, terms or conditions must be contracted, accepted and practiced substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations.

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

Note that in the case of the proceedings the requirements for application of art. 63 of the CIRC are met (cfr. also art. 77(3) of the LGT): a) existence of special relationships (relationship of dominance of capital between B..., C... and A...); b) establishment of conditions (remuneration of the loan) divergent from those that would be applied between independent entities; c) causal nexus between the existence of special relationships and these divergent conditions vis-à-vis competitive market conditions – that is, if the debtors were not from the Group, the claimant would certainly apply a higher rate than that employed, to at least pass on all the charges it bore with the banking loans – namely stamp tax and other banking charges associated.

The Tribunal is not unaware that the application of norms which, like those of transfer pricing, are essentially anti-evasion and whose application is based quite heavily on the concept of "comparability" of transactions – sometimes of complex operationalization – may raise some resistance to their use as a foundation element of fiscal corrections.

However, the law exists to be used in the situations to which it must be applied. And, it being true that the concept of comparability is sometimes of difficult applicability, the same occurs with the use of the concept of "indispensability" of article 23 of the CIRC.

The latter (art. 23 of the CIRC) should not be applied systematically as an anti-abuse clause; for it contains, first and foremost, a general condition to be respected for the deductibility of expenses. If there are anti-abuse norms that adapt to certain situations, they should, first, be the tools of control used by the AT.

In this framework, the assessment under challenge is flawed by error on the legal and factual grounds, due to erroneous interpretation and application of article 23(1)(c) of the IRC Code, which constitutes a vice of violation of law, for which reason they must be declared illegal and consequently annulled.

IV. Decision

In accordance with the foregoing, this Arbitral Tribunal agrees to uphold the arbitral claim and consequently to declare the annulment, for illegality, of the assessment under challenge of IRC (statement of IRC (Corporate Income Tax) assessment notice No. 2016... relating to the period of 2012 and the corresponding statement of account adjustment No. 2016...).

V. Value of Proceedings

In accordance with the provisions of art. 97-A(1)(a) of the Code of Tax Procedure and Process (CPPT) and 3(2) of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €132,104.50.

Notify.

Lisbon, 16 November 2018

The Arbitrators

Fernanda Maças (arbitrator-president)

Tomás Cantista Tavares (arbitrator-member)

Américo Brás Carlos (arbitrator-member – dissenting as per attached statement, which forms an integral part of this decision)

(Text prepared by computer, pursuant to article 131(5) of the Code of Civil Procedure, applicable by remission of article 29(1)(e) of the Legal Regime of Tax Arbitration)

DISSENTING OPINION

I voted against the Judgment because it imputes to the tax act under analysis a vice of violation of law for, in summary, being based on article 23(1) and subparagraph c) of the CIRC and not on article 63 of the same Code.

I understand that, when the AT intends to carry out any corrective assessment, it is it that, obviously, chooses the path that leads to it. Then, it justifies it and submits itself to the scrutiny that taxpayers and courts will make of that choice and that course. It is therefore on the tax act practiced and its substantiation that the judgment of the court falls, and not on the substantiation that in the view of the taxpayers should have been used.

In the case, the AT opted to sustain the fiscal correction in question on article 23(1) of the CIRC, submitting the situation of fact – obtaining financing with expenses, followed by the cession of capital obtained to the parent company, without reimbursement of the part of the charges relating to stamp tax and other financing expenses – to the test of the proven indispensability of the expenses, for the purposes of their fiscal deductibility; and concluded, as does the Judgment, that, by this route, the charges in question would not be fiscally deductible. As the judgment well states, "it is not possible to see any interest of the claimant in the financing of the group companies". Therefore, in this perspective, I do not find any illegality inherent to the challenged act.

The Judgment concluded, however, that the AT should have based its tax act on article 63 of the CIRC and not on article 23(1) and subparagraph c) of the CIRC, a thesis to which, with due respect, I do not adhere.

Given that the mechanism of article 23 of the CIRC is of general scope, prior and applicable to all entities, with or without special relationships between them, as results from its systematic insertion in the CIRC – "General Rules of the chapter on Determination of Taxable Income" – I do not see that the choice of this legal foundation for the act of additional assessment is, by itself, a cause of illegality.

On the other hand, article 63 is not a norm that precludes the general norm of article 23(1) of the CIRC, such that in the presence of the requirements of that provision the application of this one is set apart. The scope of article 63 of the CIRC is not equal to that of article 23(1), nor concentric with it. Article 63 of the CIRC operates in the face of divergence between the contractual conditions practiced between related subjects, by comparison with those that would be practiced between unrelated entities, in comparable operations. But, with respect to the expenses recorded, it will operate when these have already passed the test of fiscal indispensability of article 23 of the CIRC. And, in the proceedings, it is through this initial and general test that the charges with stamp tax and other financing expenses (such as commissions) do not pass. It being necessary, in my opinion, nothing more to legally support the act of corrective assessment sub judice.

Article 23(1) operates in light of the consideration of expenses that are not deductible because they lack the absolute condition of indispensability – in the sense that they either are or are not, there being no intermediate grades in it – while article 63 of the CIRC translates to a quantitative correction by the amount of the difference between the values practiced and the arm's length prices that would exist, for comparable operations, between independent entities.

I find that the situation sub judice does not fit within the teleology and the factual circumscription of article 63 of the CIRC. The fiscal corrections made under the terms of this provision, of a quantitative nature in light of the arm's length price, are intrinsically connected to or dependent on elements that are extraneous to the treatment of the question in dispute. I indicate, by way of example, the mechanism of correlative adjustment (numbers 11 and 12), the selection of the method that assures the highest degree of comparability (number 3), and the obligation to maintain documentation relating to the policy adopted regarding transfer pricing (number 6).

Mechanisms of adjustment and obligations that neither fit nor are required within the scope of article 23 of the CIRC.

For these reasons, I understand that the tax act under analysis should have been maintained. And hence, this dissenting opinion.

Américo Brás Carlos