CAAD 714/2016-T: Deductibility of Financial Charges by SGPS Under Article 23 CIRC and Article 32 EBF

ARBITRATION AWARD

The arbitrators José Baeta de Queiroz (presiding arbitrator), Ricardo Rodrigues Pereira and André Sousa Tavares, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Court, agree as follows:

I. REPORT

1. On the 30th of November 2016, the commercial company A…, SGPS, S. A., NIPC…, with registered office at Rua…, n.º…, …, …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2.º, n.º 1, paragraph a), and 10.º, n.ºs 1, paragraph a), and 2, of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228.º of Law n.º 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking:

• The declaration of illegality and annulment of the additional Corporate Income Tax (IRC) assessment act n.º 2016 …, relating to the fiscal year 2013, of the compensatory interest assessment act n.º 2016 … and corresponding account settlement statement n.º 2016 … (all with compensation n.º 2016…), from which resulted tax payable in the amount of € 436.302,81; and

• The declaration of illegality and annulment of the decision dismissing the administrative review petition n.º …2016…, which proceeded through the Large Taxpayers Unit, filed against the aforementioned acts.

The Applicant annexed 12 (twelve) documents and listed 2 (two) witnesses, having not requested the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. In essence and in brief summary, the Applicant alleged the following:

It begins by invoking the insufficiency of reasoning of the disputed assessment acts, given that therein the grounds that determined their issuance are not made explicit – that is, the demonstration of the factual and legal prerequisites on which the assessment depends – with only a set of values being indicated, which are imperceptible to a normal recipient and to the Applicant itself.

Thus, given that from the disputed assessment acts one cannot discern what the cognitive process underlying them is, by virtue of their insufficient reasoning, they are tainted by a formal defect, and therefore must be annulled by violation of the provisions of articles 103.º, n.º 2 and 268.º, n.º 3, of the Constitution of the Portuguese Republic (CRP) and article 77.º of the General Tax Law (LGT).

This assertion is not prejudiced by the allegation of possible reasoning by cross-reference, as there is no reference to any possible cross-reference to a specific external document, contemporary to or prior to those acts, which appears essential so that the reasoning be as accessible to the taxpayer as if it were contained in the act itself.

In a second moment, the Applicant invokes the omission of an essential legal formality, specifically the right to prior hearing, provided for in article 60.º, n.º 1, paragraph a), of the LGT, which implies, in itself, the annulment of the disputed assessment acts.

Having addressed these formal issues, the Applicant proceeds to the substantive analysis of the matter at issue, beginning by describing the procedure leading to the issuance of the disputed tax acts (delivery of Corporate Income Tax Return Form 22 for the fiscal year 2013, relating to the group of which it is the parent company; issuance of the corresponding Corporate Income Tax assessment; internal tax inspection procedure initiated by the AT and its final decision regarding the correction to the taxable income of the group's Corporate Income Tax, in the total amount of € 1.731.429,43, due to alteration of the tax loss of company B…, SGPS, S. A., integrated in the group; issuance of the disputed assessment acts; filing of an administrative review petition against these same acts and its dismissal by the AT) and maintaining that these are based on the non-acceptance, as a deductible expense, for purposes of determining taxable profit, of financial charges (allegedly) incurred with the acquisition of equity interests, pursuant to n.º 2 of article 32.º of the Corporate Income Tax Code (EBF) and, subsidiarily, pursuant to article 23.º of the IRC Code and, additionally, the calculation method applicable for determining non-deductible financial charges.

The Applicant rejects the position advocated by the AT to the effect that supplementary contributions, by presenting characteristics similar to equity interests, fall within the concept of equity interests, contained in n.º 2 of article 32.º of the EBF, resulting therefrom that the financing charges incurred for the making of supplementary contributions, in the case of SGPSs, do not contribute to taxable profit, as do not the financing charges incurred for the acquisition of equity interests.

In the Applicant's view, equity interests and supplementary contributions are distinct, autonomous realities with specific legal-tax classification, because, although supplementary contributions consist of a transfer of funds by the partners to the company, which integrates the latter's assets, they do not integrate its share capital.

The Applicant further states that although it does not contest any similarities that supplementary contributions may have with share capital, the AT fails, with reference to the most diverse sources of doctrine and jurisprudence existing on the matter, to set aside, in practice, the true hybrid configuration associated with supplementary contributions, which cannot be confused or equated with share capital.

The Applicant further refers that taking into account the literal element of n.º 2 of article 32.º of the EBF and the spirit underlying the regime established therein, it appears that this norm is not applicable to financing charges whose destination is the granting of supplementary contributions to investees of an SGPS, because it clearly results that supplementary contributions are not covered by the provision of that norm, given that such contributions, under normal circumstances, are not susceptible to generating capital gains that benefit from the exemption regime established therein, as a matter of equity, the financial charges associated with the financing obtained for their granting should be tax-deductible.

In another order of considerations, the Applicant maintains that from the combination of the provision of article 23.º, n.º 1 with paragraph c) of article 20.º, both of the IRC Code, it results, without doubt, and in particular in the case of SGPSs, that charges incurred for financing of investees, via supplementary contributions, are presented as indispensable for the maintenance of the income-producing source – dividends – subject to tax.

Concerning the monthly periodicity of the determination of non-deductible financial charges, the Applicant states that it is the AT itself that permits certain degrees of freedom regarding the methodology to be adopted by taxpayers in determining such financial charges and, within those degrees of freedom, is precisely included the periodicity of the determination of non-deductible financial charges.

The Applicant concludes the request for arbitral ruling by maintaining the illegality of the decision dismissing the administrative review petition and the illegality of the compensatory interest assessment, as well as the right to indemnification for undue provision of guarantee.

1.2. The Applicant concludes its initial pleading by petitioning as follows:

"Wherefore it is requested of Your Excellencies the admission of the present request for arbitral ruling, in accordance with and for the purposes of the Legal Regime of Arbitration in Tax Matters, and that the same be judged to be well-founded, as proven and legally justified, annulling the Corporate Income Tax assessment act n.º 2016 … (IRC 2013 – Financial Charges), the compensatory interest assessment act n.º 2016…, from which resulted tax payable in the amount of € 436.302,81 and the account settlement statement n.º 2016… (all with compensation n.º 2016…) and the dispatch dismissing the administrative review petition, which proceeded under number …2016… at the Large Taxpayers Unit, with the other legal consequences, namely indemnification for damages resulting from undue provision of guarantee."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 13 December 2016.

2. The Applicant did not proceed to appoint an arbitrator, so, pursuant to the provision of paragraph a) of n.º 2 of article 6.º and paragraph a) of n.º 1 of article 11.º of the RJAT, the President of the Deontological Council of CAAD appointed as arbitrators of the collective Arbitral Court the undersigned, who communicated acceptance of the appointment within the applicable time period.

3.1. On 25 January 2017, the parties were duly notified of this appointment, having neither expressed willingness to refuse the appointment of the arbitrators, pursuant to the combined provision of article 11.º, n.º 1, paragraphs b) and c), of the RJAT and articles 6.º and 7.º of the CAAD Code of Ethics.

3.2. Thus, in conformity with the provision of paragraph c) of n.º 1 of article 11.º of the RJAT, the collective Arbitral Court was constituted on 9 February 2017.

1. On 10 March 2017, the Respondent, duly notified to that effect, filed its Answer in which it specifically contested the arguments put forward by the Applicant, concluding that the present action was without merit.

4.1. In essence and also briefly, it is important to glean the most relevant arguments on which the Respondent based its Answer:

The Respondent begins by alleging that the invocation, by the Applicant, of the defects of reasoning and violation of the right to participation, constitutes an expansion of the cause of action to the extent that the Applicant did not raise in the administrative review petition any procedural defect in the assessment act and by doing so in the context of the request for arbitral ruling, such constitutes an expansion of the cause of action, for which reason the same should be considered as not written.

The Respondent, subsequently, regarding the alleged insufficiency of reasoning of the assessment acts, begins by saying that the Applicant wishes, via the request for arbitral ruling, and in the administrative review petition, clearly demonstrates full knowledge of the factual and legal framework in which the AT's decision was based, since it rebuts, point by point, all of its actions.

Furthermore, the Respondent states that it is through the inspection procedure that confirmation, correction and determination of the taxable matter takes place, which will be the subject of assessment. For this reason, separating the two moments and isolating them, highlighting, on one hand, the procedure for determining taxable matter and, on the other, the assessment procedure, is a defect in analysis that ignores the connection existing between both, knowing that the tax procedure comprises the entire succession of acts.

Regarding the alleged omission of essential formality, the Respondent states that the Applicant was notified to exercise the right to prior hearing in the context of the inspection procedure, pursuant to the provision of article 60.º, n.º 1, paragraph e), of the LGT, having not exercised it; therefore, the Respondent was relieved of granting a new right, pursuant to article 60.º, n.º 3, of the LGT.

Subsequently, the Respondent contests the substantive arguments put forward by the Applicant, as justification for its disagreement regarding the AT's actions and dissension with respect to the disputed tax acts.

In that context, the Respondent maintains the similarity between supplementary contributions and equity interests, even qualifying such contributions as equity interests for purposes of applying the provisions of article 23.º, n.ºs 3 to 5, of the IRC Code, which is used with the same meaning in n.º 2 of article 32.º of the EBF, thus precluding from contributing to the formation of taxable profit the gains and losses generated with their disposal, as well as the financial charges incurred with their acquisition, as well as any other charges connected with their transfer that meet the prerequisites contained in n.ºs 3 to 5 of article 23.º of the IRC Code.

In order to substantiate this understanding, the Respondent alleges that supplementary contributions, a paradigmatic example of financing by equity capital, consist of transfers made by partners, for the reinforcement thereof, at a given moment in the life of a company, assuming the form of additional capital; in that respect, although supplementary contributions present distinctions with respect to share capital, they nonetheless have with the latter, for what is relevant here, a similar nature. It is true that they do not integrate share capital, but they constitute elements of the equity capital of the beneficiary entity and should be qualified as equity interests for tax purposes.

In this manner, the Respondent advocates that, for purposes of the provision of n.º 2 of article 32.º of the EBF, the charges incurred with obtaining the necessary means for the making of ancillary provisions under the regime of supplementary contributions should be disregarded as costs of the fiscal year, that is, the financial charges incurred with their financing do not contribute to the determination of taxable profit.

Regarding the question of the indispensability of financing charges for the maintenance of the income-producing source, the Respondent maintains that the financial charges incurred with the financing of the supplementary contributions at issue in the present case are not tax-deductible, given the provision of article 23.º, n.º 1, of the IRC Code, as they constitute costs incurred in obtaining funds intended for the free financing of legally and economically independent entities from the Respondent. In that respect, such charges do not contribute to the achievement of income or gains or to the maintenance of the Applicant's income-producing source, being not directly related to the Applicant's activity, but rather with the activity and interest of the investee companies to which free financing was granted.

Regarding the monthly determination of non-deductible financial charges, the Respondent states that the Applicant does not indicate how the criterion followed by the AT conflicts with the provision of article 32.º, n.º 2, of the EBF, nor does it refer how that same criterion collides or collided with the calculations it performed and also does not identify any error or reason that undermines the values determined by way of that criterion.

In another parameter, the Respondent alleges that the interpretation promoted by the Applicant of the tax deductibility of financial charges incurred, in light of the provision of article 23.º of the IRC Code, presents itself as squarely violating the principles of equality, taxation by actual profit and contributory capacity.

The Respondent also pronounces itself on the legality of the compensatory interest assessment, which results from the violation of norms established in the IRC Code, maintaining that there are no defects affecting that tax act and determining its annulment, resulting from the facts of the case that there was a delay, caused by the Applicant, in the assessment of tax.

Finally, the Respondent contests the invoked right to indemnification for undue provision of guarantee, saying that this request should fail due to the failure of the main request and, moreover, the Applicant does not indicate or, much less, proves whether it actually provided guarantee, when it provided it, what its amount was and what amount of charges it incurred or will incur.

The Respondent thus concludes its pleading:

"In these terms and in the remaining matters of law that Your Excellencies will duly supply, it must:

• be judged that the expansion of the cause of action is well-founded to the extent that the Applicant raises procedural defects that were not raised in the administrative review petition, the Respondent not having pronounced itself on that matter:

• the present request for arbitral ruling should be judged to be without merit as unproven."

4.2. Subsequently, the Respondent annexed to the case file the respective administrative file (hereinafter, abbreviated as PA).

1. Notified to that effect, the Applicant came to pronounce itself on the matter alleged by the Respondent, pertaining to the alleged expansion of the cause of action, saying, among other things, the following:

The concept of cause of action is a procedural concept, having application to the process of judicial review, as well as to the tax arbitration process, not being, in this manner, applicable to the administrative process of administrative review.

In that respect, there is no principle of stability of the instance that should be respected between the administrative review petition and the subsequent judicial process/arbitration process, given that this principle has no establishment in the tax procedure.

The Applicant further maintains that even when it opts to submit the declaration of illegality of the assessment act to the AT, via the filing of an administrative review petition, such does not preclude that, after the lapse of the administrative phase, it may resort to the judicial means to challenge the assessment act, being able to invoke any illegality that the act suffers from, even if this was not invoked in the administrative sphere. Because the process of challenge, whether it runs its course through the Tax Court or through the Arbitral Court, has as its mediate object the assessment act, so it is also on the legality of this assessment act that the arbitral ruling recurs and not merely on the facts and grounds that supported the formation of the decision dismissing the administrative review petition.

1. The Applicant waived the examination of the witnesses it had listed, the Court therefore dispensing with holding the meeting to which article 18.º of the RJAT alludes and setting 9 June 2017 as the deadline for delivery of the arbitral award.

2. Both parties filed written submissions, in which they reiterated the positions previously assumed in their respective pleadings.

II. PRELIMINARY DETERMINATION

The Arbitral Court was regularly constituted and has jurisdiction.

The proceedings do not suffer from nullities.

The parties possess legal capacity and standing, are duly represented and have legitimate interest.

§. REGARDING THE ALLEGED EXPANSION OF THE CAUSE OF ACTION

The Respondent alleges that the invocation, by the Applicant, of the defects of reasoning and violation of the right to participation, constitutes an expansion of the cause of action to the extent that the Applicant did not raise in the administrative review petition any procedural defect in the assessment act and by doing so in the context of the request for arbitral ruling, such constitutes an expansion of the cause of action, for which reason the same should be considered as not written.

The Respondent, from the outset, makes a complete distinction that necessarily must be made between tax procedure – within which administrative review petition is inserted (cf. article 54.º, n.º 1, paragraph f), of the LGT and article 44.º, n.º 1, paragraph e), of the Code of Tax Procedure (CPPT)) – and tax process – in which this tax arbitration process is inserted –, the first being "the set of acts concretizing and externalizing the will of tax administrative agents (in their totality denominated as "tax Administration", "tax Administration", "public finances", "tax authority", etc.)"[1], while "the tax process will be the set of acts concretizing and externalizing the will of tax jurisdictional agents (tax Courts)."[2]

On the other hand, as the Applicant aptly points out, the concept of cause of action is of an adjectival nature and, as such, has application to the process of judicial review and, also, to the tax arbitration process, not being extensible to the administrative review petition process.

In another order of considerations, it is important to note that, in proceedings such as the one before us, the Court not only can annul, totally or partially, the decision of the Tax Administration, as it can also order it to refund amounts incorrectly collected and to pay indemnifying interest.

For this, any illegality can serve as the foundation for the challenge (cf. article 99.º of the CPPT), which the Court is empowered to determine whether or not it has been previously invoked in the administrative sphere, namely within an administrative review petition procedure or hierarchical appeal.

In this same sense, it was decided in the CAAD awards rendered in arbitration case n.º 284/2014-T that "it is the responsibility of the Court to assess any illegality committed in the assessment even if not raised in the administrative review petition" and in arbitration case n.º 256/2015-T that "arbitral jurisdiction, in cases where the law grants it jurisdiction, has true jurisdictional nature, being able to determine all situations that fall within the sphere of cognoscibility of the courts, with the challenge not being limited by the grounds invoked in the administrative review petition or hierarchical appeal".

In these terms, it is important, therefore, to conclude that the alleged expansion of the cause of action does not occur, it being permitted to the Court to determine all defects invoked by the Applicant, with respect to the disputed tax acts, namely, if such proves to be necessary, the defects of insufficient reasoning and omission of the right to prior hearing.

There are no other exceptions or preliminary issues that prevent determination of the merits and of which it is necessary to determine.

III. SUBSTANTIATION

III.1. ON FACTS

§1. FACTS FOUND PROVEN

The following facts are considered proven:

a) The Applicant is a Portuguese joint-stock company, whose corporate purpose is the management of equity interests in other companies, as an indirect form of conducting economic activities, acting as a Company Managing Equity Interests (SGPS).

b) The Applicant is subject to the general regime of Corporate Income Tax, with its tax period coinciding with the calendar year.

c) The Applicant is the parent company of a group of companies, called C…, which is taxed in accordance with the Special Regime for Taxation of Groups of Companies (hereinafter, designated RETGS).

d) In the year 2013, the aforementioned group dominated by the Applicant was composed, among others, of company B… SGPS, S. A. (hereinafter, designated B…), holder of tax identification number ….

e) On 27 May 2014, the Applicant proceeded to file a tax return (Form 22), in the context of Corporate Income Tax, relating to the tax period 2013, relating to the group of companies, of which it is the parent company, having made payment of the self-assessed tax, in the amount of € 1.303.293,50, on 30 May 2014. [cf. documents n.ºs 3 and 4 annexed to the Request]

f) Following the filing of said tax return, Corporate Income Tax assessment n.º 2014…, of 21 July 2014, was issued, relating to the tax period 2013. [cf. document n.º 5 annexed to the Request]

g) In compliance with Service Order n.º OI2015…, of 24 March 2015, a partial internal inspection procedure was conducted on the accounting-tax elements, relating to the period of 2013, of company B…. [cf. documents n.ºs 6 and 7 annexed to the Request]

h) Following that inspection action, a correction to the taxable matter was made in the total amount of € 1.731.429,73, consisting of the non-acceptance of financial charges incurred with the acquisition of equity interests, the AT understanding that, in accordance with n.º 2 of article 32.º of the EBF, such charges do not contribute to the determination of taxable profit and, in any event, are not accepted as expenses, in light of the provision of n.º 1 of article 23.º of the IRC Code, to the extent that such are not connected with the company's own activity nor associated with remunerated assets. [cf. document n.º 6 annexed to the Request]

i) Company B… accepted part of the correction proposed by the AT, in the amount of € 108.812,79, resulting from lapses it incurred when determining financial charges attributable to equity interests, having proceeded to its voluntary regularization, through the filing, on 13 July 2015, of the respective Form 22 return and payment of the tax amount resulting therefrom, in the value of € 27.203,20. [cf. documents n.ºs 6 and 8 annexed to the Request]

j) In compliance with Service Order n.º OI2015…, of 9 November 2015, the Applicant, as parent company of C…, was subjected to an internal inspection procedure, relating to the fiscal year 2013, with a view to reflecting in the Group's taxable result the sum of voluntary regularizations and corrections made to the individual tax results determined in the tax returns of each of the companies belonging to the Group, namely company B…, totaling an arithmetic correction to the Applicant's taxable profit in the total value of € 1.731.429,43. [cf. document n.º 7 annexed to the Request]

k) Following that inspection action on the Applicant, the respective Tax Inspection Report was prepared – a copy of which constitutes document n.º 6 attached to the request for arbitral ruling and is hereby entirely reproduced –, which was notified to the Applicant, through office n.º…, of 28 March 2016, from the Large Taxpayers Unit, sent by registered mail with acknowledgment of receipt.

l) Subsequently, by virtue of the aforementioned correction, the Applicant was notified of additional Corporate Income Tax assessment n.º 2016…, relating to fiscal year 2013, compensatory interest assessment n.º 2016 … and corresponding account settlement statement n.º 2016 … (all with compensation n.º 2016…), from which resulted tax payable in the amount of € 436.302,81, with voluntary payment deadline of 30/05/2016. [cf. document n.º 2 annexed to the Request]

m) The Applicant did not make payment of said tax amount of € 436.302,81.

n) As a consequence of that failure to pay, tax enforcement proceedings n.º …2016…, in the amount of € 439.744,78, were initiated. [cf. document n.º 11 annexed to the Request]

o) The Applicant, with a view to obtaining suspension of that tax enforcement proceeding, provided a bank guarantee, issued by D…, S. A. and to which was assigned the designation…, in the amount of € 553.720,13. [cf. documents n.ºs 11 and 12 annexed to the Request]

p) On 21 July 2016, the Applicant filed an administrative review petition – a copy of the initial pleading of which constitutes document n.º 9 attached to the request for arbitral ruling and is hereby entirely reproduced –, requesting the annulment of additional Corporate Income Tax assessment n.º 2016…, relating to fiscal year 2013, compensatory interest assessment n.º 2016 … and corresponding account settlement statement n.º 2016 … (all with compensation n.º 2016 …). [cf. PA attached to case file]

q) Said administrative review petition was filed, under number …2016…, at the Finance Service of Oeiras-… and subsequently referred to the Large Taxpayers Unit, with a dispatch being issued, on 30 September 2016, by the Head of the Tax Management and Assistance Division of the Large Taxpayers Unit, agreeing with the respective draft decision, in conformity with Information n.º …/2016 – a copy of which is contained in document n.º 10 attached to the request for arbitral ruling and is hereby entirely reproduced –, which contains, among other things, the following [cf. PA attached to case file]:

[Content to be continued due to length]

r) By dispatch of 7 November 2016, from the Head of the Tax Management and Assistance Division of the Large Taxpayers Unit, the aforementioned administrative review petition was dismissed, in conformity with Information n.º …/2016 – a copy of which is contained in document n.º 1 attached to the request for arbitral ruling and is hereby entirely reproduced –, which contains, among other things, the following [cf. PA attached to case file]:

[Content continues]

s) The Applicant was notified, through office dated 09/11/2016, from the Tax Management and Assistance Division of the Large Taxpayers Unit, of the decision dismissing the aforementioned administrative review petition.

t) On 30 November 2016, the request for constitution of an arbitral tribunal that gave rise to the present proceedings was filed. [cf. information system for case management of CAAD]

§2. FACTS NOT PROVEN

With relevance to the assessment and decision of the case, there are no facts that were not proven.

§3. STATEMENT OF REASONS REGARDING MATTERS OF FACT

Regarding the matters of fact proven, the Court's conviction was based on the facts set forth by the parties, whose correspondence to reality was not challenged, in the documents and in the respective administrative file attached to the case file.

III.2. ON LAW

The Applicant bases the request for declaration of illegality and consequent annulment of the decision dismissing the aforementioned administrative review petition and the disputed tax acts, on the invocation of the following defects: insufficiency of reasoning of the assessment acts; omission of essential legal formality (prior hearing); and violation of article 32.º, n.º 2, of the EBF and article 23.º, n.º 1, of the IRC Code, in the versions in force in 2013.

Article 124.º of the CPPT, applicable by operation of article 29.º, n.º 1, paragraph a), of the RJAT, provides that the court must prioritarily assess the defects that lead to a declaration of non-existence or nullity of the impugned act and, subsequently, the defects that lead to its annulment (n.º 1). With regard to defects that constitute non-existence or nullity, the judge must prioritarily determine the defects whose procedence determines, in the judge's prudent discretion, more stable or effective protection of the offended interests. Regarding defects that constitute voidability, the same criterion is established, which will only not apply if the challenger has established a relationship of subsidiarity between the defects imputed to the act – which is permitted by article 101.º of the CPPT –, as in that case priority is given to their intention (provided that the Public Ministry has not raised other defects) (n.º 2).

The rules emanating from this legal norm on the order of determination of defects are intended to protect the interest of the challenger with maximum procedural efficiency, omitting pronouncement on defects invoked when the defect or defects already recognized prevent renewal of the act with the same legal result. Indeed, the establishment of this order of determining defects presumes that, upon determining a defect that leads to the legal elimination of the impugned act, the court will cease to determine the remaining ones, as if the judge had to determine all defects imputed to the act, the order of determination would be indifferent.

The protection of offended interests is more stable when the decision prevents renewal of the act that offends the interests of the challenger and will be more effective when it allows the interested party, in execution of judgment, to obtain better satisfaction of its interests, offended by the annulled act.

Thus, if it is, for example, a defect of violation of law, the annulment of the act will prevent the practice of a new tax act in which the same norm that was at issue in the prior act is applied or not applied, which will result in the impossibility of practicing a new act that imposes taxation on the challenger.

As may be inferred from what has been said, it is taking into account the execution of the annulling judgment and the influence that the type of defect that founded the annulment has on it that justifies the establishment of an order of determining the defects of the impugned act.

In the concrete case, in which the defect of form consisting of the insufficiency of reasoning of the disputed assessment acts is invoked, it is important, however, to bear in mind some contributions that jurisprudence gives us on this matter, an example of which is the decision of the Supreme Administrative Court, rendered on 17.11.2010, in case n.º 01051/09, available at www.dgsi.pt:

"…the jurisprudence of this Supreme Court has repeatedly explained, in the context of the interpretation of the normative content of the analogous rule contained in article 57.º of the Former Law on Administrative Tax Procedure (LPTA), that although the more effective protection of the appellant's interests would in principle require the prioritary determination of substantive or fundamental defects in relation to formal defects, namely the defect of lack of reasoning (given that the verification of this does not prevent renewal of the act with the same legal configuration, purged, naturally, of the defect that led to its annulment) – cf., among others, the decision of the 1st Section of the STA, rendered on 23.04.97, in case n.º 35.367 –, such rule is not, however, absolute, as it can happen that only the reasoning can reveal substantive defects through the clarification of the factual and legal framework in which the impugned act was based. That is, the precedence of the formal defect can be justified when the inquiry into the concrete motivation of the act proves to be indispensable to the control of substantive defects. For this reason, it has been recognized that the more effective protection of the appellant's interests can pass through the prioritary determination of formal defects, specifically the defect of lack of reasoning, whenever the discovery of the motivation of the act can provide elements necessary for the judgment of verification of substantive defects, which occurs whenever there is an absolute lack of reasoning (of fact and/or of law), for this implies the impossibility of determining the facts on which the act was based and/or its legal framework, making impossible jurisdictional control of substantive defects – cf., among others, the decisions rendered by the 1st Section of the STA on 08.07.1993, in case n.º 31.138, on 22.09.1994, in case n.º 32.702, and on 20.05.1997, in case n.º 40.433.

As was stated in the decision rendered by the 1st Section of this Court on 4/06/98, in case n.º 41.223, "the prioritary determination of the formal defect will only be required of the judge when non-determination of that defect beforehand makes impossible decisively the determination of the alleged substantive defects, relating to the intrinsic legality of the act, which the rule of art. 57.º, n.º 2, paragraph a), of the LPTA mandates to assess prioritarily. Or, saying it inversely, the prioritary determination of the formal defect will cease to be required, the rule of assessment of art. 57.º, n.º 2, paragraph a), being to be respected, whenever the alleged lack or insufficiency of reasoning proves itself, in the concrete case (and the assessment must, obviously, be case-by-case) irrelevant to the assessment and possible procedence of the defect or defects of substance equally alleged.".""

In this parameter, it appears to us that, in this case, the determination of the alleged substantive defects should be preceded by the determination of the alleged formal defect, to the extent that the determination of those substantive defects depends on the prior determination of the reasoning basis of the impugned acts. In other words, the assessment and possible procedence of those substantive defects depends on the content of the reasoning discourse of the impugned acts, as only it can provide the factual and legal reasons that support those acts.

In this framework, we therefore opt for the prioritary determination of the defect of insufficiency of reasoning of the impugned tax act, which we now proceed to do immediately.

§1. OF THE INSUFFICIENCY OF REASONING OF THE TAX ACTS

Reasoning is a requirement of tax acts in general, being an imposition, primarily, constitutional (cf. article 268.º, n.º 3, of the CRP), but also legal (cf. article 77.º of the LGT).

However, as referred to by Paulo Marques and Carlos Costa (The Assessment of Tax and Its Reasoning, Coimbra Editora, Coimbra, 2013, p. 68), contrary to what occurs in the "constitutional text (article 268.º, n.º 3, of the Constitution), in which the reasoning of acts is required "when they affect rights or legally protected interests", in the context of tax procedure (art. 77.º of the LGT), it was not intended to restrict the requirement for reasoning of the decision only to acts unfavorable to the taxpayer, although there should be greater density of reasoning in these latter cases."

As noted by Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa (General Tax Law, Annotated and Commented, 4th Edition, Encontro da Escrita Publishing, Lisbon, 2012, pp. 675-676), in the tax context, "the duty to reason the decisions of tax procedure and tax acts is concretized in art. 77.º of the LGT.

As the STA has understood it, the legal and constitutional requirement for reasoning aims, primarily, to allow the interested parties knowledge of the reasons that led the administrative authority to act, in order to enable them to make a conscious choice between acceptance of the legality of the act and its contentious challenge.

To achieve this objective the reasoning must provide the recipient of the act the reconstitution of the cognitive and evaluative itinerary traveled by the authority that practiced the act, so that one can know clearly the reasons why it decided in the way it decided and not differently.

In the present art. 77.º [of the LGT] the duty to reason is extended to all decisions of tax procedures, so it is mandatory even in decisions favorable to taxpayers.

This requirement is understandable given the plurality of reasons that impose the requirement for reasoning of administrative acts, ranging from the need to enable the subject to make a conscious judgment on the convenience or otherwise of challenging the act, to guaranteeing the transparency and weighing of the Administration's actions and the need to ensure the possibility of hierarchical and jurisdictional control of the act."

Also according to these authors (ibidem, p. 676), the reasoning should "consist, at a minimum, of a brief exposition of the factual and legal grounds that motivated the decision, or a declaration of agreement with the grounds of earlier opinions, information or proposals, including those that make up the tax inspection report."

As advocated by Joaquim Freitas da Rocha, the reasoning – "which, in general, covers both the duty of motivation (i.e., the exposition of the reasons or motives justifying the decision, namely when there are discretionary spaces) and the duty of justification (that is, the ordered reference to the factual and legal prerequisites that support that same decision)" – should be done ex officio, completely, clearly, presently and expressly, with a view to "enabling a "normal recipient" the reconstitution of the cognitive and evaluative itinerary followed by the author of the act to issue the decision. The lack of these requirements – incomplete, obscure, abstractly cross-referential reasoning – as well as the lack of reasoning itself, constitutes illegality, susceptible of leading to annulment of the act in question, by means of discretionary or contentious remedies."[3]

Given that reasoning should be done by means of a brief exposition of the reasons of fact and law that motivated it, nothing prevents, however, that it can be done by cross-reference and adoption of previous opinions, information and proposals as well as to the tax inspection report, as postulated by n.º 1 of article 77.º of the LGT, then assuming the designation of reasoning by cross-reference or by reference (per relationem or per remissionem), as it is expressed in another document. Thus, "assessments derived from inspection corrections should be deemed reasoned when the report contains the reasons for that correction and subsequent assessment. In that case, to know whether the assessment act is or is not reasoned, the interpreter cannot isolate from the inspection report, as this constitutes the culmination of a procedure which a broad concept of assessment necessarily involves. (…)

In the scope of the tax inspection procedure, allowing the modality of reasoning "per relationem" or "per remissionem", article 63.º, n.º 1, of the Tax Inspection Procedural Code (RCPIT) provides that tax acts or acts in tax matters resulting from the report may be reasoned on its conclusions, through adherence or agreement with these, and in all cases the entity competent for its practice must reason any divergence from the conclusions of the report. (…)

The importance of factual and legal motivation contained in the tax inspection procedure, subsequently absorbed by the tax decision, is understood in view of the fact that the assessment act strictly speaking represents the culmination of an extensive and complex administrative procedure based on the preparatory acts practiced by tax inspection services that integrate the assessment procedure broadly speaking (article 11.º of the RCPIT)."[4]

Now, if reasoning is, in the terms referred to, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required of a concrete tax act should be that which is functionally necessary so that it does not present itself to the taxpayer as a pure demonstration of arbitrariness.

In this regard, our courts have repeatedly decided in terms which, as an example and by completeness of analysis, we quote from the decision of the Central Administrative Court of the South, rendered on 04.12.2012 in case n.º 06134/12, available at www.dgsi.pt:

"Reasoning is a relative concept that can vary depending on the legal type of administrative act we are examining.

It has been a constant understanding of jurisprudence and doctrine that a given act (in the case of tax administrative act) is duly reasoned whenever it is possible, through it, to discover what cognitive path its author used to reach the final decision (cfr. decision of S.T.J. 26/4/95, C.J.-S.T.J., 1995, II, p. 57 et seq.; A. Varela and others, Manual of Civil Procedure, Coimbra Editora, 2nd edition, 1985, p. 687 et seq.; Alberto dos Reis, Code of Civil Procedure Annotated, Coimbra Editora, 1984, V, p. 139 et seq.). That is. Using the language of various decisions of the S.T.A. (cf. all, decision S.T.A-1st Section, 6/2/90, A.D., n.º 351, p. 339 et seq.) the administrative act is only reasoned if a normally diligent or reasonable recipient – a normal person – placed in the concrete situation expressed by the reasoning statement and before the concrete act (which will determine according to its diverse nature or type a greater or lesser requirement of the density of elements of reasoning) is in a position to know the functional (not psychological) cognitive and evaluative itinerary of the author of the act. It will be further stated that reasoning can be express or consist of mere declaration of agreement with previous opinion, information or proposal, which, in this case, constitutes an integral part of the respective act (the so-called reasoning "per relationem" - cfr. art. 125.º of the Administrative Procedure Code).

To ascertain whether a tax administrative act is or is not reasoned it is necessary, first of all, to make the distinction between formal reasoning and material reasoning: one thing is to know whether the Administration has made known the motives that determined it to act as it acted, the reasons on which it founded its action, a question that lies in the scope of the formal validity of the act; another, quite different and already situated in the scope of the substantive validity of the act, is to know whether those motives correspond to reality and if, corresponding, are sufficient to legitimize the concrete administrative action (cfr. decision of S.T.A.-2nd Section, 13/7/2011, case 656/11; decision of T.C.A.South-2nd Section, 19/6/2012, case 3096/09).

If formal reasoning does not specifically clarify the motivation of the act, by obscurity, contradiction or insufficiency, the act is considered not reasoned (cfr. art. 125.º, n.º 2, of the Administrative Procedure Code). There will be obscurity when the statements made by the author of the decision do not make clear what the reasons are why the decision was made in the way it was. In other words, the grounds of the act should be clear, so that the meaning of the reasons that determined the practice of the act can be perfectly grasped, thus not being permitted the use of dubious, vague and generic expressions. There will be contradiction of reasoning when the reasons invoked to decide, justify not the decision made, but a decision of opposite meaning (contradiction between grounds and decision), and when grounds are invoked that are in opposition to others. In other words, the grounds of the decision should be congruent, that is, that they are premises that necessarily lead to the decision that functions as the logical and necessary conclusion of the motivation adduced. Finally, reasoning is insufficient if its content is not enough to explain the reasons why the decision was taken. In other words, the reasoning should be sufficient, in the sense that it does not leave unsaid reasons that adequately explain the final decision (cfr. Marcello Caetano, Manual of Administrative Law, vol. I, Almedina, 1991, p. 477 et seq.; Diogo Freitas do Amaral, Course of Administrative Law, vol. II, Almedina, 2001, p. 352 et seq.; Diogo Leite de Campos and others, General Tax Law commented and annotated, Vislis, 2003, p. 381 et seq.; decision T.C.A.South-2nd Section, 2/12/2008, case 2606/08; decision T.C.A.South-2nd Section, 10/11/2009, case 3510/09; decision T.C.A.South-2nd Section, 19/6/2012, case 3096/09)."

On the other hand, regarding the reasoning of law, the Supreme Administrative Court "has decided that, for it to be considered sufficient, it is not always necessary to indicate the applicable legal provisions, being sufficient the reference to the pertinent principles, to the legal regime or to a well-determined legal framework, and the act should be considered reasoned of law when it is inserted in a perfectly cognizable legal-normative framework – among many others, the decisions rendered by the 1st Section of the STA on 27/02/1997, on 17/05/1998, and on 28/02/2002, in cases n.º 36.197, 32.694 and 48071, respectively.

As noted in the decision of the Section of Administrative Contention rendered on 27/05/2003, in case n.º 1835/02, "it has been the understanding of this Supreme Administrative Court that, in the reasoning of law of administrative acts, express reference to legal provisions is not required, being sufficient the reference to the pertinent legal principles, to the applicable legal regime or to a determined normative framework – cf. for example, the decisions of 28.02.02, case 48.071, of 28.10.99, case 44.051 (respective appendix to the Official Gazette, p. 6103), of 8.6.98, case 42.212 (Appendix, p. 4263), of 7.5.98, case 32.694 (Appendix, p. 3223) and of the plenary of 27.11.96, case 30.218 (Appendix, p. 828). More than this, it has been said that in the context of reasoning of law, given the functionality of the institute of reasoning of administrative acts, that is, the merely instrumental purpose that it pursues, a minimum content is accepted translated in the adduction of grounds which, notwithstanding the absence of express reference to any legal provision or legal principle, enable the reference of the decision to a well-determined legal framework - cf. Decision of the plenary of 25.5.93, case 27.387 (Appendix, p. 309) and decisions in subsection of 27.2.97, case 36.197 (Appendix p. 1515) and above-cited decisions of 7.5.98, case 32.694 and of 28.10.99, case 44.051)".

Orientation which, moreover, was adopted by the Plenary of that Section, in the decision of 25/03/93, in case n.º 27387, in which it is stated that the duty of reasoning is assured whenever, notwithstanding the absence of express reference to any legal provision or legal principle, the decision is placed in a determined and unequivocal legal framework, perfectly cognizable from the point of view of a normal recipient, concluding therefore that there will be reasoning of law whenever, in light of the text of the act, the legal reasons that determined it are perfectly intelligible.

Whence it follows that, even before this jurisprudential current, which we support without reservation, only in very particular cases (as were, in fact, those analyzed in the aforementioned decisions) can it be concluded that an act is reasoned of law despite no direct legal reference existing in the text of the act. And such only occurs when, as is explained in that decision of 27/05/2003, two conditions are shown to be verified:

"- The first is that it can be stated, unequivocally, before the objective data of the procedure, what was the legal framework taken into account by the act;

• The second is that it can be concluded that this legal framework was perfectly known or cognizable by the recipient, hypothesizing that it would be by a normal recipient in the concrete position in which that one is found.

The second condition does not function without the first, as this integrates it. If one does not know which legal framework was actually taken into account by the act, it can never be accomplished; and, for this reason, it is irrelevant that the recipient can know, and even knows, which legal framework should have been considered. The recipient cannot substitute either the act or its author. Reasoning is a requirement of the act. And the recipient has the right to know which legal framework was taken into consideration, under which legal regime the author of the act understood it to practice it.""[5]

In another order of considerations, it is important to point out that the tax inspection report "constitutes perhaps the focal piece of the inspection procedure, the culmination of the work performed by tax inspection professionals, identifying and systematizing all facts known with tax relevance in the scope of said procedure, not dispensing with the necessary legal-tax framework. Thus, article 62.º, n.º 3, of the Tax Inspection Procedural Code scales the elements that the report should contain, considering the dimension and complexity of the inspected entity, with emphasis, for what matters here, on the description of facts susceptible of substantiating any type of joint or subsidiary liability, as well as the description of tax-relevant facts that alter the declared or to be declared values subject to taxation, with mention and attachment of the means of proof and legal substantiation supporting the corrections made."[6]

Furthermore, as results from the provision in art. 60.º, n.º 1, of the Tax Inspection Procedural Code, "in situations where potentially unfavorable tax corrections are proposed, the services must notify the inspected entity within 10 days of the draft conclusions of the inspection report, also making known the tenor of the inspection acts, as well as their reasoning, for purposes of exercising prior hearing of the taxpayer. The inspected taxpayer must have perfect knowledge of the tax corrections proposed by tax inspection, to be able to decide whether or not to exercise said faculty. Should it come to the procedure to exercise this right of prior hearing recognized constitutionally, the inspected entity may make such arguments as it deems fit."[7] In that situation, all "new elements raised in the hearing of the taxpayers are mandatorily taken into account in the reasoning of the decision (article 60.º, n.º 7, of the LGT)."[8] As observe Saldanha Sanches and João Taborda da Gama ("Hearing-Participation-Reasoning: Co-responsibility of the taxpayer in the tax decision", Tribute to José Guilherme Xavier de Basto, Coimbra, Coimbra Editora, 2006, p. 295, apud Paulo Marques and Carlos Costa, The Assessment of Tax and Its Reasoning, Coimbra Editora, Coimbra, 2013, pp. 77 and 78), "there is a dialogical reasoning in a double sense: through the new facts alleged by the taxpayer, the Tax Administration conducts a cognitive process that will enrich its position (what are the taxpayer's reasons?; will the reasons alleged correspond to the true reasons?; are the interests alleged by it worthy of legal protection?); on the other hand, the record of the dialogue between the Administration and the taxpayer permits a reinforced clarification of the reasons for the Administration's actions, which has the effect of preventing it from concealing the real grounds (or the absence of grounds) of its actions."

Returning to the case at hand, it results from the Tax Inspection Reports relating to the inspection procedures to which both company B… and the Applicant were subject, that the Tax Inspection Services reasoned factually and legally the aforementioned corrections made regarding Corporate Income Tax for fiscal year 2013.

It should also be noted that both the aforementioned administrative review petition and the request for arbitral ruling itself are unequivocal proof that the Applicant has perfect knowledge of the cognitive and evaluative itinerary pursued by the AT regarding the corrections made to the taxable income of Corporate Income Tax for the year 2013, thus knowing the factual and legal reasons that are at their genesis, which permitted it to opt, in an informed manner, between acceptance of the act or activation of legal means of challenge and, in that context, to exhaustively rebut the AT's actions.

In these terms, it appears to us that the disputed tax acts should be considered duly reasoned both factually and legally.

Consequently, without need for further extensive considerations, the alleged defect of form rooted in the insufficiency of reasoning of the impugned tax acts is judged to fail.

§2. OF THE VIOLATION OF ARTICLE 32.º, N.º 2, OF THE EBF AND ARTICLE 23.º, N.º 1, OF THE IRC CODE

The Tax and Customs Authority made corrections to the taxable matter for fiscal year 2013 of company B…, integrated in C…, of which the Applicant is the parent company, basing itself, for this, on a dual reasoning.

The Tax and Customs Authority begins by maintaining that the case sub judice falls within the provision of n.º 2 of article 32.º of the EBF (version in force in 2013), by understanding that supplementary contributions fall within the concept of equity interests.

In addition to this, the Tax and Customs Authority understands that the aforementioned financial charges do not meet the requirements required by article 23.º of the IRC Code (version in force in 2013), to be considered as expenses, because they were incurred in favor of other legal and economically independent entities from the Applicant.

To the extent that they constitute autonomous grounds and, for this reason, each of them has the capacity to, by itself, support the correction made by the AT, they will be subject to independent analyses, and if it is concluded that one of them has legal basis, the determination of the other will be rendered unnecessary and moot.

Before proceeding, it is also important to note that the questions that are raised here have already been, with the same factual and legal assumptions, previously and on various occasions, subject to analysis by arbitral courts constituted under the CAAD, namely in cases n.ºs 12/2013-T, 30/2013-T, 376/2014-T, 734/2014-T, 24/2015-T and 326/2015-T, with whose decisions we agree, so we will follow their reasoning (in pursuit, moreover, of the legal purpose established in article 8.º, n.º 3, of the Civil Code, to obtain uniform interpretation and application of law).

§2.1. OF ARTICLE 32.º, N.º 2, OF THE EBF

§2.1.1. HERMENEUTIC ANALYSIS

In the version in force in 2013, article 32.º of the EBF (headed "Companies Managing Equity Interests (SGPS)"), established the following in its n.º 2:

"2. The gains and losses realized by SGPSs from equity interests of which they are holders, provided they are held for a period of no less than one year, and, likewise, the financial charges incurred with their acquisition do not contribute to the formation of taxable profit of these companies."

It results from the literality of this norm, in what matters to consider here, that the financial charges incurred with the acquisition of equity interests of which SGPSs are holders, provided they are held for a period exceeding one year, do not contribute to the formation of taxable profit of these companies.

In other words, the financial charges associated with the acquisition of equity interests of which SGPSs are holders, provided they are held for a period exceeding one year, are considered as non-deductible expenses, for tax purposes.

The objective of the legislator, to prevent the cumulation of two benefits, is easily perceptible: SGPSs already see their gains from equity interests being tax-exempt, and, when such occurs, they cannot cumulate with the benefit of tax acceptance of the interest incurred with the financing for the acquisition of those equity interests.

Attending to the contours of the case sub judice, the epicenter of the hermeneutic exegesis that we are called upon to perform lies in the concept of equity interests, with a view to clarifying what should be deemed to be integrated in it; specifically, given that the financial charges at issue in the case were incurred by company B…, which is an SGPS, to make supplementary contributions under the regime of ancillary contributions, to its investees, it is important to ascertain whether these supplementary contributions should or should not be qualified as equity interests.

In pursuit of this purpose, it seems necessary to begin by invoking the rules governing legal hermeneutics, first and foremost, within the context of tax law; and thus we must then invoke article 11.º of the LGT (headed "Interpretation"), which establishes the following:

"1. In determining the meaning of fiscal norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

1. Whenever, in fiscal norms, terms specific to other branches of law are employed, they must be interpreted in the same sense as they have therein, unless something else directly results from the law.

2. If doubt persists regarding the meaning of the applicable norms of incidence, account should be taken of the economic substance of the tax facts.

3. Gaps resulting from tax norms covered in the reserve of law of the Assembly of the Republic are not susceptible to integration by analogy."

From the provision of this norm, two aspects are important to retain here: the first, to note that its n.º 1 constitutes a cross-reference to article 9.º of the Civil Code; the second, to emphasize that although the rule is that terms used in fiscal norms should be interpreted with the same scope they have in other branches of law, this is only so if it does not directly result from fiscal law that the sense of the term used therein is different from that which it has in other branches of law (in consonance, moreover, with the principle lex specialis derogat legi generali).

As we have just said, whenever it directly results from a fiscal norm, special for the situation it regulates, the sense of a given term, it will not matter to know if that sense corresponds or not to what is used in general law, as that sense directly resulting from the law for a specific situation will necessarily be the one adopted, to the detriment of the sense that is used in any norm that does not have the nature of special law for said situation.

Thus, the first hermeneutic task of the interpreter of fiscal law, in order to ascertain the sense of the terms used therein, will consist of understanding whether the fiscal law directly provides the sense of those terms; only upon a negative answer should the interpreter then appeal to the senses that those terms have in other branches of law.

Having said this, returning to the concrete case, what is at issue here, as we said above, is the densification of the concept of equity interests – in order to delimit the scope of application of n.º 2 of article 32.º of the EBF – and, more specifically, determine whether supplementary contributions are or are not covered by that concept.

Searching, then, the legal-tax system, in search of some norm that might help us answer that question, we encounter n.º 3 of article 45.º of the IRC Code (version in force in 2013), from which it directly results that equity interests and supplementary contributions are, for tax law, autonomous concepts.

In article 45.º (headed "Non-deductible Expenses for Tax Purposes"), n.º 3, of the IRC Code, the following is established:

"3. The negative difference between gains and losses realized through the onerous transfer of equity interests, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to equity interests or other components of equity capital, namely supplementary contributions, contribute to the formation of taxable profit in only half of their value."

As stated in the CAAD decision rendered in arbitration case n.º 24/2015-T:

"Two concepts are used in this norm: that of "equity interests" and that of "other components of equity capital".

The "equity interests" are also "components of equity capital", as can be inferred from the word "other", but the scope of "equity interests" is necessarily more restricted than that of "equity capital", which will encompass, in addition to "equity interests" also "the other components".

As the norm is drafted, supplementary contributions will fall within the concept of "other components of equity capital" and not within "equity interests", as the reference to them appears following the latter concept and not to the first.

In truth, if it were understood, for this purpose, that supplementary contributions were integrated in the concept of "equity interests", it is obvious that the reference to them would be included following this concept and not following the concept of "equity capital": that is, it would be stated "(…) losses or negative patrimonial variations relating to equity interests, namely supplementary contributions, or other components of equity capital contribute to the formation of taxable profit in only half of their value".

That reference to supplementary contributions did not exist in the version of article 42.º of the Corporate Income Tax Code (CIRC) of Law n.º 32-B/2002, of 30 December, being made only in the version introduced by Law n.º 60-A/2005, of 30 December, so the legislative amendment was made with the intent to clarify the tax scope of the concepts used, namely the concept of "equity interests", showing that it, in the perspective of the legislator of the CIRC, did not encompass supplementary contributions.

As this is an amendment with clarifying effect, it is to be presumed with reinforcement that the legislator knew how to concretize this objective in adequate terms (article 9.º, n.º 3, of the Civil Code), and if intended to make explicit that supplementary contributions, for purposes of Corporate Income Tax, fall among the "other components of equity capital" and not among "equity interests".

This delimitation of the concept of "equity interests" that is extracted from the aforementioned n.º 2 of article 45.º is made for purposes of determination of losses, which is included in the matter dealt with by article 32.º, n.º 2, of the EBF (it is a norm that excludes, with respect to SGPSs, the general tax relevance provided in the CIRC for gains and losses) so that, having to presume that the legislator expressed its thinking in adequate terms (pursuant to said article 9.º, n.º 3, of the Civil Code), it is justified to conclude that the same concept of "equity interests" was used in the special norm that was used in the norm that provides for the general tax relevance.

Furthermore, the norm of article 32.º, n.º 2, of the EBF was reformulated by Law n.º 64-B/2011, of 30 December, already after the amendment introduced by Law n.º 60-A/2005 in article 45.º of the CIRC and the new version of that norm maintains the reference only to "equity interests" without any allusion to the "other components of equity capital" to which article 45.º, n.º 3 alludes.

This conclusion, extracted from the literal tenor of article 32.º, n.º 2, of the EBF, combined with article 45.º, n.º 3, is confirmed by the reason for the special regime of gains and losses realized by SGPSs, which does not apply with regard to supplementary contributions, as is ably explained in the CAAD decision rendered in arbitration case n.º 12/2013-T, in these terms:

"in general, the regime of gains aims to grant a special favorable regime to tangible and financial immobilized assets (shares and quotas) of companies, as a way to combat the lock-in effect – phenomenon that in the system of tax realization conditions the rational flow of economic assets (buying and selling) for reasons relating to constraints financial (payment of tax). In short, to avoid the scenario of a subject that does not sell an asset (share or quota) of which it is a holder – and all economic reasons would advise it – merely because it will pay at that moment a high tax (because taxation is only discharged with the sale of the asset and not in the cadence of its annual appreciation). It is this reason that justifies the under-taxation of tangible and financial assets (shares and quotas), embodied in a special tax regime for taxation of gains.

And none of this occurs with supplementary contributions. They are returned, at par, according to the rules of commercial law. There does not exist, nor is one sought to force the existence, of a market (secondary) of massive transactions in supplementary contributions. And it is not credible that the few holders of supplementary contributions below par do not wish to receive their nominal value, with fear or concern about the payment of tax associated; or that this be an economic obstacle such that it justifies creating or inserting them in the special regime of gains and losses.""

§2.1.2. APPLICATION TO THE CONCRETE CASE

It is concluded, with meridian clarity, from the above exposition that article 32.º, n.º 2, of the EBF (version in force in 2013), in establishing, with respect to equity interests, that financial charges incurred with their acquisition do not contribute to the formation of taxable profit of SGPSs, does not exclude the relevance for the formation of taxable profit of financial charges incurred with supplementary contributions.

In this parameter, the aforementioned corrections made by the AT find no legal support in article 32.º, n.º 2, of the EBF (version in force in 2013).

§2.2. OF ARTICLE 23.º, N.º 1, OF THE IRC CODE

§2.2.1. HERMENEUTIC ANALYSIS

In the version in force in 2013, article 23.º of the IRC Code (headed "Expenses"), established the following in the body of its n.º 1:

"1. Expenses are considered those that are proven to be indispensable for the realization of income subject to taxes or for the maintenance of the income-producing source, namely:"

Being important, complementarily, to attend to the provision of its paragraph c):

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

As is referred to in the CAAD decision rendered in arbitration case n.º 12/2013-T:

"1. Art. 23.º of the IRC contains an open clause, which requires interpretation and application to the concrete case (without the Tax Authority being able to enter into a judgment of opportunity or technical discretionality), by which only costs indispensable for the realization of income subject to tax or for the maintenance of the income-producing source are fiscally accepted.

1. The indispensability between costs and income is assessed in an economic sense: indispensable costs are those incurred in the interest of the company, which are connected with its capacity, by insertion in its lucrative scope (in a mediate or immediate form) and in the exercise of its concrete activity.

2. The Tax Authority cannot judge the soundness and opportuneness of the economic decisions of company management. It cannot interfere in the freedom and autonomy of management of the company. A cost will be accepted tax-wise provided it is appropriate to the productive structure of the company and to the obtaining of profits, even if it turns out to be an economically unfruitful or economically ruinous operation.

3. The indispensable expense is equivalent to any expense incurred in order to obtain income and that represents an economic decline for the company.

4. Art. 23.º of the IRC mandates not only an adequate causal connection between cost and income (in the aforementioned economic terms), but also alternatively connects (as indicated by the word "or") with the maintenance of the income-producing source – in the sense of an economic link between the expense and the subsistence and maintenance of the company and its activity.

5. With regard to financial charges, tax costs are interest on third-party capital applied in operation – as indicated by paragraph c) of n.º 1 of art. 23.º of the IRC, which in the structure of the norm (examples in the paragraphs and general principle in the body of n.º 1) is assumed as the concretization of the general principle: the interest is indispensable when the third-party capital is applied in operation.

6. Art. 23.º of the IRC merely refuses the tax acceptance of costs, which although thus accounted for by the company, are not in reality business costs. These are clearly abusive situations, as such expenses do not fall within the scope of its activity – they were incurred not in the interest of the company, but for the pursuit of objectives alien to it (for example, to conceal personal expenses of the administrators).

7. Tax cost requires proper and selfish interest of the company that records the cost: that interest must exist autonomously and cannot be diluted in the collective interest or of the group."

This being so, attending to the contours of the concrete case, it is important to analyze four key issues:

(i) the interpretation of article 23.º of the IRC Code and the question of "indispensability" of expenses;

(ii) the concept of "activity" of business entities;

(iii) the concept of asset and income-producing source;

(iv) a participating company that borrows and transfers those funds to participated entities, free of charge, is conducting its own activity or another's activity (i.e., performing acts of management alien to its interest)?

Let us examine each of them, individually.

i) On the interpretation of article 23º of the IRC and the question of "indispensability" of expenses[9]

There arises, in this provision, a nuclear requirement in the admissibility of expenses for tax purposes: their indispensability.

What should, then, be understood by "indispensability"?

Among us, two analyses are usually invoked regarding what should be the appropriate interpretation of the concept of indispensability contained in article 23º of the IRC.

The first is by Tomás Tavares, "On the relationship of partial dependence between accounting and tax law in determining the taxable income of legal entities: some reflections at the level of costs", in Science and Tax Technique, n.º 396, 1999, pp. 7-180; and the second by António M. Portugal, The Deductibility of Costs in Portuguese Tax Jurisprudence, Coimbra, Coimbra Editora, 2004.

In the first of the aforementioned works, Tomás Tavares extensively analyzes the question relating to the interpretation of the concept of indispensability contained in article 23.º of the IRC.

The author points out three possible interpretations, defending that only one of them constitutes the correct solution.

A first understanding would translate into a necessary or mandatory relationship between costs incurred and income obtained. Such understanding of indispensability would mean that only the "absolute necessity" of an expense to obtain income would permit its deduction as a negative component of taxable profit. The author qualifies such an interpretation as absurd. He does so in the following terms[10]: "…the funneling proposed by this conception would lead to the tax disregard of certain declines borne, truly and really, by the organization, in clear and flagrant violation of the principle of contributory capacity….In the second place, given that, at the limit, the deductibility of costs relating to businesses that turned out to be ruinous for the company would never be accepted, given the absence (or insufficiency) of the income resulting. Now the truth is that Tax Law cannot censure an unfruitful business policy…Tax Law must recognize the right to error of the business owner."

A second interpretation of the concept of indispensability – meaning "appropriateness" – is dealt with by the author in the following terms[11]: "…this purpose does not arise as the interpretive yardstick, both in attention to the numerous practical problems it poses, and, especially, because it also consents to administrative control over the merit of business decisions. Indeed, appropriateness is a fragile concept, with an open and undefined meaning, which facilitates the interference of the administrative machinery in the economic choices of the taxpayers".

Finally, the author supports the thesis according to which the correct interpretation of the concept of indispensability is that which equates indispensable expenses to costs incurred in the interest of the company, in pursuit of the activities resulting from its corporate purpose.

This thesis is expressed in the following terms[12]: "The legal notion of indispensability is cut out, therefore, over an economic-business perspective, by the filling, direct or indirect, of the ultimate motivation for the obtaining of profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed in a lucrative profile. This purpose brings, in a purposeful manner, the economic and tax categories closer, through a primarily logical and economic interpretation of legal causality. The indispensable expense is equivalent to any cost realized in order to obtain income and that represents an economic decline for the company. In general, therefore, the tax deductibility of the cost depends, only, on a causal and justified relationship with the productive activity of the company".

And it continues[13]: "…Indispensability subsumed to any and all acts carried out in the interest of the company… The legal notion of indispensability thus represses acts that are discordant with the company's purpose, not insertable in the social interest, especially because they do not aim at profit…".

It should be noted that the cited text leaves us in no doubt about the author's position (indispensable costs are equivalent to expenses incurred in the interest of the company). However, the fact is that an excerpt of that text, in particular the relationship between expenses and productive activity, has served interpretive purposes of the concept of indispensability that even the author himself has already clearly eliminated, in the CAAD decision rendered in arbitration case n.º 12/2013-T.

A. Moura Portugal, discussing the same concept, deals above all with the history of jurisprudential interpretation made of it from the time of Industrial Tax until 2001.

In any case, this author, and with regard to the question of knowing what is the best interpretation of the concept of indispensability, adopts the following position[14]:

"The solution adopted among us (at least in doctrine), in the wake of understandings advocated by Italian doctrine, has been to interpret indispensability in function of the corporate purpose. This position is present from the start in the writings of Vítor Faveiro, who relates the indispensability of the expense to its appreciation as an act of management in function of the concrete corporate purpose, refusing that this indispensability can be assessed freely from any subjective judgment of the law enforcer[15]".

See, also, what Tomás Tavares refers to regarding intra-group loans, already in 1999[16]:

"These operations (free supplementary transfers from a participant to a participand) correspond, therefore, to normal acts of management, notwithstanding the apparent discordance with the interest of the sacrificed entity (…) The ratio of these legal options lies in the fact that, with them, the company pursues its business activity with a lucrative purpose…".

And in note 427, on p. 150 of said work, sustains the author the following: "In our opinion, this operation (paying interest for obtaining a loan, whose proceeds are loaned, without interest, to another entity) can be inserted in the lucrative purpose of the sacrificed entity…".

In sum: the doctrinal works most frequently invoked on this question reject the interpretation of the concept of indispensability as meaning a necessary causal relationship between costs and income. Both maintain that any economic decline (cost) that has a relationship with the corporate purpose, whether incurred in the scope of the activity, or in the interest of the company, will meet the requirement of indispensability, and therefore should not be refused tax acceptance pursuant to article 23.º of the IRC.

The doctrinal anchor that the AT, and some jurisprudence, have gleaned from the work of Tomás Tavares regarding the subject here under examination – according to which the obtaining of funds by a participant transferred without remuneration to a participand does not constitute activity or interest of the latter – was completely dismantled by the author himself in the CAAD decision rendered in arbitration case n.º 12/2013-T, in the terms that we had the opportunity to cite above.

In the view of this Court, to equate the notion of indispensability to a relationship with productive activity or to an obligatory nexus of causality with the obtaining of income is not, therefore, a position supported by the reference doctrine.

Beyond what has already been said, and still on that nexus of causality, see the position of Diogo Leite de Campos and Mónica Leite de Campos[17]: "To admit an administrative judgment a posteriori on the financial, commercial, etc., management of the company would involve the constant risk of this judgment being supported by supplementary elements that did not exist, or did not exist clearly, at the moment of decision-making and that could not have been taken into account. The tax administration does not have to judge whether a company was well or poorly managed".

See, also, Rui Morais, who maintains[18]: "The invocation of the rule of indispensability of costs can never be made to substitute the judgment of appropriateness and opportuneness of the charges assumed, as resulted from the decision of the corporate bodies, by another judgment, also of business nature made by the tax administration or the courts".

And continues[19]: "We cannot have as good the orientation of certain jurisprudence that refuses the tax recognition of certain costs because it is not possible to establish a direct correlation with the obtaining of concrete income. Taken to the extreme such an understanding, we would have to say that research expenses would only be tax-deductible when such research had success, when, as its result, the company began to sell new goods and services…"

[Translation continues but appears to be cut off in the original document]