IRC Arbitration: Impairment Losses, Exceptional Devaluations & Retroactive Application of Article 35(4) CIRC

ARBITRAL DECISION

The Arbitrators Councillor Jorge Lopes de Sousa (appointed by agreement of the other Arbitrators), Dr. José Alberto Pinheiro Pinto and Professor Dr. Ana Maria Rodrigues, appointed respectively by the Claimant and the Respondent, to form the Arbitral Tribunal constituted on 16-02-2016, agree as follows:

1. Report

A… – …, SGPS, S.A., legal entity no. …, with registered office at …, no. …, …, hereinafter referred to as "A… SGPS" or "Claimant", dominant company of a group (the B… Group) subject to the special tax regime for groups of companies provided for in Articles 69 et seq. of the Corporate Income Tax Code (IRC), which includes C… – …, S.A., legal entity no. … (hereinafter referred to as "C… S.A."), came, under Articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January, and Articles 1 and 2 of Regulatory Order no. 112-A/2011 of 22 March, to request the constitution of an Arbitral Tribunal with a view to the declaration of partial illegality of the dismissal of the administrative review and the partial illegality of the self-assessment of IRC (and consequent municipal surcharge), including state surcharge, of the B… tax group for the fiscal year 2011, regarding the amount of € 623,961.59, with its consequent annulment in this respect.

The Claimant further requests the refund of the said amount, plus compensation interest at the legal rate, calculated from 01-09-2012.

The TAX AUTHORITY AND CUSTOMS AUTHORITY is the respondent.

The Claimant appointed an arbitrator, Dr. José Alberto Pinheiro Pinto, under Article 6, no. 2, paragraph b) of the RJAT.

Under Article 6, no. 2, paragraph b) and Article 11, no. 3 of the RJAT and within the time limit provided for in Article 13, no. 1 of the same legal instrument, the head of the Tax Administration service appointed as Arbitrator Prof. Dr. Ana Maria Rodrigues.

The appointed arbitrators appointed the third arbitrator, Councillor Jorge Manuel Lopes de Sousa, under Article 11, no. 4 of the RJAT.

The signatories appointed to comprise this collective Arbitral Tribunal accepted the appointments in accordance with legal provisions.

Under Article 11, no. 7 of the RJAT, the President of CAAD informed the Parties of this appointment on 01-02-2016.

Thus, in accordance with the provisions of Article 11, no. 7 of the RJAT, after the time limit provided for in Article 13, no. 1 of the RJAT had expired, the collective arbitral tribunal was constituted on 16-02-2016.

The Tax Authority and Customs Authority submitted a Response, defending itself by exception and by challenge.

By order of 18-03-2016, it was decided to dispense with the hearing provided for in Article 18 of the RJAT and that the proceedings continue with successive written submissions.

The Parties submitted their submissions.

The arbitral tribunal was properly constituted and its material jurisdiction to hear the refund claim filed by the Claimant is questioned.

The parties have legal personality and capacity and are legitimate (Articles 4 and 10, no. 2, of the same legal instrument and Article 1 of Regulatory Order no. 112-A/2011 of 22 March).

The proceedings do not suffer from nullities and no further exceptions were raised.

2. Findings of Fact

2.1. Established Facts

Based on the elements contained in the file and in the administrative file attached to the records, the following facts are considered established:

a) The Claimant A… -…, SGPS, SA, NIPC …, is the dominant company of the economic group in which it is inserted and is subject to IRC with classification under the special tax regime for groups of companies;

b) On 31-05-2012, the Claimant filed the IRC Form 22 declaration for the fiscal year 2011 and the Group comprised of the company C… – …, S.A. (C…) (document no. 1 filed with the request for arbitral pronouncement, whose content is given as reproduced);

c) One of the companies that comprised the group in 2010 is C… – …, S.A., NIPC …, (hereinafter referred to as "C…, SA") which, for the fiscal year 2011, established an individual taxable profit of € 55,324,581.63 (Form 22 declaration of C…, SA, attached to the administrative review contained in the administrative file, whose content is given as reproduced);

d) C…, SA, in the Form 22 declaration for the fiscal year 2011, made several tax adjustments to accounting profit, namely the increase, in field 720 of table 07, of the amount of €6,363,477.39, relating to 40% of the increase in depreciation of assets subject to revaluations (Form 22 declaration of C…, SA, attached to the administrative review contained in the administrative file, whose content is given as reproduced);

e) The amount indicated in the said field 720 reflects a portion of the depreciation charged with respect to assets revalued under Law no. 36/91 of 27 July (reflected in the tax schedule of official form 33.12E attached to the administrative review as document no. 3), and Decree-Law no. 264/92 of 24 November (reflected in the tax schedule of official form 33.15 attached to the administrative review as document no. 4) (document no. 24 filed with the request for arbitral pronouncement, whose content is given as reproduced, Form 22 declaration of C…, SA, attached to the administrative review and Articles 6 and 7 of the Response);

f) The Claimant understood that the amount indicated in field 720 does not fully reflect the tax impact associated with the revaluations carried out under the legal instruments, in particular under Law no. 36/91 of 27 July, and, as the dominant company of the group of companies subject to the special tax regime for groups of companies of which C…, SA forms an integral part, submitted to the Tax Administration, on 26-05-2014 an administrative review by which it sought, among other things, to make an adjustment to the taxable profit of C…, in its favor, in the amount of € 2,154,563.48, in accordance with Article 35, no. 4 of the IRC Code then in force (document no. 2 filed with the request for arbitral pronouncement, whose content is given as reproduced and administrative file);

g) By letter of 15-07-2015, the Claimant was notified to exercise the right of hearing regarding the draft decision of the administrative review, based on Information no. …-…/2015, a copy of which is contained in document no. 21 filed with the request for arbitral pronouncement, whose content is given as reproduced, in which reference is made, among other things, to the following:

§ IV.I. On the taxable matter

§ IV.I.I. Adjustments to taxable profit

§ IV.I.I.I. Arguments of the Claimant

1. The Claimant is the dominant company of a group of companies in which it is inserted, being taxed in accordance with the provisions of the special tax regime for groups of companies, under Articles 69 et seq. of the CIRC;

2. On 31 May 2012, in compliance with its declarative obligations under IRC, it filed the IRC Form 22 Declaration for the fiscal year 2011.

3. Within the scope of the group, the company C… – …, SA (C…) is found.

4. In 2011, C… individually established a taxable profit in the amount of € 55,324,581.63, and in that fiscal year made several tax adjustments to accounting profit, among which stands out the increase, in field 720 of table 07, of the amount of € 6,363,477.39, relating to 40% of the increase in depreciation of assets subject to revaluations carried out under legal instruments.

5. That amount reflects a portion of the depreciation charged with respect to assets revalued under Law no. 36/91 of 27 July and Decree-Law no. 264/92 of 24 November.

6. Having concluded that that amount does not fully reflect the tax impact associated with the revaluations carried out under the legal instruments, in particular under Law no. 36/91 of 27 July, the Claimant seeks to make:

• an adjustment to the taxable profit of C…, in favor of the State, in the amounts of € 8,288.51, thus reflecting the totality of the excessive depreciation resulting directly from official forms 33.12 and 33.15;

• an adjustment to the taxable profit of C…, in its favor, in the amount of € 2,154,563.48, in accordance with Article 35, no. 4 of the CIRC; and

• an adjustment to the taxable profit of C…, in its favor, in the amount of € 4,136,754.37, arising from the transition to the new tax rules approved by Decree-Law no. 159/2009 of 13 July.

1. As a consequence of these adjustments, the Claimant seeks to also correct the amount increased by C… in field 720 of table 07, making a correction in favor of the State in the amount of € 861,825.39, thus bringing the value to be adjusted in that field to € 7,233,591.29.

2. According to the Claimant, these adjustments will have a negative impact on the taxable profit of C… in the amount of € 5,421,203.95, which will amount to € 49,903,377.68, which should be reflected in a correction of the same amount in the taxable profit established by the group, which will thus amount to € 160,482,132.30.

A – Adjustment to the taxable profit of C…, in favor of the State, in the amount of € 8,288.51

1. C… increased in field 720 of Q07 of the IRC Form 22 Declaration for the fiscal year 2011, the amount of € 6,363,477.39.

2. This amount aims to reflect the depreciation that was charged on assets revalued under Law no. 36/91 of 27 July and Decree-Law no. 264/92 of 24 November and which are not considered fiscally deductible under Article 15, no. 2, paragraph a) of Regulatory Decree no. 25/2009 of 14 September.

3. Having as reference the amounts reflected in the official form schedules 33.12E and 33.15, the Claimant concluded that the value of excessive depreciation relating to assets revalued under Law no. 36/91 amounts to € 6,159,120.11, corresponding to the value of excessive depreciation of assets revalued under Decree-Law no. 264/92, to the amount of € 212,645.79.

4. To that extent, the value that should have been considered by C… in field 720 of Q07 amounts to €6,371,765.90 (€6,159,120.11 + €212,645.79), and not €6,363,477.39, and an adjustment in favor of the State should be made in the amount of € 8,288.51.

B – Remaining Adjustments: B1 – Adjustment under Article 35, no. 4 of the CIRC; B2 - Transition Adjustment under Article 159/2009, no. 5 of Decree-Law of 13 July

1. "The reprivatization process of the D… Group began in 1994 with the spin-off of the former E… into several entities, among which one that would give rise to the current B… group".

2. "[The said] spin-off was carried out in accordance with the provisions of Decree-Law …/94 of … …, in the context of which it was determined that the capital of the then C…–…, SA, would be made through the contribution of assets allocated to the activity that would be exercised by it".

3. "The value of the assets transferred [to the then C… – …, SA] had been, within the reprivatization process of the D… Group, subject to valuation carried out by independent entities, chosen from among those previously qualified by the Ministry of Finance for that purpose and subject to the approval of the Minister of Finance".

4. "In 2007, already outside the D… group, new allocation of assets held by the company resulting from the said spin-off [(C… –…, SA)], which served to realize the share capital of the current C…, was made, as resulted from Council of Ministers Resolution no. …/2006".

5. "The transfer of the assets in question, from E… to the [C… – …, SA (company that gave place to the now Claimant)], and from this to C…, was always carried out without any change in the accounting and tax value of those assets, being their value that which resulted from the valuation made within the E… by independent entities, in the context of the reprivatization process of that entity".

6. The said valuation to which those assets were subjected while still within E…, among downward revaluations (negative) and upward revaluations (positive), determined a positive net equity variation in the amount of 31,666,263,000$00.

7. That positive net equity variation was not considered fiscally relevant in determining the taxable profit of E… in fiscal year 1994.

8. Similarly, the negative equity variation was not considered fiscally relevant in determining the taxable profit of E… in fiscal year 1994.

9. "Since those revaluations (positive and negative) were not considered fiscally relevant within E…, and given that a portion of the assets that underwent them were (...) transferred to the claimant, it is important to assess what the tax framework is that underlies this reality (...)".

10. "If with respect to positive revaluations the tax regime is clear, the same is not verified, at least not immediately, with respect to negative revaluations".

11. "In effect, there is no express reference in Portuguese tax legislation to the tax framework of any decrease in depreciation as a result of revaluations carried out under tax legislation (...)".

12. "The claimant considers that the revaluation of assets within the reprivatization process of the D… Group, which resulted in a reduction of their book value, represents an impairment loss, which was not considered fiscally relevant at the time it was recognized within E… (...)".

13. The situation of C… did not fall within no. 2 of Article 10 of Regulatory Decree no. 2/90 of 12 January in force at the time the revaluation was carried out (1994), so that it could not have been considered fiscally relevant at the time it was recognized.

14. "In light of the foregoing, under Article 35, no. 4 of the IRC Code with the wording given to it by Decree-Law no. 159/2009 of 14 September, that impairment loss recognized in fiscal year 1994 may be accepted fiscally, in equal parts, during the remaining useful life period of the assets that gave rise to it".

15. "In these terms, the Claimant considers that two corrections should be made for purposes of determining the taxable profit of C… and which aim to reflect, for tax purposes, the amount of depreciation that ceased to be charged as a result of that negative revaluation".

16. "The first of these adjustments aims to reflect fiscally the amount of depreciation that would have been accepted in fiscal year 2011 under Article 35, no. 4 of the IRC Code, had that impairment loss not been recognized", amounting to the sum of "€2,154,563.48".

17. "The second adjustment aims at the fiscal recognition of amounts that could not be recovered until 2009 (inclusive), due to the fact that the tax regime in force until that date did not allow the recovery, for tax purposes, of the impairment loss recognized in prior fiscal years".

18. "Thus, and to the extent that the entry into force of Decree-Law no. 159/2009 of 13 July determined a change in the tax regime applicable to the situation in question, the claimant considers that it may recover, as a transition adjustment, the portion of depreciation that would have considered fiscally relevant in prior fiscal years had the new tax regime been applicable to them".

19. "Although no equity variation occurred in the case of C… upon the transition to the new accounting rules, it is certain that the tax framework associated with this reality changed (...) and, similar to what occurred with respect to other realities, the change in the tax framework associated with this reality should have had an associated tax adjustment that allows recognizing, in equal parts over a period of 5 years (from 2010 to 2015), the impairment loss that would have been accepted until fiscal year 2009, had the new tax regime been applicable to this reality".

20. "As to the total value to be recognized by C… to this end between 2010 and 2015, it amounts to € 34,472,953.09".

21. "This amount corresponds to the value of depreciation from prior fiscal years that would have been charged on the acquisition value (€ 157,041,867.92) less the depreciation from prior fiscal years on the revalued value (€113,598,626.86) and the portion of that difference that was already accepted for tax purposes up to 31 December 1993 (€8,970,287.97)".

22. "This amount equally, in a general manner, corresponds to the value of the impairment loss that could have been recovered in each year (€2,154,563.48), for 16 years (between 1994 and 2009, inclusive)".

23. Finally, the claimant emphasizes that "in the context of determining the values associated with this reality, the Claimant verified that, with reference to fiscal year 2011, the amount increased by C… as an increase in depreciation resulting from the revaluation of its assets under Law no. 36/91 and Decree-Law no. 22/92, was influenced by the decrease in depreciation associated with elements of the asset whose revaluation (...) resulted in a reduction of its value".

24. "In effect, the determination of the value to be adjusted in field 720 was carried out by C… having as reference the formula contained in the official form schedules of elements of the asset revalued (in this case the schedule with identification 33.12E) and which corresponds to the application of a percentage of 40% on the difference between the sum of column 15 (reintegrations that are accepted in full) and column 12 (reintegrations charged in the fiscal year)".

25. "Now, the amount considered in each line in column 15 corresponds to the multiplication of the depreciation rate charged in the fiscal year by the historical acquisition value, which implies, in the case of goods revalued negatively, that a value is obtained in column 15 greater than that which appears in column 12".

26. "Whence it follows that, by determining the value to be added in field 720 through the difference between columns 15 and 12, C… already considered 40% of the depreciation that ceased to be charged due to the negative revaluation of those goods as fiscally deductible".

27. "In other words, the amount increased by the claimant was lower than what should have been made in a portion corresponding to 40% of the depreciation that would have been charged had those goods not been negatively revalued".

28. "Now, since the provision in Article 15, no. 2, paragraph a) of Regulatory Decree no. 25/2009 applies to situations in which there is an increase in depreciation as a result of revaluation, and to the extent that the Claimant is requesting the adjustment due with respect to negative revaluations (which amounts, with reference to fiscal year 2011, to €2,154,563.48), the adjustment to be made in field 720 of table 07 (with reference to form 33.12E) should amount to € 7,020,945.46".

29. "From this results a correction in favor of the State in the amount of € 861,825.39 (€ 7,020,945.46 -6,159,120.11) (...)".

30. "It should be noted additionally that, in light of this finding, the claimant considers that, until 2009, the value of the depreciation adjusted by C… for purposes of determining its taxable profit, as a result of the increase in depreciation resulting from positive revaluations under legal instruments, was equally negatively influenced by the existence of these negative revaluations (...)".

31. "Thus, and as regards the transition adjustment referred to previously by the claimant, it only seeks to request that the portion not yet recognized in prior fiscal years be recognized in its favor, which corresponds to 60% of the amount initially established by it".

32. "In other words, the claimant seeks that a transition adjustment be recognized in its favor in the total amount of €20,683,771.85 (€34,472,953.09 x 60%), of which the amount of €4,136,754.37 (€20,683,771.85/5) should be recognized with reference to fiscal year 2011".

33. Finally, it should be noted that the Claimant, through a petition filed on 18.03.2015, attached a decision issued by the Administrative Arbitration Center (CAAD), in the context of case no. 630/2014-T, claiming its interest and usefulness for the review of the present administrative review, in that it deals with the same subject matter.

§ IV.I.I.II. Assessment

A – Adjustment to the taxable profit of C…, in favor of the State, in the amount of € 8,288.51

(...)

B – Remaining Adjustments:

B1 – Adjustment under Article 35, no. 4 of the CIRC

1. As expressed above, the Claimant seeks to apply, in fiscal year 2011, the regime provided for in Article 35, no. 4 of the CIRC to an alleged impairment loss suffered upon the revaluation of assets carried out in 1994 in the context of the reprivatization process of the D… Group.

2. Being that, with respect to fiscal year 2010, CAAD decided in the sense now sought by the Claimant, thus admitting the application of the said regime to the matter in question.

3. To decide in that sense, the award begins by alluding to the regime of reintegrations and amortizations in force until the year 2010, highlighting the legal possibility of excessive amortizations being accepted as costs of subsequent fiscal years.

(...)

1. Based on this argumentative course, the award concludes to the effect that the self-assessment made by the claimant for the year 2010 suffers from error by not including reference to impairment losses recorded in prior fiscal years resulting from revaluation.

1. Having examined the file and analyzed the evidence produced, the following facts are considered established, with interest for the decision of the present administrative review:

• Through Decree-Law no. 7/91, the legal nature of E… was altered, converting it into a private law legal entity with the status of a limited company with exclusively public capital.

• It was determined in the said legal instrument that E… would proceed through spin-offs to form new limited companies.

• By way of Decree-Law 131/94, the spin-off process of which E… would be the subject was regulated, and in the context the now Claimant would be constituted.

• For purposes of constituting the new limited companies, notably its share capital, and as determined by law, in 1994 E… conducted a revaluation of its assets.

• That revaluation was carried out under Decree-Law no. 22/92 of 14.02, in conjunction with the provision in no. 4 of Law no. 36/91 of 27.07.

• The valuation to which those assets were subjected while still within E…, among downward revaluations (negative) and upward revaluations (positive), determined a positive net equity variation in the amount of 31,666,263,000$00.

• That positive net equity variation was not considered fiscally relevant in determining the taxable profit of E… in fiscal year 1994.

• Similarly, the negative equity variation was not considered fiscally relevant in determining the taxable profit of E… in fiscal year 1994.

• The transfer of assets from E… to the Claimant was always carried out without any change in the accounting and tax value of those assets, being their value that resulted from the valuation made within E….

• In 2006, in the context of the change in the business structure of the energy sector, it was legally determined that the current C… be constituted, by spin-off of the now Claimant, and that the share capital thereof be constituted through the separation of assets and liabilities associated with the concession for the operation of the electricity transmission network.

• According to the data presented by the Claimant, the assets that were separated for purposes of constituting the share capital of C… and which had been subject to negative revaluation at the time of the privatization process of E…, suffered, upon that valuation, a depreciation in the global amount of € 55,640,444.87.

• In determining the value to be adjusted in field 720 of the IRC Form 22 Declaration, C… has taken into account the difference between depreciation on the revalued value and acquisition value of assets subject to negative revaluation, when, in legal terms, that value should only correspond to 40% of the differences between depreciation on the revalued value and that on the acquisition value of assets subject to positive revaluation (see Article 15, no. 2 of Regulatory Decree 25/2009 of 14.09).

• With the adoption of such a procedure, C…, until the period 2009 inclusive, has already deducted fiscally a portion of the difference between the acquisition cost and the value of negative revaluations of which certain assets were subject, specifically, the amount of € 13,789,181.23 (34,472,953.09*40%).

• With reference to fiscal year 2011, the amount increased by C… as an increase in depreciation resulting from the revaluation of its assets under Law no. 36/91 and Decree-Law no. 22/92, is equally negatively influenced by the application of the calculation procedure of the value to be added in field 720 of Q07 of IRC Form 22 of which we gave account above.

1. The following facts were not considered proven due to lack of documentary evidence to that effect:

• That E…, following the process of revaluation of its assets, had recorded in accounting any "impairment loss" (extraordinary amortization, in POC terminology) regarding assets subject to negative revaluation.

• That C…, upon the introduction in its balance sheet of assets and liabilities associated with the concession for the operation of the electricity transmission network separated from the assets of the now Claimant, had recorded in accounting any "impairment loss" (extraordinary amortization, in POC terminology).

1. Having analyzed the argumentation presented by the Claimant, it is considered that it consists only in the subsumption of the depreciations suffered by certain assets upon the legal revaluation into the concept of impairment and, consequently, in the application of the provision contained in no. 4 of Article 35 of the IRC in the 2011 wording.

2. Without prejudice to issues related to the retroactive application of the law that this position entails, it should be noted from the outset that Article 35, no. 4 of the CIRC may only be applied to impairment losses reflected as such in the accounting of entities, which, in the present case, is not demonstrated.

3. Therefore, those depreciations could never be accepted fiscally under no. 4 of Article 35 of the CIRC.

1. On the matter in question, a decision was previously issued by CAAD in the context of case no. 630/2014-T, which validated the application of the said article to the situation listed above.

2. In light of this, we consider it necessary to assess the arguments presented in the award in order to determine whether they have sufficient legal value to constitute a point of reference in the decision to be rendered on the matter in question.

3. Let us begin by noting that one of the argumentative pillars established in the award consists of the equation, for legal purposes, of the figure of excessive amortizations provided for in Article 21 of Regulatory Decree 2/90 – which allowed the fiscal deduction in subsequent fiscal years of amortizations not accepted by exceeding the maximum permitted quotas – with the figure of depreciations suffered by assets upon the legal revaluation.

4. In effect, as transcribed above in points 68, 69 and 71, the award sustains that the depreciations suffered by assets by force of the legal revaluation did not lose the right to assume fiscal relevance, since those losses could have been deducted fiscally through the depreciation regime that had been applied to the assets in question, similar to what occurred not only with excessive amortizations resulting from the adoption of useful lives shorter than the minimum period defined by law (Article 21 of Regulatory Decree 2/90 of 12.01), but also with exceptional depreciations whose deduction had not been requested or was requested untimely from the Tax Administration.

5. This idea assumes great importance in the structure and logical sequence of the argumentative block contained in the said award, assuming itself as an essential proposition on whose validity other reasons pointed out there to support the applicability of no. 4 of Article 35 of the CIRC in the 2010 wording depend.

6. In truth, this is the decisive argument for the award to consider that the application of Article 35, no. 4 of the CIRC in the 2011 wording to depreciations resulting from legal revaluation, verified in 1994 in the sphere of E…, does not contain a case of prohibited retroactive application of the law at the fiscal level.

7. In keeping with the foregoing, it is stated in the award, with the purpose of dispelling any doubt as to the possibility of such application constituting a case of retroactivity prohibited by tax law, that "the application of the regime of Article 35, no. 4, does not mean the revival of a right that had previously been lost", in that "by the fact that relevance of the depreciations resulting from revaluation was not requested in 1994, the right of the claimant to obtain that relevance as costs in subsequent fiscal years was not extinguished, which was permitted by Article 21 of Regulatory Decree no. 2/90".

8. Therefore, according to the award, the fact that we are faced with a situation in which the possibility of producing fiscal effects has not yet been exhausted, a conclusion that results from the equation of depreciations resulting from legal revaluation with situations of excessive amortization (excessive amortizations resulting from the adoption of useful lives shorter than the minimum period defined by law and exceptional depreciations), removes from the horizon any scenario of retroactive application of Article 35, no. 4 of the CIRC in forms not accepted by the current legal order.

9. In the absence of this argument, we would be led to consider that the possible effects of the depreciations of assets resulting from legal revaluation would be limited temporally to the year 1994, the date of revaluation, thus considering that the application of Article 35, no. 4 of the CIRC applied thereto involved a retroactive application of tax law not accepted by the legal order.

10. Having evidenced the importance that the said argument plays in the argumentation developed in the award, it now becomes relevant to ascertain its validity.

11. Therefore, the question that must be addressed is whether the depreciations of assets resulting from legal revaluation could assume fiscal relevance from the date they occurred to the present moment, through the application of the regime of amortizations and depreciations that had been applied to those assets, similar to what, according to the award, occurs in the case of (i) excessive amortizations resulting from the adoption of useful lives shorter than the minimum period defined by law and (ii) exceptional depreciations.

12. As follows from what has been stated, the depreciations in question resulted from valuations of the fixed assets of E… carried out in the context of its privatization process.

13. To the value of the assets defined by that valuation, fiscal relevance was attributed by Law no. 36/91 of 27 July which, in no. 1 of its Article 4, determined that "companies subject to privatization may consider the value of elements of fixed assets resulting from evaluations carried out by entities qualified for the purposes of privatization processes as valid for the purposes of the provision in paragraph b) of no. 1 of Article 29 of the IRC Code (...)".

14. In turn, Decree-Law 22/92 of 14 February, which came to regulate the regime established in Article 4 of Law no. 36/91 of 27 July, provided, in no. 1 of Article 5, that "the tax regime of reintegrations of elements revalued under Law no. 36/91 of 27 July is governed by the provisions on reintegrations and amortizations of the IRC Code and Regulatory Decree no. 2/90 of 12 January", mentioning in no. 3 of the said article that "reintegrations of elements of fixed assets may be calculated on the values resulting from revaluation as from fiscal year 1991, inclusive".

15. One of the advantages associated with the revaluation operations of tangible fixed assets translated into the obtaining of clear tax advantages through the increase in amortizations, which, however, companies could only benefit from if they presented profits to which they could allocate the supplementary amortizations.

16. Given that the revaluation of the assets that were transferred from E… to C…, among downward revaluations (negative) and upward revaluations (positive), determined a positive net equity variation in the amount of 31,666,263,000$00, the tax advantage that C… benefited from through the increase in amortizations is evident.

17. Naturally, the obtaining of the increase in amortizations in the sphere of C… resulted from the application of the regime of reintegrations of elements of fixed assets on the positive values resulting from revaluation, in keeping with the provision in no. 1 of Article 4 of Law no. 36/91 of 27 July and nos. 1 and 3 of Article 5 of Decree-Law 22/92 of 14 February.

18. Note that, as follows from the text of the cited articles, the application of the regime of reintegrations of elements of fixed assets on the values resulting from revaluation constituted an option of the companies subject to privatization, to which point the expressions "may consider the value (...) for the purposes of the provision in paragraph b) of no. 1 of Article 29 of the IRC Code" and "the reintegrations of elements of fixed assets (...) may be calculated on the values resulting from revaluation (...)".

19. So that, if the overall result of the revaluation did not determine a positive net equity variation, with the inherent tax advantage, the companies could always continue to depreciate the fixed assets based on their respective values prior to revaluation.

20. As follows from the cited legal provisions, the option to be taken regarding which value of the revalued assets to be considered for purposes of applying the regime of reintegrations and amortizations, whether the value prior or subsequent to the legal revaluation, would have to be global, encompassing both positive and negative revaluations of assets.

21. Therefore, opting for the company the value resulting from the revaluation, it would follow that the amortizations, both of assets subject to positive revaluation and negative revaluation, would henceforth be calculated based on those new values, which would imply, in the case of the positive revaluation, an increase in amortizations and, in the case of the negative revaluation, their decrease compared to those that would be obtained based on values prior to revaluation.

22. As it is obvious, it would not be legitimate to choose only the revalued values in cases in which such revaluation had been positive, continuing, with respect to assets subject to negative revaluation, to proceed with their amortization based on values prior to revaluation.

23. Being this the sense that we can draw from the provision in no. 1 of Article 4 of Law no. 36/91 of 27 July and nos. 1 and 3 of Article 5 of Decree-Law 22/92 of 14 February, it is certain, however, that the same collides head-on with the position assumed in the award, for, according to it, it was possible to depreciate the depreciations of value suffered by assets subject to negative revaluation.

24. What, in practical terms, is equivalent to saying that, according to the CAAD decision, it was possible to continue to depreciate the said assets based on the book value prior to revaluation.

25. However, as we saw above, the argumentation woven in the award to reach this conclusion does not derive from a different interpretation of the provision in Law no. 36/91 of 27 July.

26. In reality, the award when addressing the provision in Law no. 36/91 reaches a conclusion similar to that defended in this information.

27. In effect, it is stated therein that "in the specific case of revaluations carried out in the context of privatization processes, it is Law no. 36/91 of 27 July itself that expressly determines their fiscal relevance, establishing in no. 1 of its no. 4 that companies subject to privatization may consider the value of elements of fixed assets resulting from evaluations carried out by entities qualified for the purposes of privatization processes as valid for the purposes of the provision in paragraph b) of no. 1 of Article 29 of the IRC Code. (...) That is, the fiscal relevance that was permitted for revaluations carried out in privatization processes was only this of considering the value resulting from the revaluation 'for purposes of applying the constant quota method'".

28. On the other hand, and as we have made clear, the origin of the position defended in the award lies in the understanding that the depreciations suffered by assets upon the legal revaluation did not lose the right to assume fiscal relevance, since those losses could have been deducted fiscally through the depreciation regime that had been applied to the assets in question, similar to what occurred not only with excessive amortizations resulting from the adoption of useful lives shorter than the minimum period defined by law (Article 21 of Regulatory Decree 2/90 of 12.01), but also with exceptional depreciations whose deduction had not been requested or was requested untimely from the Tax Administration.

29. It being that understanding which is now important to examine as to its accuracy and validity, let us analyze the regime of amortizations and reintegrations that was in force until 2010.

30. Now, amortizations and reintegrations are the accounting process of distributing, in a rational and systematic manner, the cost of an asset that depreciates over the different fiscal years encompassed by its useful life, and are only accepted when recorded as costs or losses of the fiscal year to which they relate.

31. The amortization or reintegration quotas were, under the Regulatory Decree no. 2/90, calculated based on:

a) The acquisition cost or production cost, depending on whether, respectively, elements acquired from third parties for consideration or elements manufactured or constructed by the company itself;

b) The value resulting from revaluation under legislation of a fiscal character;

c) The real value, at the date of the opening of the books, for goods subject to valuation for this purpose, when the acquisition cost or production cost is not known, that value being able to be subject to correction, for tax purposes, when considered excessive.

1. Translating the amortization quota the cost attributable to the depreciation of goods by reason of their allocation to the production process in a fiscal year, the useful life period will be the time during which an asset is expected to be available for use, the tax law imposing restrictions on it, "which is understandable even to prevent taxpayers from choosing excessively short amortization periods in order to anticipate the effect of the fiscal consideration of these costs".

2. Regulatory Decree no. 2/90 determined what useful life period was to be considered, by indicating the rate to be applied to the depreciable amount (defined, as seen, in no. 1 of Article 2 of this legal instrument) "to obtain the value of the amortization quota (the cost that, for this reason, must be considered in each fiscal year)".

3. It is also important to note that, in the context of Regulatory Decree no. 2/90 of 12.01, reintegrations and amortizations were only accepted when recorded as costs or losses of the fiscal year to which they relate (no. 3 of Article 1 of Regulatory Decree no. 2/90 of 12.01).

4. On the other hand, reintegrations and amortizations that were not considered as costs or losses of the fiscal year in which they were recorded for exceeding the maximum amounts admitted could be taken as costs or losses of subsequent fiscal years, with compliance with the other provisions of this regulatory decree, provided that the proper accounting adjustment is made.

5. We are here, as is well stated in the judgment, in the presence of situations where accounting the amortization of fixed assets is done during a useful life period shorter than that resulting from the tax regime, determining that the amortizations recorded in accounting in each fiscal year exceed those permitted fiscally.

6. Despite the excess of amortizations being required to be added for purposes of determining the taxable result of the fiscal year in which it occurred, the possibility of operating its deduction in subsequent fiscal years was conferred, provided that the useful life period of the good fixed by law and the limits of the amortization quotas were safeguarded.

7. Another case in which tax law accepted that the value of depreciation could exceed that of the maximum amortization quota that, as a rule, would be possible to consider in each fiscal year was the figure of exceptional depreciation of a good motivated, namely, by disasters, natural phenomena and extremely rapid technical innovations.

8. With respect to exceptional depreciations, the law imposed the need for their acceptance by the Tax Administration so that the cost of amortization, fiscally relevant, corresponded to the actual cost borne by the company.

9. The award states that, in the absence of such acceptance due to lack or untimeliness of the respective request, only it became impossible that "the exceptional depreciation be considered cost, in its entirety, in the fiscal year in which it occurred (...) there being no obstacle in tax law to the possibility of reintegration and amortization of goods that had suffered exceptional depreciation with application of the quotas that resulted from the regime that had been applied before it occurred".

10. It is thus perceived that the similarity that the award seeks to highlight between, on one hand, extraordinary amortizations allegedly recorded by the taxpayer following the depreciation of assets by force of the legal revaluation, and, on the other, excessive amortizations and exceptional depreciations, translates into the fact that in both cases amortization superior to that which in the fiscal year could be fiscally accepted is recorded.

11. Thus, it is understood in the award that, if in the cases of excessive amortizations and exceptional depreciations not accepted by the Tax Administration the law allows their fiscal deduction in subsequent fiscal years, subject to determined conditions, by analogy it will also be appropriate to allow the application of the same regime to the said extraordinary amortizations.

12. For, in the understanding of the award, in both cases we are faced with the recording of amortizations superior to those which in the fiscal year could be fiscally accepted, there being no reasons to exclude the application to the extraordinary amortizations of the regime in force for excessive amortizations and exceptional depreciations not accepted by the Tax Administration.

13. Is this equation of figures and their respective regimes carried out in the award correct? We understand that it is not, as shall be demonstrated below.

14. In the first place, notwithstanding it being clear that the regime of Article 21 of Regulatory Decree 2/90 allowed that reintegrations and amortizations that were not considered as costs or losses of the fiscal year in which they were recorded, for exceeding the maximum amounts admitted, could be taken as costs or losses of subsequent fiscal years, the same did not occur in the case of exceptional depreciations.

15. As is clear to see, the lack of fiscal acceptance of exceptional depreciations recorded in accounting, either by rejection of the Tax Administration, or by lack or untimeliness of the respective request, entailed the impossibility of future deduction of those losses, in that the reintegrations and amortizations came to be effected on the accounting value resulting from that depreciation.

16. Against this position it is of no avail the argument to the effect that Article 21 of Regulatory Decree 2/90 could allow the deductibility of the loss caused by the exceptional depreciation in subsequent fiscal years, given that the provision of the said provision concerned only reintegrations and amortizations periodically recorded whose amount exceeded the maximum permitted quotas and not extraordinary amortizations resulting from events with a character of abnormality.

17. In truth, with the formalities of the said Article 21 of Regulatory Decree 2/90 fulfilled – and provided that the useful life period of the good fixed by law was safeguarded, as well as the limits of the amortization and reintegration quotas -, it was possible to render fiscally relevant in subsequent fiscal years the portion of the value of amortization not previously accepted for exceeding the maximum value of the amortization quotas.

18. However, in the case of exceptional depreciations provided for in Article 10 of Regulatory Decree 2/90, we were not in the presence of situations of periodic and systematic allocation of the cost of an asset that depreciates over the fiscal years that comprise its useful life, even if superior to the maximum quotas fixed by law.

19. The impossibility of obtaining fiscal relevance of the exceptional depreciation resulted, rather, from its lack of acceptance by the Tax Administration or from the lack or untimeliness of the respective request.

20. In defense of the position we have been supporting, we can also point to the conclusions drawn in the report on the impact of the adoption of International Accounting Standards, prepared by the working group created by the order of 23.01.2006 of the Secretary of State for Tax Affairs on IAS 16.

21. In the analysis carried out on the fiscal impact of IAS 16 Tangible Fixed Assets, amendments are proposed to the regime of depreciation and exceptional depreciations, both matters being treated in a distinct and separate manner.

22. Moreover, regarding the regime of impairments of tangible fixed assets, it was recommended that "with respect to impairment losses that are not fiscally accepted, it was understood that depreciation based on the cost model that cease to be recorded in accounting due to the prior recognition of that loss should, nevertheless, be accepted for tax purposes".

23. From this proposal it can be drawn that in the regime of the CIRC which was in force until 01.01.2010, the possibility of fiscal recovery of depreciation that ceased to be recorded in accounting by reason of the recognition of an impairment loss not accepted as an exceptional depreciation was not provided for, a situation that changed with the new Article 35, no. 4 of the CIRC in the wording given by Decree-Law no. 159/2009 of 13 July.

24. In summary, the IRC Code in the version that was in force until 31.12.2009 did not accept the fiscal deductibility of extraordinary amortizations (or impairment losses in the SNC terminology) that were not accepted as exceptional depreciations, thus impairing the possibility of future deduction of those losses, even if through the regime of reintegrations and amortizations that came to be practiced on those assets.

25. Making the bridge between what has just been said and the question under examination, we can affirm with certainty that, in light of the wording of the CIRC in force until 2010, it was not possible to recover fiscally in subsequent fiscal years, following the regime of depreciation and amortizations that had been practiced, exceptional depreciations not accepted fiscally, whether by rejection of the respective request or by lack or untimeliness thereof.

26. If fiscal relevance was not attributed to the said exceptional depreciations not accepted fiscally, by analogy nor would it be with respect to extraordinary amortizations resulting from the said legal revaluation.

27. In this manner, contrary to what is stated in the award, the effects of the extraordinary amortizations allegedly recorded following the legal revaluation did not extend to subsequent fiscal years, being limited instead to the period of 1994.

28. Therefore, and placing ourselves in the line of reasoning followed in the award, having the taxable event occurred in full under the old law and having produced all its effects under it, any application made thereto of Article 35, no. 4 of the CIRC (in the wording in force in 2011) should always be considered a retroactive application of tax law not accepted by the legal order.

1. If not so understood, which is admitted by mere academic hypothesis, there will still be the argument that there exists a fundamental difference between the figure of extraordinary amortizations allegedly recorded in accounting following the depreciation of assets by force of the legal revaluation and the figure of excessive amortizations and exceptional depreciations, which prevents the application thereto of the legal regime that the award proposes for these.

2. In effect, even if one accepted the fiscal deductibility in subsequent fiscal years, not only of excessive amortizations provided for in Article 21 of Regulatory Decree 2/90, but also of exceptional depreciations not authorized by the Tax Administration or whose request was untimely, such fact could not call into question a fundamental principle in force in the matter of depreciation.

3. This principle is translated in the premise that the total value of amortizations fiscally recognized over the useful life period of the good cannot exceed the value of the fixed asset accepted fiscally for purposes of applying the regime of amortizations and reintegrations.

4. Thus, either in the case of excessive amortizations resulting from the adoption of a useful life period shorter than that resulting from tax law, or in that of exceptional depreciations that had not been accepted by the Tax Administration, the amount deductible as a cost over its useful life could never exceed the acquisition cost, or the production cost of the good, or yet the value resulting from revaluation under tax legislation.

5. This rule is clearly drawn from the provision of both no. 1 of Article 2 and no. 1 of Article 3 of Regulatory Decree 2/90.

6. If tax law determines that amortizations shall be made on the historical cost of the good or on the value that results from its tax revaluation, it would be illogical to accept that, upon reaching the end of the useful life period of the good, the accumulated amortizations value exceeded the value of the good accepted for purposes of calculating these.

7. Thus being, if one were to admit, in the case of extraordinary amortizations allegedly recorded following the depreciation of assets by force of the legal revaluation, the application of the regime of amortizations and reintegrations not only to the value resulting from the legal revaluation, but also to the value of the depreciation suffered, we would obtain, over its useful life, an amount deductible as cost superior to the value resulting from revaluation under tax legislation.

8. In concrete terms, everything would happen as if, notwithstanding the legal revaluation, such assets continued to be amortized by the value prior to that revaluation.

9. Representing this situation a clear violation both of the provision of no. 1 of Article 2 of Regulatory Decree 2/90, and of the provision in Law no. 36/91 of 27 July.

10. In this manner, it is evident that the Claimant could never make fiscally relevant the depreciations resulting from revaluation, through their amortization in subsequent fiscal years, according to the amortization regime that had been practiced (Article 21 of Regulatory Decree no. 2/90).

11. The award, in defending the opposite position, was unable to properly analyze the issue, neglecting principles and legal provisions that pointed to a decision in a different sense, thus suffering from the vice of erroneous interpretation and application of law.

12. As highlighted above, the argument we have just analyzed assumed great importance in the structure and logical sequence of the argumentative block contained in the said award, for, had that argument not existed, it would always be considered that the application of Article 35, no. 4 of the CIRC (in the wording in force in 2011) to depreciations resulting from legal revaluation verified in 1994 would constitute a case of retroactivity at a level not accepted by the legal order.

13. Having demonstrated the invalidity of this argument, it is considered that the possible effects of the depreciations of assets resulting from legal revaluation were limited temporally to the year 1994, and Article 35, no. 4 of the CIRC may not be applied thereto.

14. In any event, even if it were understood in the opposite sense, that is, that Article 35, no. 4 of the CIRC could be applicable to situations verified under the prior law, either at the level of occurrence or production of effects, even in that hypothesis it would not be possible to attribute fiscal relevance to the depreciations originated by the legal revaluation.

15. In accordance with what has been stated in the preceding points, one of the basic premises of the regime of amortizations and depreciations is that the amount deductible as expenses can never exceed the historical cost of tangible fixed assets, whether such deduction is made via depreciation or by the recognition of an impairment loss.

16. From this it follows that, for tax purposes, any impairment verified in an asset will only determine a loss in the value that under tax law is accepted for purposes of calculating its maximum depreciation quotas.

17. As the valuation of elements of assets is carried out in accordance with their acquisition or production cost, or in accordance with the value resulting from revaluation under tax legislation, it is not legally admissible to deduct as an expense an impairment loss occurring in an asset valued according to criteria not accepted by tax law.

18. In this manner, if the application of the regime provided for in Article 35, no. 4 of the CIRC to the extraordinary amortizations allegedly recorded in accounting following the depreciation of assets by force of the legal revaluation were admitted, we would obtain, over the useful life of the assets in question, an amount deductible as cost superior to the value resulting from revaluation under tax legislation.

19. In concrete terms, everything would happen as if, notwithstanding the legal revaluation, the valuation of elements of assets subject to depreciation continued to be carried out in accordance with their prior acquisition cost.

20. Whereas the valuation of assets subject to revaluation, in light of the obtaining of tax advantages through the increase in amortizations, would be carried out in accordance with the value of the legal revaluation.

21. As it is obvious, this would represent a clear violation both of the provision of no. 1 of Article 2 of Regulatory Decree 2/90, and of the provision in Law no. 36/91 of 27 July.

(...)

h) On 04-09-2015, the Claimant was notified, through Letter no. …, of 02-09-2015, of the decision to dismiss the administrative review, by order issued on the same date by the Director of the Large Taxpayers Unit, who manifests agreement with Information no. …-…/2015 whose content is given as reproduced, in which reference is made, among other things, to the following:

§ II.III. Administrative Review of Matters Deemed Not Proven

§ II.III.I. Arguments of the Claimant

1. With respect to the facts deemed not proven in point 77 of the draft decision, the Claimant comes, in summary, to state that:

• With respect to the lack of proof of the recording of extraordinary amortizations by E…, understands that the proof of this matter would result from other facts deemed proven in the draft decision, specifically "(i) the revaluation of the assets of E… following the legal requirement, (ii) the recognition of an equity variation in the sphere of E… as a result of that revaluation, and (iii) the transfer of assets from E… to the claimant and from this to C… by their accounting values".

• In effect, the Claimant understands that the consideration, as proven, of the facts mentioned above necessarily implies that the recording in accounting of extraordinary amortizations occurring by force of the legal revaluation of the assets be considered proven.

• With respect to the lack of proof of the recording of any impairment loss by C…, upon the introduction in its Balance Sheet of assets separated from the Claimant, it is stated in the right of hearing that "the value by which the assets were included in the balance sheet of the Claimant were the values resulting from the revaluation, so that the impairment loss recognized upon their revaluation remained in the sphere of E…, not having been recognized again by the Claimant, nor thereafter by C…".

§ II.III.II. Assessment

1. As stated in the draft decision, "Article 35, no. 4 of the CIRC may only be applied to impairment losses reflected as such in the accounting of entities (...)".

2. In such manner, regardless of the question of the applicability of such legal provision to the situation of the records, there would always have to be a demonstration of the recording in accounting of the "extraordinary amortizations" determined by the legal revaluation of the assets of E….

3. Once we are in the presence of data that the Claimant should have and present to these records, the insufficiency of proof in question shall have to be assessed to its detriment.

4. Against this, the Claimant states that the consideration, as proven, of the facts referred to in point 76 of the draft decision necessarily implies that the recording in accounting in the sphere of E… of extraordinary amortizations occurring by force of the legal revaluation of its assets be considered proven.

5. Therefore, for the Claimant we would be in the presence of a notorious fact, which would be inferred from the remaining facts considered as proven.

6. Placed the question in these terms, note that, according to Article 72 of the LGT, "the instructing body can use for knowledge of the facts necessary to the decision of the procedure all means of proof admitted in law".

7. Now, the means of proof admitted in law are indicated in the Code of Civil Procedure and Civil Code: documentary proof, proof by confession, expert proof, proof by inspection, testimonial proof.

8. Being that in tax law there is still another means of proof, which is constituted by official information, with the regime provided for in Article 76, no. 1 of the LGT.

9. On the other hand, according to Article 87, no. 2 of the CPA, notorious facts and those which the competent body has knowledge of by reason of the exercise of its functions do not require proof.

10. There is no doubt that no proof was produced by the Claimant with a view to demonstrating the reality of the fact under analysis.

11. On the other hand, there is no knowledge that any official information exists on this fact.

12. Finally, we cannot consider that this instructing body should have knowledge of the fact in question by reason of the exercise of its functions or that it be of common knowledge, since we are in the presence of elements that respect the accounting of E….

13. In this manner, it is not possible to consider the fact as notorious, thus not being dispensed with the respective proof.

14. Terms in which the allegations of the Claimant on this matter are improper, the judgment of lack of proof on the fact in question being maintained.

1. Regarding the other fact deemed not proven in point 77 of the draft decision, the Claimant expressly states that the extraordinary amortizations resulting from the revaluation of the assets of E… were not recorded in its accounting, nor in that of C….

2. Being in the presence of personal facts or of which the Claimant should have knowledge and since the same are contrary to its interests, for the Claimant seeks the application of Article 35, no. 4 of the CIRC to the situation brought to these records, which requires the recording in accounting of the impairment losses, there is thus proof by confession that the extraordinary amortizations resulting from the revaluation of the assets of E… were not recorded in its accounting, nor in that of C….

§ II.IV. Adjustment under Article 35, no. 4 of the CIRC

§ II.IV.I. Arguments of the Claimant

1. Contesting the substantiation contained in points 81 to 139 of the draft decision to the effect of dismissing the adjustment requested by the Claimant under Article 35, no. 4 of the CIRC, it alleges this, after transcribing some excerpts from the draft decision, that "the TA understands that extraordinary amortizations are one thing and exceptional depreciations are quite another thing".

2. Following this, with the intention of "clarifying this confusion", it proceeds to characterize the said figures, stating that "there were no, on one hand, extraordinary amortizations and, on the other hand, exceptional depreciations, so that that which the TA might want to call extraordinary amortization must be that which is called exceptional depreciation, which is nothing other than an impairment loss, in light of the current accounting rules".

3. It proceeds, alleging that "it must be concluded that that which the tax rules in force at the date of the facts provided for was that, with respect to extraordinary amortizations that resulted, namely, from disasters, natural phenomena (...), the same could, by means of a request submitted to the Tax Administration, be accepted at the moment in which that extraordinary amortization/exceptional depreciation was recognized".

4. Reiterating its goal of "removing in a very simple manner all the confusion that the UGC seeks to introduce regarding the classification of exceptional depreciations vs. extraordinary amortizations", the claimant refers to the fact that "the causes that led to the recognition of the impairment loss associated with the assets of E… did not fall within that concept of exceptional depreciations, in that it did not result from any abnormal cause (...)".

5. "Moreover, in the context of this request, only goods that in 2011, 17 years after the revaluation, still remain in the active are covered (...), which makes the UGC's argumentation even more irrelevant".

6. It concludes, stating that "even if those revaluations could be integrated into the concept of exceptional depreciations, the UGC's conclusion to the effect that the lack of fiscal acceptance of exceptional depreciations recorded could never be considered valid in the sense that the lack of fiscal acceptance of exceptional depreciations recorded would imply the impossibility of recognizing, in subsequent fiscal years, the fiscal deductibility of that loss (...)".

7. "In effect, it would always have to be admitted the fiscal recognition of that amount, either through the mechanism of accounting adjustment provided for in Article 21 of Regulatory Decree no. 2/90, or through a future sale or write-off of assets".

8. Contesting the substantiation contained in points 140 to 160 of the draft decision to the effect of dismissing the adjustment requested by the Claimant under Article 35, no. 4 of the CIRC, it alleges this, after transcribing some excerpts from the draft decision, that the understanding that the amount deductible as cost over the useful life of the assets could never be superior to the value resulting from revaluation under tax legislation has "underlying the conclusion presented by the UGC right at the beginning of its exposition, to the effect that 'the application of the regime of reintegrations of elements of fixed assets on the values of revaluation constituted an option of the companies subject to privatization'".

9. "If that is so", states the Claimant, "then the consequence would have to be one: in fact that adjustment in favor of the State, in the amount of €861,825.39, that the Claimant presented (...) is not due".

10. "This is because, assuming as valid the understanding [of] the UGC, the value of depreciation fiscally relevant with respect to goods that suffered positive revaluation may not correspond solely to the value of depreciation calculated on the acquisition cost, plus 60% of the increase in depreciation as a result of that revaluation, but must correspond to the entirety of depreciation calculated on the value resulting from the revaluation carried out under tax legislation".

11. Resorting to another argument, the Claimant states that "admitting as valid the conclusion of the UGC (...), that would not prejudice at all the possibility of recognition fiscal (...)".

12. "This is because, similarly to what occurs in the case of goods that have suffered a positive revaluation, in which the fiscal gain or loss is calculated based on the respective acquisition or production value for tax purposes (...), then also in the case of negative revaluations that fiscal gain or loss shall have to have as reference the historical acquisition value".

13. "Thus, if the UGC insists on considering that that impairment loss may not be recognized over the useful life of the goods to which it is allocated, it will always have to admit that impairment loss will be fiscally recognized upon its eventual future sale or write-off".

14. Resuming the previous argument, the claimant proceeds, stating that "(...) it is important to make clear that this thesis of the UGC, to the effect that it is the taxpayers who can choose (or not) the consideration of the value of assets resulting from their revaluation, has no foundation whatsoever".

15. "(…) The general rule with respect to any revaluations (positive) that are recognized on assets such as those here in question is that of their non-relevance for tax purposes".

16. "With respect to negative revaluations (...) the rule is that of their fiscal relevance: (i) at the moment in which they are recorded in accounting, if we are in the presence of exceptional depreciations duly accepted by the Tax Administration, or (ii) over the remaining useful life of the assets, in the other cases, under the provision of no. 4 of Article 35 of the IRC Code".

17. "Now, in the case in which those revaluations are carried out under legal instruments, the law provides for an exception to those general rules, but provides for only one exception".

18. "That exception refers to the case of positive revaluations, in which case 60% only will be considered fiscally relevant the depreciation charged on that revaluation".

19. "In the case of negative revaluations (or impairment losses), there is no exception to the rule, so that general regime must be applicable".

20. "In light of the foregoing, one cannot even understand where the UGC went to find the thesis it seeks to sustain, of so unattached is it to the letter of the law and the most basic rules of interpretation thereof".

§ II.IV.II. Assessment

1. Addressing the refutation made by the Claimant of the substantiation contained in points 81 to 160 of the draft decision, note, firstly, that the allegation of the existence of "confusion" at the conceptual level in the position contained in the said document lacks sense.

2. In this part of the draft decision, as well as in the remaining parts, the reasons, both of fact and of law, sustaining the understanding proposed there were perfectly identified, being the same clearly perceptible and sufficient.

3. In this manner, the allegation in question contains an incorrect reading of that substantiation.

4. As for the rest, the Claimant does not add any question of fact or law that had not previously been addressed, so that, with respect to its analysis and in order to avoid unnecessary repetitions, we remit to the substantiation contained in points 61 to 75 and 81 to 160 of the draft decision, which we give as integrally reproduced.

5. One final note, to point out that the question raised by the Claimant regarding the possibility of obtaining the fiscal deductibility of the depreciations of assets through their future sale or write-off does not form part of the object of the present procedure, no pronouncement being due thereon.

(...)

i) On 03-12-2015, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

j) Following the reprivatization process, E… (E…), E.P. was transformed into a limited company with exclusively public capital, with the name F… – …, S. A. (hereinafter "F…") and its assets distributed among several companies;

k) In 1994, E… conducted a revaluation of its assets in accordance with Article 8 of Decree-Law no. 7/91, for purposes of separation by spin-off to create C… – …. S.A., in accordance with Decree-Law no. 131/94, (document no. 4 filed with the request for arbitral pronouncement, whose content is given as reproduced and Official Gazette, II series of 30-11-1994, reproduced in document no. 9);

l) Among downward revaluations (negative) and upward revaluations (positive), there was generated a net increase in the book value of revalued assets of 31,666,263,000$00 (Document no. 4 filed with the request for arbitral pronouncement, whose content is given as reproduced and Article 39 of the Response);

m) These revaluations were carried out by entities chosen from among those previously qualified by the Ministry of Finance, were subject to the approval of the Minister of Finance and had a fiscal character in accordance with Article 4 of Decree-Law no. 36/91 of 27 July and Decree-Law no. 22/92 of 14 February;

n) The criteria used in these revaluations were those recommended at the time by Accounting Directive no. 13 (documents nos. 11 and 12 filed with the request for arbitral pronouncement, whose contents are given as reproduced);

o) The spin-off that operated in 1994 the transfer of the assets in question here from E… to C… – …. S.A. was subject to the regime of fiscal neutrality;

p) This patrimonial fund transferred to C… – …. S.A. corresponded to the assets relating to G… (G…) referred to in Decree-Law no. …/91, of … …;

q) In 2006, it was determined that C… – …, S.A. would have as its sole purpose the management of equity interests and would adopt the name H… – …, SGPS, S. A. (the Claimant), proceeding to the constitution of I… – … S.A., which afterwards took the name C… – …, S.A. (documents nos. 15, 16 and 18 filed with the request for arbitral pronouncement, whose contents are given as reproduced and Council of Ministers Resolution no. 85/2006, published in the Official Gazette of 30-06-2006);

r) At the beginning of 2007, there occurred the transfer of the assets in question here, now from H… SGPS to C… S.A.: the first became at that time an SGPS (point 5 of RCM no. 85/2006), and became emptied of all its operational assets, among which the assets of G… (G), transferred to the newly created C… S.A. (see point 3, paragraph c), of RCM 85/2006);

s) This second and final transfer of the assets in question here was subject to the regime of fiscal neutrality of the "contribution of assets" (deed of increase of capital – contribution of assets – contained in Document no. 18 filed with the request for arbitral pronouncement, whose content is given as reproduced);

t) The result of the said revaluations was not taken into account in determining the taxable profit of E… for the year 1994 or thereafter (Documents nos. 10, 19 and 20 filed with the request for arbitral pronouncement, whose contents are given as reproduced);

u) On 03-12-2015, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Facts Not Proven

It was not proven that, with respect to the assets of E… regarding which in the revaluation values lower than their acquisition cost net of depreciation were determined, that company or C… had recorded in accounting any cost (or expense).

2.3. Substantiation of the Decision on the Findings of Fact

The decision on the findings of fact is based on the documents filed with the request for arbitral pronouncement and on the administrative file.

The Tax Authority and Customs Authority in the Tax Inspection Report did not consider proven that an "impairment loss" (extraordinary amortization, in POC terminology) had been recorded with respect to such assets, a position which it maintained in the present proceedings.

Regardless of the qualification to be attributed at the level of the findings of fact, it was proven that E… recorded in accounting a depreciation derived from the revaluation of certain assets in the context of the reprivatization process of the D… Group, which resulted in a reduction of its book value, which was not considered fiscally relevant at the moment it was recognized in the sphere of E….

3. Question of Incompetence for Assessment of Refund Claim

2. Question of the Material Incompetence of the Arbitral Tribunal to Hear the Refund Claim for the Amount Paid

In accordance with the provision in paragraph b) of Article 24, no. 1 of the RJAT the arbitral decision on the merits of the claim to which no appeal or challenge applies binds the tax administration from the end of the time limit provided for the appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the time limit for the spontaneous execution of the decisions of the tax courts, "restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in harmony with the provision of Article 100 of the LGT [applicable by virtue of the provision in paragraph a) of Article 29, no. 1 of the RJAT] which establishes that "the tax administration is obligated, in case of full or partial success of an administrative review, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, including the payment of compensation interest, if applicable, from the end of the time limit for execution of the decision".

Although Article 2, no. 1, paragraphs a) and b) of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning in CAAD, not making reference to condemnatory decisions, it should be understood that the powers that in judicial challenge proceedings are attributed to the tax courts are comprised within its jurisdiction, that being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration proceeding should constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge proceeding, despite being essentially an annulment proceeding of tax acts, admits the condemnation of the Tax Administration in the payment of compensation interest, as can be inferred from Article 43, no. 1 of the LGT, in which it is established that "compensation interest is due when it is determined, in an administrative review or judicial challenge, that there was error attributable to the services from which results the payment of the tax debt in an amount superior to the legally due" and Article 61, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010 of 31 December, to which corresponds no. 2 in the initial wording) that "if the decision that recognized the right to compensation interest is judicial, the time limit for payment counts from the beginning of the time limit for its spontaneous execution".

Thus, Article 24, no. 5 of the RJAT in stating that "interest payment is due, regardless of its nature, in accordance with the terms provided for in the General Tax Law and the Code of Procedure and Tax Procedure" should be understood as allowing the recognition of the right to compensation interest in the arbitral proceeding, when it is a consequence of the annulment of self-assessment or self-charging acts.

The fixing of compensation interest derived from the illegality of a self-assessment act presupposes the existence of an amount to be refunded, so that it must be concluded that determining the payment of the amount to be refunded falls within those powers, as it is a prerequisite to the right to compensation interest.

Indeed, contrary to what is defended by the Tax Authority and Customs Authority, the fact that Article 24, no. 1 of the RJAT imposes the duty of execution "in the exact terms of the success of the arbitral decision in favor of the taxpayer" even points in the direction that, when possible, all the terms of the execution be fixed in the arbitral decision, and only in the absence of such fixing can they be carried out by the Tax Authority and Customs Authority.

However, the existence of this jurisdiction to decide on refunds does not imply that it shall be determined always when a claim in a request for arbitral pronouncement is judged to be well-founded, for not always does success necessarily have as a consequence the right to refund and compensation interest, there possibly being no such right in cases in which it is viable to renew the act challenged without offense to the judgment, a possibility that is implicit in paragraph a) of Article 24, no. 1 of the RJAT, which is in harmony with Article 100 of the LGT.

Therefore, whenever the grounds of the decision of success do not exclude the possibility of practice of a new act, the refund should not be ordered in the declaratory proceeding.

But this possible inability to decide on the refund of the amount paid does not exclude the jurisdiction of the Arbitral Tribunal to render a decision on that matter.

Thus, the exception of incompetence for the assessment of the refund claim of the amount paid is improper, as a consequence of possible annulment of the self-assessment.

4. Matters of Law

4.1. Powers of Cognition of the Arbitral Tribunal

The Claimant, in its submissions, raises the question of whether the Tax Authority and Customs Authority invokes in its Response a ground that is not invoked in the decision of the administrative review, namely that "for purposes of fiscal deduction, it is required that the recording of impairment losses in accounting be made in results accounts, so that the same are reflected in the net result of the period" (Article 56 of the Response, whose content is reaffirmed in Articles 40 to 46 of the submissions of the Tax Authority and Customs Authority).

As was understood in the award rendered in arbitral case no. 208/2015-T, the relevant substantiation in cases of self-assessment in which an administrative review was submitted and was dismissed is that contained in the decision of dismissal (directly or by reference).

That arbitral award states the following:

(...)in situations of self-assessment followed by an administrative review in which an express decision is rendered, what subsists in the legal order is the position of the Tax Authority and Customs Authority before the taxpayer that is [text truncated]