IRC Deduction of Capital Losses on Share Transfers Under Article 23(5) CIRC – CAAD Ruling 727/2016-T

ARBITRAL AWARD

The arbitrators José Baeta de Queiroz, president, Gustavo Lopes Courinha and João Menezes Leitão, members, who constitute the present Arbitral Tribunal, agree:

I. Report

1. A…, S.A., legal entity no. …, with registered office at …, P.O. Box …, …-… …, in its capacity as the dominant company of GROUP B… subject to the special tax regime for groups of companies (hereinafter referred to as the Claimant), submitted on 06.12.2016, pursuant to the provisions of article 2.º and article 10.º of Decree-Law no. 10/2011, of 20 January, as amended subsequently (Legal Framework of Tax Arbitration, hereinafter LFTA), a request for arbitral pronouncement in tax matters, in which the Tax and Customs Authority (hereinafter Respondent or TCA) is the Respondent, with a view to the declaration of illegality and annulment of the additional assessment of Corporate Income Tax (CIT) no. 2016…, of 3 August 2016, the assessment of compensatory interest no. 2016… and the corresponding account settlement statement no. 2016…, of 5 August 2016, all practiced by reference to the year 2012, from which resulted the amount payable of €4,708,434.57.

2. In the request for arbitral pronouncement, in accordance with the provisions of articles 5.º, no. 3, al. b), 6.º, no. 2, al. b), 10.º, no. 2, al. g) and 11.º, no. 2 of the LFTA, the Claimant designated as arbitrator Gustavo Lopes Courinha.

Pursuant to no. 3 of article 11.º of the same LFTA, the Respondent indicated as arbitrator João Menezes Leitão.

The arbitrators designated by the parties, pursuant to the provisions of articles 6.º, no. 2, al. b) and 11.º, no. 6 of the LFTA, with observance of the prescribed by article 3.º, no. 2, al. b) of Order no. 112-A/2011, of 22 March, designated, by agreement, José Baeta de Queiroz as President Arbitrator.

In accordance with the provision in no. 7 of article 11.º of the LFTA, and as confirmed by communication from the President of CAAD, the Collective Arbitral Tribunal was constituted on 6.03.2017.

1. In the request for arbitral pronouncement (hereinafter initial petition or IP), the Claimant petitions (cf. the final prayer for relief) that it be "annulled the additional assessment of corporate income tax no. 2016…, of 3 August 2016, the assessment of compensatory interest no. 2016… and the corresponding account settlement statement no. 2016…, of 5 August 2016, all practiced by reference to the year 2012" for the following reasons (which are transcribed from the aforementioned final prayer for relief of the IP):

"for violation of article 23.º, no. 5 of the CIT Code because we are not in the presence of a tax operation, within the terms of the rule but rather a paid transmission;

for violation of article 73.º of the general tax law, because notwithstanding the above, we are in the presence of a rebuttable presumption;

for violation of articles 13.º, 18.º and 104.º, no. 2 of the Constitution of the Portuguese Republic, notwithstanding the above, disrespecting the principles of freedom of tax management, equality, tax capacity, proportionality, prohibition of excess;

for violation of article 13.º of the legal framework of tax arbitration;

for violation of article 63.º, no. 4 of the general tax law".

Further requests, consequently, that it be determined "the reimbursement to the Claimant of the amount unduly paid, plus indemnity interest calculated at the legal rate in force".

1. The TCA, pursuant to article 17.º, no. 1 of the LFTA, submitted response (hereinafter abbreviated as R.), in which, by exception, it alleged the incontestability of the act, based on a decided case/resolved case, and, by challenge, petitioned the inadmissibility of the request for arbitral pronouncement and the maintenance in the legal order of the tax acts challenged.

2. By order of the President of the Arbitral Tribunal, the meeting referred to in article 18.º of the LFTA was scheduled for 23.5.2017, at which the testimony of the witnesses enrolled by the Claimant, C… and D…, and the witness enrolled by the respondent, E…, was heard, and oral submissions by the parties were made, all as shown in the minutes contained in the case file.

In accordance with no. 2 of article 18.º of the LFTA, 6.9.2017 was designated for the delivery of the final decision.

II. Clarification of Issues

1. The arbitral tribunal is regularly constituted and is competent to judge the request for arbitral pronouncement (article 2.º, no. 1, al. a) of the LFTA), the parties enjoy legal personality and capacity, have standing (articles 4.º and 10.º, no. 2 of the LFTA and article 1.º of Order no. 112-A/2011, of 22 March) and are properly represented.

2. The Respondent invoked the exception of a decided case/resolved case with respect to the contestability of the assessment sub judice, whose appreciation, because it is connected with the defect invoked by the Claimant regarding the violation, by such assessment, of article 13.º of the LFTA and depends on the establishment of the relevant factuality, shall be carried out following the judgment of the matter of fact.

3. There are no other exceptions or preliminary issues that prevent knowledge of the merits and which need to be addressed preliminarily, so the case is in a condition to have a final decision delivered.

III. Questions to be Decided

1. In general terms, the subject matter to be decided, as extracted from the procedural documents of the parties, concerns establishing the legality of the acts of additional assessment of CIT no. 2016…, of 3 August 2016, of compensatory interest assessment no. 2016… and account settlement statement no. 2016…, of 5 August 2016, which had as their basis an arithmetic correction to the taxable income of CIT for 2012 based on the application of the provision in no. 5 of article 23.º of the CIT Code (in the version in force ratione temporis), regarding capital loss ascertained with the paid transfer of share capital, in the amount of €17,691,831.71.

2. In specific terms – and bearing in mind that, as is well known, although the Tribunal does not have to analyze all the arguments that the parties invoke to support their respective position, it is incumbent on the Tribunal to resolve the questions submitted to its consideration, that is, the concrete problems that, taking into account the claim, the cause of action and the exceptions invoked, it is called upon to decide within the scope of the dispute, without prejudice to the answer given to any question potentially affecting the knowledge and assessment of others –, in addition to the matter of exception relating to the invocation by the Respondent of a decided case/resolved case already identified above, the following are the questions to be resolved, taking into account the defects of violation of law attributed by the Claimant to the impugned acts:

i) legal characterization of the assessment of CIT no. 2016… challenged in this case;

ii) failure to comply with the right to prior hearing provided in art. 60.º, no. 3 of the General Tax Law (hereinafter GTL);

iii) inadmissibility of the assessment sub judice under the terms of article 13.º, nos. 1 and 3 of the LFTA in view of the challenge by the Claimant before CAAD in March 2016 of the first additional assessment of CIT for the year 2012;

iv) infraction of article 23.º, no. 5 of the CIT Code (hereinafter CITC) because the requirement of the existence of a paid transfer is not met;

v) infraction of article 73.º of the GTL because there is a rebuttable implicit presumption;

vi) illegality of the assessment challenged for permitting, unjustifiably, different treatment of identical operations in the context of a group of companies or in their absence, with infraction of the principle of equality enshrined in art. 13.º of the Constitution of the Portuguese Republic (hereinafter also CRP);

vii) infraction of articles 13.º and 104.º no. 2 of the Constitution of the Portuguese Republic (hereinafter also CRP), for disrespect of the principles of tax capacity, taxation of actual income, proportionality and prohibition of excess;

viii) infraction of article 63.º of the Code of Tax Procedure and Process (hereinafter also CTPP);

ix) reimbursement of tax paid and indemnity interest.

IV. Decision on the Matter of Fact and Its Motivation

1. Having examined the documentary evidence produced, both that presented with the IP[1] and that resulting from the administrative procedure (which, improperly, is not paginated) attached to the case file (hereinafter AP), which includes the Tax Inspection Report (abbreviated as TIR), dated 30.3.2015, relating to the Group (also attached as doc. no. 8 to the IP), and the individual TIR, dated 26.12.2014, relating to the Claimant (also contained as Annex II to doc. no. 8 attached to the IP), and having considered the witness testimony given, the Tribunal finds proven, with relevance for the decision of the cause, the following facts:

I. The Claimant deducted from its taxable income, in the income tax return declaration of CIT – Form 22 for the year 2012, the amount of €17,691,831.71 corresponding to a fiscal loss that it considered generated with the transfer of the 100% participation held in the capital of F…, SA to G… SGPS, SA, held 100% by the Claimant, as a means of carrying out the capital increase of that company (reference contained in the TIR of 26.12.2014 attached to the AP and as Annex II to doc. no. 8 attached to the IP, pp. 7-8, resulting from indication by the Claimant itself, and factuality acknowledged in art. 152.º of the IP).

II. The Claimant was subject, by force of Service Order no. OI2014… of 17.4.2014, to an internal inspection procedure, relating to the year 2012, from which resulted the TIR dated 26.12.2014, endorsed by an order of 30.12.2014 thereupon with the following wording: "I agree with the conclusions of the report"), which was notified by Office no. … of 31.12.2014 (cf. document at AP and Annex II to doc. no. 8 attached to the IP).

III. The aforementioned TIR, as shown in the document at AP and Annex II to doc. no. 8 attached to the IP, contains the following, which is relevant to transcribe here (pp. 4, 5, 6, 7, 8, 10, 11, 18 and 19):

"I.4.1. CORRECTIONS TO TAXABLE INCOME - CIT

I.4.1.1 Loss resulting from paid transfer of share capital: 17,691,831.71 Euro

A… SA deducted from taxable income, 17,691,831.71 Euro, corresponding to a fiscal loss that it considered generated with the paid transfer of share capital from an associate to another company held 100% and which therefore finds itself in special relationship. The expenses ascertained with this operation are not fiscally deductible under no. 5 of art. 23.º of the CITC (...).

I.4.2. TAX DUE - SELF-ASSESSMENT OF CIT

I.4.2.1. Tax Support Investment Regime (TSIR): 5,637,538.95 Euro

In field 355 of the Form 22 declaration of 2012 the company improperly invokes the right to tax credit under al. b) of no. 2 of art. 90.º of the CITC in the amount of 5,637,538.95 Euro regarding TSIR and not deductible because of:

I.4.2.1.1. Tax Support Investment Regime (TSIR) carried out in 2012: 16,714.16 Euro

(...)

I.4.2.1.2. Tax Support Investment Regime (TSIR) - carryforward from prior periods: 5,620,824.79 Euro

(...)

II.1. CREDENTIALS AND PERIOD IN WHICH THE ACTION OCCURRED

In fulfillment of Service Order no. OI2014… of 2014-04-17, an internal inspection procedure was carried out. (...).

III.1 CORRECTIONS TO TAXABLE INCOME

III.1.1 Loss with paid transfer of share capital: 17,691,831.71 Euro

Situation Identified

The company in the income tax return of CIT - Form 22 relating to the period of 2012 considered, for purposes of determining taxable income an adjustment to the accounting result, the deduction of 17,691,831.71 Euro (Table 07, Field 355) as a fiscal loss realized with the transfer of the participation in F…, SA (…) for carrying out the capital increase of G… SGPS SA.

The amount deducted results from the following calculations:

Questioned the company as to the nature of the operation that generated the declared loss, the values considered in the calculations and the tax framework it considered for the operation, the company indicated briefly that:

a. operation under analysis

The operation that originated the fiscal loss that the company considers deductible consisted in the transfer of the 100% participation held in F…, SA to G… SGPS, SA as a means of carrying out the capital increase of that company.

b. values received from the investee

In application of the provision in no. 4 of art. 45.º of the CITC, the company now considers:

b1. To be lacking dividends distributed by F… SA in the last 4 years in the amount of 12,000,000.00 Euro as distribution of the result of 2011 and;

b2. To have improperly considered as dividends distributed the amount of 117,000,000 Euro received following the release of excess capital after capital reduction of that company by reduction of the nominal value of shares that occurred in 2012, and which it now considers to correspond to the return of invested capital and not to the distribution of results.

In summary, as a result of the operations that occurred in the period of 2012 with the 100% participation in the Capital of H…, SA of F…, SA, the former considered in determining its taxable income, a fiscal loss of 17,691,837.71 Euro which it intends to see corrected to the value of 122,691,831.71 Euro following the analysis it now makes of the same operations.

As to the tax framework of the operation, the company considers:

The limitation of the loss realized of 50% provided in no. 5 of art. 45.º of the CITC to be inapplicable, because the loss ascertained corresponds to the variation in fair value of the participation in F…, SA between the moment it was recognized (as a result of the division of H…, SA) and the moment of the contribution in kind to the capital of G… SGPS, SA, since in both moments the value of the participation is given by an independent valuation.

Being a variation in fair value and in accordance with a decision of CAAD (process no. 108/2013-T) variations in fair value of financial investments cannot be subject to that limitation.

The limitation imposed on losses with the paid transfer of share capital to related companies to be inapplicable because TCA has already excluded from the concept of goods acquired from related entities, goods received as realization of capital contribution in kind, by interpreting that this operation does not qualify as an acquisition by the company that receives the goods, the company understands that also for the transferor the transfer of the goods cannot qualify as a paid transfer.

In that sense, one of the basic prerequisites for the application of no. 5 of art. 23.º of the CITC would not be met.

(...)

Analysis

As indicated above, the company declared as a fiscal expense of 2012 a loss realized with the transfer of shares representing 100% of the capital of F…, SA as a means of carrying out the capital increase of its associate, held 100%, G… SGPS, SA which it calculated at 17,691,837.71 Euro and which it intends to see corrected to the value of 122,691,831.71 Euro, considering that that expense is not limited by the provision in no. 5 of art. 23.º of the CITC.

The analysis of the tax impact of this operation must thus follow two phases:

In a first moment, to evaluate whether the loss constitutes a fiscal expense eligible under article 23.º of the CITC, in particular as regards the provision in its no. 5;

In a second moment, and should the eligibility of the expense be verified, it is important to quantify it taking into account the regime applicable to losses with share capital.

i. As to the subjection to the regime of no. 5 of art. 23.º of the CITC

The application of the above-cited rule stems from the cumulative fulfillment of two conditions:

[1] that the expenses have been incurred with «the paid transfer of share capital, whatever the title by which it is operated»

[2] and that the transfer is made to «entities with which special relationships exist in the terms of no. 4 of article 63.º, or entities resident in Portuguese territory subject to a special tax regime».

It is thus necessary to test the fulfillment of each of these conditions.

As to the first condition, we must evaluate whether the operation in question constitutes a paid transfer under any title; if that operation has as its object share capital and if the expense considered stems from that operation.

Now the expense considered by the company was ascertained with the transfer of shares representing the capital of an associate for the carrying out of a capital increase of another company, so there is no doubt that the operation that generated the expense has as its object share capital.

It then remains to determine whether the transfer of shares for carrying out a capital increase constitutes a paid transfer for the purposes that this rule aims at, and it should be emphasized that it is precisely the fulfillment of this concept that the company contests. (...)

Thus:

• As to the existence of transfer

As already indicated, the operation that was at the origin of the expense entered by H… in determining its taxable income consisted in the transfer of shares representing the Capital of F… to G… SGPS.

There is thus no doubt as to the passage of an asset from the legal sphere of H… to G… SGPS, a passage that qualifies as a transfer.

• As to the onerousness of the operation for H…

In the sphere of H… there is the patrimonial sacrifice that consists in the removal of those assets and simultaneously, it derives the advantage of maintaining the position of sole shareholder of G… SGPS from which there is expectably the existence of future economic benefits (condition necessary for the accounting recognition of the asset under the current accounting normalization).

In summary, it is considered demonstrated that the transfer of shares of one company for carrying out a capital increase of another company constitutes a paid transfer of share capital and that the expenses deducted in determining taxable income as loss realized stem from that transfer, thus verifying the fulfillment of the first condition required for the application of no. 5 of art. 23.º of the CITC.

As to the second condition, we must evaluate whether there are special relationships between the entity transferring the share capital and the entity benefiting from its transfer.

The operation had as participants H…, SA and G… SGPS, SA, the first being the holder of all the capital of the second, both before and after the capital increase of the latter.

Under al. a) of no. 4 of art. 63.º of the CITC, it is considered that special relationships exist between two entities if one entity holds, directly or indirectly, a participation not less than 10% of the capital or voting rights.

In this case, verifying that H…, SA held at the date of the operation 100% of the capital of the company to which it transfers the ownership of the shares of F…, there is no doubt that the operation in question was carried out between two related entities.

In summary, being demonstrated that:

the fiscal expense under analysis stems from an operation with share capital;

the operation, transfer of shares for carrying out a capital increase, constitutes a paid transfer;

There are special relationships between the entity that transfers and the entity that receives the share capital;

The operation in question is subject to the regime of no. 5 of article 23.º of the CITC, whereby any expense ascertained is not eligible as a negative component of taxable income.

Additionally, we cannot fail to note that we do not agree with the interpretation given by the company to the different tax concepts that were at the origin of the calculation of the fiscal loss analyzed above and even less with the interpretation that leads to moving from 17,691,837.71 Euro to an ascertained loss of 122,691,837.71 Euro for the reasons that follow in summary form:

a) For the improper application of monetary depreciation coefficients to the acquisition cost, since at the date of alienation (16 October 2012) at least two years had not elapsed since the date of acquisition (30 November 2010), cf. what no. 1 of art. 47.º of the CITC provides;

Thus, and based on the values declared (which do not include 12,000,000.00 Euro of dividends received) we would have that the ascertained loss would be 2,554,526.36 Euro,

b) Admitting as a study hypothesis that the amount received, following the distribution of the reserve created with the reduction of the nominal value of the shares of F… (117,000,000.00 Euro) are not subject to taxation because they correspond to the reimbursement of the investment made - as the company argued during the inspection procedure, then its value would have to be deducted from the acquisition cost considered in the loss calculation, we have that after the application of no. 3 of art. 45.º of the CITC, there was no loss;

c) If on the other hand the company maintained the position it considered in its initial calculations, in which it considered that value as dividends received and not taxed by application of article 51.º of the CITC, for purposes of the adjustment provided in no. 4 of art. 45.º of the CITC there was to be considered 129,000,000.00 Euros of dividends received in the last four years (4x365 days) and not taxed by art. 51.º of the CITC we have that after the application of no. 3 of art. 45.º of the CITC, there was no loss.

Thus it is concluded that, by application of no. 5 of art. 23.º of the CITC, the deduction of 17,691,837.71 Euro ascertained with the paid transfer of share capital from H… to its 100% investee, G… SGPS is improper. (...)

IX - RIGHT TO HEARING

In fulfillment of the provisions of articles 60.º of the General Tax Law (...) and of the Supplementary Regime of the Tax Inspection Procedure (...) the company was notified, through our office no. …, of 2014-12-02, by registered mail with receipt acknowledgment, to exercise within a period of 15 days the right to hearing on the corrections proposed in the draft report.

H… submitted the Right to Hearing in writing which was received in these offices on 18 December 2014 with no. …, regarding the corrections proposed in the Draft Report which are summarized and analyzed below:

IX.1 Loss Resulting from Paid Transfer of Share Capital

H… SA, cf. paragraphs 4° and 5.° of its statement indicates that:

a) Does not contest the correction to the taxable income of CIT without prejudice to doing so in the context of an administrative appeal, depending on the evaluation it makes of the arguments invoked by the TCA in the Project of Corrections to support its decision.

b) Considering that "the TCA bases its reasoning on no. 5 of art.º 23° of the CIT Code requests "that the TCA support its position equally as to the framework of the operation under the terms of art.°s 45° and 47° of the CIT Code"

Regarding what was requested by H…, it is important to note that:

1. The reasoning contained in the Draft Report demonstrates that the operation from which H… recognized a loss of 17,691,837.71 Euro, under the terms of art° 46.º of the CIT Code, meets the prerequisites for application of the provision in no. 5 of art. 23.º of the CIT Code.

2. This is moreover the reasoning that H… intends to analyze for a possible administrative appeal, and the TCA cannot at this stage reformulate the reasoning subject to prior hearing.

3. However, as indeed results from the reasoning of point III.1.1. of the Draft Report of the Inspection it is considered demonstrated that the operation of the entry of share capital for carrying out the capital increase constitutes a paid transfer of share capital and therefore subject to the provision of art. 46.º of the CIT Code, being, given the framework in no. 5 of art. 23.º of the CIT Code, any evaluation as to the calculations considered by H… unnecessary.

Given the above, the proposed correction is maintained and thus becomes final".

IV. In fulfillment of Service Order no. 0I2014…, of 2014-11-18, a partial internal inspection action was carried out on the CIT of the Group I… SA, relating to the Special Tax Regime for Groups of Companies (STRGC) for the year 2012, carried out (cf. TIR of 30.3.2015, no. II.2., p. 5) "with the objective of verifying compliance with the tax obligations inherent to the application of the Special Tax Regime for Groups of Companies, recommended in article 69.º and following of the CIT Code, of the group I… regarding the period of 2012 and to reflect in the taxable income of the group the corrections made by the Tax Authority, as a result of inspection procedures concluded to date, in the Income Statement Form 22 of CIT of each of the companies that integrate it", from which resulted the TIR of 30.3.2015 attached to the AP and as doc. no. 8 to the IP, endorsed by an order thereupon (with the following wording: "I agree").

V. In the TIR indicated in the previous point the following was recorded, as far as relevant here (pp. 6, 8, 9, 10):

"III.1. CORRECTIONS TO TAXABLE INCOME - CIT

The group presented, as per the return submitted on 2014-12-01, identified with no. …-… -…, Taxable Income in the amount of 154,921,780.49 Euro, this return being the base document for analysis of the present inspection action.

According to no. 1 of art. 70.º of the CITC "the taxable income of the group is calculated by the dominant company, through the algebraic sum of the taxable incomes and fiscal losses determined in the periodic individual declarations of each of the companies belonging to the group". In this way, where there are changes to the fiscal results declared by the companies belonging to the group, the taxable income of the group will have to be adjusted by the same amount. (...)

III.1.1 Corrections to Taxable Income resulting from corrections made to the dominant company H…, SA: 17,691,831.71 Euro

In fulfillment of Service Order no. OI2014… of 2014-04-17, an internal inspection procedure was carried out, relating to the period of 2012, to company H…, SA. (...)

Following the aforementioned inspection action, corrections made on an individual basis to the company mentioned above were identified which were fixed at the total amount of 17,691,831.71 Euro, broken down as follows:

Loss resulting from paid transfer of share capital

H… SA deducted from taxable income, 17,691,831.71 Euro, corresponding to a fiscal loss that it considered generated with the paid transfer of share capital from an associate to another company held 100% and which therefore finds itself in special relationship. Thus, the expenses ascertained with this operation are not fiscally deductible under no. 5 of art. 23.º of the CITC, correcting the Taxable Income of the group with the reasoning contained in point III.1.1.1 of the Inspection Report which is annexed and is an integral part of this Report (Annex II). [TIR mentioned above in no. III of proven facts].

III.2. TAX DUE - SELF-ASSESSMENT OF CIT

(...) The total corrections proposed at the level of the calculation of the group's tax in the period, following the conclusions of the inspection of the group company and not considered in the indicated return, amounts to 6,522,927.95 Euro, which is broken down as follows:

III.2.1. Tax Support Investment Regime (TSIR): 5,637,538.95 Euro

(...) In field 355 of the Form 22 declaration of 2012 company H… SA improperly invoked the right to tax credit under al. b) of no. 2 of art. 90.º of the CITC in the amount of 5,637,538.95 Euro regarding TSIR and not deductible because of:

III-2.1.1 Corrections to the calculation of tax resulting from corrections made to the dominant company H…, SA: 16,714.16 Euro

Following the aforementioned inspection action, corrections to the calculation of Deductible Tax Benefits to CIT collection on an individual basis to H… SA were identified which were fixed at the total amount of 16,714.16 Euro, for improper deduction from CIT collection, under the tax benefit provided in the "Tax Support Investment Regime Carried Out in 2009" (TSIR) (...) because in the calculation of the tax benefit it did not consider the exclusion of investment made in energy production activity in accordance with the binding information provided to it and as required by no. 1 of article 2.º of Law no. 10/2009.

Thus, the deductible tax benefit is corrected under al. b) of no. 2 of art. 90.º of the CIT Code in the group declaration with the reasoning contained in point III.2.1.1 of the Inspection Report which is annexed and is an integral part of this Report. (Annex II) [TIR mentioned above in no. III of proven facts].

III-2.1.2 Corrections to the calculation of Tax resulting from corrections made to the dominant company H…, SA: 5,620,824.79 Euro

Following the aforementioned inspection action, corrections to the calculation of Deductible Tax Benefits to CIT collection on an individual basis to H… SA were identified which were fixed at the total amount of 5,620,824.79 Euro, for improper deduction from CIT collection, included in field 355 - Tax Benefits of table 10 of the income return, under TSIR from periods prior to 2012 as results from the information entered in Annex D of Form 22.

Thus, the deductible tax benefit is corrected under al. b) of no. 2 of art. 90.º of the CIT Code in the group declaration with the reasoning contained in point III.2.1.2 of the Inspection Report which is annexed and is an integral part of this Report. (Annex II) [TIR mentioned above in no. III of proven facts].

III - 2.2 Result of Assessment: 885,389.00 Euro

(...) From the verifications carried out in the present inspection it is demonstrated that the taxable income ascertained by the group under the terms of no. 1 of art. 70.º of the CITC, in its income return submitted by the dominant company, presents itself influenced by the following tax benefits to be considered in the calculation of the limit referred to in article 92.º of the CITC:

a. Regarding the increase in donations: 188,651.72 Euro. Sum of fields 406 of Annex D of each company that integrates the STRGC

b. Regarding donations: 708,148.50 Euro. Sum of accounts SNC 6882 Donations of each company that integrates the STRGC

c. Regarding the increase in membership fees: 289,249.43 Euro. Sum of fields 407 of Annex D of each company that integrates the STRGC

d. Regarding the increase in depreciation through fiscal revaluation: 2,747,416.95 Euro. Value calculated based on the sum of the values entered by each company that integrates the STRGC in field 720 of the income return Form 22 of CIT in the total of 1,831,611.30 Euro. Considering that the added value corresponds to 40% of the increase in expenses with depreciation not accepted fiscally under al. a) of no. 2 of article 15.º of Regulatory Decree no. 25/2009, we have that the total increase in expenses related to depreciation through fiscal revaluations was 4,579,028.26 Euro of which 60% corresponding to a tax benefit (2,747,416.95 Euro). (...)

Thus it is demonstrated that the CIT collection ascertained after the deductions of als. a) and b) of no. 2 of art. 90° of the CITC, considering the impacts of the corrections to the Taxable Income of the Group and the deductible TSIR in the period described in this Report, if calculated without the effect of tax benefits not enumerated in no. 2 of art. 92° of the CITC is 32,279,140.77 Euro, being that 90% of its value amounts to 29,051,226.69 Euro, higher by 885,389.00 Euro to the value ascertained with the effect of tax benefits.

In conclusion, in the determination of the CIT Tax to be paid by the Group I… with reference to the period of 2012, there is lacking the amount of 885,389.00 Euro corresponding to the part in which the tax assessment is lower than what is ascertained under the terms of no. 1 of article 92° of the CITC.".

VI. In the exercise of the right to hearing that it made in relation to the draft of the TIR of the Group, which resulted in the TIR indicated in the preceding point, the Claimant declared (see art. 4.º), regarding the correction to the taxable income of CIT proposed regarding the loss resulting from paid transfer of share capital in the amount of € 17,691,831.71 the following: "With respect to the correction to the taxable income of CIT, H… chose to, at this stage, not contest it, without prejudice to doing so in the context of an administrative appeal or judicial or arbitral challenge" (cf. document of exercise of the right to hearing, with date of receipt of 13.3.2015, at AP).

VII. The Claimant was notified, in January 2016, of the additional assessment of CIT no. 2015…, relating to the year 2012, issued on 17.12.2015, from which resulted the decrease in the amount to be reimbursed to € 15,690,554.99, the assessment of compensatory interest no. 2015…, issued on 21.12.2015, in the amount of € 353,616.86, as well as the account settlement statement no. 2015…, issued on 21.12.2015, from which resulted tax and interest payable in the amount of € 6,876,544.81 (cf. document no. 9 attached to the IP).

VIII. As results from the respective wording (see doc. no. 9 attached to the IP), the aforementioned additional assessment of CIT no. 2015… proceeded to alter the quantitative regarding the deduction of tax benefits at collection (from € 27,841,616.79 to € 22,204,077.84) and the elements dependent thereon, but did not reflect any alteration to the taxable income declared in the amount of € 154,921,780.49.

IX. The non-inclusion of the correction to taxable income of 17,691,831.71 Euro and consequent alteration from € 154,921,780.49 to € 172,613,612.20 was due to the fact that the form submitted for purposes of preparing the Unique Correction Document resulting from the conclusions of the inspection procedure did not reflect, in the corresponding field, the correction relating to taxable income, but only the correction relating to tax, an incongruity that was later detected by another employee in a consultation made to the procedure (testimony of E…).

X. The aforementioned additional assessment of CIT no. 2015…, assessment of compensatory interest no. 2015… and account settlement statement no. 2015… (see above no. VII) were the subject of the request for arbitral pronouncement, which was conducted under process number 191/2016-T, in which the decision shown to be attached to the case file by the Claimant's request of 1.3.2017 was delivered.

XI. By Office no. …, dated 14.7.2016, issued by the Division of Inspection of Non-Financial Companies II (DINFCII), of the Unit of Large Taxpayers, and sent to the Claimant, headed "Correction of error in the preparation of the correction document relating to the inspection procedure of the group I… (currently A…) in the period of 2012", the Claimant was notified of the following which is transcribed (cf. doc. no. 4 attached to the IP):

"It is hereby informed that, in fulfillment of OI 2014… of this Organizational Unit, an inspection procedure was carried out concerning the determination of CIT ascertained by Group I… in the period of 2012, proposing a set of corrections in the Draft Inspection Report, of which H… SA was notified (...), on 26 February 2015(...).

In response to the office mentioned came H…, SA to exercise in writing its right to hearing (...) in which it identifies the corrections present in the Draft Inspection Report and, expressly, indicates its intention to, at that stage, not contest the increase of Taxable Income in 17,691,831.71 Euro.

For completion of the inspection procedure the Inspection Report was prepared and H… SA was notified, on 17 December 2015 (...) where the following are considered as final corrections to the values declared by the group:

a) Increase of Taxable Income in 17,691,831.71 Euro, thus moving from 154,921,780.49 Euro to 172,613,612.20 Euro;

b) Decrease of deduction of benefits to CIT collection and, 5,637,538.95 Euro moving from 27,841,616.79 Euro to 22,204,077.84 Euro;

c) Fixation of tax to be added as result of the assessment at 885,389.00 Euro instead of zero declared by the group.

However, in the preparation of the Unique Correction Document (UCD) with no. 2015-…-… which gave rise to the assessment no. 2015-…-…-…through oversight, the correction to Taxable Income, in the amount of 17,691,831.71 Euro was not included.

Article 174.º of the Code of Administrative Procedure (CAP) provides, with the heading "Rectification of Administrative Acts" that: "1 - Errors of calculation and material errors in the expression of the will of the administrative body, when manifest, may be rectified, at any time, by the bodies competent for revocation of the act. 2 - Rectification may take place ex officio or at the request of interested parties, has retroactive effect and must be done in the form and with the publicity used for the practice of the act rectified."

Thus, in order to rectify the situations referred to above which fall within the provision of that article 174.º of the CAP, a new Unique Correction Document (UCD) will be prepared so as to reflect the tax situation that results from the corrections considered in the Inspection Report notified to group I… on 17 December 2015.

Given the above, you are hereby notified that a new assessment will be issued in which the correction to Taxable Income will be included in the amount of 17,691,831.71 Euro, thus moving from 154,921,780.49 Euro to 172,613,612.20 Euro, thus complying with the latter part of article 174.º of the CAP "The rectification (...) has retroactive effect and must be done in the form and with the publicity used for the practice of the act rectified".

XII. The office indicated in the preceding point was not preceded by notification for exercise of prior hearing by the Claimant (allegation contained in articles 3.º and 113.º of the IP not contested as per articles 60.º, 61.º and 117.º of the R.).

XIII. The Claimant was notified on 8.8.2016, by access to electronic mailbox (as per docs. nos. 5, 6 and 7 attached to the IP) of the act of additional assessment of CIT no. 2016…, of 3.8.2016, with indication of corrected amount of taxable income from € 154,921,780.49 to € 172,613,612.20, in the amount of € 17,691,831.71, and indication of amount to be reimbursed of € 10,982,120.42 (cf. doc. no. 1 attached to the IP), of the act of assessment of compensatory interest no. 2016…, with indication of the amount of € 639,093.50 (cf. doc. no. 2 attached to the IP), and of the corresponding account settlement statement no. 2016…, of 5 August 2016, with balance ascertained of € 4,708,434.57 and payment deadline of 3.10.2016 (cf. doc. no. 3 attached to the IP), relating to the year 2012.

XIV. The additional assessment of CIT no. 2016… mentioned in the preceding point was not preceded by notification for exercise of prior hearing by the Claimant (allegation contained in articles 1.º, 108.º and 109.º of the IP not contested as per articles 60.º, 61.º and 117.º of the R.).

XV. Given the pending nature of the tax enforcement process no. …2016…, the Claimant adhered on 7.11.2016 to the Special Program for Reduction of Indebtedness to the State (SPRIS), approved by Decree-Law no. 67/2016, of 3.11, in the payment modality of full payment, pursuant to Accession Term no. …, attached in doc. no. 11 to the IP, having proceeded to payment of the amount of € 4,422,957.93 on 10.11.2016, as per doc. no. 12 attached to the IP.

1. No other facts with relevance for the decision of the merits were alleged or manifested that remained unproven.

2. The Tribunal's conviction regarding the facts given as proven resulted from the examination of the documents brought to the case file, the uncontested information contained in the TIRs, the witness testimony indicated and the acknowledgment of facts or their non-controversial character, all as specified in the points of the factual matter enumerated above.

It should be noted that, regarding the testimony of the witnesses enrolled by the Claimant, C… and D…, who performed functions of an accounting scope in Group B…, and who were indicated to the matter alleged in articles 35.º, 36.º, 102.º, 103.º, 108.º and 109.º of the IP (as per the minutes of the meeting of 23.5.2017 of hearing of witnesses, contained in the case file), that the same did not assume autonomous probative relevance for the decision of fact, insofar as they merely confirmed the facts subject to nos. IV, V, VII and VIII of the facts proven (stating in particular that they had verified that one of the corrections proposed in the TIR had not been assessed), facts that were given as proven based on the documents above specified.

The testimony of E…, team coordinator of tax inspection in the Unit of Large Taxpayers since 2013, who revealed direct knowledge and described the matter in question, showing itself credible, was considered for the proof of the fact referred to in no. IX.

V. On the Law

Following the office…, dated 14 July 2016, a (second) additional assessment relating to the year 2012 was issued, corrective of the assessment no. 2015…, of 17 December 2015: this is the assessment no. 2016…, of 3 August 2016, now at issue;

In the grounds of that act – hereinafter, "new additional assessment" – it is stated that "in the preparation of the Unique Correction Document (UCD) with no. 2015-… -… which gave rise to the assessment no. 2015-…-…-…, through oversight, the correction to Taxable Income was not included", whereby the corresponding "rectification" of the latter was carried out - hereinafter, "old additional assessment" - pursuant to article 174.º of the Code of Administrative Procedure (CAP), with the corresponding "retroactive effects";

With respect to this assessment, the Claimant alleges, in a preliminary way:

In the first place, that there does not exist a true rectification capable of producing retroactive effects, whereby there is no legal support for the new additional assessment capable of retroacting to December 2015;

In the second place, that should any error exist, it could not be remedied by means of a rectification by application of article 174.º of the CAP;

In the third place, that such additional assessment – once characterized as an independent assessment act – constitutes a new external inspection;

In the fourth place, that, as it is an act that introduces a modification to the old additional assessment, it lacks the need to be the subject of the exercise of the right of prior hearing as to its own existence, in casu, as to the grounds for its invocation;

In the fifth and last place, that special deadlines of caducity to render or alter the content of the act contested in the arbitral instance, established in article 13.º/no. 3 of the LFTA, were violated.

Legal characterization of the new additional assessment

We judge that a large part of the argumentative set expended by the Claimant presupposes the analysis of the legal nature of the new additional assessment.

In effect, having the legal and fiscal situation of the taxpayer been consolidated in the first act of additional assessment – the old additional assessment – that assessment cannot, without more, be modified in its terms, not only for reasons of manifest requirement of stability of the fiscal relationship (the Claimant had already, inclusively, paid the amount of the old additional assessment at the time of issuance of the new additional assessment), but especially because it is that the premise of the entire procedural tax system: the existence of a sole additional assessment, a definitive act that condenses and brings together the entire course of inspection and that stabilizes in terms tending to be definitively the fiscal relationship.

Indeed, even if implicitly, the TCA itself comes to recognize the uniqueness of the additional assessment as a premise of the tax procedure, when it alleges precisely that a violation occurred, by the Claimant, of the rule of unified challenge: having supposedly the Claimant not contested the old additional assessment as to the matter of the fiscal loss, it would be prevented from doing so now upon the challenge of the new additional assessment.

For that reason, it is already advanced that, should the characterization of the new additional assessment be that of an act of simple rectification – as the TCA maintains in the present case – no defect (at least, of the first four alleged by the Claimant) can be attributed to it or prevent the integral production of its effects.

In truth, being a true rectification, not only is the mentioned retroactive effect achieved (because the rectifying act is integrated into the rectified act), but the recourse to the special procedure of article 95.º-A of the Code of Tax Procedure and Process (CTPP) is not imposed, whose terms appear to be clearly conceived to proceed from the initiative of the taxpayer or, at least, not to prejudice the taxpayer.

Only the requirement of prior hearing shall perhaps be, arguable in that eventuality, as we shall see hereinafter.

Supposed Rectification

It happens, however, that it is not possible to characterize as rectificatory the content of the administrative act embodied in the assessment no. 2016…, of 3 August 2016 – the new additional assessment does not manifestly constitute a simple rectification.

In effect, the recourse to the figure of rectification as conceived by article 174.º no. 1 of the CAP demands the verification of "errors of calculation and material errors in the expression of the will of the administrative body, when manifest" (emphasis ours).

It is evident, both for doctrine and for administrative jurisprudence (or civil jurisprudence, let us say in passing), that the addition of an amount of € 17,691,831.71 to the taxable income of the year 2012 does not fall within the concept of "manifest material or calculation errors".

The manifest errors to which that provision refers are precisely those which, under the general terms of article 249.º of the Civil Code, are "revealed in the very context of the declaration or through the circumstances in which the declaration is made" and which, for that very reason, give "the right to the rectification of it."

It is, precisely, the fact that the error is self-evident – is immediately apprehensible by its recipient – that makes it freely rectifiable: the legal order, very understandably, does not protect the legal position of the recipients (in this case, the Claimant) who should have become aware of the notorious lapse incurred by the declarant (in this case, the TCA).

Now, any normal declaratee placed in the position of the Claimant would be prevented, by the simple analysis of the first act of additional assessment – the old additional assessment –, from immediately concluding to the existence of a lapsus calami.

It must be recalled, in this respect, that since inspection and assessment activities are attributed to different bodies of the TCA – the act of additional assessment of tax being the responsibility of the Director-General (superior body of the TCA), the inspection act being the responsibility of inspection teams – neither is there evident any manifest error by the very contrast between the Inspection Report and the old additional assessment.

It is worth, in this line, emphasizing that the assessment may reflect in full or, only partially, the changes proposed and contained in the Inspection Report; this simple fact invalidates, by itself, the invocation of the existence of a "manifest error" that would justify an intervention of mere correction on the part of the TCA.

It is not, therefore, of any rectification that the new (second) additional assessment consists. And such is not devoid of consequences.

Resorting to the lucid description of Freitas do Amaral, we shall say that: "If errors of calculation or material errors are manifest – that is, obvious, evident, striking – a special regime, quite expeditious, provided and regulated in article 148.º (current, 174.º) of the CAP applies: if, on the other hand, errors of expression are not manifest – that is, are concealed, doubtful, difficult to detect –, rectification follows the general regime of revocation, more laborious and restrictive." – see (among all) Diogo Freitas do Amaral, Course of Administrative Law – Volume II, 2nd edition, Almedina, Coimbra, 2011, p. 512.

Thus being, as well argues the Claimant, we do not find ourselves before a case of rectification, fact which compromises by itself the administrative procedure adopted and, consequently, the new additional assessment here contested, which thus, because devoid of grounds, is vitiated as a result of the violation of the applicable supporting law and, naturally, by the subsequent non-compliance with the required formalities.

And this already admitting that such new additional assessment, even if legally permitted (which shall be analyzed hereinafter), would not affront the fundamental principle of legal certainty, which governs the entire administrative and tax procedure; which in any case would always be, very doubtful.

Admitting, further, that the issuance of the old additional assessment did not already extinguish the inspection administrative procedure itself (under the terms of article 127.º of the CAP)[2], which would require a new procedure especially for the purpose – and note, in this respect, the strong argument that the legal-fiscal relationship itself established by the old additional assessment was extinguished by way of its fulfillment (through the payment made by the Claimant) –, it then falls to us to equate the legal nature applicable to the intervention of the TCA leading to the issuance of the new additional assessment.

Amendment/Substitution

Now, and contrary to what is maintained by the TCA, we judge that it would instead be appropriate and applicable in casu the regime (naturally, more guaranteeing for the taxpayer) of amendment/substitution of administrative act, which follows, ex vi article 173.º no. 1 of the CAP, the rules of the regime of administrative revocation, set forth in articles 165.º and following of the same diploma, applicable to the tax procedure by referral of article 2.º letter d) of the Code of Tax Procedure and Process (CTPP).

In effect, an amendment/substitution occurs whenever the administrative body alters the legal regulation of a certain situation of life regulated by a prior administrative act through a new act "whose legal effects are partially (amendment) or totally (substitution) distinct from those of the amended or substituted act." - Diogo Freitas do Amaral, Course of Administrative Law – Volume II, 2nd edition, Almedina, Coimbra, 2011, p. 468.

Turning to the case, it is verified that this is precisely what happens; the Director-General uses the new additional assessment to modify the old one, adding € 17,691,831.71 to the taxable income of the year 2012, in line with the proposal initially not accepted contained in the Inspection Report, whose content was, meanwhile, understood to be wholly to subscribe to.

We are thus in a position to conclude that the TCA, not being (in the abstract) perhaps prevented from modifying the tax act – correcting the supposed errors (even the non-manifest ones) incurred in the course of issuance of the old additional assessment –, would have to do so with due respect for certain guarantees of the administered/taxpayer that the legal regime of amendment/substitution expressly grants.

Resuming again the teachings of Freitas do Amaral, it is well understood the reason for the rigidity of the legal regime: "…both the amendment and the substitution of administrative acts approach quite closely, in practical terms, to revocation…. For that reason it is understood that the legislator has expressly provided for the hypothesis that they (amendment and substitution) occur in fraud of the law, that is, be used by the administrative body as a means of skirting the rules of revocation and, in particular, the rules that confer special protection to acts constitutive of rights or legally protected interests." - Diogo Freitas do Amaral, Course of Administrative Law – Volume II, 2nd edition, Almedina, Coimbra, 2011, pp. 468-9.

Indeed, there are authors who have even denied, inclusively, the specialty of amendment/substitution in relation to revocation, considering a great proximity of the figures, which also helps explain, equally, the legislator's choice – José Robin de Andrade, Revocation of Administrative Acts, 2nd edition, Coimbra, 1985.

Let us then see whether, concretely, it is possible to have recourse to amendment/substitution and the terms in which the same must take place, in order to ascertain whether the new additional assessment is, still, capable of being used, despite the grounds for the same being manifestly inadequate.

And, immediately as to the terms in which the same is permitted – which would, in any case, have to be expressly invoked by the TCA (and they are not), which vitiates the act for lack of grounds – if it is glimpsed that none of the legal enabling hypotheses demonstrate as being verified.

In effect, we are of the belief that none of the possibilities given by article 167.º of the CAP is fulfilled, in the present case; it is especially evident that, being acts constitutive of rights (see the extremely broad legal notion of "acts constitutive of rights", contained in no. 3 of that rule[3]) – the fixation of the terms of the fiscal relationship, by means of the old additional assessment – we are not facing any case excepted by the letters of no. 2 of that legal provision.

There does not exist, thus, any legal sustenance (at least, evident) for the modifying intervention intended by the TCA, by means of the issuance of the new additional assessment.

But even if, by abstract hypothesis, this were not so, immediately it is verified that the defects alleged by the Claimant irremediably inquinate the modifying act issued by the TCA.

The first of these defects concerns the temporal production of the respective legal-fiscal effects.

At issue are the retroactive effects intended by the TCA in the recourse to the figure of "rectification", as alleged in the grounds of the new additional assessment, contained in the office…, of 14 July 2016.

In truth, as notoriously results from the legal regime of the CAP that regulates acts of administrative revocation (applicable remissively to acts of amendment/substitution): "As a rule, revocation only produces effects for the future, but the author of the revocation may, in the very act, attribute to it retroactive efficacy when this is favorable to the interested parties or when these expressly consent thereto…".

Now, neither of the two hypotheses can be said to be verified in the present case: neither the new additional assessment is (objectively) favorable to the claimants, nor have they consented to it.

Thus being, ruled out as is the ambitioned retroactivity, also by here there arises an inquiry into the new act of assessment, as to the effects it intended to obtain, with the subsequent invalidity.

In the second place, the same is to be said with respect to the essential formality of prior hearing, imposed by the rule of equalization of formalities resulting from article 170.º of the CAP: such formality, being required for the amended/substituted act, is immediate and equally required for the amending/substitutive act.

Indeed, and in any case, being the amending/substitutive act an authentic administrative act, even in the absence of such a provision, the respective procedure would always be subject to the exercise of prior hearing of the taxpayer/interested party, under the general terms of article 60.º of the General Tax Law (GTL) and of article 121.º of the CAP.

And to this legal prescription it is not possible to escape, opposing that the Claimant had already manifested itself in the context of the Inspection Report, simultaneously, on the content of both additional assessments (the old [of 2015] and the new [of 2016]), with support in no. 3 of article 60.º of the GTL.

For the very admissibility (legal possibility) of the new additional assessment, as well is seen by the content of the IP, which is truly at issue here; it is a matter of knowing whether the TCA can issue, even if within the legal period of caducity, a second (but which could well be a third, fourth or fifth) additional assessment, without the taxpayer being taken into consideration on its respective grounds and terms.

And this does not appear (nor could it ever appear) in the TIR on which the Claimant exercised hearing, which presupposes a sole act of additional assessment.

Such a question is, by itself, deserving of a new analysis – it translates a new element brought into the procedure lacking the emission of opinion by the interested taxpayer, which finds itself faced with a decision that is broadly unfavorable to it, as it results in an increased patrimonial ablation, without its being able to be heard on the legal possibility of the very existence of the same.

Such prior hearing was never diligenced; and the omission of this essential formality also inquinates the amending/substitutive act in which is translated the new additional assessment of CIT of the year 2012.

From the above results, straightaway, the inadmissibility of the exception adduced by the TCA, insofar as the act here challenged is not the one that was appreciated in process no. 191/2016-T, and its illegality does not result from the grounds relating to the same act, but from the legal impossibility of the practice of the subsequent acts, here scrutinized.

Results, also, that the new act of additional assessment is manifestly vitiated by the defect of violation of law, being for that reason sanctioned with the respective invalidity.

Prejudiced is left, consequently, the appreciation of the remaining defects attributed to the act by the Claimant.

The request for annulment of the assessment of compensatory interest also proceeds, since they would only be due if there had been a delay in the assessment of tax attributable to the taxpayer (article 35º no. 8 of the GTL), when what was ascertained is that the assessment was illegal.

Equal fate has the request for indemnity interest, for the error verified by the arbitral tribunal is entirely attributable to the services of the TCA, in making the assessment when it was not permitted to do so – articles 24º no. 5 of the LFTA, 43º no. 1 of the GTL and 61º of the CTPP.

VI. DECISION

By decision, by majority, it is judged that the request is entirely well-founded and, in consequence, the acts of additional assessment of CIT no. 2016…, of 3 August 2016, assessment of compensatory interest no. 2016… and the corresponding account settlement statement no. 2016…, of 5 August 2016, all practiced by reference to the year 2012, are annulled, with the Respondent condemned to refund the tax resulting therefrom, plus indemnity interest counted from the undue payment until effective reimbursement.

VII. VALUE OF THE CASE AND COSTS

Nevertheless, in the present case, and by force of the provision in articles 22º no. 4 and 12º no. 3 of the LFTA and 5º no. 2 of the Regulation of Costs in Tax Arbitration Processes (RCTAP), there is no need to establish the amount of costs nor their responsibility, the mandatory provision of article 97º-A no. 1 of the CTPP is not without effect, ex vi article 29º no. 1 letters a) and b) of the LFTA and 3º of the RCTAP, according to which the value of the case equals the importance liquidated whose annulment is intended.

It is thus irrelevant that the payment made by the taxpayer is lower, as happened in the case, because it was made under the SPRIS.

The value of the case is consequently corrected to € 4,708,434.57 (four million, seven hundred and eight thousand, four hundred and thirty-four euros and fifty-seven cents), in place of the € 4,442,957.93 indicated by the Claimant, although without consequence to the arbitration fee due.

Lisbon, 5 September 2017.

To be notified.

The arbitrators

José Baeta de Queiroz

Gustavo Lopes Courinha

João Menezes Leitão
(dissenting, as per attached dissenting opinion, which integrates this decision)

Dissenting Opinion

I) The factual case sub judice. The application of no. 5 of art. 23.º of the CITC (tax disregard of the loss resulting from paid transfer of share capital to a related entity)

1. The substantive matter under consideration in the present case, as observed from the proven factuality (see proven facts nos. I, III, V, XIII), relates to an additional assessment of CIT regarding a correction to the taxable income of 2012 of the Claimant concerning the tax deduction of a loss in the amount of €17,691,831.71 generated with the paid transfer of share capital to an associate company held 100%.

Such correction to taxable income promoted by the TCA, as per Inspection Reports individual and of group mentioned in nos. II, III, IV and V of the factual decision, is absolutely pellucid in terms of subsumption of the case to the competent legal provision of the CIT Code, namely, the normative segment of art. 23.º, no. 5 of the CITC (in the version applicable ratione temporis), according to which: "Are not (...) accepted as expenses of the period of taxation those incurred with the paid transfer of share capital, whatever the title by which it is operated, to entities with which special relationships exist, in the terms of no. 4 of article 63.º (...)", since:

• the Claimant declared as a fiscal expense of 2012 a loss, which it calculated at €17,691,837.71, realized with the transfer of shares representing 100% of the capital of F…, SA as a means of accomplishing a capital increase of G… SGPS, SA, held 100% by itself;

• G… SGPS, SA, to which were transferred the shares representing all of the capital of F…, SA, in view of the fact that it is held 100% by the Claimant, constitutes an entity with which the latter possesses special relationships, under the terms of al. a) of no. 4 of article 63.º of the CITC (in the version in force at the date), which provides that "it is considered that special relationships exist between two entities in situations in which one has the power to exercise, directly or indirectly, a significant influence in the management decisions of the other", which is deemed fulfilled between: "An entity and the holders of the respective capital, or the spouses, ascendants or descendants of these, who hold, directly or indirectly, a participation not less than 10% of the capital or voting rights";

• the transfer of shares representing the capital of one company for carrying out a capital increase of another company constitutes a paid transfer of share capital, because such contribution of property implies the transfer of the title of participations in F…, SA to the company G… SGPS, SA benefiting therefrom, as capital contribution, by counterpart, since to the patrimonial sacrifice resulting from the alienation of the participations in F…, SA corresponds the patrimonial advantage of the acquisition of a new participation in company G…SGPS, SA equivalent to the amount of the respective capital increase.

In this way, it is transparent the realization in the case of the legal consequence resulting from the provision of no. 5 of art. 23.º of the CITC: the non-acceptance, for tax purposes, of the loss of €17,691,837.71, ascertained by the Claimant with the alienation of the shareholding in F…, SA, being able such an expense not to be assumed as a negative component of taxable income.

1. Add further, while at it, that the tranquility of the legal subsumption of this tax situation in the face of art. 23.º, no. 5 of the CITC is not susceptible to being disturbed by the manifestly inauspicious arguments adduced on: i) the requirement of the existence of a paid transfer not being met; ii) the rule of art. 23.º, no. 5 constituting an implicit rebuttable presumption; iii) such provision allowing, without justification, different treatment of identical operations in the context of a group of companies or in the absence thereof.

Regarding the first argument, beyond what has already been noted above and the invocation of the provision in art. 46.º of the CITC, no particular development is necessary, since the only element furnished to support such (non) characterization is an interpretation given to the concept of "acquisition" for the purposes of art. 32.º, no. 3 of the EBF that is found in an order of DGCI of 19.11.2009. Since, as is well-known, iura novit curia (no. 3 of art. 5.º of the Code of Civil Procedure and no. 2 of art. 2.º of the LFTA), it suffices to note that the Tribunal is not constrained by the erroneous appreciations and legal qualifications made by the procedural parties – or by the TCA within the scope of distinct and antecedent administrative resolutions. In any case, ex abundantia, one may always convoke illuminatingly PAULO DE TARSO DOMINGUES, "The regime of contributions in the Code of Commercial Companies" in Journal of the Faculty of Law of the University of Oporto, year 3 (2006), p. 673-723 (p. 676): "the notion of contribution correspond[s] to the patrimonial contribution of the partner to the company that is destined to the payment of the social participations that it acquires, i.e., contribution is the patrimonial contribution that the partner undertakes to perform and deliver to the company as counterpart for the social participations that it subscribes" and PINTO FURTADO, Course of Law of Companies, 5th ed., Coimbra, 2004, p. 107: "The contribution is a performance that has as counterpart the share, quota or share. It is not, therefore, an alienation or oneration gratuitously, a liberality, but a dispositive act for consideration".

As to the idea that no. 5 of art. 23.º of the CITC contains an implicit rebuttable presumption, it suffices to pay attention to the text of the legal enactment in question ("Are not (...) accepted as expenses of the period of taxation...") to conclude, in an entirely distinct way, that it is rather a rule that demands a general and unconditional requirement of application. The elucidation of the normative content of this precept is, moreover, well done by the orders of the Supreme Administrative Court of 11.2.2009, process no. 0862/08 and of 8.1.2014, process no. 0437/13, which properly explained that such precept "enacts, without more, the non-acceptance «as costs or losses of the period of expenses incurred with the paid transfer of share capital» to entities with which «special relationships» exist" and that the "tax disregard of losses or negative patrimonial variations resulting from paid transfer of share capital among related entities was the remedy found by the legislator to prevent – denying them tax relevance - evasive practices known and recurring tending to the artificial diminishment of the taxable income of dominated entities, and which, precisely because such practices are known and recurring, it was opted purely and simply to withdraw any tax relevance from them, regardless of the weighing of the concrete conditions of the operation". Add also that one must never confuse what are reasons of legislative policy with the technical instrument of legal presumptions. Well clarified thus the Constitutional Court, in its decision no. 753/14, that: "It could be said that the legal regime is based on the idea that operations effected in those circumstances have a purely fiscal purpose and not an economic one. But that may be the reason of legislative policy that led the legislator to declare as non-deductible the costs incurred in that type of transaction. There is no presumption here in the proper sense. The rule does not allow presuming any tax fact, from the occurrence of transactions of share capital between companies in a group relationship, which the taxpayer could contradict through a proof procedure. It merely disqualifies as a cost the negative results stemming from such transactions. Certain it is that such disqualification may determine an increase in the tax to be assessed by virtue of it being impossible to reflect in taxable income the losses attributable to the operation. But such is the necessary consequence of a legal mechanism of automatic operation that bears on the criteria for deductibility of costs or losses. Being a legal criterion for the ascertainment of taxable income, and not a tax fact presumible that is attributable to the taxpayer, there is no room for the admission of proof to the contrary".

Finally, the allegation that such provision implies an unjustified different treatment of identical operations in the context of a group of companies in relation to situations of non-existence of group structure simply represents the preposterus use of the principle of equality, taking into account that this principle implies treating equally what is essentially equal and differently what is essentially different in attention to the measure of the difference. Now, if there is something established in the fiscal field (as all the vast dogmatics concerning the fiscal implications of activities developed among related entities and on transfer pricing demonstrates) it is that operations are not identical, on the contrary they are quite distinct, the situations and possibilities of companies inserted in groups of companies (of the multi-company enterprise, thus) in comparison with independent entities (cf. JOSÉ ENGRÁCIA ANTUNES, "The taxation of groups of companies", in Taxation, no. 45, January-March 2011, p. 25 which reports to the "situations of avoidance, evasion and tax fraud, which may have relevant projections in the regulation of taxation of groups of companies, taking into account the play provided in the respective tax planning by its typical polycentric legal structure and by the submission of its components to a unitary business strategy"). There thus stands, for the case what was appreciated in the order of the Constitutional Court no. 139/2016: "it cannot be affirmed that the Claimant is, under any light, in a situation equal or equivalent to that of a company that carries out transactions on social shares outside those "special relationships", given the reasonableness of, in this context, preventing tax avoidance operations".

1. Following what has been set forth, regarding the adjustment ratione constitutionis of this rule, in attention to the mentioned general, unconditional and automatic character of its application, one can only subscribe to what was decided by the Constitutional Court in the already cited decision no. 753/14 – after observing that: "the legislator appears to have considered (...) that losses resulting from transfer of share capital among related companies are not normally indispensable for the achievement of income or gains subject to tax or for the maintenance of the source producer, allowing at the same time to prevent the risk of artificial creation of losses, with the consequent effect of tax evasion, and also to provide for the difficulty of verification, by the Tax Authority, of the existence of an actual economic interest in the transaction (for which the mere demonstration that market values were practiced would not suffice)", the following is stated: "Faced with the effective risk of tax regulation in groups of companies by effect of a strategy of transfer of share capital among companies, the non-deductibility of expenses ascertained in those transactions proves to be justified by the relevance of the interests that determine the restriction" concluding then that: "There is not verified in these terms the invoked violation of the right to taxation according to real income albeit by reference to the principle of proportionality". It was, moreover, an orientation that had already received acceptance in the jurisprudence of the Supreme Administrative Court cited above: "such a faculty is not forbidden to the legislator either by the Fundamental Law (article 104.º of the Constitution) nor by the principles of European Law, in particular that of proportionality and necessity, since that, it not being though this the rule, it is admitted that specific anti-abuse rules can legitimately translate themselves - in cases that offer special risk from the point of view of erosion of the tax bases -, in the non-deductibility of certain components of the income, or that is, in their irrelevance for tax purposes" (order of 8.1.2014, process no. 0437/13).

2. In these terms, it appears limpid, in terms of material tax Law, that the appreciation of the concrete case before the applicable legal normativity (not disconform sub specie constitutionis), leads to identify as the only legally adequate solution the non-deductibility of the loss defined by the Claimant with the transfer of shares representing 100% of the capital of F…, SA to G… SGPS, SA, and, consequently, as grounded and legal the correction to taxable income promoted by the Individual and Group Inspection Reports reported in points nos. II, III, IV and V of the facts proven.

II) The second additional assessment challenged

1. The clarity of the framing of the matter from the point of view of its substantive legal-fiscal treatment emerges wrapped in the case sub judice by the particular formality that the correction to taxable income concerning the deduction of the loss with the paid transfer of share capital in the amount of €17,691,831.71 promoted by the Individual and Group Inspection Reports was not the subject of an initial additional assessment, insofar as it was verified that there was issued a first additional assessment, relating to diminution of deduction of benefits to CIT collection and fixation of tax as result of assessment, and only in an autonomous – and second – additional assessment was the increase of taxable income in €17,691,831.71 resulting from that correction included (cf. proven facts nos. VII, VIII and XIII).

2. In face of this second additional assessment, the decision that prevailed operated a legal framing that I judge to be apart from the conceptions and solutions specific to the legal-fiscal order, of whose legal provisions there is little trace in the discourse developed, which was oriented, rather, by an inadequate invocation of the Code of Administrative Procedure (CAP).

From the start, it must always be kept in mind, as well reminds the Claimant in its IP (art. 52.º), that "the Code of Administrative Procedure (...) is of merely subsidiary application, as results from article 2.º, letter c), of the General Tax Law". Therefore, the invocation of provisions of the CAP, as a normative criterion for deciding legal-fiscal relations, can only be done in attention to cases omitted in face of the specific rules of Tax Law or to rules of general application to all procedures (cf. art. 2.º of the CAP), under penalty of infringing the relationship of specialty between Tax Law and Administrative Law or, if you will, between the tax procedure as a special administrative procedure, subject to specific rules proper to the General Tax Law (GTL), the Code of Tax Procedure and Process (CTPP) and the "other codes and tax laws" (cf. art. 2.º, als. a) and b) of the GTL) and the common administrative procedure, disciplined by the CAP. Now, the CIT Code and the General Tax Law contain specific provisions regarding additional assessments, which were incomprehensibly disregarded by the decision that prevailed.

For that reason, it is immediately to be said that I do not think that one can accept the idea presented in the decision that prevailed of the application in casu of the regime of "amendment/substitution of administrative act, which follows ex vi article 173.º no. 1 of the CAP the rules of the regime of administrative revocation, set forth in articles 165.º and following of the same diploma, applicable to the tax procedure by referral of article 2.º al. d) of the Code of Tax Procedure and Process", as if there were no special discipline respecting additional assessments.

It happens that the application, thus made, to the assessment challenged, of that discipline of article 173.º of the CAP, with the referral to the regime of administrative revocation – which constitutes a manifestation of dispositive competence, which it is necessary to distinguish perfectly, particularly in attention to the new CAP, from administrative annulation (cf. article 165.º, nos. 1 and 2 of the CAP) –, notably of the provision in article 167.º, nos. 2 and 3 of the CAP, signifies that it is considered possible, in Tax Law, regarding a tax assessment, its amendment/substitution/revocation "for reasons of merit, convenience or opportunity", which I hold as inadmissible (cf. beyond the indistinct literal content of article 79.º of the GTL, the very article 167.º, no. 1, 1st part, of the CAP, which establishes that cannot be subject of administrative revocation in technical sense the acts practiced in the exercise of bound powers, in fulfillment of legal imperatives, as are the acts of assessment of taxes).

1. Before expliciting better this basic disagreement with the decision that prevailed, some considerations appear convenient regarding its grounds.

I begin by saying that the appreciation made as to the rejection of the characterization of the second additional assessment, challenged in this case, as an act of rectification (article 174.º of the CAP) appears to me, from the start, otiose: on one hand, because both parties, within the scope of their procedural documents, although discussing such matter, ruled out that characterization regarding the assessment of CIT challenged, properly characterizing it as "additional assessment" (cf. articles 2.º, 4.º, 51.º to 93.º of the IP and articles 34.º to 51.º of the R.); on the other hand, because, if I read well the Office reproduced in no. XII of the facts proven, to which must be attributed the placement of this question of rectification, this figure is reported to the UCD ("in the preparation of the Unique Correction Document (UCD) with no. 2015-… -… which gave rise to the assessment no. 2015-…-…-…through oversight, the correction to Taxable Income, in the amount of 17,691,831.71 Euro was not included"). As the object of the present process are the acts of additional assessment of CIT and compensatory interest singled out, it seems to me irrelevant to discuss, as regards these, the figure of the secondary administrative act of the rectificatory type in attention to the ostensive premise of the regime of rectification of errors of calculation or material (cf. article 174.º, no. 1 of the CAP).

In any case, I always note that I do not think it proper, to rule out the character as manifest of the material error, to appeal to the argument merely hypothetical, without connection with the facts, that the assessment could reflect fully or partially the alterations proposed and contained in the Inspection Report – for the reason that, precisely, as results from the facts proven (nos. II and IV), in the situation sub judice it was verified that the conclusions of the individual and group TIRs were sanctioned wholly by the orders thereupon appended, whereby, manifestly, the non-inclusion of the correction to taxable income promoted by the TIRs never could constitute a grounded divergence from their respective conclusions (cf. article 63.º, no. 1 of the Supplementary Regime of the Tax Inspection and Customs Procedure – SRTIP). Therefore, attending to the circumstances in which the first additional assessment

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