CAAD Arbitration on IRC Transfer Pricing Corrections for 2011-2012 (Case 733/2015-T)

ARBITRAL AWARD

Case No. 733/2015-T

The arbitrators José Poças Falcão, presiding arbitrator, Paulo Mendonça and João Menezes Leitão, arbitrator members, who constitute the present Arbitral Tribunal, hereby agree:

I. Report[1]

1. A... - ..., S.A., a legal entity and tax identification number …, with registered office at …, …, … (hereinafter referred to as the Claimant), filed on 04.12.2015, pursuant to the provisions of Article 2 and Article 10, nos. 1, para. a) and 2 of Decree-Law No. 10/2011, of 20 January, as amended (Legal Framework for Tax Arbitration, hereinafter LFTA), a request for arbitral decision in tax matters, in which the Tax and Customs Authority (hereinafter, Respondent or TA) is the opposing party, with a view to obtaining a declaration of illegality and annulment of the corrections to the taxable base of Corporate Income Tax (CIT) for the tax years 2011 and 2012 reflected in the tax assessment acts for CIT No. 2015 ..., of 24.08.2015, and compensation act No. 2015 ..., relating to the tax year 2011, and assessment act for CIT No. 2015 ..., of 24.08.2015, and compensation act No. 2015 ..., relating to the tax year 2012.

2. In the request for arbitral decision, in accordance with the provisions of Articles 5, no. 3, para. b), 6, no. 2, para. b), 10, no. 2, para. g) and 11, no. 2 of the LFTA, the Claimant expressed its intention to designate as arbitrator Mr. Dr. Paulo Mendonça.

Pursuant to no. 3 of Article 11 of the same LFTA, the Respondent designated as arbitrator Mr. Dr. João Menezes Leitão.

The arbitrators designated by the parties, in accordance with the provisions of Articles 6, no. 2, para. b) and 11, no. 6 of the LFTA, observing the requirements of Article 3, no. 2, para. b) of Order No. 112-A/2011, of 22 March, designated by mutual agreement as Presiding Arbitrator His Excellency Dr. José Poças Falcão.

In accordance with the provisions of no. 7 of Article 11 of the LFTA, and as per communication from the President of CAAD, the Collective Arbitral Tribunal was constituted on 01.03.2016.

In these terms, the Arbitral Tribunal is regularly constituted to examine and decide on the subject matter of the present proceedings.

1. In the request for arbitral decision (hereinafter initial petition or IP), the Claimant petitions the following:

"a) The declaration of illegality and annulment of the arithmetic corrections to the taxable base of CIT for the tax years 2011 and 2012, made in the context of tax inspection carried out pursuant to service orders nos. … and …, using the transfer pricing regime set out in Article 63 of the CIT Code;

b) As a consequence of a), the declaration of illegality and consequent annulment of the assessment act for CIT No. 2015 ..., of 24 August 2015, and compensation act No. 2015 ..., relating to the tax year 2011;

c) Also as a consequence of a), the declaration of illegality and consequent annulment of the assessment act for CIT No. 2015 ..., of 24 August 2015, and compensation act No. 2015 ..., relating to the tax year 2012;

d) Condemnation of the Public Treasury to pay compensatory interest, at the legal rate of 4% per annum, from the date of overpayment of the CIT assessment for 2011 identified in b) until the date of processing of the respective credit note, in accordance with Articles 43, nos. 1 and 4 of the General Tax Law and 61 of the Tax Procedure Code".

1. The TA, pursuant to Article 17, no. 1 of the LFTA, filed a reply, requesting dismissal of the request for arbitral decision, on the grounds that it is unproven.

2. By order of the President of the Tribunal of 26.04.2016, it was decided to dispense with the meeting provided for in Article 18 of the LFTA and to proceed with the case through successive written pleadings, with the deadline for rendering and notification of the final decision set for 15.07.2016.

The parties subsequently filed their written pleadings, in which they essentially reiterated the positions already set out in their written submissions.

II. Clarification of Issues

1. The arbitral tribunal is competent to judge the request for arbitral decision (Article 2, no. 1, para. a) of the LFTA), the parties have legal standing and legal capacity, have legitimate interest (Articles 4 and 10, no. 2 of the LFTA and Article 1 of Order No. 112-A/2011, of 22 March) and are duly represented.

The cumulation of claims relating to corrections to the taxable base and to the tax assessment acts for CIT that gave effect to them relating to 2011 and 2012, identified above, is admissible in light of Article 3, no. 1 of the LFTA, given that the merits of the claims depend on the examination of the same factual circumstances and the interpretation and application of the same legal rules.

There are no nullities and no exceptions have been raised, so nothing prevents judgment on the merits.

III. Thema Decidendum

1. The thema decidendum, as extracted from the IP of the Claimant and the response of the TA, relates to determining the legality of the arithmetic corrections to the taxable base of CIT based on the transfer pricing regime that were reflected in the tax assessment acts for CIT No. 2015 ..., of 24.08.2015, and compensation act No. 2015 ..., relating to the tax year 2011, and assessment act for CIT No. 2015 ..., of 24.08.2015, and compensation act No. 2015 ..., relating to the tax year 2012.

More specifically, the subject matter of the dispute concerns the legality of the corrections made, with respect to the tax years 2011 and 2012, to the quantum of financial expenses deducted for interest relating to capital contributions made to the Claimant by its shareholders, based on the application of the transfer pricing rules contained in Article 63 of the Corporate Income Tax Code (CIT Code) and Order No. 1446-C/2001, of 21 December.

The analysis of this procedural subject matter requires, having regard to the allegations of breach of law raised by the Claimant, the examination of the following issues: i) conformity with the transfer pricing rules of the external comparables adopted by the Claimant; ii) conformity with the transfer pricing rules of the internal comparable that, in substitution for the external comparables, was used by the TA as the basis for the corrections made; iii) absence of the prerequisites for application of the transfer pricing regime.

IV. Decision on the Factual Matters and its Rationale

1. Having examined the documentary evidence produced, both that presented with the IP and that contained in the administrative file in the case (hereinafter AF), in particular the Tax Inspection Report (hereinafter TIR) at pages 1 to 44 of the AF, the Tribunal finds proven, with relevance to the decision of the case, the following facts:

1. The Claimant, currently named A...- ..., S.A., and previously A... - ..., LLC, was established in 2007, with the corporate purpose of manufacturing, marketing, importing and exporting medicines, specialties ..., chemicals, personal hygiene products, cosmetics, dietetic products, clinical, hospital and surgical use products, biotechnology products, biogenerics, diagnostics and clinical and hospital materials, active pharmaceutical ingredients and other components intended for the manufacture of specialties ..., as well as the provision of services for the promotion of medicines and other pharmaceutical products (See TIR, II.3, p. 9 and factuality recognized in no. 14 of the IP).

2. On 21.01.2009, the date of execution of the shareholder loan agreements and the bank financing agreement described below, the Claimant, with a share capital of €26,687,500, had the following shareholders: 1) A... II S.a.r.L., with registered office in Luxembourg, with 78.545% of the capital; 2) B..., with 9.956% of the capital; 3) C..., with 3.677% of the capital; 4) D..., with 3.677% of the capital; 5) E..., with 3.677% of the capital; and 6) F..., with 0.468% of the capital (TIR, II.3.3, p. 10).

3. On 21.01.2009, the shareholders identified in the preceding point made capital contributions to the Claimant in the total amount of €80,062,500 (€80,212,500 as from 20.03.2012), in proportion to their shareholdings in the capital, as follows (cf. table set out in point III.1.2 of the TIR, p. 14):

(*) On 17.02.2012, A... II S.a.r.L. became the holder of the entire capital of A....

1. For this purpose, shareholder loan agreements ("Shareholder loan") were executed on the aforementioned date of 21.01.2009, by the Claimant, as shown as docs. nos. 6 to 12 to the IP, respectively, with shareholders A... II, in the amount of € 62,885,250.00, subsequently increased on 20.03.2012 by €150,000.00, totaling € 63,035,250.00 (cfr. docs. nos. 6 and 7), C..., in the amount of € 2,943,750.00 (cfr. doc. no. 8), D..., in the amount of € 2,943,750.00 (cfr. doc. no. 9), E..., in the amount of € 2,943,750.00 (cfr. doc. no. 10), B..., in the amount of € 7,971,000.00 (cfr. doc. no. 11), and F..., in the amount of € 375,000.00 (cfr. doc. no. 12).

2. The purpose of the shareholders with the aforementioned shareholder loan agreements was to provide the company with the means to pay for the acquisition of 100% of the capital of G... - …, S.A., Tax ID …, and of the companies held by it, A... ..., S.A., Tax ID …, I...... - ..., S.A., Tax ID … and H... - …, S.A., Tax ID …, which occurred on 21.01.2009 (TIR, II.3.1, p. 9, and III.1.3, pp. 15-16; cfr. factuality recognized in no. 31 of the IP).

3. As regards remuneration, it was agreed in all shareholder loan agreements to a fixed interest rate of 10% per annum (cfr. in docs. nos. 6 to 12 attached to the IP clause 4 ["Interest"]), with the exception of the agreement executed with B… (cfr. clause 4 in doc. no. 11 attached to the IP) in which an interest rate of 12.55% was provided for, but the interest rate actually charged was 10% per annum (TIR, III.1.2, p. 15; cfr. factuality recognized in no. 39 of the IP).

4. In clause 5 of the shareholder loan agreements (cfr. also clause 1 ["Definitions"] and clause 4 in docs. nos. 6 to 12 attached to the IP) it is stipulated that the repayment of the capital contributions and the payment of interest should occur on the earlier of the following dates, but no sooner than one year and one day from their constitution:

a) The date on which the capital shares held by the lender in the capital of the borrower are transferred to a third party not included in the lender's group;

b) The date of termination of the shareholder loan agreement (seven years and one day, that is, 22.01.2016) and in the same proportion as the accrued amount of the Credit Facility Agreement and Securities Agreement ("Financing Agreement and Guarantees Agreement").

1. In clause 5.2 of the shareholder loan agreements (cfr. docs. nos. 6 to 12 attached to the IP), it was provided that early repayments could be made, without any bonus or penalty, but no sooner than one year and one day from their constitution or if the repayment infringes any commitment assumed or results in breach under any financing contract or other financial obligation of the borrower.

2. In clause 8 of the shareholder loan agreements (cfr. docs. nos. 6 to 12 attached to the IP) the subordination of the shareholders' credits to the performance of payment obligations established in the Credit Facility Agreement and Securities Agreement ("Financing Agreement and Guarantees Agreement") or in other financing agreements that the borrower may have entered into for the purpose of financing the acquisition of G... and its subsidiaries was established.

3. The shareholder loan agreements do not provide for specific associated guarantees (cfr. docs. nos. 6 to 12 attached to the IP).

4. The interest on the capital contributions covered by these agreements was calculated annually and recorded in account 691113, in the amounts of €8,006,250.00 in 2011 and €8,017,916.67 in 2012, in compliance with the principle of accrual of income, but was not paid, with the breakdown by shareholder in the years in question being as follows (TIR, III.1, pp. 13-14):

1. The Claimant, together with other borrower entities, entered into a financing agreement on 21.01.2009 with a banking syndicate, in the amount of €74,500,000.00, divided into three tranches (as described in the table below):

a) Tranche A, in the amount of €53,400,000.00, intended to partially reimburse the Current Debt [the "Senior Debt of the Borrowers, existing at the Signing Date and which will be partially reimbursed at the Signing Date"] and for payment of costs related to such reimbursements, with semi-annual repayments until 15.01.2015;

b) Tranche B, in the amount of €14,100,000.00, to provide funds to the Claimant, as the Acquirer, "for payment of the acquisition price of the Shares …, as well as for payment of costs related to that acquisition", with full repayment on 15.01.2016; and

c) Treasury Tranche, in the amount of €7,000,000.00, "for financing any future working capital needs of the Borrowers", on a current account basis, with full repayment on 15.01.2016 (cfr. the financing agreement at pages 344 to 416 of the AF, Annex 10 to the TIR, and in partial copy as doc. no. 4 attached to the IP, the contents of which are hereby reproduced, respective recitals G and H, clauses 1.1, definitions 87, 157 to 162, 3.1, 3.2, 3.3; cfr. also factuality recognized in no. 23 of the IP).

1. Specifically regarding repayment, it results from clause 13 of the financing agreement, without prejudice to voluntary early repayments and mandatory early repayments, the following (cfr. docs. referred to in the preceding point and factuality recognized in no. 24 of the IP):

1. With respect to remuneration, clause 8.1 of the financing agreement establishes that "The amount of the Loan outstanding shall bear interest at a rate equivalent to the Euribor rate plus the Margin and Mandatory Costs, if any" and clause 9.1 of the same agreement determines, as to the Margin (spread), that "Tranche A and the Treasury Tranche for the periods of Interest Counting that commence before the Banks' receipt of the Balance Sheet and Annual Accounts and the respective Ratio Certificate for the fiscal year 2009, is 3% (three percent)" and "Tranche B is 3.50% (three point fifty percent)", with clause 9.2 providing that "For the periods of Interest Counting that commence after the Banks' receipt of the Balance Sheet and Annual Accounts and the respective Ratio Certificate for the fiscal year 2009 and provided that the Merger is definitively registered, the Margin for Tranche A and Treasury Tranche shall be calculated, depending on the Net Senior Leverage Ratio indicated in the last Ratio Certificate received by the Banks (relating to the immediately preceding Calculation Period), as follows (cfr. documents referred to above in 12):

1. In the tax years 2011 and 2012, the Claimant recorded in account 691103, respectively, € 3,492,742.85 and € 1,756,645.40 as interest on the loan subject of the financing agreement referred to above in 12, such interest being the result of the application of the 6-month Euribor rate plus a spread of 3% in tranche A and 3.5% in tranche B (cfr. TIR, III.1, p. 13, and factuality recognized in no. 26 of the IP).

2. The Claimant, together with other borrower entities and its shareholders, executed on 21.01.2009 with the banking syndicate (with the exception of …) the Guarantees Agreement, attached as doc. no. 5 to the IP, the contents of which are hereby reproduced, under which were constituted financial pledge of shares, pledge of shares and pledge of quotas, promise of financial pledge of shares, pledge of shares and pledge of quotas, financial pledge of bank accounts, pledge of movable property, promise of pledge of movable property, the pledge and promise of pledge of trademarks and promise of pledge of patents, pledge of establishment, pledge of shareholder credits, promise of mortgage, assignment of credits with the scope of guarantee, "For security of the timely and complete performance of the obligations arising for the Borrowers from the Financing Agreement" (cfr. recital B) of the Guarantees Agreement).

3. On 21.01.2009, the Claimant proceeded to acquire the entire capital of the company G... - …, S.A. (TIR, II.3.1, p. 9).

4. On 02.12.2009, with retroactive effect to 01.01.2009, the merger by incorporation into the Claimant (then named A...), as the incorporating entity, of the aforementioned companies G... - …, S.A., A... ..., S.A., I...... - ..., S.A., and H... - …, S.A. occurred (TIR, II.3.1 and III.1.3, pp. 9 and 16, and factuality recognized in nos. 19 and 20 of the IP).

5. On 17.02.2012, A... II S.a.r.L. acquired the remaining capital stock of the Claimant, so that from that date it became the sole shareholder of the Claimant, also becoming the sole holder of the capital contributions in the amount of €80,062,500, and on 20.03.2012, A... II S.a.r.L. reinforced this amount with an additional capital contribution of €150,000.00, subject to the same terms of the agreement of 21.01.2009 (TIR, II.3.1, II.3.3 and III.1.2, pp. 9, 10 and 15 and document at pages of the AF, Annex 5 to the TIR).

6. The Claimant organized the transfer pricing files for the tax years 2011 and 2012, as per documents attached as Annexes 8 and 9 to the TIR, the contents of which are hereby reproduced, in which it identifies the capital contributions made in 2009, as well as the reinforcement made in 2012, as a related party transaction and rejects the use as an internal comparable of the bank loan entered into on 21.01.2009 based on its amount (TIR, III.1.5, p. 18 and footnote 1, and III.1.7, p. 20 and points VI.2 and V of the transfer pricing files for 2011 and 2012, respectively; cfr. also the factuality recognized in the first part of no. 70 of the IP).

7. In the aforementioned transfer pricing files, the Claimant used the Bloomberg database, having employed the following criteria and filters (cfr. TIR, III.1.7, pp. 20 et seq., as well as the factuality recognized in nos. 75 to 77 of the IP):

[Data regarding search criteria and ranges for 2011 and 2012]

1. Following service orders nos. OI2014... and OI2015..., determined by the verification of high values of financial charges, the Claimant was subject to external tax inspection, of partial scope (CIT), for the tax years 2011 and 2012 (TIR, II.1 and II.2, p. 8).

2. From the TIR, with the conclusions of the inspection action identified in the preceding point, the contents of which and its respective annexes are hereby fully reproduced, the following appears, which, due to its relevance, is important to highlight[2] (TIR, pp. 17 to 44):

i) - "III.1.5 - SUBORDINATION OF THE CAPITAL CONTRIBUTIONS MADE (RELATED PARTY TRANSACTION) TO THE TRANSFER PRICING RULES

(...)

for the application of transfer pricing rules, it is necessary that the taxpayer carry out transactions with an entity with which it is in a situation of related party relationships, and must then ensure that substantially identical terms or conditions are being contracted and practiced to those which would normally be between independent entities in comparable transactions.

It is thus important to know the legal definition of related party relationships and whether this applies to the case under analysis, that is, to the capital contributions made by the shareholders of A... in 2009.

(...)

we can conclude that the shareholder A... II Sarl, which at that date held 78.545% of the capital stock of A..., falls within paragraph a) of no. 4 of Article 63 of the CIT Code, being thus considered that it had (and has) the power to exercise significant influence in the management decisions of the company, so there are thus related party relationships between these two entities.

(...)

three of the shareholders who made capital contributions on 2009/01/21 were, at that date, administrators of the company, one of them exercising the position of President of the Board of Directors (B…) and two exercising the position of Member (C... and F…), thus all of them having the power to exercise significant influence in the management decisions of the company, so there are thus related party relationships between A... and each of them.

With regard to the remaining shareholders who made capital contributions, namely: E… and D…, it is verified that they are children of the shareholder and board member C... so it is concluded that they equally fall within paragraph c) of no. 4 of Article 63 of the CIT Code.

For all the above reasons, we conclude that the case at issue - the making of capital contributions by shareholders to the company - is a related party transaction, pursuant to no. 4 of Article 63 of the CIT Code and paragraph b) of no. 3 of Article 1 of Order 1446-C/2001, of 21 December, and is thus subject to compliance with the Arm's Length Principle (...).

The same was concluded by the taxpayer, having produced the transfer pricing files, referred to in no. 6 of Article 63 of the CIT Code, for the tax years 2011 and 2012, delivered in the course of the inspection action, in which it identifies the capital contributions made in 2009, as well as the reinforcement made in 2012, and which gave rise to interest expenses to be paid in 2011 and 2012, as a related party transaction (points VI.2 and V of the transfer pricing files for 2011 and 2012, respectively)".

ii) - "III.1.7 - METHOD APPLIED BY THE TAXPAYER TO ENSURE COMPLIANCE OF THE RELATED PARTY TRANSACTION WITH THE ARM'S LENGTH PRINCIPLE

a) Justification of the method applied

From the analysis of the transfer pricing reports submitted by A... in the course of the inspection procedure, relating to the tax years 2011 and 2012, it was verified that it, with the objective of assessing whether the terms and conditions agreed and practiced in the related party transaction complied with the Arm's Length Principle, considered the application of the various methods described in no. 3 of Article 63 of the CIT Code.

From the analysis carried out, the taxpayer concluded that the Comparable Uncontrolled Price Method is the most appropriate to assess whether the related party transaction complies, or not, with the Arm's Length Principle (see page 47 and 48 of the transfer pricing reports for 2011 and 2012, respectively).

It further states that although A... holds a loan from banking entities, the same was not considered a reliable comparable insofar as, given the amounts of the banking loan in question, such a factor would have a material impact on the price of the transaction, namely on the interest rate.

Thus, the taxpayer considered that it was not possible to use an internal comparable, resorting to external comparables, namely by using the interest rates practiced by banking institutions, for medium/long-term financing, with financing amounts generically comparable to the transaction under analysis.

b) Application of the Comparable Uncontrolled Price Method by the taxpayer

The taxpayer intended in its analysis to use an external comparable, through the identification of interest rates practiced in the international financial market that corresponded to transactions comparable to the related party transaction.

Thus, it resorted to the Bloomberg database to search for interest rates on:

• bonds issued in 2011 and 2012;

• whose issuer has a rating equal to or higher than CCC+ (Standard & Poor's notation);

• with maturity greater than one year and less than ten years;

• with an outstanding debt value greater than 1.5 million Euros; and

• with fixed interest rate.

The search was conducted by initially selecting securities with ratings higher than CCC+ (Standard & Poor's notation) and subsequently excluding results with variable rates, and selecting observations with maturity between one and ten years and with collateral secured by assets.

From the transfer pricing reports presented, the following grounds for the search presented by the taxpayer are extracted:

• From the use of the Bloomberg database:

It was justified because it is a research tool for information relating to world financial markets, available through specialized terminals, which provides accurate and current information at economic, political and financial levels.

• From issuers with rating equal to or higher than CCC+:

Given that prices practiced in the market depend, to a large extent, on the sharing of risks between entities involved in a given transaction, it becomes necessary to analyze the risks to which A... is exposed in the development of its activities.

Given the above, the transfer pricing reports for 2011 and 2012 provide an analysis of market risks, inventory risks, credit risks, supply risks, quality risks, regulatory risks and default risks of A... in those years.

From said analysis the taxpayer concludes that all risks are low, with the exception of default risk which is at a medium level.

As a result of this analysis, the reports consider that securities with ratings equal to or higher than CCC+ should be selected.

• Fixed interest rate:

Since the interest rate contracted in the capital contributions made was fixed (10%/year), results subject to changes in market behavior were excluded.

• Securities with collateral secured by assets:

Since it is considered that the shareholders will have as collateral the assets of A... in case of default by the latter.

From the selection made, 32 (thirty-two) transactions were considered as generically comparable to the related party transaction under analysis for 2011, which are identified at pages 68 and 69 of the 2011 file, and for 2012, 58 (fifty-eight) transactions which are identified at pages 195 to 199 of the 2012 file.

From the interest rates applicable to the transactions considered comparable by the taxpayer, the arm's length intervals were determined which are reproduced in the following tables:

Table X – Gross annual interest rate verified in generically comparable financial transactions

Thus A... concludes that the interest rates applied to the capital contributions made in 2009 (of 10%) are found in the intervals determined (between the minimum and maximum value), thus satisfying that transaction the Arm's Length Principle.

III.1.8 - CONCLUSION REGARDING THE VIOLATION OF THE ARM'S LENGTH PRINCIPLE

Having knowledge of the method applied by A..., as well as the comparables used in the analysis carried out, it is important next to analyze these and, consequently, the conclusion drawn by the taxpayer that the transaction satisfies the Arm's Length Principle.

a) Regarding the method used - Comparable Uncontrolled Price Method (CUPM)

Regarding the method used - Comparable Uncontrolled Price Method - we have nothing to point out as (...) in accordance with OECD guidelines this constitutes the most direct and most reliable means of applying the Arm's Length Principle, obviously provided that it is possible to identify a transaction or set of comparable transactions in the open market.

Regarding the observations drawn by the taxpayer from the Bloomberg database, the following considerations are made.

b) Regarding the entities issuing the bonds

A... correctly considers in its transfer pricing report for 2011 (p.30), in our view, that functional analysis, that is, the description of the functions performed, the assets employed and the risks assumed by the taxpayer and its related entities in the normal course of their activity, is relevant for the purposes of determining an arm's length price.

This is because, on the one hand, the profitability of a transaction is directly related to its complexity, risks assumed and assets used and, on the other, the comparable transactions to be used should be similar to the transactions under analysis, involving similar functions, assets and risks.

Thus, the taxpayer, in the transfer pricing reports for 2011 and 2012, conducted a functional analysis of A... and its positioning in the market in which it operates.

In fact, in the analysis of the positioning of the related party transaction, account must be taken of its specificity, namely:

• its positioning in the Portuguese market, whose sovereign debt crisis that began in 2009 led to the deterioration of national financial markets;

• its positioning in the pharmaceutical market in general, since, despite the difficulties that, in general, beset the world markets, it was estimated (in 2010) that it would appreciate;

• its positioning in the national industry, since the industry ... represents a strategic sector and one that contributes most to economic growth in multiple variables, being a key sector of the Portuguese economy;

• its positioning in the sector, given it has very specific constraints and risks, namely regulatory instability and prices;

• its positioning in the generic medicines sector in particular since, despite the constraints of the industry ... in Portugal and in general, recent changes in national legislation have allowed growth in the sale of generic medicines, which constitutes an opportunity for A... itself; and, among others,

• of the company itself, verified through economic and financial analysis of the same, such as its structure, its assets and liabilities, its financial ratios - by way of example the analysis of liquidity ratios where the taxpayer concludes that "denote the robust capacity (...) to meet its short-term responsibilities", among others.

Having in mind that the related party transaction constitutes a loan to the company (capital contributions made by the various shareholders in 2009), the functional analysis referred to becomes even more important since, unlike what may happen when the related party transaction is a supply of goods or services, the granting of credit is intimately related to the debtor entity and the perception of risk that the entity granting the credit has of that entity and of the entire underlying transaction.

(...)

it is concluded that the use of external comparables will have to result in a selection of entities that are similar to A... both in terms of rating, country of origin, sector of activity, and financial situation, elements which condition the structure, economic and financial results, risks, constraints and opportunities, among others, so as to ensure the highest degree of comparability between the transactions.

Now, of the external comparables used by the taxpayer (32 for 2011 and 58 for 2012), it is verified that the entities issuing the selected securities are quite diverse, both in terms of the markets in which they operate and in terms of the activities they develop.

Although the Transfer Pricing Reports make no reference to the entities considered comparable by the taxpayer (despite the obligation imposed by no. 6 of Article 63 of the CIT Code), a brief analysis of some of these was conducted, from which it was concluded that:

• For 2011 we have entities with headquarters in Germany, Belgium, France, the Netherlands, among others, and whose activities range from production and/or marketing of disposable hygiene products, to the provision of medical diagnostics, cable data services, weapons production and financial companies, among others;

• In 2012, we also have entities from various geographic markets such as Portugal, France, Italy, the United Kingdom, the Netherlands, among others, and from differentiated sectors such as vehicle rental, road concessions, airport operator, financial companies, among others.

It should be noted that, in addition to the difference in markets and activities, there are also differences in business structures and size of the companies selected, both among themselves and when compared with A....

From this it is concluded that the entities are not directly comparable to A..., as the markets and activities in which they operate are quite different, which significantly alters the conditions of access to credit since the structure, inherent risk and business opportunities differ from those applicable to the related party transaction under analysis.

Although the taxpayer, in the study carried out, attempted to minimize the aforementioned divergence, through the selection of issuing entities with ratings equal to or higher than CCC+ (in Standard & Poor's notation), such, in our view, is not sufficient since in the sample selected, as already mentioned, there are companies with different activities, sizes and structures, factors which directly influence the granting of credit, and which did not undergo any case-by-case assessment by the taxpayer, who accepted (as is given to understand) all observations resulting from the computer search filters.

Furthermore, the choice of the criterion of entities with ratings equal to or higher than CCC+ suffers, in our view, from two analytical errors.

On the one hand, the filters applied are too broad, including all entities with a rating of CCC+, B, BB, BBB, A, AA, AAA and, within each of these, those with addition of (+) or (-). From this it is drawn that the entities included in the study are immense and of different degrees of risk since entities with a CCC+ rating are not directly comparable with AAA-rated entities, for example.

This is because, if "a bond rated 'CCC is currently vulnerable to non-payment and dependent on favorable business, financial and economic conditions for the debtor to honor its financial commitments relating to the bond", a bond rated as 'AAA' has the highest rating assigned by Standard & Poor's, with the debtor's capacity to honor its financial commitments relating to the bond being "extremely strong". This dependence or non-dependence on external conditions to honor its commitments directly influences the risk and, consequently, the cost of access to credit (interest rate).

On the other hand, the study presented by A... does not demonstrate what rating was assigned to it and that justifies the selection of entities CCC+ or higher, so the selection made is not justified.

From reading the Transfer Pricing Reports, a superficial and subjective analysis of the risk of the taxpayer is extracted (and which supposedly resulted in the consideration of the company with the CCC+ risk notation) however the assessment of a rating must be supported by various objective and technical criteria such as balance sheet analysis, cash flow analysis, statistical projections, financial ratios, among others, and not merely a subjective appreciation of risk factors.

(...)

it is our understanding that the entities selected, by diverging significantly from A... at the various points already mentioned, do not comply with the provisions of no. 5 of the aforementioned Order, thus not meeting the conditions to be considered comparable.

c) Regarding the date of issue of the bonds

Regarding the date of issue of the bonds researched by the taxpayer in the Bloomberg database, bonds issued in the year 2011 were considered for the analysis of the transfer pricing report for 2011, and those issued in 2012 for the analysis of the transfer pricing report for 2012.

Such filter is not, in our view, capable of bringing the final data sample obtained by A... closer to the related party transaction under analysis. In fact, through the filter applied by the taxpayer, transactions are obtained entered into in 2011 and 2012, transactions which are necessarily intimately linked to the evolution that financial markets underwent in those years.

Having in mind that financial markets are extremely volatile, financing conditions can change (and do change) significantly from one moment to the next. Thus, it is not irrelevant to contract a loan (banking or shareholder) in 2009 or in another year since some premises suffered changes over the passage of time.

Also the companies themselves that contracted the financing underwent changes at the level of business structure, market position, opportunities and business risks, economic and financial results presented, among others, not allowing better comparability.

(...)

The analysis of the taxpayer would make perfect sense in transactions that can be reviewed annually. In these, the taxpayer would have to ensure, in all years in which the related party transactions take place, that they are in accordance with the Arm's Length Principle.

In the case under analysis, however, both the related party transaction and the possible comparable transactions are subject to contracts between the parties. In the case of the capital contributions, a maturity term for the financing of 7 (seven) years and 1 (one) day was stipulated, so it is not possible for A..., even if the conditions of access to credit in the open market changed, to correct the interest rates borne.

It seems to us thus that to obtain transactions comparable to the related party transaction under analysis, transactions for financing contracted in 2009 should have been selected, and consequently, subject to the market conditions to which A... was subject at the time the shareholders made the capital contributions.

d) Regarding the maturity criterion

The taxpayer selected securities with maturity greater than 1 year and less than 10 years.

As already mentioned, the capital contributions made in 2009 had a maturity of 7 (seven) years and 1 (one) day, the interval of maturity selected by the taxpayer comprising the term of the related party transaction under analysis.

However, and given that it is a financing transaction, the maturity of the loan is of utmost importance for the rates practiced since it is not irrelevant to conduct a financing for three or for seven years, for example.

The fact that the interval selected by the taxpayer spans securities with maturities between one and ten years does not limit the comparables used, thus not obtaining, in our view, the highest degree of comparability referred to in no. 2 of Article 63 of the CIT Code and no. 2 of Article 4 of the aforementioned Order.

e) Regarding the criterion of the outstanding debt value

According to the reference in the transfer pricing reports for 2011 and 2012, securities were selected from the database with an outstanding debt value greater than 1.5 million Euros.

It is also stated in those reports that although A... holds a loan from banking entities, it was not considered a reliable comparable given the values of the financing in question.

From the analysis of the bank financing agreement in question (which will be better explained in point II1.1.9 of this report) it is verified that the total financing value was 74.5 million Euros, of which 14 million Euros (corresponding to tranche B) were intended for the acquisition of the capital of company G... SA - a destination also given to the capital contributions of the related party transaction under analysis.

Thus, the logical reasoning used by the taxpayer in the selection of comparables for the related party transaction is not understood, as, if on the one hand it rejects the banking financing transaction because the value (74.5 million Euros, or 14 million Euros if only tranche B is considered) is divergent from the capital contributions made (80 million Euros), on the other, it accepts comparables whose debt value is merely greater than 1.5 million Euros, that is, whose difference is considerably greater than that of the bank loan.

Furthermore, from the elements disclosed in the tables of the Annexes to the Transfer Pricing Reports, both in 2011 and 2012, there is no column indicating the amounts associated with each of the securities selected by the taxpayer, so it was not possible to know concretely from the mere analysis of those, what amounts were associated with the transactions considered comparable by the taxpayer, the 32 (2011) or 58 (2012) results obtained possibly having values approximating the minimum selected (1.5 million euros) or far above the 80 million EUR of the related party transaction (since there is no maximum ceiling in the selection).

For this reason, A... was requested to provide the amount of the observations considered generically comparable to the related party transaction, both for 2011 and 2012. In response to the request made, new tables with the final set of comparable transactions for 2011 and 2012 were sent by electronic mail, in all respects identical to those contained in the Annexes to the Transfer Pricing Reports, with the addition of a column with the issued amount (of the debt).

From the analysis of the new tables presented (Annex 11) it is concluded that the amounts of the accepted observations are very dispersed, varying between 1.5 M € and 800 M €.

(...)

Moreover, if we divide the amounts of the bonds by intervals of values, it is verified that the intervals with the highest results accepted are not coincident with the interval where the comparable transaction is inserted.

Regarding 2011, approximately 62.5% of the transactions considered comparable by the taxpayer are located in the intervals between 200 M € and 400 M €, with only 9% (3 observations) being located in the interval between 1.5 M € and 100 M €. Even these, two with the value of 1.5 M € and another with the value of 26 M €, are frankly divergent from the value of the related party transaction (80 M €).

Regarding the year 2012, it is verified that the interval with the highest number of observations (17 observations) is between 200 M € and 300 M €, with only 15.52% (9 observations) belonging to the interval of the related party transaction. Of these, only five could be considered as having a value approximating the situation under analysis (between 65 M € and 84.5 M €).

It should further be noted, regarding the lack of refinement in the filtering carried out by the taxpayer, that of the results accepted as comparable there are in 2012 one whose outstanding debt amount is not specified (N/A) and three whose practiced rate is 0%, which denotes incomparability of these transactions due to lack of knowledge of factors strongly influencing the cost of credit (the amount, in the first case, and others that lead independent investors to accept the null interest rate in loans they make, in the second case).

Thus, by the fact that the taxpayer used comparables whose amounts are so divergent from that of the related party transaction (between 53 times less and 10 times more), in our view, the highest degree of comparability referred to in no. 2 of Article 63 of the CIT Code and no. 2 of Article 4 of the aforementioned Order is not ensured.

f) Conclusion

Having regard to no. 3 of Article 4 of the aforementioned Order, "[t]wo transactions meet the conditions to be considered comparable if they are substantially identical (...) in such a way that the differences existing between the transactions or between the companies involved in them are not capable of affecting in a significant manner the terms and conditions that would be practiced in a normal market situation(...)", which in our view does not occur in the case at issue, as set out above.

Thus, and considering that the observations accepted by the taxpayer led to the determination of the minimum and maximum limit, as well as interquartile, of the interest rates in 2011 and 2012 (...), we conclude that the intervals presented are also not valid.

So much so that, in a more careful analysis, we can verify the great dispersion of the observations accepted.

(...)

In view of all the above, we conclude that the external comparables used by the taxpayer to justify the conformity of the related party transaction with the Arm's Length Principle do not fulfill the requirements imposed by Order 1446-C/2001, of 21/12, and therefore do not provide the highest degree of comparability between the related party transaction and other non-related transaction(s) and, consequently, do not satisfy the Arm's Length Principle.

It should be noted that, from the analysis of the accounts of the taxpayer, the loan obtained from a banking consortium in 2009/01/21 was identified as a transaction substantially identical to the related party transaction, carried out between A... and an independent entity, and thus comparable to the related party transaction. In this way, the analysis of that transaction will proceed in the following points.

III.1.9 - SEARCH FOR A COMPARABLE TRANSACTION

a) Characteristics of the bank loan contracted by A... on 2009/01/21

As already mentioned in this report, it was verified that A... has a bank loan, contractualized in 2009.

From the analysis of the financing agreement (Annex 10) it was verified that it was executed with a banking syndicate consisting of the following banking entities: Banco BPI SA, Banco Espírito Santo de Investimento SA, Banco Santander Totta SA, Banif - Banco de Investimento SA, Banif Banco Internacional do Funchal SA, Caixa - Banco de Investimento SA and Caixa Geral de Depósitos SA.

The financing agreement is dated 2009/01/21 and was made in the total amount of 74.5 million Euros, (see recital F on page 10 of the financing agreement) distributed in three tranches in the following amounts and intended for the following purposes:

• Tranche A: in the amount of 53.4 million Euros, intended for the partial refinancing of the debt of the group companies on that date;

• Tranche B: in the amount of 14.1 million Euros, intended to finance the acquisition by A... (then A... SA) of G... SA and subsidiaries directly or indirectly held by it. This amount was deposited in full in a bank account of A... with value date on the date of the agreement, having effectively been used for the acquisition of said equity interests;

• Treasury Tranche: 7 million Euros, intended to provide A... with the necessary funds for any future working capital needs of treasury. This tranche can be used several times over the period of the loan.

The loan shall be repaid in the following terms:

• Tranche A: in consecutive semi-annual instalments in accordance with Annex XII of the agreement (not presented);

• Tranche B and Treasury Tranche: fully repaid on 15 January 2016, i.e., with a maturity term of 7 years minus 6 days.

The contracted interest rate is equivalent to Euribor plus the Margin ("spread"). The margin differs for the various tranches, being as follows:

• Tranche A and Treasury Tranche: 3% - this margin may be reduced to a minimum of 2.25% through a table contained in the agreement, according to the net senior leverage ratio presented annually by the company (as described in the agreement);

• Tranche B: 3.5%

It should further be noted that from reading the financing agreement it is concluded that the banking entities granting the credit were aware of A...'s intention to acquire the shares of company G... SA, not least because one of the tranches of the loan would serve that same purpose, as well as of the company's restructuring process, namely the merger to occur later (and which occurred on 2009/12/02 with effect to 2009/01/01).

Moreover, they were aware of the contents of the share purchase and sale agreements executed on the same date as the financing agreement, and of the memorandum of the new structure of the company, documents that were delivered to the granting banks, as mentioned in B of the recital of the Financing Agreement and in Annex V, points 13 and 15.

It is thus concluded that, in the elaboration of the financing agreement, account was taken, in addition to the risks of the company itself at that moment, of the market in which it operates, of the activity in which it is engaged, and of the objective of the transaction itself, the risks and opportunities derived from the alteration of A...'s business structure.

b) Comparison between the related party transaction (capital contributions) and the banking transaction carried out

Having regard to the existence of a financing transaction of A... carried out on the same day as the related party transaction, for the same purposes and with an identical maturity term, it becomes important to analyze whether this transaction is a comparable that meets the requirements indicated in Article 5 of Order 1446-C/2001, of 21/12, and that is therefore capable of ensuring the highest degree of comparability between the related party transaction and the market price.

By the above, the following comparative table is presented in which the two transactions presented are compared: the related party transaction (granting of capital contributions) and the independent transaction (bank financing).

Table XII - Comparison between the related party transaction and independent transaction

Notes:

(a) The total value of the transaction is divided into three tranches: Tranche A (53.4 M EUR), Tranche B (14.1 M EUR) and Treasury Tranche (7 M EUR).

(b) The interest rate applicable to tranche B is Euribor+3.5%; the interest rate applicable to tranches A and treasury is Euribor+3%, which may be reduced depending on the net senior leverage ratio presented annually by the company. The intervals of rates indicated in the table are the maximum and minimum values referred to in the launch notices issued by BES Investimento, relating to the 74.5 M € loan, for the periods under analysis.

From the analysis of the preceding table it is verified that the date of the transaction is coincident in both transactions, so they benefited from identical market conditions since, both the financial market, and the pharmaceutical sector (in which A... is engaged), and the position of the company itself were the same at the date of execution of the contracts, with no adjustment needing to be made regarding these aspects.

Also regarding the term of the loans, it is concluded as to their similarity since in both cases repayment is total at the end of the contracts, which are on 2016/01/15 and 2016/01/22, that is, the maturities have a time difference of 7 (seven) days, both being roughly of 7 (seven) years. Also in this case, there is no adjustment to be made given that the time difference in repayment (7 days) does not influence in a significant manner the cost of the loan, i.e., the interest rate to be applied.

As regards the value of the transaction, we can also conclude as to its similarity. Given that the total value of the bank loan was 74.5 million EUR, this was the total value accepted by the banking syndicate and by A..., so that, in terms of the amount raised by the company under market conditions at the date, this will be the value to be considered. Also the risk assumed by the entities granting credit took into account the total value of the loan. In this case, it is verified that the amounts of the credits in both transactions are quite close, thus enjoying similar conditions resulting from the volume of the transactions.

Regarding the purpose of the financing transaction, which may influence its cost positively or negatively in light of the opportunities, assets and liabilities derived from it, it is concluded that there are points in common between the two transactions. In fact, part of the bank loan (14.1 million EUR) was intended for the acquisition of the capital of company G... SA, a destination also given to the capital contributions granted by shareholders to A....

From the comparative analysis of the conditions of the transactions in question, it is verified that the greatest divergence between them is precisely in the interest rates applied. In fact, the contracts of the related party transaction stipulate a fixed interest rate of 10% per annum. However, the bank financing agreement stipulates a variable rate, indexed to Euribor, plus a margin of 3.0% or 3.5%, depending on the purpose of the loan.

From all the analysis carried out on the transaction between independent entities (bank loan) it is concluded that this meets the requirements of Article 5 of the aforementioned Order.

Moreover, given that the banking transaction was carried out with a banking syndicate, consisting of seven distinct banking entities, this is a strong indicator that it was governed by effective market conditions at that date.

Indeed, in accordance with the guidelines issued by the Basel Banking Supervision Committee (v. § 31) all participants in a banking syndicate (or other type of credit granting consortium) shall conduct risk assessment and return on investment due diligence as if it were an individual transaction. Thus, in the bank loan transaction under analysis, seven risk assessments of the borrower and the transaction would have been conducted, concluding to the application of the stated rate.

c) Comparison between the related party transaction, the banking transaction and the comparable presented by the taxpayer.

In order to systematize all the information collected and analyzed, namely that resulting from the related party transaction (capital contributions), the external comparables used by the taxpayer (drawn from the Bloomberg database) and the internal comparable (bank loan), the following table was constructed.

Table XIII - Comparison between the related party transaction, external comparable and internal comparable

| | Related Party Transaction: Capital Contributions | Comparable Internal: Bank Loan | Comparable External: Bloomberg Database |
|---|---|---|
| Date of transaction | 21-01-2009 | 21-01-2009 | Variable, in 2011 and 2012 |
| Date of repayment | 15-01-2016 | 22-01-2016 | Variable between: 2011: 20-12-2013 and 15-03-2021 2012:05-12-2014 and 15-09-2022 |
| Value of transaction (EUR) | 80,062,500.00 | 74,500,000.00 (a) | Unknown and variable (> 1,500,000.00) |
| Purpose of transaction | Acquisition of the entire capital of company G... SA | - Partial refinancing of prior debt (53.4 M €); - Acquisition of the capital of company G... SA (14.1 M €); and - Treasury needs (7 M €) | Unknown and variable |
| Annual interest rate of transaction | 10% | - between 4.725% and 5.318% (Tranche B) - between 4.068% and 3.279% (Tranches A and Treasury) (b) | Variable between: 2011: 4% and 12.75% 2012:0% and 12.375% |

Notes:

(a) The total value of the transaction is divided into three tranches: Tranche A (53.4 M EUR), Tranche B (14.1 M EUR) and Treasury Tranche (7 M EUR).

(b) The margin of 3% is applicable to tranches A and treasury, which may be reduced depending on the net senior leverage ratio presented annually by the company; The margin of 3.5% is applicable to tranche B.

III.1.10 - IMPACT OF THE VIOLATION OF THE ARM'S LENGTH PRINCIPLE ON THE DETERMINATION OF THE TAXABLE RESULT

Considering that:

• A financing transaction of the taxpayer was carried out through capital contributions made by all shareholders in 2009, in the total amount of approximately 80 Million Euros;

• There are related party relationships between the entities involved in the transaction (A... and shareholders) pursuant to no. 4 of Article 63 of the CIT Code;

• In transactions between entities in the situation of related party relationships as referred to, terms or conditions must be contracted, accepted and practiced that are substantially identical to those that would normally be contracted between independent entities in comparable transactions, as provided for in no. 1 of Article 63 of the CIT Code;

• The taxpayer must adopt, for the determination of the terms or conditions referred to above, the method capable of ensuring the highest degree of comparability between the transactions it carries out and others substantially identical, in normal market situations, according to no. 2 of Article 63 of the CIT Code;

• The Comparable Uncontrolled Price Method was identified as the one that best meets the requirement referred to above;

• The factors of comparability listed in no. 5 of Order 1446-C/2001, of 21 December, are not considered to be present in the selection of comparables by the taxpayer, neither as regards the entities issuing the bonds, nor as regards the date of issue of these, their maturity, outstanding debt value or characteristics of the transaction;

The transactions presented by the taxpayer cannot, therefore, be accepted as comparable, with the highest degree of comparability referred to in no. 2 of Article 63 of the CIT Code and no. 2 of Order 1446-C/2001, of 21 December, not being obtained with their use, and the Arm's Length Principle being thus compromised with the interest rate applied by the taxpayer.

Thus, the use of an internal comparable (bank loan) in the application of the Comparable Uncontrolled Price Method provides the highest degree of comparability between the related party transaction and the comparable market price at the date, given the main characteristics of the transaction being coincident or very similar; lender entity, date of transaction, value and maturity of the loan and objective of the credit transaction.

It thus becomes necessary to proceed to the calculation of the expense of the related party transaction at that price, i.e., to the calculation of the cost of the transaction as if it had been carried out between independent entities, at market price.

For this, the rate resulting from the financing agreement signed on 2009/01/21 with a consortium of banks shall be applied to the amount of the capital contributions made, also on that date, that is, the 6-month Euribor rate, plus a margin ("spread").

Given that the aforementioned financing agreement stipulates different margins depending on the purpose of the loan, the margin corresponding to the purpose coincident with the related party transaction shall be applied, that is, 3.5% (corresponding to tranche B of the bank loan).

The interest shall be counted day by day on the capital loaned in debt and not yet repaid, taking as a basis a year of 360 days and the number of days elapsed, similarly to the financing agreement.

For the calculation of the interest that would be supported by a loan between independent entities, identical to the capital contributions made, the following table was prepared.

[Table showing interest calculations with Euribor rates for 2011 and 2012]

As is concluded from the analysis of the preceding table, the value of the interest is considerably lower than that considered by the taxpayer. It should be noted in this regard what is mentioned in the OECD guidelines (see § 1.34) which states that independent companies, when evaluating the conditions of a possible transaction, compare that transaction with other options that realistically are available to them and only conclude the transaction if they do not have another clearly more advantageous alternative.

Having completed the analysis of the transaction relating to the granting of capital contributions by shareholders to the company on 2009/01/21, and the reinforcement made on 2012/03/21, it was concluded that the terms and conditions practiced in that related party transaction are not substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable transactions, thus disrespecting the Arm's Length Principle.

It is thus important to calculate what impact the violation of the Arm's Length Principle had on the determination of the Taxable Profit / Tax Loss of the periods under analysis.

In this way, a comparative analysis was conducted between the expenses recorded by A... in its accounts in 2011 and 2012, which negatively influenced both the accounting result and the tax result of those periods, and the expenses that should have been considered, had the Arm's Length Principle been applied and accepted conditions identical to those practiced between independent entities - as per the following table.

Table XV - Impact of the Violation of the Arm's Length Principle on the Taxable Profit

From the above, it is verified that A... considered in the determination of the fiscal results (tax losses) of the years 2011 and 2012 excessive shareholder loan interest expenses in the amounts of 3,940,947.57 EUR and 4,227,054.72 EUR, respectively.

Consequently, pursuant to no. 8 of Article 63 of the CIT Code, the taxpayer should have made, in the CIT income tax returns model 22, positive corrections to the Taxable Profit/Tax Loss in the amounts corresponding to the tax effects mentioned.

A... did not make the aforementioned corrections in the returns for the tax years 2011 and 2012, so correction will be made to the tax losses declared by the taxpayer, with reference to those periods, in the amounts calculated in the preceding table".

(...)

iii) IX. RIGHT TO BE HEARD

IX.1 - ANALYSIS OF THE BANK LOAN CONTRACTUALIZED IN 2009

The taxpayer comes to challenge the internal comparable used by the Tax Inspection with respect to the amount of the transaction, interest rate (fixed vs. indexed), repayment of interest and guarantees as referred to in the following paragraphs.

a) Regarding the amount (§16 to 19):

The taxpayer states that although the overall value of the loan contracted by the company in 2009, of approximately 74.5 million EUR, is comparable to the amount of the capital contributions made, of approximately 80 million EUR, the same is distributed among 3 different tranches that present different amounts, purposes and remunerations.

It further states that "the Tax Inspection Services consider that only tranche B, in the amount of 14.1 million EUR, is comparable with the capital contribution transaction, given that it presents the same purpose, i.e. intended for the acquisition of the capital of company G... SA, while the remaining tranches were intended, mainly, for the financing of the existing debt in the company"

Thus the taxpayer concluded that "the Tax Inspection Services are not authorized to use the argument of difference and diversity of amounts to disregard the majority of the observations presented by A... as generically comparable and, simultaneously, consider as a valid internal comparable a bank loan whose amount is substantially lower than the amount of the capital contributions in question."

Regarding the allegation we have to state that, contrary to what is indicated by the taxpayer, the Tax Inspection Services do not consider that only tranche B, in the amount of 14.1 million EUR, is comparable with the capital contribution transaction - see tables XII and XIII.

In fact, the total loan was subject to one same financing agreement, with common clauses. The amount of the loan was effectively 74.5 million EUR, despite being constituted by 3 tranches. As the taxpayer mentions in § 13, all conditionalities interfere with a determining element of the financing, which is the risk assumed by the lenders. Now, we cannot look at a 74.5 million EUR loan and divide it into 3 "small" loans, merely because the debtor decided to give different uses to the value it received.

In fact, the Tax Inspection Services consider that the loan, in its entirety, is generically comparable to the related party transaction, in particular in the amounts involved – which directly influence the total risk assumed by the banking consortium. The fact that part of the loan had the same purpose as the capital contributions made (acquisition of the capital of G... SA) only serves, in our view, to strengthen the comparability of the transactions since it demonstrates that the banking entities involved had full knowledge of the capital acquisition transaction in progress and were thus able to measure the risk of the transaction with a greater degree of reliability, knowing the constraints and opportunities of the company.

The more concrete reference to tranche B in the draft report is due to the existence of a small difference in the applied spread (0.5%) and which, being higher in the value to be applied in the acquisition of the capital of G... SA, was taken into account in the calculations of the interest rate to be considered for the capital contributions made.

b) Regarding the interest rate (fixed vs. indexed) (§20 and 23):

Regarding the indexation of the interest rate, the taxpayer states that while the bank loan has an underlying variable interest rate (indexed to Euribor), the capital contributions present a fixed interest rate.

It further states that having regard to the "unfavorable and volatile economic-financial context as that experienced in 2009, contracting a fixed rate functions as a defense mechanism against financial risk" and therefore considers "reasonable and rational that, in periods of turbulence in the financial markets, a premium is paid in an attempt to contract a loan at a fixed rate".

Regarding the aforesaid, we have to state that what is at issue regarding the interest rate agreed between A... and its shareholders is whether this is, or is not, in accordance with the Arm's Length Principle, that is, whether the conditions contracted, accepted and practiced are substantially identical to those that would be between independent entities, and, if possible, between the taxpayer itself and one (or several) independent entity/entities.

It is further added that, at each moment, economic agents desire and seek the best market conditions for the transactions they need / intend to develop.

Thus, and keeping the above in mind, we conclude that A..., in negotiating the financing agreement with the banking consortium, would have negotiated the best possible conditions at that moment, a moment that was equally "unfavorable and volatile, inserted in a "period of turbulence in the financial markets" as referred to by the taxpayer (since the agreement was executed precisely on the same date as the capital contribution agreements).

Thus, it seems to us that the evaluation of the best possible conditions to be practiced at that date (January 2009) between A... and an independent entity, for a financing transaction in the order of 74.5 million EUR, with a maturity term of 7 years, was in accordance with the company's choice to contract financing at 6-month Euribor plus a spread between 3% and 3.5%. From this results the consideration of an indexed rate, and not a fixed one, as under the same conditions of the financial markets this was the rate practiced between independent entities.

c) Regarding the repayment of interest (§ 21, 22 and 26):

The taxpayer comes to distinguish, regarding the period of receipt of interest, between the financing agreement and the capital contribution agreements, stating that, while in the bank loan interest is paid periodically, in the capital contributions interest is paid at the end of the agreement. Due to the temporal hiatus, the taxpayer considers that the assumption of risk is greater in the second case which justifies a remuneration of the loaned amount also higher.

Although the temporal difference in the receipt of interest (semi-annual in the case of the bank loan and at the maturity of the agreement in the case of the capital contributions) this does not directly influence the interest rate to be applied.

In fact, interest is the remuneration charged for a loan of money (expressed as a percentage - rate). The rate to be paid is a compensation made by the borrower to have the right to use the borrowed money until the day of payment (repayment). The creditor, on the other hand, receives compensation for not being able to use that money. Thus, the term that influences the interest rate is that of the loan of the agreed amount and not that of the interest (which is already in itself a result of the application of the agreed rate).

However, the parties may agree to simple or compound interest so that, in the latter case, to compensate the creditor for the temporal extension of receipt of interest. In this case, the interest rate remains the same, but the value of unpaid interest will increase to the initial debt value (interest on interest).

In the case in question (capital contributions) it was understood between the parties not to contract compound interest but rather simple interest so it was understood, in the calculations made in point III.1.10, to maintain that characteristic.

d) Regarding the guarantees (§ 24 to 28):

The taxpayer alleges that "another crucial aspect to be considered in the difference between the interest rates and which reinforces the incomparability of the transactions selected by the Tax Inspection Services concerns the guarantees of the creditors which, in the case of the capital contributions, are limited, as is the rule, to the general assets of the debtor (...) while in the bank loan they have a reinforced character: Mortgages on all real estate; Pledge in first degree on: all shares representing the capital (...)".

On the other hand, it considers that A... adopted that criterion in the process of selecting the presented comparables, having been only considered observations guaranteed by the respective collaterals.

Regarding what was stated by the taxpayer, we will make three considerations.

First, it should be noted that the guarantees indicated by the taxpayer are of a generic nature and not concrete to the transaction at issue: which mortgages were actually contracted and registered, and which pledges?

Second, and regarding the criterion adopted in the selection process in which transactions guaranteed by collaterals were considered, it is unknown in concrete terms which collaterals guarantee the selected loans, what type of guarantees are in question and whether they are similar, or not, to those of the related party transaction.

Finally, and even if the elements above mentioned were known (and we do not know them), it is important to emphasize that the related party transaction is between A... and all of its shareholders (some also administrators of the company and the rest direct family members of these).

Such a fact strongly influences the guarantees given to third parties. This is because, while it is true that in theory creditors may have greater guarantees (mortgages, pledges, ...) in practical terms it is the administrators and/or capital holders of companies - which in this case, as already mentioned, are coincident - who hold the real knowledge of the state in which these are, both at the financial level and at the technical, commercial, competitive level, among others, and can make decisions that limit the guarantees of their creditors or that maximize the opportunities to recover the loans made to the company by themselves or third parties.

In this way, the Tax Inspection Services do not consider that the degree of uncertainty regarding the receipt of the loaned sum is so notoriously superior in the case of the bank loan as the taxpayer would have it believed.

e) Conclusions regarding the internal comparable used by the Tax Inspection (§ 29 to 32):

The taxpayer concluded, in its analysis of the bank loan contractualized in 2009 (internal comparable used by the Tax Inspection) that this will not be "a more reliable comparable than those presented by A...". It further states that "in accordance with paragraphs 3.59 and 3.60 of the OECD guidelines, it would be necessary to make adjustments to the CUP given that there is no comparability of criteria, there is no coincidence of some terms and conditions and there is not even an Arm's Length interval that makes the sole observation statistically significant".

It further adds that "in cases in which (...) certain comparability defects may still remain, the existence of a considerable number of observations in the interval, together with the application of statistical tools that use measures of central tendency to narrow the interval (e.g., interquartile range, median, etc.), allow increasing the reliability of the analysis (as set out in paragraph 3.57 of the OECD guidelines) and its statistical relevance".

From the analysis of what was stated by the taxpayer, it should be noted that it says it does not accept the internal comparable because it lacks adjustments, but nevertheless the external comparables used by A... also suffer from incomparability with the related party transaction under analysis, with A... having no concern whatsoever about the conduct, or even consideration, of adjustments.

As for the reference to paragraph 3.57 of the OECD guidelines, it should be noted that, despite the suggestion made by the taxpayer regarding the use of statistical tools to narrow the interval, this was not in practice taken into consideration by A.... In fact, the taxpayer proceeded to calculate the interquartile range and the median but for purely indicative purposes since it did not consider this interval or value in the conclusions drawn. This is because, if we analyze table XI in light of what has now been mentioned by the taxpayer (and which falls within the OECD guidelines) we conclude that had the interquartile range it now refers to (7.31% - 9.63% in 2011 and 6.228% - 9% in 2012) been considered, the rate applied to the capital contributions (10%) would have been outside the interval, with the conclusion drawn being that the rate applied to the capital contributions does not comply with the Arm's Length Principle.

Contrary to what has now been stated, A... used in the Arm's Length Interval the minimum and maximum values of the observations, not being able thus, in our view, to come to refer that the reliability of the analysis and the statistical relevance were increased by the use of statistical tools, in accordance with the reference in paragraph 3.57 of the OECD guidelines.

IX.2 - ANALYSIS OF THE COMPARABLES USED BY A...

In the right to be heard, the taxpayer comes to reinforce that the "methodology used by A... regarding the selection of comparability criteria (...) does not suffer from any incorrectness, incongruence or lack of clarity, and should be accepted".

In the following sub-sections the considerations of the taxpayer are set out, and analysis thereof is conducted simultaneously.

a) Regarding the issuing entities (§ 34 to 39)

The taxpayer disagrees with the Tax Inspection Services when these consider that the entities selected and accepted by A... as comparable diverge significantly from it, namely in terms of rating, markets in which they operate and activities they develop, not thus meeting the conditions...

[Document appears to continue but is truncated in the provided text]