Process: 734/2014-T

Date: April 7, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitration case (734/2014-T) addresses the tax deductibility of financial charges incurred by an SGPS holding company to finance supplementary and ancillary contributions to its subsidiaries under Portuguese Corporate Income Tax (IRC) law. The taxpayer challenged an additional IRC assessment of €648,977.08 for fiscal year 2010, asserting that financial costs related to financing its subsidiaries through supplementary contributions should be deductible expenses. The Tax Authority argued that Article 32(2) of the Tax Benefits Statute (EBF) prohibits the deduction of financial charges associated with acquiring capital shares, and that supplementary contributions and ancillary contributions under the supplementary contributions regime should be treated equivalently to capital shares for this purpose. The case was brought before the Administrative Arbitration Centre (CAAD) under the Legal Regime of Tax Arbitration (RJAT), with the taxpayer also seeking annulment of compensatory and late payment interest assessments, plus reimbursement of guarantee costs. The arbitral tribunal, constituted in December 2014, examined whether ancillary contributions granted on a free basis and following the supplementary contributions regime under Article 210 of the Commercial Companies Code should be subsumed within the concept of 'capital shares' for purposes of the non-deductibility rule. This case is significant for SGPS companies and holding structures in determining the tax treatment of financing costs related to intra-group capital injections beyond traditional share capital.

Full Decision

ARBITRATION DECISION

Case No. 734/2014-T

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. António Alberto Franco and Professor Doctor Luísa Anacoreta, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 26-12-2014, agree on the following:

1. Report

A..., SGPS, S.A., with registered office at Rua …, number …. …, …, taxpayer number …, filed a request for constitution of a collective arbitral tribunal, in accordance with the provisions of articles 2.º, no. 1, paragraph a), and 10.º and following articles of the Legal Regime of Tax Arbitration (RJAT), in which the TAX AUTHORITY AND CUSTOMS SERVICE is the Respondent.

The Applicant seeks the annulment of the additional corporate income tax assessment no. 2013 …, the acts establishing compensatory interest no. 2013 … and late payment interest no. 2013 …, and the corresponding statement of account reconciliation no. 2013 … (compensation no. 2013 …), all made by reference to the fiscal year 2010, and likewise seeks the annulment of the order of the Deputy Finance Director of the Finance Directorate of Lisbon dated 22-07-2014, with the consequence that the Applicant shall be compensated for the costs incurred with the provision of guarantee which ultimately proved unwarranted.

The request for constitution of the arbitral tribunal was accepted by the Esteemed President of the CAAD on 26-09-2014 and notified to the Tax Authority and Customs Service on 23-10-2014.

In accordance with the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

On 10-12-2014 the parties were duly notified of such appointment, and did not express any wish to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11.º no. 1, paragraphs a) and b) of the RJAT and articles 6.º and 7.º of the Deontological Code.

In accordance with what is provided in paragraph c) of no. 1 of article 11.º of the RJAT, the collective arbitral tribunal was constituted on 26-12-2014.

The Tax Authority and Customs Service filed a response, arguing for the dismissal of the present arbitration claim.

By order of 19-02-2015, the meeting provided for in article 18.º of the RJAT was dispensed with and it was decided that the proceedings should continue with written submissions.

The parties filed submissions.

The parties have legal personality and capacity, are legitimate and are duly represented (articles 4.º and 10.º, no. 2, of the same statute and article 1.º of Regulation no. 112-A/2011, of 22 March).

The proceedings are not vitiated by any defects and there is no impediment to consideration of the merits of the case.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

a) The Applicant is a joint-stock company under Portuguese law, whose corporate purpose is the management of shareholdings in other companies, as an indirect form of exercise of economic activities, operating as a Shareholder Management Company (SGPS);

b) The Applicant is subject to the general corporate income tax regime, with its tax period coinciding with the calendar year;

c) With reference to the fiscal year 2010, the Applicant was the parent company of a group of companies taxed in accordance with the Special Tax Treatment Regime for Groups of Companies ("RETGS") (tax group), constituted by the following companies:

d) In order to finance its subsidiaries, the Applicant obtained financing, which was intended for the realization of supplementary contributions, or of ancillary contributions under the supplementary contributions regime, in favor of those entities.

e) By virtue of the financing granted, the Applicant came to bear the respective financial charges, recording them in fiscal year 2010 as fiscally relevant expenses of the fiscal year;

f) With reference to fiscal year 2010, the Group declared taxable income of €27,529,333.40, through the Income Declaration Form 22 identified with no. … of 27-05-2011;

g) In compliance with Service Order no. … of the Large Taxpayers Unit, the Tax Authority and Customs Service conducted an external inspection procedure for fiscal year 2010 at C… SGPS, SA (hereinafter "C...");

h) C... has as its main activity the management of shareholdings in other companies and is subject to the general corporate income tax regime, being taxed in accordance with the special tax treatment regime for groups of companies, forming part of the group of which the Applicant is the parent company;

i) As a result of the said Inspection action, a correction was made to the declared fiscal result, in individual terms to the above-identified company, which was fixed at the total amount of € 648,977.08;

j) In the Tax Inspection Report, the content of which is deemed to be reproduced, the following is stated as the basis for the correction, among other things:

  1. Description of Facts

The taxable person added to taxable income the amount of €1,115,888.00 relating to financial charges incurred with the acquisition of capital shares which, in accordance with no. 2 of article 32.º of the Tax Benefits Statute (EBF), do not contribute to the determination of Taxable Income.

For the purposes of correct determination of financial charges to be excluded, as set out below, supplementary contributions and ancillary contributions with the same regime should be considered as capital shares.

According to the accounting records, the ancillary contributions granted to the various Group companies are recorded in account SNC 411300000 -IF -Subs. -loans granted. From the perspective of the beneficiary companies, the ancillary contributions are recorded in an equity account, more specifically in account SNC 53100000 -Supplementary Contributions.

On the other hand, upon consultation of Minutes of the General Assembly of the above-mentioned companies, it can be seen, for example that (i) "(. ..) the realization, by the sole shareholder, of ancillary contributions to the Company (. ..)" (ii) or that "(. ..) the said contributions should follow, in everything that does not contradict the ancillary contributions regime, the regime of supplementary contributions provided for in article 210º of the Commercial Companies Code (. ..)", that is, that the ancillary contributions granted by C... are on a free basis and follow the regime of supplementary contributions.

The position of ancillary contributions granted to the subsidiaries is presented below:

(...)

III. In light of the coherence of the tax system:

Supplementary contributions, as well as ancillary contributions under the supplementary contributions regime, as financial investments included in the Fixed Assets, follow, in their disposal, the regime of gains and losses realized contained in articles 46° and following of the Corporate Income Tax Code, whereby losses suffered from the onerous transfer of ancillary contributions under the supplementary contributions regime represent fiscally a loss, subject to the corresponding regime.

On the other hand, it is important to highlight the reasons why, in substance, financial charges incurred with the financing of ancillary contributions should be excluded for the purposes of determination of taxable income, in accordance with article 32.º of the EBF, embodying the principle contained in article 23° of the Corporate Income Tax Code.

(...)

Thus, it is concluded that there is subsumption, to the concept of capital shares, set forth in article 32.º of the EBF, not only of shareholdings (shares and quotas) but also of other components of equity that in substance perform the functions of capital, as happens, in this case, with supplementary contributions and ancillary contributions under the supplementary contributions regime. Otherwise, the principle of equality and the coherence of the tax system itself could be at issue. It follows, then, that financial charges incurred with the acquisition of shareholdings or granting of supplementary contributions - which may potentially come to benefit, at the time of disposal, from the tax exclusion regime - cannot influence the determination of taxable income, that is, if the gains are not taxed, the corresponding expenses that are linked to such income cannot equally be considered for the purposes of determination of taxable income.

In light of the above, financial charges incurred both with the acquisition of shareholdings and with the granting of supplementary contributions are excluded for the purposes of determination of taxable income, given what is established in no. 2 of article 32.º of the EBF.

(...)

On the provision of article 23° of the CIRC

Even if supplementary contributions are not subject to the special regime provided for in article 32.º of the EBF, then it will always have to be assessed the deductibility of these charges in light of no. 1 of article 23.º of the Corporate Income Tax Code.

Financial charges incurred by an entity - whether or not a SGPS - with the obtaining of funds which are intended to be granted on a non-remunerative basis by that same entity to a subsidiary, are not considered tax expenses in light of the provision of article 23.º of the Corporate Income Tax Code.

(...)

It is thus considered that the deduction of interest and other charges should comply with the same rules that are generally applicable to other expenses incurred by companies, and therefore their deductibility is subject to the observance of the basic principle according to which they will only be fiscally deductible when they are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of income of the respective taxpayer.

In fact, the capital obtained, generating the financial charges, when channeled to the granting of supplementary contributions to the subsidiaries are clearly not used in the activity of the company that bears the charges, for which no taxable income is returned that would compensate for the expenses, in so far as the supplementary contributions are not remunerated.

(...)

We conclude, thus, that, even if supplementary contributions were not considered capital shares for the purposes of application of article 32.º of the EBF, the financial charges incurred with the financing obtained for the granting/maintenance of unremunerated supplementary contributions are not accepted as an expense in accordance with no. 1 of article 23.º of the Corporate Income Tax Code, in the sense moreover of what jurisprudence has been, both of the Administrative Supreme Court as well as of the Tax Court.

In summary, they are not considered fiscally deductible, in accordance with article 23° of the CIRC, the financial charges incurred with financing used for the granting of ancillary contributions to subsidiaries, because such capital is not used in the company's own activity nor is it associated with remunerated assets.

  1. Conclusion

In light of all the above, it cannot therefore but be concluded that, on the one hand, the application of the discipline of no. 2 of article 32.º of the EBF to the factuality under analysis - which is subsumable in that provision by, as demonstrated above, supplementary contributions being encompassed therein - leads to the exclusion of financial charges incurred with the granting of the said supplementary contributions for the purposes of determination of taxable income. On the other hand, even if supplementary contributions were not considered capital shares for the purposes of application of article 32º of the EBF, the fiscal deductibility of those financial charges would conflict with article 23.º of the CIRC, in so far as they are neither connected with the company's own activity nor associated with remunerated assets.

(...)

Finally, it should be noted that the amount of non-deductible financial charges considered and added to Table 07 of Declaration Form 22 of C..., corresponds to €1,169,022.00 and not merely €1,115,888.00 as considered in the Draft Report, whereby the proposed correction of €702,111.08 is converted to €648,977.08.

k) As a result of the correction made, the Tax Authority and Customs Service issued the additional corporate income tax assessment no. 2013 …, the acts establishing compensatory interest no. 2013 … and late payment interest no. 2013 …, and the corresponding statement of account reconciliation no. 2013 … (compensation no. 2013 …), from which resulted an amount to pay of € 157,956.16 and final payment date of 11-03-2013 (document no. 2, attached to the request for arbitral decision, the contents of which are deemed to be reproduced);

l) On 19-04-2913, the Applicant filed an administrative complaint of the acts referred to in the preceding paragraph (document no. 4 attached to the request for arbitral decision, the contents of which are deemed to be reproduced);

m) By Office no. …, of 23-07-2014, of the Administrative Justice Division of the Finance Directorate of Lisbon, the now Applicant was notified of the Order of the Deputy Finance Director of the Finance Directorate of Lisbon, of 22-07-2014, which determined the dismissal of the administrative complaint filed against the said assessments (document no. 1 attached to the request for arbitral decision, the contents of which are deemed to be reproduced);

n) The Applicant provided a bank guarantee to suspend the fiscal enforcement proceeding no. …2013…, which was instituted for collection of the amount to pay resulting from the assessments referred to (document no. 5 attached to the request for arbitral decision, the contents of which are deemed to be reproduced);

o) On 22-10-2014, the Applicant filed the request for constitution of the arbitral tribunal which gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Justification for the Determination of Factual Matters

The determination of factual matters is based on the administrative file and the documents attached to the initial petition, with no controversy over the proven facts.

3. Legal Matters

3.1. Questions to be Considered

The Tax Authority and Customs Service made a correction to the taxable matter of fiscal year 2010 of C..., a company belonging to the group of which the Applicant is the parent company, because it understood that financial charges in the amount of € 648,977.08, incurred by that company for the purposes of ancillary contributions under the supplementary contributions regime to its subsidiaries, should not be considered as expenses.

The correction made has dual justification.

Firstly, the Tax Authority and Customs Service understands that the limitation contained in no. 2 of article 32.º of the Tax Benefits Statute (EBF), in the wording in force in 2010, applies to this situation, because supplementary contributions are encompassed in the concept of "capital shares".

Furthermore, the Tax Authority and Customs Service understood that the financial charges referred to do not meet the requirements to be considered as expenses, required by article 23.º of the CIRC, in the wording in force in 2010, because they were incurred in favor of another entity, legally and economically independent.

Being independent grounds, each of them with the potential to sustain the correction made, they will be considered separately, without prejudice to the fact that if it is concluded that one of them has legal support, the consideration of the other will be rendered moot by being unnecessary.

3.2. Question of the Qualification of Supplementary Contributions as "Capital Shares" for the purposes of article 32.º, no. 2, of the EBF, in the wording in force in 2010

Article 32.º, no. 2, of the EBF established, in the wording in force in 2010, the following:

"2 - The gains and losses realized by SGPSs, SCRs and ICRs from capital shares which they hold, provided they are held for a period of no less than one year, and likewise, the financial charges incurred with their acquisition do not contribute to the formation of taxable income of these companies."

From the final part of this provision it follows that financial charges incurred with the acquisition of capital shares do not contribute to the formation of taxable income of SGPSs.

In the case at issue, the financial charges in question were incurred by C..., which is a SGPS, to carry out supplementary contributions with the supplementary contributions regime, to its subsidiaries, whereby the applicability of this provision to the situation depends on the qualification of these supplementary contributions as "capital shares".

Thus, "in the determination of the meaning of tax provisions and in the qualification of the facts to which they apply, the rules and general principles of interpretation and application of laws are observed" (article 11.º, no. 1, of the General Tax Law), which constitutes a referral to article 9.º of the Civil Code.

In no. 2 of the same article 11.º it is established that "whenever, in tax provisions, terms proper to other branches of law are used, they should be interpreted in the same sense as that which they have therein, unless otherwise directly provided by law".

From this provision it follows that, although the rule is that terms used in tax provisions should be interpreted with the same scope that they have in other branches of law, there is an exception, which is when it directly derives from tax law that the meaning of the term used in the tax law is different from what it has in other branches of law.

Moreover, it is an exception that is in harmony with another general interpretive rule, which is that special law prefers to general law in its specific field of application, that is, if it directly derives from a tax provision, special for the situation that it regulates, the meaning of a given term, it will not be necessary to know whether or not that meaning corresponds to the one used in the general law, since that meaning directly deriving from the law for a specific situation will necessarily be the one that has to be adopted and not the meaning with which it is used in any provision that does not have the nature of special law for the said situation.

In any case, from no. 2 of article 11.º of the General Tax Law it follows that, in proper legal interpretation, the first task of the interpreter of tax law to determine the scope of a term used in it is to determine whether tax law directly establishes the meaning of that term.

Only if this is not the case can appeal be made to the meaning of the terms used in other branches of law.

Now, in the case at issue, for clarification of the question of whether supplementary contributions are encompassed in the concept of "capital shares" there is a provision from which it directly derives that these are not included in this concept, which is no. 3 of article 45.º of the CIRC, in the wording of Decree-Law no. 159/2009, of 13 July, in force in the year 2010.

It is established in this no. 3 of article 45.º as follows:

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

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

"Capital shares" are also "components of equity", as is apparent from the word "other", but the scope of "capital shares" is necessarily more restricted than that of "equity", which will encompass, in addition to "capital shares" also "the other components".

As the provision is worded, supplementary contributions will be encompassed in the concept of "other components of equity" and not in "capital shares", since the reference to them appears after the latter concept and not after the former.

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

That reference to supplementary contributions did not exist in the wording of article 42.º of the CIRC ( [1] ) of Law no. 32-B/2002, of 30 December ( [2] ), being only made in the wording introduced by Law no. 60-A/2005, of 30 December, whereby the legislative amendment was made with the intent to clarify the fiscal scope of the concepts used, namely the concept of "capital shares", showing that it, in the perspective of the CIRC legislator, did not encompass supplementary contributions.

Being an amendment with clarifying scope, it is to be presumed with reinforced strength that the legislator knew how to concretize adequately that objective (article 9.º, no. 3, of the Civil Code), and if it intended to make explicit that supplementary contributions, for purposes of corporate income tax, are encompassed among "other components of equity" and not in "capital shares".

This delimitation of the concept of "capital shares" which is extracted from the referred no. 2 of article 45.º is made for purposes of determination of losses, which is included in the matter dealt with by article 32.º, no. 2, of the EBF (it is a provision that excludes in relation to SGPSs the general tax relevance provided for in the CIRC for gains and losses) whereby, having to presume that the legislator expressed his thought in adequate terms (pursuant to the referred article 9.º, no. 3, of the Civil Code), the conclusion is justified that the same concept of "capital shares" was used in the special provision as was used in the provision that establishes the general tax relevance for gains and losses.

Moreover, the provision of article 32.º, no. 2, of the EBF was reformulated by Law no. 64-B/2011, of 30 December, already after the amendment introduced by Law no. 60-A/2005 in article 45.º of the CIRC and the new wording of that provision maintains the reference only to "capital shares" without any allusion to "other components of equity" to which article 45.º, no. 2 alludes.

This conclusion, drawn from the literal tenor of article 32.º, no. 2, of the EBF, combined with article 45.º, no. 2, is confirmed by the rationale for the special regime of gains and losses realized by SGPSs, which does not apply in relation to supplementary contributions, as is ably explained in the award of the CAAD delivered in case no. 12/2013-T, in the following terms:

"in general, the regime of gains is intended to grant a special favorable regime to tangible and financial fixed assets (shares and quotas) of companies, as a way of combating the lock-in effect – a phenomenon that in the tax system of realization conditions the rational flow of assets (buying and selling) by reasons linked to constraints (payment of tax). Essentially, to avoid the scenario of a subject who does not sell an asset (share or quota) of which he is holder – and all economic reasons would advise him to do so – merely because he will pay a large tax at that moment (because taxation is only discharged with the sale of the asset and not on the schedule of its annual appreciation). It is this reason that justifies the under-taxation of tangible and financial assets (shares and quotas), embodied in a special tax regime for the taxation of gains.

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

Thus, it is concluded that article 32.º, no. 2, of the EBF, in the wording in force in 2010, when establishing, by reference to "capital shares", that "do not contribute to the formation of taxable income" of SGPSs the "financial charges incurred with their acquisition", does not preclude the relevance to the formation of taxable income of financial charges incurred with supplementary contributions.

Therefore, the correction made does not have legal support in article 32.º, no. 2, of the EBF.

3.3. Question of the Indispensability of Financial Charges Incurred with Supplementary Contributions to Subsidiaries for the Formation of Taxable Income of C...

The non-consideration by the Tax Authority and Customs Service of the said financial charges with supplementary contributions to subsidiaries for the formation of taxable income of the Applicant was also based on the understanding that such expenses cannot be considered indispensable for the formation of taxable income of C...:

"(...) the capital obtained, generating the financial charges, when channeled to the granting of supplementary contributions to the subsidiaries are clearly not used in the activity of the company that bears the charges, for which no taxable income is returned that would compensate for the expenses, in so far as the supplementary contributions are not remunerated";

"In summary, they are not considered fiscally deductible, in accordance with article 23° of the CIRC, the financial charges incurred with financing used for the granting of ancillary contributions to subsidiaries, because such capital is not used in the company's own activity nor is it associated with remunerated assets".

This question has already been considered, with the same factual and legal assumptions in the CAAD case no. 39/2013-T, with whose decision agreement is reached, whereby its justification will be followed.

3.3.1. The Interpretation of the Concept of Indispensability of Costs or Losses

The interpretation of the concept of indispensability contained in article 23.º of the CIRC has, in Portuguese tax law doctrine, in TOMÁS TAVARES and ANTÓNIO PORTUGAL, authors of seminal works regarding the elucidation of such concept.

For the first of these authors: "The legal notion of indispensability is delineated, therefore, on an economic-business perspective, by fulfillment, direct or indirect, of the ultimate motivation for the obtaining of profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable in a profit-making profile."

And continues: " (…) Indispensability is subsumed in any act carried out in the interest of the company…The legal notion of indispensability thus represses acts that are at odds with the purpose of the company, not insertable in the corporate interest, especially because they do not aim for profit".

The second author, regarding the question of what is the best interpretation of the concept of indispensability, expresses the following position:

"The solution adopted among us (at least in doctrine), following the understandings propounded by Italian doctrine, has been to interpret indispensability in function of the corporate purpose. This position is present from the outset in the writings of Vítor Faveiro, who traces the indispensability of the expense to its appraisal as an act of management in function of the concrete corporate purpose, refusing that this indispensability can be assessed freely from any subjective judgment of the law applier".

These works thus sustain that any economic decline (expense) that has a relation with the corporate purpose, whether incurred in the ambit of the activity, or shows a business purpose, will fulfill the requirement of indispensability.

On the level of jurisprudence, and in particular regarding the deductibility of expenses relating to interest borne by companies that apply borrowed capital in the financing of subsidiaries, the Award of the Administrative Supreme Court of 7 February 2007 deserves mention, in which it is stated:

"It follows from this that the costs provided for therein cannot but relate, first and foremost, to the company itself.

That is, for a certain amount to be considered a cost of that company, it is necessary that the respective activity be developed by it itself, and not by other companies.
If not, how could the exercise of the activity of another company with which it had some relationship be attributed to a company.

The disputed amounts correspond to interest on bank loans and stamp duty incurred by the appellant and applied in the free financing of an associated company.

Such amounts are not, therefore, directly related to any activity of the taxpayer inscribed in its corporate purpose, which is undertakings and management of real property and not the management of shareholdings or financing of risk companies, nor do they even relate, albeit indirectly, to its activity.

Also here the notion of activity or corporate interest is revealed to be the distinctive feature in the fiscal admissibility of expenses, when assessed by article 23.º of the CIRC. And in the additional jurisprudence, cited by the Applicant and by the Tax Authority and Customs Service, what predominates, as was to be expected, is the question of the connection of the fiscal admissibility of financial expenses as a function of considering whether or not the financing entity carries out its own activity in those operations.

Now, in light of what was referred to, it is clear that, both on the doctrinal level and in the sphere of jurisprudence, the connection to activity will be the nuclear element of the interpretive key to the concept of indispensability. Thus, and for the case at issue, the analysis of what is understood by "activity" of companies, in particular of a SGPS, proves to be essential.

Let us then, on a general level, see what we understand by activity of corporate entities; and then, in the case at issue, what should be understood by own activity of a SGPS.

3.3.2. The Activity of Companies

The activity of a corporate entity consists in the operations arising from the use and management of its resources. Such resources are, in the first place, the assets that form part of its respective patrimony.

From the notion of "asset" that the accounting rule establishes, it can be concluded that both the management of a physical asset, as well as that of an intangible one, as well as that of a non-current asset held for sale, as well as that of a financial asset would be activity.

Thus, suppose that company ALFA participates in company BETA in the proportion of 100%. The first is thus the holder of a financial asset. What "activity" results in the sphere of ALFA from the participation which it holds in BETA?

The first can intervene in the second, determining the production of new goods or services, the minimization of expenses, or other measures that increase operating profit. But it is also clear that ALFA could intervene in BETA on the level of financial operations. Either by increasing the capital of BETA in order to increase its investment capacity, or by providing it with financial means that strengthen its treasury.

The entity ALFA, in the exercise of its own activity, administers and makes decisions relating to a financial asset, which arises from the said participation. This constitutes activity of ALFA and not of BETA. The latter benefits from that activity, suffers the effects of the decisions of ALFA, but does not develop the activity of management of the participation.

If the managers of ALFA execute operations that affect the financing of BETA they are not developing the activity of third parties. They are developing their own activity of ALFA, deriving directly from the management of the financial asset embodied in the participation in BETA. The company BETA has the nature of a subsidiary entity, which gives to the decisions of the parent company the qualification of its own activity, inherent to its purpose: the management of such participation. And that management can involve financing operations that are part of the activity of the parent company.

The subsidiary is not just any entity alien to the activity and interests of the parent company. There is no expense in the sphere of the latter that has nothing to do with its corporate interest. The expense with interest incurred with capital obtained, and subsequently contributed to the subsidiary, is made in the interest of the parent company, as a direct consequence of its activity of management of an asset that emerges from a participation, which is real or potentially productive of income.

3.3.3. The Activity of SGPSs and the Deductibility of the Financial Charges in Question

In accordance with the provision of article 1.º of Decree-Law no. 495/88, of 30 December ( [3] ) shareholder management companies (SGPSs), have as their sole corporate purpose the management of shareholdings in other companies, as an indirect form of exercise of economic activities, with the participation in a company considered as an indirect form of exercise of the economic activity thereof when it does not have an occasional character and reaches, at least, 10% of the capital with voting rights of the subsidiary company, whether by itself or through participations of other companies in which the SGPS is dominant. ( [4] )

The participation in a company is considered to be an indirect form of exercise of the economic activity thereof when it does not have an occasional character and reaches, at least, 10% of the capital with voting rights of the subsidiary company, whether by itself or together with participations of other companies in which the SGPS is dominant.

In light of what was set forth, it is clear that the activity of SGPSs - a concept essential for assessing the indispensability of expenses incurred by these in the ambit of the application of article 23º of the CIRC – not only encompasses the management of shareholdings, but is moreover its sole corporate purpose.

Now, the management of shareholdings will naturally involve its acquisition, the administrative operations carried out by the parent company necessary for the appreciation of the acquired financial asset, the financing of such asset and the eventual subsequent disposal. All this can be subsumed in the activity of a SGPS.

Thus, the financing of a subsidiary follows from the interest of the parent company, in order to, guaranteeing the financial sustainability of the acquired asset, increase its potential as a source of income production.

In such case, the financial charges that result from financing contracted for, subsequently, to strengthen the equity capital of a subsidiary, are included in, form part of the ambit of, the activity of a SGPS. There is no doubt about this in light of the provision of the rule, above mentioned, that regulates its activity. ( [5] )

It is thus concluded that, being these charges related to the company's own activity of the SGPS, they fulfill the requirements on which the interpretation of the concept of indispensability of article 23.º of the CIRC is based, namely in the part of no. 1 of this article in which relevance is given to expenses indispensable for the maintenance of the source of income production, in which are included charges of a financial nature, expressly referred to in paragraph c) of the same number.

By the foregoing, the second ground for the correction made by the Tax Authority and Customs Service to the taxable income of the Applicant, relating to financial charges with the referred supplementary contributions, also lacks support.

Thus, it is concluded that the correction made has no legal foundation, whereby it is vitiated by a defect of violation of law due to error regarding the legal assumptions, which justifies its annulment (article 135.º of the Code of Procedure in the Administrative Courts).

3.4. Assessment of Compensatory Interest

The assessment of compensatory interest is premised on corrections to the taxable income of the Applicant, whereby, having concluded that these corrections are illegal, such assessments are vitiated by the same defects that vitiate the corporate income tax assessment, whereby they must also be annulled.

3.5. Assessment of Late Payment Interest

The Applicant, although it made reference in the initial part of the request for arbitral decision to the assessment of late payment interest, ultimately states, in articles 274.º to 277.º that the assessment of late payment interest is based on a statement of assessment no. 2011 …, which was contested in the Administrative and Tax Court of Sintra.

Thus, no cognizance is taken of the question of the legality of the assessment of late payment interest.

4. Compensation for Unwarranted Guarantee

The Applicant further formulates a request for compensation for unwarranted guarantee.

In accordance with the provision of paragraph b) of article 24.º of the RJAT, the arbitral decision on the merits of the claim from which no appeal or review lies binds the tax administration from the end of the period provided for appeal or review, with the administration, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of sentences of the tax courts, to "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for such purpose".

In the legislative authorization on which the Government based itself for approving the RJAT, granted by article 124.º of Law no. 3-B/2010, of 28 April, it is proclaimed, as the primary directive of the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that "the tax arbitration process should constitute an alternative procedural means to the process of judicial review and to the action for recognition of a right or legitimate interest in tax matters".

Although article 2.º, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals that function at the CAAD and does not make reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the referred legislative authorization, that included in its jurisdiction are the powers that in a process of judicial review are attributed to the tax courts in relation to acts whose assessment of legality falls within their jurisdiction.

Although the process of judicial review is essentially a process of mere annulment (articles 99.º and 124.º of the Code of Procedure in Tax Courts), it can in it be given condemnation of the tax administration in the payment of compensatory interest and of compensation for unwarranted guarantee.

In truth, although there is no express provision to that effect, it has come to be peacefully understood in the tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a claim for condemnation to payment of compensatory interest can be cumulated with a claim for annulment or for declaration of nullity or non-existence of the act, in so far as in those codes reference is made to the fact that the right to compensatory interest arises when, in administrative complaint or court proceedings, the tax administration is convinced that there was error of fact imputable to the services. This regime was subsequently generalized in the Code of Procedure in Tax Courts, which established in no. 1 of its article 24.º that "there shall be a right to compensatory interest in favor of the taxpayer when, in administrative complaint or court proceedings, it is determined that there was error imputable to the services", subsequently, in the General Tax Law, in whose article 43.º, no. 1, it is established that "compensatory interest is due when it is determined, in administrative complaint or judicial review, that there was error imputable to the services from which results payment of the tax debt in an amount higher than legally due" and, finally, in the Code of Procedure in Tax Courts in which it was established, in no. 2 of article 61.º (to which corresponds no. 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".

Regarding the claim for condemnation in the payment of compensation for unwarranted guarantee, article 171.º of the Code of Procedure in Tax Courts establishes that "compensation in case of bank guarantee or equivalent improperly provided shall be claimed in the proceedings in which the legality of the exigible debt is disputed" and that "the compensation should be claimed in the complaint, review or appeal or in case its ground is subsequent within 30 days after its occurrence".

Thus, it is unequivocal that the process of judicial review encompasses the possibility of condemnation to payment of unwarranted guarantee and is moreover, in principle, the appropriate procedural means for filing such a claim, which is justified by obvious reasons of procedural economy, since the right to compensation for unwarranted guarantee depends on what is decided regarding the legality or illegality of the act of assessment.

The request for constitution of the arbitral tribunal has as its corollary that it will be in the arbitral process that the "legality of the exigible debt" is discussed, whereby, as results from the express tenor of that no. 1 of the referred article 171.º of the Code of Procedure in Tax Courts, it is also the arbitral process that is appropriate for considering the claim for compensation for unwarranted guarantee.

Moreover, the cumulation of claims relating to the same tax act is implicitly presumed in article 3.º of the RJAT, when it speaks of "cumulation of claims even if relating to different acts", which makes it clear that the cumulation of claims is also possible regarding the same tax act and the claims for compensation for compensatory interest and condemnation for unwarranted guarantee are capable of being encompassed by that formula, whereby an interpretation in this sense has, at least, the minimum verbal correspondence required by no. 2 of article 9.º of the Civil Code.

The regime of the right to compensation for unwarranted guarantee is contained in article 53.º of the General Tax Law, which establishes the following:

Article 53.º

Guarantee in case of improper provision

  1. The debtor who, to suspend execution, provides a bank guarantee or equivalent shall be compensated in full or in part for the prejudice resulting from its provision, if he has maintained it for a period exceeding three years in proportion of the accrual in administrative review, judicial review or opposition to execution which have as their object the debt guaranteed.

  2. The period referred to in the preceding number does not apply when it is determined, in administrative complaint or judicial review, that there was error imputable to the services in the assessment of the tax.

  3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of compensatory interest provided for in this law and can be claimed in the proper process of complaint or judicial review, or autonomously.

  4. Compensation for improper provision of guarantee shall be paid by deduction from the tax revenue of the year in which payment was made.

In the case at issue, the errors in the correction underlying the corporate income tax assessment and the assessment of compensatory interest is imputable to the Tax Authority and Customs Service, since the correction which it made was of its own initiative and the Applicant in no way contributed to that error being committed.

Thus, the Applicant has the right to be compensated for the prejudice which resulted from the provision of guarantee to suspend fiscal execution no. …2013…, instituted for the collection of the amounts assessed, to the extent that it relates to the corporate income tax assessment and compensatory interest (the part relating to late payment interest is excluded, by what is referred to in point 3.5.).

As there are no elements that allow determination of the amount of compensation, the condemnation will have to be made by reference to what comes to be assessed in execution of this award (article 609.º in the Code of Civil Procedure and article 565.º of the Civil Code).

5. Decision

In accordance with the foregoing, this Arbitral Tribunal agrees on:

a) To uphold the claim for arbitral decision and annul the additional corporate income tax assessment no. 2013 …, the assessment of compensatory interest no. 2013 …, the statement of account reconciliation no. 2013 … and the compensation no. 2013 … to the extent that they relate to such assessments;

b) To take no cognizance of the question of the legality of the assessment of late payment interest no. 2013 …;

c) To uphold the claim for recognition of the right of the Applicant to compensation for unwarranted guarantee and to condemn the Tax Authority and Customs Service to pay to the Applicant the compensation to be assessed in execution of this award, relating to expenses with the guarantee provided to suspend fiscal execution no. …2013…, to the extent that it relates to the corporate income tax assessment and compensatory interest.

6. Value of the Proceedings

In accordance with the provision of article 315.º, no. 2, of the Code of Civil Procedure and article 97.º-A, no. 1, paragraph a), of the Code of Procedure in Tax Courts and article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 157,956.16.

7. Costs

In accordance with article 22.º, no. 4, of the RJAT, the amount of costs is fixed at € 3,672.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, chargeable to the Tax Authority and Customs Service.

Lisbon, 07-04-2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(António Alberto Franco)

(Luísa Anacoreta)

[1] Article 42.º of the CIRC, in the renumbering made by Decree-Law no. 198/2001, of 3 July, corresponds to article 45.º, in the renumbering of Decree-Law no. 159/2009, of 13 July.

[2] The previous wording of the corresponding provision, introduced by Law no. 32-B/2002, of 30 December, was as follows:

"3 – The negative difference between the gains and losses realized through the onerous transfer of capital shares, including their redemption and amortization with capital reduction, contributes to the formation of taxable income in only half of their value."

[3] Wording of Decree-Law no. 318/94, of 24 December.

[4] However, although the sole corporate purpose of SGPSs is the management of shareholdings in other companies, article 4.º, no. 1, of the same statute, in the wording of Decree-Law no. 318/94, of 24 December, allows SGPSs to provide technical services of administration and management to all or some of the companies in which they hold shareholdings.

[5] As already referred, the justification set forth in points 3.3.1., 3.3.2. and 3.3.3. of the award delivered in CAAD case no. 39/2013-T was adopted.

Frequently Asked Questions

Automatically Created

What expenses are deductible under IRC for SGPS holding companies in Portugal?
Under Portuguese IRC law, SGPS holding companies face specific limitations on expense deductibility. While general business expenses are deductible under Article 23 of the Corporate Income Tax Code, Article 32(2) of the Tax Benefits Statute (EBF) specifically prohibits the deduction of financial charges incurred with the acquisition of capital shares. This restriction aims to prevent tax arbitrage where dividends received are exempt but financing costs would be deductible. The key controversy in this case involves whether supplementary contributions and ancillary contributions under the supplementary contributions regime should be treated as 'capital shares' for purposes of this non-deductibility rule. The Tax Authority took the position that such contributions, being equity components that perform capital-like functions, should be subject to the same limitation, thereby disallowing the deduction of related financing costs.
Can an SGPS company challenge an additional IRC tax assessment through CAAD arbitration?
Yes, SGPS companies can challenge additional IRC tax assessments through CAAD (Administrative Arbitration Centre) arbitration, as demonstrated in this case. Under the Legal Regime of Tax Arbitration (RJAT), particularly Articles 2(1)(a) and 10 et seq., taxpayers can file a request for constitution of an arbitral tribunal to dispute tax assessments. The procedure involves: (1) filing a request with CAAD, (2) acceptance by the CAAD President, (3) notification to the Tax Authority, (4) appointment of arbitrators by the Deontological Council, (5) constitution of the tribunal within specified timeframes, (6) filing of the Tax Authority's response, (7) written or oral submissions by parties, and (8) issuance of the arbitral decision. This arbitration mechanism provides an alternative to judicial courts, offering specialized tax expertise and potentially faster resolution of corporate tax disputes including assessments, compensatory interest, and late payment interest.
How does Portuguese tax law treat the deductibility of costs incurred by SGPS entities?
Portuguese tax law treats the deductibility of costs incurred by SGPS entities with significant restrictions designed to prevent tax base erosion. Under the general rule of Article 23 of the IRC Code, expenses incurred for the purposes of obtaining or guaranteeing taxable income are deductible. However, Article 32(2) of the Tax Benefits Statute creates a specific anti-abuse provision for SGPS companies and other holding entities: financial charges (interest, financing costs) related to the acquisition of shareholdings are non-deductible when the corresponding dividends benefit from the participation exemption regime. The Tax Authority in this case extended this principle to supplementary contributions and ancillary contributions under the supplementary contributions regime, arguing that these equity instruments function economically as capital and should therefore trigger the same non-deductibility rule. The coherence principle requires that if losses on disposal of such contributions are tax-deductible under Articles 46 et seq. of the IRC Code, then the financing costs should symmetrically be non-deductible to prevent asymmetric tax treatment.
What is the CAAD arbitration procedure for disputing IRC liquidation and compensatory interest?
The CAAD arbitration procedure for disputing IRC liquidation and compensatory interest follows the framework established by the RJAT (Legal Regime of Tax Arbitration). The taxpayer initiates the process by filing a request for constitution of an arbitral tribunal under Article 10 RJAT, specifying the contested acts (additional assessment, compensatory interest, late payment interest). Upon acceptance by the CAAD President, the Tax Authority is notified and the Deontological Council appoints a panel of arbitrators (typically three for collective tribunals). Parties have the right to refuse arbitrators under Articles 6 and 7 of the Deontological Code. Once constituted, the tribunal manages the proceedings, which may include dispensing with oral hearings under Article 18 RJAT if appropriate. The Tax Authority files a response, parties submit written arguments, and the tribunal issues a decision on the merits. Throughout the process, parties must have legal personality, capacity, and proper representation. The arbitral decision has the same force as a court judgment and can result in annulment of the contested assessments and interest charges.
Are guarantee costs recoverable when an IRC additional assessment is annulled by a tax arbitration tribunal?
Yes, guarantee costs are potentially recoverable when an IRC additional assessment is annulled by a tax arbitration tribunal, as specifically requested in this case. When the Tax Authority issues an additional assessment and the taxpayer contests it, Portuguese tax law typically requires the taxpayer to provide a bank guarantee or other security to suspend the collection of the debt during the dispute. This guarantee involves costs (bank fees, commissions, collateral opportunity costs) borne by the taxpayer. When an arbitration tribunal ultimately annuls the additional assessment, finding it to have been unwarranted, the principle of restitutio in integrum suggests the taxpayer should be made whole, including recovery of costs incurred solely due to the improper assessment. In this case, the applicant explicitly requested compensation for costs incurred with the provision of guarantee which ultimately proved unwarranted. The legal basis for such recovery stems from the general principle that the State must compensate for damages caused by illegal administrative acts, though the specific conditions and amounts recoverable would depend on the tribunal's interpretation of applicable law and the taxpayer's proof of actual costs incurred.