Summary
Full Decision
ARBITRAL DECISION
The arbitrators Counsellor Maria Fernanda Maçãs (arbitrator-president), Dr. Paulo Lourenço and Dr. Artur Maria da Silva (arbitrator members), appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, agree as follows:
1. Report
A…, SGPS, S.A., collective person no…, with registered office in …, …, … …, filed a request for the constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2.° and 10.° of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority is respondent, with a view to declaring the illegality of the additional assessment act for corporate income tax (IRC) relating to the years 2010, 2011 and 2012 (assessments no. 2014 …, 2014 … and 2015 ….), of the Statements of Settlement and Accounts no.s 2014 … (2010), 2014 …. (2012) and 2015 … (2012) and, furthermore, of the respective compensatory interest (assessments no. 2014 …, 2014 … and 2015 …), for violation of law due to errors in the factual and legal assumptions.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 10 December 2015.
Pursuant to the provisions of subparagraph a) of section 2 of article 6.° and subparagraph b) of section 1 of article 11.° of RJAT, as amended by article 228° of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal Her Excellency Counsellor Maria Fernanda Maçãs, Dr. Paulo Lourenço and Dr. Artur Maria da Silva, who communicated their acceptance of the assignment within the applicable period.
On 2 February 2016, the parties were duly notified of this appointment and did not express their intention to refuse, in accordance with the combined provisions of article 11.° section 1 subparagraphs a) and b) of RJAT and articles 6° and 7.° of the Code of Ethics.
Thus, in accordance with the provision set out in subparagraph c) of section 1 of article 11.° of RJAT, as amended by article 228° of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 17 February 2016.
The Tax and Customs Authority responded, contending that the claim should be dismissed as unfounded.
By order of 25 April 2016, the tribunal set 23 May 2016, at 15:00, for the holding of the hearing, as well as to clarify whether they intended to submit arguments.
The said hearing took place on 23 May 2016 for the examination of witnesses, with the tribunal setting 17 August for the purpose of delivering the arbitral decision.
The Claimant and the Respondent submitted their arguments on 6 June 2016 and 23 June 2016, respectively.
The arbitral tribunal was duly constituted and is materially competent, in accordance with the provisions of articles 2.°, section 1, subparagraph a), and 30.°, section 1, of Decree-Law no. 10/2011, of 20 January.
The parties have legal personality and capacity, are entitled to be parties and are duly represented (articles 4.° and 10.°, section 2, of the same instrument and article 1.° of Ordinance no. 112-A/2011, of 22 March).
The case is not affected by any nullities and no exceptions were raised.
Thus, there is no obstacle to the examination of the merits of the case.
2. The Issue
According to the Inspection Report, which is the basis of the assessments now being challenged, the Tax Authority understood that an investment made by the Claimant, because it aimed at the acquisition of equity interests, should have been considered as a "non-remunerated asset" for purposes of the provision in article 32.° of the EBF (in the version then in force) and in Circular no. 7/2004, of 30 March, that is, that the Claimant should have added in Table 07 of the Model 22 Declaration the value of the financial charges imputable to such investment, since it is a company managing equity interests.
The Tax Authority further contends that, in order for the Claimant's credit to be considered a "remunerated asset", the corresponding interest should have been recognized as revenue in the year in question, by virtue of the principle of periodization of income and expenses.
The subject matter of the present case is strictly identical to that which was examined in the scope of Case 780/2014T (CAAD), for which reason we shall follow very closely the decision taken there, as we agree with the solutions presented therein.
On the other hand, the questions to be decided are exclusively matters of law and have already been likewise decided by the superior courts, namely the question of the unconstitutionality of the circular and its respective application to companies managing equity interests.
2.1. Facts
2.1.1. Proven Facts
The following facts are considered proven and of interest for a proper decision in the case:
A) The Claimant is a commercial company whose corporate purpose consists in the management of equity interests in other companies.
B) The Claimant participated in an investment plan that Company B…, SGPS, SA intended to develop during the year 2008;
C) The operation, designated as "…", developed in three distinct phases, one in August 2008, by means of payment of one-third of the total value, another, of the same amount, in October 2008, and the last, with the remaining value, on 31 March 2009;
D) For its participation in the first phase of said operation, the Claimant paid the sum corresponding to 14,832,526.73, in exchange for the acquisition of 37,474,417 shares of B…, SGPS, SA;
E) Following the nationalization of Bank C…, SA (Law no. 62-A/2008, of 11 November), a General Shareholders' Meeting was held on 18 December 2008, in which the following was decided: "(…) the resolutions of the Board of Directors of 30 June, 4 July and 12 August 2008 are hereby annulled and, consequently, the increase in capital of the company from the amount of € 470,925,000 to € 706,387,500 (…) "; and, furthermore, that "the Company shall reimburse the Shareholders who subscribed to the capital increase and purchasers of treasury shares the amounts paid by them as the first installment, deducted from expenses reasonably incurred, with the reimbursement being able to be deferred through the use of a bond loan and within a maximum period of seven years, with conditions and interest to be stipulated by the Board of Directors."
F) At the beginning of 2010, the now Claimant initiated legal proceedings against B…, SGPS, SA, demanding its condemnation, among others, to the payment of said sum of € 14,832,526.73, plus the corresponding default interest, calculated from the date of service until full payment, which is proceeding under no. 785/10.6TVLSB, in the 1st Section of the 2nd Civil Court of Lisbon.
G) In September 2010, B…, SGPS, SA, now designated as D…, SGPS, SA, proceeded, unilaterally, to the conversion of the credits arising from the annulment of the "operation" into a bond loan, convertible into shares at the option of the issuer, with a total of 14,716,833 bonds being charged to the now Claimant, with a nominal value of € 1.00, which gave the right to payment of interest.
H) B… SGPS, SA, now D… SGPS, SA, has made available to the Claimant the interest corresponding to said bond loan;
I) The Claimant did not accept the decision to convert its credit into bonds, and has been rejecting receipt of these amounts;
J) In October 2012, in the proceedings referred to in F), a procedural order was issued that partially upheld the action and which condemned B… SGPS, SA, now designated as D… SGPS, SA, to pay to the Claimant the sum of € 14,832,526.73, plus accrued and accruing default interest from the date of service until full payment, to be calculated at the legal rate in force at each moment for credits held by merchants;
K) On 13 December 2013, the Court of Appeal of Lisbon revoked the first instance decision and determined that the proceedings should continue for trial to ascertain whether the 2008 resolution already included approval of the manner in which reimbursement should be made;
L) The Claimant was subject to a tax inspection regarding the years 2010, 2011 and 2012, with corrections being made to the taxable income declared, in the amounts of € 395,671.05, € 425,707.89 and € 320,327.20, respectively;
M) In the Tax Authority's view, the amount of € 14,829,776.73, relating to the account Other Debtors and Creditors – B…-Company B…, SGPS, SA, should not be considered as a "remunerated asset", since it had no type of revenue associated with it, and should be classified accountingly as "other assets";
N) The Tax Authority considered the financial charges supported and imputable to such value, in the amount of € 320,808.30, to be not tax-deductible, because they related to the acquisition of equity interests;
O) The Claimant filed, on 18 May 2015, with the Finance Office of …, a formal complaint in which it petitioned for the annulment of the additional assessments relating to the years 2010, 2011 and 2012;
P) Until the deadline provided in article 57.° of the General Tax Law (LGT), such complaint was not decided, for which reason, presuming its rejection, the present request was filed;
Q) In order to suspend judicial collection (in execution proceedings) of the assessments in question, the Claimant contracted three bank guarantees with E… (docs nos. 22, 23 and 24, attached with the arbitral request), which involved the payment of an initial amount of €3,775.26 (docs nos. 25, 26 and 27, attached with the arbitral request;
R) To date and in accordance with the contracted conditions, the Claimant has already paid the sum of €5,490.02 (docs 28, 29 and 30 to 32), attached with the arbitral request;
2.1.2. Unproven Facts
There are no facts relevant to the examination of the merits of the case that have not been proven.
2.1.3. Basis for the Determination of Factual Matters
The proven facts are based on the documents in the case file (Petition and attached documents), with no real dispute existing regarding them, but only regarding the legal consequences that derive therefrom.
2.2. Matters of Law
The question to be decided in the scope of the present case concerns the need to ascertain whether an investment made by the Claimant, because it aimed, in the Tax Authority's view, at the acquisition of equity interests, should have been qualified as a "non-remunerated asset" for purposes of the application of the provision in article 32.° of the EBF, in the version then in force, and in Circular no. 7/2004, of 30 March.
The Claimant maintains that there is no application of article 32° of the EBF nor of Circular no. 7/2004, taking into account that the acquisition of equity interests was subject to annulment and the amount of the investment converted into a credit against third parties and that the circular referred to above does not contemplate the existence of non-remunerated assets that are not equity interests.
Furthermore, the Claimant contends that Circular no. 7/2004 cannot be applied to the present case, taking into account that it is unconstitutional, since it proceeds to the creation of a norm of incidence, a matter that can only be regulated by law.
The legal questions raised have already been decided in the scope of Case no. 780/2014T (CAAD), as noted, and, agreeing with the solutions presented therein, we shall follow very closely the judgment underlying such case.
2.2.1. Unconstitutionality of Circular no. 7/2004
The Claimant alleges the unconstitutionality of Circular no. 7/2004 on the grounds that, through it, the Tax Administration did not merely interpret tax law, but rather created a new norm of tax incidence, in violation of articles 103.°, sections 2 and 3 and 165.° section 1 subparagraph i) of the Constitution.
The question was recently examined by the Constitutional Court, in the scope of Case no. 42/2014, of 9 January, which decided as follows:
The problem was already raised and examined in this Court, deciding in Judgment no. 583/2009 that the prescriptions contained in Circulars of the Tax Administration, regardless of their persuasive effect in the practice of taxpayers, do not constitute norms for purposes of the system of constitutionality control entrusted to the Constitutional Court. It is stated in that judgment:
"Since Judgment no. 26/85 (published in the Official Journal, II Series, of 26 April 1985) the Constitutional Court, with a view to identifying the appropriate object of constitutionality review proceedings, has been adopting a functionally adequate concept of norm to the system of control that the Constitution entrusts to it. This concept of norm encompasses acts of public authority that contain a "rule of conduct" for private parties or for the Administration, a "criterion of decision" for the latter or for the judge or, in general, a "standard for assessing conduct".
But, since this is a concept of control purposefully designed to ensure the system of legal protection typical of the constitutional democratic rule of law, it is not sufficient that the instrument in question binds the Administration to adopt, in the exercise of individual and concrete acts of application and as long as it does not alter it, a given criterion that it has established. It is necessary that this criterion be endowed with binding effect also for the other subject of the relationship (heteronomous normativity) and constitute a parameter that the judge cannot fail to consider unless he issues an instrumental judgment of invalidity regarding it. If the "criterion of decision" is of administrative origin and only binds within the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of constitutional supremacy that justifies the intervention of the Constitutional Court.
Now, a frequently raised problem in tax law is the normative relevance of so-called administrative guidelines. It is, as Casalta Nabais says, Tax Law, 5th ed., p. 201 (although stating that this does not deprive them of the quality of legal norms): "[…] internal regulations which, having as addressees only the tax administration, only this body owes obedience to them, being thus binding only for the organs hierarchically below the organ issuing them.
For this reason they are binding neither for private parties nor for courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating working methods or modes of operation, whether they are interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.
It is true that they densify, make explicit or develop legal provisions, previously defining the content of acts to be performed by the tax administration in its application. But this does not convert them into a standard of validity of the acts they support. In fact, the verification of the legality of acts of the tax administration must be effected through direct comparison with the corresponding legal norm and not with the internal regulation, which has interposed itself between the norm and the act".
These acts, among which "circulars" stand out, emanate from the power of self-organization and hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within their subjective scope (of the hierarchical relationship) that their observance is assured. They incorporate directives for future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are patterns of standardized decision-making, adopted to rationalize and simplify the functioning of services. Although indirectly they may protect the legal certainty of taxpayers and ensure equality of treatment through uniform application of law, they do not regulate the matter on which they bear in relation to these, nor do they constitute a rule of decision for courts.
The fact that the Tax Administration is bound (section 1 of article 68.°-A of the General Tax Law) by the generic guidelines contained in circulars in force at the moment of the tax fact and has the duty to proceed with the conversion of binding information or other types of understanding provided to taxpayers into administrative circulars, in certain circumstances (section 3 of article 68.° of the LGT), does not alter this perspective because it does not transform this content into a norm with external effect. It is true that the administered party may invoke, in relation to the administration, the content of the publicized administrative guidance and, if applicable, assert it before the courts, even at the sacrifice of the principle of legality (cfr. Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the principles of good faith and legal certainty, not because of its normative value, that the content of the circulars prevails. The administered party only complies with them if and insofar as it suits them, for the same reasons that justify that they can invoke binding individual information that favors them (article 59.°, section 3, subparagraph e) and article 68.° of the LGT).
Consequently, lacking heteronomous binding force for private parties and not imposing on the judge except by the doctrinal value they may possess, the prescriptions contained in the "circulars" of the Tax Administration do not constitute norms for purposes of the system of constitutionality control within the competence of the Constitutional Court."
All considered, it can be concluded that circulars, because they are legal norms that only bind Tax Authority officials, by reason of their duty of hierarchical obedience, because they have the nature of internal regulations, are not norms for purposes of examining their constitutionality. They express only the interpretation that the Tax Authority makes of a certain legal norm, thereby integrating the basis of the assessment in question.
In these terms, we conclude that the claim is not admissible insofar as it concerns the alleged unconstitutionality of Circular no. 7/2004.
2.2.2. Correction of the Claimant's Taxable Income
The divergence, as stated, resides in the qualification to be given to the investment of € 14,829,776.73 made by the Claimant, more specifically in determining whether such amount should be classified as "Remunerated Asset" or as "Other Assets" for purposes of applying the formula contained in Circular no. 7/2004.
It is important to analyze, in a first phase, the provision of section 2 of article 32.° of the EBF to subsequently be able to conclude on the guidelines contained in that Circular.
Law no. 32-B/2002, of 20 December, which approved the State Budget for 2003, once again altered the taxation regime for capital gains realized by SGPS companies with the disposal of equity interests, causing these gains to no longer contribute to the formation of taxable profit for IRC purposes. Parallel to this, the deductibility of capital losses was excluded, as well as the financial charges incurred by such companies for the acquisition of equity interests.
The reasons underlying this legislative amendment are made explicit in the State Budget Report for 2003. Under the heading "Main changes in IRC" and the subheading "Broadening of the taxable base and moralization and neutrality measures", it points to the exemption from IRC taxation of capital gains realized by SGPS with the disposal of equity stakes held for more than one year, accompanied by measures aimed at preventing abusive tax planning, bringing the national regime closer to the Dutch model, a measure associated with the establishment of a regime denying the deductibility, for purposes of determining the taxable profit of such companies, of charges of a financial nature directly associated with the acquisition of the corresponding equity interests (report accessible at www.dgo.pt).
Thus, the regime provided for in article 32.° of the EBF aimed to create a more competitive tax regime for SGPS, bringing the Portuguese regime closer to some international experiences considered more relevant[1], following many other legislative interventions relating to the taxation of that type of entity that had already occurred since the creation of its legal regime in 1988[2].
The fiscal disregard of the financial charges incurred by SGPS with loans obtained to finance the acquisition of equity interests aimed, therefore, to counterbalance the tax benefit granted to capital gains resulting from the disposal of such equity interests.
The concern for balancing underlying the provision in question, seeking to make a matching between gains/income (capital gains) and costs/expenses (capital losses) of SGPS, and the refusal of the accumulation of advantages, is stated by Luís Graça Moura in the following passage: "the legislator will have aimed at the attribution of a benefit – total exclusion from taxation of capital gains – which, however, was to be counterbalanced by the non-deductibility of certain financial charges incurred, creating an environment of neutrality between eventual gains with certain assets (certain financial investments[3]) and the liability necessary to create the conditions for the obtaining of such gains, that is, the liability related to the acquisition of such equity interests. The underlying construction would be that the contracting of such loans represented, potentially, an element capable of placing the SGPS in the position of realizing capital gains that it excluded from taxation (...)"[4].
The wording given by the State Budget Law/2008 to the then article 31.°, section 2, of the EBF (later renumbered to article 32.°)[5], was the following:
Article 31.°
Companies managing equity interests (SGPS) and venture capital companies (SCR)
1 (...)
2 Capital gains and losses realized by SGPS and SCR by means of the onerous transmission, whatever the title by which it operates, of equity stakes of which they are owners, provided that they are held for a period not less than one year, and, likewise, the financial charges incurred with their acquisition, do not contribute to the formation of the taxable profit of these companies.
3 (...)
This is the legal basis invoked by the Tax Authority to support the correction made.
In the context of the expanded reasoning presented by the Claimant, one of the questions that needs to be considered is whether the financial charges it incurred with the acquisition of equity stakes are or are not deductible pursuant to article 23.° of the IRC Code, that is, whether they are or are not indispensable for the obtaining of its revenue or maintenance of its source of income.
However, the question here at issue is not that one. What is at issue is the fiscal disregard of such charges, by virtue of a special regime that the legislator decided to provide for certain types of legal entities, namely SGPS.
We understand, contrary to what the Claimant advocates, that the legislator did not seek to reproduce sectorially the rule that already existed in article 23.° of the IRC Code - in the version in force in 2009 -, that is, the rule of non-deductibility of charges associated with revenue not subject to IRC.
The provision of the deductibility of financial charges, contained in subparagraph c) of section 1 of article 23.° of the IRC Code does not contradict the provision in section 2 of article 32.° of the EBF. Financial charges are, in general, a cost (expense) indispensable for the realization of revenue/income, pursuant to article 23.° of the IRC Code. Another matter is the exclusion of the deductibility of certain charges of that type, relating to SGPS[5].
In summary, the tax provision in question cannot be understood in the context of the general orientation contained in article 23.° of the IRC Code, since it is special law applicable to SGPS.
2.2.3. Circular no. 7/2004, of 30 March
Relying on an alleged difficulty in using the direct allocation method[6] and on the possibility of its manipulation by taxpayers, the Tax Administration understood that the financial charges incurred by SGPS to be charged to the acquisition of equity interests should be calculated by applying the formula provided therein.
This formula is based on the allocation of financing that gave rise to the global financial charges of the company, that is, the different types of assets held by an SGPS. The nature of such assets would make it possible to quantify the value of the financial charges deductible and not deductible for tax purposes.
As the Tax Authority states, section 2 of article 32.° of the EBF does not establish which method to use for purposes of allocating financial charges to the acquisition of equity interests. Thus, the Tax Authority understands that Circular no. 7/2004, of 30 March, "aims only to comply with the law, determining the method and the form of calculating the financial charges incurred with the acquisition of equity stakes."
The calculation formula adopted in such Circular is, apparently, very simple, but its application proves complex from the standpoint of the assumptions used in the classification of the items to be considered, since it rests only on the distinction between remunerated and non-remunerated assets and liabilities.
Now, the classification of active and passive elements between remunerated and non-remunerated finds no basis in the legal-accounting order (NCS – National Accounting Standards System). Therefore, it appears innovatively in Circular no. 7/2004. Thus, the Tax Authority should have defined what it understands by each of these concepts. However, it did not do so, limiting itself to listing examples of remunerated and non-remunerated active and passive elements.
Section 7 of such Circular states that "given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, such imputation should be effected on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and SCR should be imputed, firstly, to the remunerated loans granted by these to the companies in which they hold stakes and to other investments generating interest, with the remainder being allocated to the remaining assets, namely equity interests, in proportion to their cost of acquisition".
Section 8 of said Circular uses an example:
"Let us consider the following values of assets and liabilities (in euros) that constitute the balance sheet of an SGPS:
Asset values:
Remunerated loans granted - 50,000
Equity stakes (acquisition cost) - 20,000
Other assets - 10,000
Liability values:
Remunerated loans obtained - 90,000
According to point 7, we have:
Remunerated liabilities imputable to remunerated loans granted: 50,000
Remunerated liabilities imputable to other assets: 90,000 - 50,000 = 40,000
Remunerated liabilities imputable to equity stakes:
20,000 ─────────────── 30,000
X ─────────────── 40,000
With X = 26,666.67
Assuming that the financial charges incurred in the year amounted to € 1,800, the portion of charges imputable to equity stakes would be:
90,000 ─────────────── 1,800
26,666.67 ─────────────── X
X = 533.33"
The Circular thus proceeds to a bipartite classification of assets, distinguishing between "remunerated assets" and "other assets". However, it does not define what it understands by each of these concepts.
And this definition would be imperative given that there is, or can scarcely be, a direct factual relationship between the total funds obtained, which involved the payment of interest, and the funds invested in the acquisition of equity interests.
There may be assets that have no associated revenue and that do not refer to the acquisition of equity interests.
The question thus posed is whether, within the framework of the application of such formula, the interested party can be permitted to prove that it incurred financial charges that should be associated with assets that, although not remunerated, are not equity stakes and, for that reason, should not be disregarded for tax purposes.
We believe we can find sound support for our answer in the jurisprudence of the Constitutional Court[8]:
"It is considered that in cases where there is the possibility of direct allocation, it should not be set aside, that if the ratio legis of the norm provided for in section 2 of article 31.° of the EBF passes to ensure the validity of a regime of neutrality of revenue and costs associated with capital gains excluded from taxation, ensuring that to revenue not relevant fiscally should correspond, respectively, that the cost associated with it is also fiscally irrelevant, then, thus being, to achieve such aim, any method (direct or indirect) is good as long as it guarantees the preservation of the said ratio legis."
Thus, for the calculation of financial charges not deductible, because associated with the acquisition of equity interests, any method (direct or indirect) is acceptable provided that it guarantees that the costs associated with revenue not subject to taxation are not fiscally deductible.
It is, therefore, perfectly legitimate to use the formula contained in the Circular, but it must be "corrected" as necessary so that the ratio legis of section 2 of article 32.° of the EBF is fully respected.
This is to say that the adoption of the formula recommended by the Circular does not bind the taxpayer to the consequences derived from it, when these result contra legem.
With the Judgment of the Administrative Court of Appeal (TCAN) of 15 January 2015, Case 00946/09, reporter Mário Rebelo: the fact that in its methodology it used the criteria recommended in circular no. 7/2004, of 30 March, in particular its sections nos. 7 and 8 does not save the legality of the operation, since the criteria and assumptions for allocating remunerated liabilities of SGPS manifestly exceed the content of article 31./2 of the EBF creating presumptions and proportional calculations that the legislator manifestly did not assume nor consent to.
It is manifest that the legislator "did not assume nor consent" that financial charges incurred by an SGPS, associated with assets that, although not remunerated, are not equity interests, be considered as non-deductible.
Such a limitation on the deductibility of costs (such a distortion of the principle of taxation of actual income) cannot be imposed by a Circular, primarily because doing so would violate the formal dimension of the principle of legality in the creation of taxes.
In the present case, the Claimant, as a result of the annulment of the "…", decided not to accept the transformation of its credit against B… SGPS, SA into the subscription of a bond loan, with bonds subject to the payment of interest[7], instead opting for the reimbursement of the amounts paid.
It must first be stressed that the Claimant can never realize capital gains or losses with the disposal of the equity interests in question (those which it intended to acquire within the scope of the "…"), since it never acquired them nor will be able to acquire them in the future.
Therefore, the relationship provided for in section 2 of article 32.° of the EBF will never occur.
Since the asset (the credit against B… SGPS, SA) is not capable of generating a capital gain, the interest associated with the bank loan that financed this asset cannot be disregarded for tax purposes.
Secondly, from a legal perspective, everything should proceed as if the contract entered into, aiming at the acquisition of shares, had never taken place, given the retroactive effects that the law provides for the annulment of a contract (article 289.°, section 1, of the Civil Code). With Heinrich Hoerster, The General Part of the Portuguese Civil Code, 1992, p. 590, since the effects of annulment retroact to the moment of execution of the transaction, in principle everything proceeds as if the transaction had never been executed. Hence, the judgment of annulment, in destroying the legal effects produced (provisionally, to be sure) has a constitutive character – unlike the judgment regarding a void transaction.
The application of such legal command does not result contradicted by the provision in article 38.°, section 1, of the LGT, since the transaction executed ("…") did not come to produce the economic effects intended by the parties, because the Claimant, despite the partial payment made, never became the owner of the shares which, through such means, intended to acquire.
Therefore, legally, it is irrelevant for the evaluations to be made, regarding the years in question, the fact that such investment was, initially, directed to the acquisition of equity interests.
Finally, from an accounting perspective, we have that, after the annulment of the "…", the Claimant should reclassify accountingly the amount paid for the acquisition of equity stakes and, as of the date of the inspection, the same should be classified as a right against third parties, and should, given its residual nature, be recognized in account 26.8 – other debtors, just as it did.
It is true that this credit cannot be considered a remunerated asset, since it truly is not. It is, for purposes here relevant, an asset that was reclassified, ceasing to be considered an investment in equity interests and becoming a credit of a general nature.
Now, as we have seen, Circular no. 7/2004 does not contemplate the existence of non-remunerated assets that are not equity interests. But, for the reasons already sufficiently explained, such an omission cannot have as a consequence that they should be considered as "other assets" (remunerated) for purposes of calculating the interest that is fiscally deductible.
3. Accounting for Interest "Due"
Here a distinction must be made between two types of interest.
We have, first, the interest made available to the Claimant by B… SGPS, SA.
The existence of such interest is irrelevant to the question at issue, since, the Claimant having not accepted the conversion of the amount paid to B… SGPS, SA into a bond loan, it would make no sense to receive such interest (which it did not) and, much less, to recognize them as revenue in its accounts.
Regarding default interest, it should be noted that the annulment of a contract does not imply the payment of interest regarding amounts to be returned, since section 1 of article 289.° and article 290.° of the Civil Code only obligate restitution, simultaneously, of what was paid.
The existence of the obligation to pay default interest also has nothing to do with the onerous or gratuitous character of a given legal transaction (that is, whether a remunerated or non-remunerated asset is at issue, in the language of Circular no. 7/2004), but rather with the late performance of an obligation.
B… SGPS, SA., was judicially called upon to proceed with the return of the sum paid by the claimant. Only from then on can there be default in the performance of the restitution obligation which, eventually, will fall upon B… SGPS, SA (now D… SGPS, SA) and, consequently, the obligation to pay such interest.
In any case, the question of whether there was non-performance and, consequently, whether there will be an obligation to pay interest, is still an open question, since the condemning judgment delivered in first instance has not yet become final.
Thus, we understand that, given the uncertainty associated with the right to receive default interest, the Claimant should not have considered financial revenue in each accounting period, since article 18.° of the IRC Code, which imposes the regime of periodization of income and expenses, in compliance with the principle of periodization of income and expenses, does not lead to the recognition of revenue that is hypothetical or merely potential, uncertain in its amount and timing of recognition.
4. Charges Incurred with the Guarantees
The Claimant further requests that the Tax Authority be condemned to the payment of the amounts incurred with the constitution and maintenance of three bank guarantees with a view to suspending the execution proceedings, in the amount of € 5,490.02.
The Claimant attached the documents evidencing the constitution of the guarantees, as well as the payments it incurred up to the date of the initiation of the present proceedings (cfr. points Q and R of the factual matters).
Bearing in mind that the guarantees were constituted only because of the assessments whose illegality is now decreed, the Tax Authority should indemnify the Claimant for the amounts referred to above.
5. Decision
In accordance with and for the reasons set forth, the Arbitral Tribunal decides:
a) Not to admit the request for declaration of unconstitutionality of Circular no. 7/2004, due to legal impossibility.
b) To uphold the claim and, in that sequence, to annul the additional IRC assessments for the years 2010, 2011 and 2012 and the respective compensatory interest, whose total amount is € 304,515.24, due to the illegality of the corrections made by the Tax Authority to the taxable income relating to the Claimant company, on the understanding that the financial charges incurred are fiscally deductible, imputable to its credit against B… SGPS, SA.
c) To condemn the Respondent to the payment of indemnification corresponding to the amounts that the Claimant incurred with the constitution and maintenance of the guarantees provided for the suspension of the execution proceedings, in the amount of € 5,490.02.
6. Value of the Case
In accordance with the provision in article 315.°, section 2, of the Code of Civil Procedure (CPC) and article 97.°-A, section 1, subparagraph a), of the Code of Procedure for Tax Matters (CPPT) and article 3.°, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 310,005.26 (three hundred and ten thousand and five euros and twenty-six cents).
7. Costs
Pursuant to article 22.°, section 4, of RJAT, the amount of costs is set at € 5,508.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 16 August 2016
The arbitrators
Maria Fernanda Maçãs
Paulo Lourenço
Artur Maria da Silva
[1] Júlio Tormenta, Companies Managing Equity Interests as an Instrument of Tax Planning and its Limits, 2011, pp. 73 to 95.
[2] Decree-Law no. 495/1988, of 30 December.
[3] Now designated as "financial investments".
[4] Luís Graça Moura, The "New" Taxation of Income of SGPS: Reflections on the Taxation of Capital Gains in the Framework of the Principle of Legal Certainty, in Legal Journal of the Portucalense University Infante D. Henrique, no. 10, March 2003, p. 122. 5 Republication effected by Decree-Law no. 108/2008, of 26/06.
[5] Provision whose conformity with the Constitution was affirmed by the Constitutional Court in its Judgment no. 42/2014, already cited, in which it was decided "not to declare unconstitutional the norm contained in article 31.°, section 2, of the Tax Benefits Statute, in the version given by Law no. 32-B/2002, of 30 December, insofar as it imposes the fiscal non-deductibility of financial charges incurred with the acquisition of equity stakes as soon as these are incurred, regardless of the realization of capital gains exempt from taxation with the disposal of such equity stakes".
[6] Which would be that of direct allocation. In practice, the use of such method would be extremely complex, as it would require rigorous cost accounting and, even so, difficult to validate by its adopters.
[7] Which would make undisputable the classification of such asset as remunerated.
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