CFEI Tax Credit for Tangible Fixed Assets and Investment Properties – IRC 2013 | CAAD 748/2016-T

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), António Martins and Américo Brás Carlos, gathered at the Administrative Arbitration Center to form an Arbitral Tribunal hereby agree on the following:

ARBITRAL DECISION

Report

1. A…, SA., legal entity no. …, with registered office in …, …, …, …, …-… Covilhã;

1.1. B…, SA., legal entity no. …, with registered office in …, no. …, … and …, … Viana do Castelo;

1.2. C…, SA., legal entity no. …, with registered office in …, …, … …, Madeira;

1.3. D…, SA., legal entity no. …, with registered office in Rua …, s/n, … … Azores,

Hereinafter "Claimants" hereby, pursuant to paragraph (a) of section 1 of article 2 and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters – RJAT) submit a request for an arbitral pronouncement directly on the dismissal of administrative appeals regarding the acts of self-assessment of corporate income tax (IRC) for the year 2013 and indirectly on the legality of said acts of self-assessment of IRC, insofar as the tax benefit designated as Extraordinary Fiscal Credit for Investment (CFEI), approved by Law no. 49/2013, of 16 July, was not computed.

The request is presented as a coalition of claimants and in relation to the different acts of dismissal, express (in the first two cases) and implicit (in the remaining cases) of administrative appeals presented by the Claimants (doc no. 4).

3.1. In exercise of the option to designate an arbitrator provided for in paragraph (b) of section 2 of RJAT and in compliance with the provisions of paragraph (g) of section 2 of article 10 and section 2 of article 11, likewise of RJAT, the Claimant designated as Arbitrator His Excellency Professor Doctor António Martins.

3.2. The request to constitute the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 29-12-2016.

3.3. Pursuant to the provisions of paragraph (b) of section 2 of article 6 and section 3 of article 11 of TJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, and within the period provided in section 1 of article 13 of RJAT, the highest-ranking official of the Tax Authority Service designated as Arbitrator His Excellency Professor Doctor Américo Brás Carlos.

3.4. By agreement, the arbitrators appointed by the parties designated as president of this Arbitral Tribunal Counsellor Dr. Maria Fernanda dos Santos Maçãs who, within the applicable period, accepted the appointment.

3.5. On 20-02-2017, the parties were notified of this designation, in accordance with and for the purposes of section 7 of article 11 of RJAT, having raised no objections or requests.

3.6. In accordance with the provision of section 8 of article 11 of RJAT the collective Arbitral Tribunal was constituted on 09-03-2017.

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

1. To support the request for arbitral pronouncement, the Claimants allege, in summary, the following:

a) Wrongfully the AT understood that the acts of self-assessment in question did not suffer from any error or irregularity since the investments made in real property classified for accounting purposes as investment properties would not meet the definition of tangible fixed assets contained in NCRF 7 and, thus, would not benefit from CFEI.

b) For this reason, the administrative appeals presented were subject to dismissal without the AT, in concrete terms, taking into account the specific characteristics of the activity developed by the Claimants and the use, economic function and essentiality in the pursuit of that activity of the real property held by them, with the AT's examination having to start from an economic-functional and systematic perspective of the accounting normalization system and not from a partially literalist view of the accounting concepts in question, entirely unsuitable for reflecting the legislator's intention in establishing CFEI.

c) The Claimants nonetheless carried out the said investments in 2013, having timely presented the corresponding Model 22 declarations and effected payment of the tax resulting therefrom, without, in those same declarations, computing the tax benefit referred to, which is now being advocated.

d) The Claimants are engaged exclusively in the operation of the shopping centers of which they are owners, and are part of Group E….

e) These are, in all cases, shopping centers well established and known to the local populations, which, as is well known, play a relevant role in the economy of the areas in which they are located and which have, in general, shown great resilience, justifying a continuous commitment to their renovation and expansion.

f) Taking advantage of their place in a group of companies dedicated exclusively to the creation, construction, promotion and management of shopping centers, the activity of the Claimants does not translate into the mere leasing of spaces, of "bare walls," in commercial buildings; but comprises a multifaceted set of services connected with the cession of commercial spaces, both upstream, beginning with the conception of such spaces and the definition of their respective tenant-mix, as well as downstream, in the provision of security and architecture services and also as a financial partner.

g) During the year 2013, the Claimants undertook very substantial investments, consisting basically of renovations of existing assets, in physical expansions of the shopping centers themselves, adding, in either case, much value to their patrimony, generating activity in the economy and, likewise, contributing, with their share, to job creation.

h) The activity developed by the Claimants regarding the management of shopping centers has an eminently active character, not being limited to the mere cession of spaces for commercial operation by third parties. Indeed, the Claimants and the other companies in the E… universe:

• continuously monitor the activity of their shopping centers, analyzing, on a recurring basis, their main operational indicators, such as traffic and sales volume, in order to perceive whether their offer constantly adapts to the needs of their visitors;

• prepare market studies to assess the level of satisfaction of customers/visitors, so that, if necessary, it be restored to desirable levels;

• actively manage the tenant-mix, seeking to maintain diversity and introducing new concepts that energize the commercial offer;

• in times of greater economic uncertainty, encourage shopkeepers to occupy spaces in shopping centers, through participation in part of their investment;

• prepare investment diagnostics, which allow identifying the actions necessary to ensure rational use of space and resources;

• identify expansion opportunities, which allow increasing leasable area and introducing new concepts, activities and brands;

• strive to periodically renew the image of spaces, adapting them to new trends and having as ultimate goal the increase in comfort of visitors;

• with the objective of meeting the specific needs of consumers, develop and execute dedicated promotional actions, aimed at encouraging visits from end users, increasing their involvement and confidence in the commercial space; an example of this is the recent commitment to installing children's playgrounds in various shopping centers to better follow consumer trends and enhance their shopping experience.

i) That is, the shopping centers of the Claimants are unique spaces, which obey their own rationality, and not atomized clusters of commercial establishments with no connection between them; rather they offer a product to consumers, consisting of a commercial space where they can find everything from post offices, citizen offices, through stores and leisure spaces.

j) The shopping center likewise has immediate clients that generate revenues that have nothing to do with strictly speaking commercial spaces: the users of leisure spaces or others and advertisers that pay to advertise in "mupis" and other advertising spaces made available in their shopping centers.

k) This orientation of the Claimants' activity toward the shopping center visitor has a particularly evident expression in "shopping center space utilization contracts," under which a mutual commitment is established between the shopkeeper and the respective owner which translates, for the former, into subjection to the commercial and management policy outlined for the shopping center and, for the latter, often, in the assumption of the success or failure of the first's business. Indelible features of that commitment are, e.g., the following contractual stipulations:

• The so-called fit-outs or participation of the owner in the construction, adaptation of more attractive stores, such as major international chains like … or …;

• The setting of variable rents dependent on the volume of sales of shopkeepers;

• The obligation for shopkeepers to have their projects for work carried out in their stores previously approved by the architects of the Claimants;

• The impossibility of transfer of their contractual position by shopkeepers without prior authorization of the Claimants;

• The need for collaboration of shopkeepers in the overall marketing policy outlined by the Claimants for the shopping centers.

l) What has just been set forth confirms not only that the shopping centers are affected by and constitute the very "operation" of the Claimants, but also that this operation is dynamic, focused on the visitor of the shopping center and perhaps more committed to this end customer than the majority of purely retail activities developed by traditional retailers, which, paradoxically, do not raise doubts (when exercised in premises occupied by them) regarding the applicability of the tax incentive being analyzed in this request for arbitral pronouncement.

m) In 2013 Law no. 49/2013, of 16 July (hereinafter, "LCFEI"), was published, where an extraordinary fiscal credit for investment (CFEI) was established that translates into a deduction from the IRC collection in the amount of 20% of investment expenses in assets affected to operation that were made between 1 June 2013 and 31 December 2013 and that did not exceed €5,000,000.00 per taxpayer.

n) On the subjective side, the Claimants fully observe the conditions set forth in article 2 of LCFEI to benefit from this tax benefit.

o) Already on the material side, that is, specifically regarding the type and nature of investments eligible for computation of the benefit, we would have to be in the presence of assets (cf. article 4):

• Affected to operation;

• Acquired in new condition and that enter into operation or utilization by the end of the taxation period that begins in or after 1 January 2014;

• That are tangible fixed assets, biological assets or intangible assets, including not only patents but other types of industrial property such as trademarks, licenses and other assimilated rights; and

• That are not susceptible to utilization in the personal sphere, which would be the case with expenses for the construction, acquisition, repair and extension of buildings when affected to productive or administrative activities.

p) At the outset the conditions for eligibility of the Claimants' investments in light of CFEI would be met:

• The Claimants comply, as has already been explained, with all the subjective conditions for access to the regime;

• Investments were made in the period from 1 June 2013 to 31 December of the same year;

• These are investments in fixed assets, corporeal (tangible, in the "physical" sense of the term) that were integrally affected to productive or administrative activities of the Claimants; moreover: they were affected to the only activity exercised by the Claimants.

• They are not susceptible to being used for private purposes;

• They entered into operation or utilization by 31 December 2014.

q) But, against what is provided in article 9 of the Civil Code, by referral of article 12 of LGT, they were not weighed and summoned to the interpretive task, specifically the systematic and teleological elements, in a demonstration of total indifference to the extra-fiscal purposes of the benefit in question (cit. Castanheira Neves, Legal Methodology – Fundamental Problems, BFDUC, Coimbra Editora, 2011, pp 104 and 105).

r) From the accounting point of view, investment expenses in any of the shopping centers held by the Claimants have, in fact, been recognized as "investment properties" pursuant to the Accounting and Financial Reporting Standard (NCRF) no. 11, not being therefore recorded as "tangible assets."

s) However, contrary to what the same classification seems to denote, to the apparent formal dichotomy tangible asset/investment property, there does not underlie the same substantial dichotomy; in other words: although intended to be recorded as investment properties (cf. copy of the balance sheet of one of the companies in the group), the investment expenses in their shopping centers already made and to be made by the Claimants do, in substance, meet the definition of tangible asset, in addition to, as we have already seen, corresponding faithfully to the ratio legis of LCFEI.

t) Indeed, a somewhat more careful reading of the norms in question reveals that the material scope of investment properties presents a clear area of intersection with the category of tangible assets, to the exact extent that these can, likewise, be leased, being, as will be seen shortly, the criterion for distinction between the assets that remain in the classification as tangible assets and those that are susceptible to recognition in that first category the circumstance of whether or not they are occupied by the owner.

u) Under the aegis of the Official Chart of Accounts (POC), the shopping centers held by the Claimants clearly fell within Class 4 of fixed assets, account # 42, which integrated the "tangible elements, movable or immovable, that the company uses in its operational activity, that are not intended to be sold or transformed, with a character of permanence greater than one year" (Cf. Explanatory Notes).

v) The distinguishing feature between this account and account # 414 ("investments in real property") was well marked: the latter encompassed urban buildings that were not affected to the operational activity of the company, while the first encompassed the "factory, commercial, administrative and social buildings," which means that, in all probability, had the POC been maintained in force until the relevant period, the LCFEI would have encompassed in the core of eligible investments the goods of corporeal fixed assets, a category in which the shopping centers of the Claimants would appear.

w) What happened in the area of the Tax Regime for Investment Support (RFAI), instituted by Law no. 10/2009, of 10 March, reinforces that conviction. In its original version, this incentive, although directed essentially to the productive sector, encompassed any investments in corporeal fixed assets, including construction, repair and extension of buildings and other constructions as long as they were affected to industrial or administrative activities (cf. paragraph (a) of section 2 of article 2).

x) More recently, this tax benefit was subject to deepening and extension, having been integrated into the Tax Code for Investment (Decree-Law no. 82/2013, of 17 June). However, regarding tangible fixed assets, the legislator seems to have wanted to leave its scope untouched, having only updated the relevant terminology in accordance with SNC; thus, where "corporeal fixed asset" was read, it now reads "tangible fixed assets."

y) That is, although it is not easy to imagine, in the productive context, an investment property affected to operation (contrary to what happens with shopping centers), this translation into the new accounting language without any reservation as to investment properties indicates that the RFAI legislator would have entirely reclassified that primitive concept (corporeal fixed asset) into this more recent one (tangible fixed asset).

z) Already the IRC legislator, who undertook an extensive adaptation of this tax to SNC, would have perceived the singularity of investment properties in accounting terms, but when it came to providing for depreciation of all these assets did not provide a distinct regime for tangible fixed assets and for investment properties recorded at historical cost that, with systematic character, suffer losses in value resulting from their use over time (cf. section 1 of article 29 of CIRC).

aa) This provision is further complemented by section 2 of article 1 of Regulatory Decree no. 25/2009, of 14 September, according to which depreciation is only considered from the entry into operation or utilization of those same investment properties subject to depreciation and tangible fixed assets, which inculcates that, in IRC, investment properties with those characteristics and tangible fixed assets merit, in principle, a parity of treatment.

bb) In reality, if we pay attention to the definition of tangible fixed asset contained in paragraph 6 of NCRF 7 we immediately understand the reason for this homogeneity of treatment: "tangible fixed assets are tangible items that: (a) are held for use in the production or supply of goods or services, for leasing to others, or for administrative purposes; and (b) are expected to be used during more than one period."

cc) Given this definition, it is evident that, when viewed in isolation – that is, without taking into account the provisions of NCRF 11 – NCRF 7 would impose the classification of the shopping centers of the Claimants as tangible fixed assets, whether because the use of the fractions of shopping centers is ceded to shopkeepers, or because the corresponding contracts of cession of operation or of use carry with them a bundle of services associated with the shopping center itself and which are assured by the Claimants (security, architecture, cleaning, marketing), or even because the shopping center itself can be regarded, per se, as a global product or service that is offered to shopkeepers and that, for some (anchor stores), can even include financial participation in the business.

dd) Properly viewed, this comprehensiveness of the notion of tangible fixed asset confers upon it, in substance, precisely the character of a general category within the class of assets, of which investment properties will be a special type, which brings together the tangible fixed assets that meet certain characteristics.

ee) This inference does not, it is true, proceed from an express ordering in accounting law of investment properties as a subcategory of the category of tangible fixed assets, but rather from the logical exegesis of said paragraph 6 of NCRF 7 when it alludes to "leasing" in the broad terms in which it does; if an investment property is not occupied by the owner (as mentioned in NCRF 11) it is because it is leased or vacant and therefore because accounting norms are Law and, as such, are interpreted in harmony with legal canons, from the point of view of their ratione juris it cannot fail to be subsumed in the definition of tangible fixed asset.

ff) Now, according to NCRF 11, investment property is land, a building or part of both held (by the owner or by the lessee in a financial lease) to earn rentals or for capital appreciation or both, and not for (a) use in the production and supply of goods or services or for administrative purposes, or (b) sale in the ordinary course of business.

gg) The investment property that, being held by the owner or by the lessee in a financial lease is intended for use in the production and supply of goods or services or for administrative purposes is designated as owner-occupied property (cf. paragraph 5) and it is precisely this criterion – that of owner-occupation – that founds, according to the official reviewer of accounts of the claimants and, in general, with the opinion of all companies in the group of companies denominated "F…" of audit, the accounting of shopping centers as investment properties and not as tangible fixed assets.

hh) This judgment has its essential basis in the provision of paragraph 9 of NCRF 11 which circumscribes, by negative delimitation, a set of situations of properties that cannot be recorded as investment properties, establishing, specifically, that owner-occupied properties are to be accounted for as tangible fixed assets.

ii) What could be inferred from this, in conjunction with the fact that the income and activity of the owners of shopping centers translates essentially into obtaining something similar to rents – the consideration for the cession of the use of commercial spaces – would be that properties leased by their owner, regardless of whether they constitute the fulcrum of the activity of their holders and the active nature of that activity – by contrast with a type of "bare walls" leasing typically passive – would always be qualified as investment properties.

jj) But, if we look more carefully, such an inference cannot be drawn from the rules of legal hermeneutics, because it is not permissible to deduce from the circumstance that owner-occupied properties cannot constitute investment properties that all properties that are not such would necessarily have to display this latter classification, especially if it is a matter of properties through which it is manifest that their holder provides other services (as is the case with shopping centers).

kk) The difficulty of classifying shopping centers is thus manifest and has been a source of controversy. On one side of that controversy, the Accounting Standardization Commission (CNC) has been arguing, in a question posed by a company (the so-called FAQ 16, published on the CNC website) that an entity that holds real property for income, whether or not that is its principal activity, should, in the corresponding accounting treatment, observe the provisions of NCRF 11 – investment properties.

ll) NCRF 11 should be understood as a special regime in relation to the general and residual regime of NCRF 7 for leased real property, just as, for example, the regime of urban leasing is a special regime of leasing; now, a property subject to the first does not lose, by that fact, its general nature of leased property, just as an investment property, by being one, does not cease to constitute a tangible fixed asset.

mm) The understanding that investment properties are a subtype of tangible assets appears to be supported in the recent proposal of the Bill for the State Budget for 2017 (370/2016, of 13 October), which provides, regarding section 10 of article 48 of CIRC that "are not susceptible of benefiting from this regime investment properties, even if recognized in accounting as a tangible fixed asset."

nn) If the legislator is not bound by accounting recognition when accounting recognition translates a formal garb that does not correspond to the material substrate that the legislator wants to protect or promote, it will not, likewise, be constrained before a formal treatment of an asset that does not permit a tax advantage whose fruition its material substrate and function claim.

oo) The aforesaid position of the CNC – which, it should be noted, has no legal value – has been rebutted among us by Prof. Ana Rodrigues (Professor of Accounting at the University of Coimbra and Member of the Commission of the 2014 IRC Reform), who argues, in relation to leased real property as the principal activity of the lessor, that:

• The leasing within the principal activity of an entity constitutes a true provision of services (cf. p. 7, doc. no. 11);

• "If the letter of the norm has some indeterminacy, it nonetheless allows that by appealing to economic substance it is possible and should classify properties (real property) appropriately. Thus, if the letter of the norm does not prevent that classification more substantive of said goods, since the meaning to be attributed to it should be that which proves most adequate to pursue the end that was sought to be ensured with this provision. The ratio of the norm could not be that which was adopted in the FAQ, given that leasing can constitute a true economic activity (page 7)";

• "It is justified, then, to perceive the incoherence of the normative provisions both of NCRF 11, as of IAS 40, since if the principal activity of the entity is the leasing of machines, these are recognized as tangible fixed assets. If that principal activity is the operational leasing of real property should these not have the same accounting classification as in the previous case? Will it make sense that in the latter case these goods should be considered investment properties and not tangible fixed assets?".

pp) This thesis, which distinguishes between the obtaining of rents as a principal activity (recommending the accounting of the corresponding assets as tangible) and as a mere accessory financial investment, is embraced in NCRF 11 itself, when in its paragraph 7 it provides that: "Investment properties are held to earn rentals or for capital appreciation or both. As a result, investment properties generate cash flows that are highly independent of the other assets held by an entity. This distinguishes investment properties from owner-occupied properties."; now, the only assets and the source generating cash flows for the claimants are the shopping centers, whereby these are not, materially, their investment properties.

qq) This is a doctrinal quarrel that has undoubtedly been fueled by the fluidity of concepts of NCRF 11, which is admitted in the norm itself, particularly in paragraphs 11 to 14.

rr) In NCRF 11 it is recognized that the approach to the notion of owner-occupied property – and therefore, to the class of tangible assets – will be greater the greater the importance of the component of services provided by the lessor beyond the leasing, being admitted, for example, that a hotel can be accounted for as being "owner-occupied," to the extent that in it such other services are provided substantially.

ss) The similarity of the situation of hotels with that of shopping centers is undeniable and has already been recognized by our superior courts and by the AT itself in the area of VAT, by clearly discerning, for the purposes of defining the scope of VAT exemption for leases, a contract of leasing of "bare walls" from a contract of cession of space in a shopping center in which its mixed nature is the most salient datum, justifying its full subjection to VAT (cf. Process: no. 2783, dispatch of the SDG of Taxes, legal substitute of the Director General, on 2011-12-20).

tt) In the same line have positioned our superior courts, by clearly distinguishing what is a leasing of "bare walls" from the active operation of a real property with a set of associated services, without which the utilization of the space becomes useless, by not serving the end for which it is intended (cf., among all, Decision of TCAS, Proc. 06375/13, of 05/07/2013).

uu) In shopping centers, cash flows are generated mainly by the amounts charged for the cession of spaces to shopkeepers – which comprise fixed amounts and variable amounts, which constitute true "participation in the shopkeeper's business," something at the antipodes of mere leasing and capital appreciation – while the amounts charged for the provision of services (security, cleaning, etc.) are complementary to those flows.

vv) Although the cession of the spaces of the shops, one cannot, in good rigor, say that the shopping centers are not occupied by the owner: it is he who defines hours, management, security, mix of stores; it is he who occupies the areas dedicated to leisure and entertainment; it is he who is responsible for advertising the shopping center.

ww) Hence, even if it were decisive for the benefit of CFEI that the shopping centers were occupied by the Claimants – which is not conceded – the truth is that they would only be investment properties if the volume of services provided were insignificant in relation to the agreement as a whole (cf. paragraph 11, NCRF 11), which, as is manifest, is not the case.

xx) From all that has been said the Claimants conclude that:

• The accounting recognition of investments in a shopping center as elements of an investment property cannot lead to their exclusion from the scope of CFEI if the same are affected to operation and, in substance, fulfill the purpose of the same CFEI and can be qualified as tangible fixed assets;

• The shopping centers of the Claimants meet not only substantially but also literally the definition of tangible fixed assets;

• Shopping centers should be understood as assets integrated in the general category of tangible fixed assets, even if their subjection to the special accounting discipline of investment properties could be defensible;

• By constituting the principal activity of the Claimants, the shopping centers are situated in the frontier zone between accounting in the terms of NCRF 11 and in the terms of NCRF 7;

• On the tax side, the legislator, doctrine and jurisprudence have distinguished shopping centers by the mixed character of the provision of service in them (in the determination of their status for the purposes of VAT and IMI, for example);

• An asset will not be investment property if: a) it does not generate cash flows highly independent of other assets held by an entity, b) the services provided to the occupant of a property are not insignificant in relation to the occupancy agreement as a whole (cf. NCRF 11);

• CFEI is applicable to investments made by the Claimant between 1 June 2013 and 31 December of the same year that meet the other conditions of the corresponding statute.

yy) The inaccessibility to CFEI by the Claimants due to the aforesaid accounting of investments as investment properties is illegal and unconstitutional by violation of the principle of equality (article 6 of EBF and article 104 of CRP) and potentially generative of distortions of the spirit of this tax benefit and of sound competition among companies operating in the same market, pursuing related activities and competing for the same target audience and violates, furthermore, the tax and accounting principle of the prevalence of substance over form.

4.1. The Claimants terminate by requesting:

"(…) the annulment of the acts of dismissal of administrative appeals whose legality assessment is required here, as well as of the acts of self-assessment of IRC above identified, insofar as they wrongfully did not consider the tax benefit to which the Claimants were entitled";

"Ordering the reimbursement of the tax resulting therefrom;

"The payment of indemnificatory interest for the deprivation of the amount of tax wrongfully paid by the Claimants from the date of presentation of the appeals sub judice to the date of reimbursement of the tax that is due."

1. The Tax and Customs Authority submitted a response and attached the administrative file, invoking in summary, the following:

a) The reasons of fact and law invoked by the Claimants are far from substantiating any of the claims formulated, which should fail, first and foremost, on grounds of merit, whereby it defends by contestation in the terms that follow.

b) Law no. 49/2013, of 16 July, established an Extraordinary Fiscal Credit (CFEI).

c) The statute defines in its article 2 the scope of subjective application and establishes in section 1 of article 3 that the tax benefit to be granted corresponds to a deduction from the IRC collection in the amount of 20% of investment expenses in assets affected to operation, which are made between 1 June 2013 and 31 December 2013.

d) Are considered, pursuant to section 1 of article 4, investment expenses in assets affected to operation, those relating to:

• Tangible fixed assets (AFT); and

• Biological assets that are not consumable (ABP)

acquired in new condition and that enter into operation or utilization by the end of the taxation period that begins in or after 1 January 2014.

e) It is thus verified, in accordance with the normative indicated, that for the purposes of CFEI only investments in assets affected to operation are relevant, being considered as such those relating to AFT (and not all, see the exclusions of sections 5, 6 and 7 of article 4) and ABP.

f) The tax legislator adopted accounting terminology to define the type of investments relevant within the scope of CFEI.

g) In the class of investments were excluded financial investments, investment properties, intangible assets (with some relevant for CFEI – see section 2 of article 4) and non-current assets held for sale, these investments not enjoying the benefit of CFEI.

h) According to what has been informed and sanctioned from above in the request for binding information no. 5596, investments in real property affected to the activity of operation of shopping centers are classified as investment properties.

i) NCRF 11 defines, in its paragraph 5, investment property as being the property (land or building, part of a building or both) held (by the owner or by the lessee in a financial lease) to earn rentals or for capital appreciation or both, and not for use in the production or supply of goods or services or for administrative purposes or for sale in the ordinary course of business.

j) The accounting definition of the concept of investment property attends solely to the objective of holding the real property (earning rentals or for capital appreciation or both).

k) The definition adopted did not attend to the activity developed by the entity according to the object of the entity, whether in the scope of the principal or secondary activity.

l) The Accounting Standardization Commission, the entity competent for issuing opinions on accounting matters in Portugal, issued FAQ 16 in which it states on this subject that "an entity that holds real property for income, whether or not that is its principal activity, should, in the corresponding accounting treatment, observe the provisions of NCRF 11."

m) Shopping centers are considered investment properties given that what is relevant in the contracts concluded with the occupants of those properties is the cession of space, with the services provided to them being of little significance in relation to the total of the contract.

n) Thus, in the particular case of shopping centers, the investment in real property is classified for accounting purposes as investment property in accordance with that established in NCRF 11, not meeting the definition of AFT contained in NCRF 7.

o) Whereby the understanding contained in binding information no. 5596 is supported, which merited the agreement dispatch of 15 October 2013 of the Subdirector General, with delegated competencies in the area of taxes on income, in which it was concluded that: "Given that the tax benefit contained in CFEI does not include investments made in investment properties, the investments made by G…, cannot benefit from the regime provided for in CFEI".

p) It is thus understood that the investment expenses made do not meet the prerequisites of article 4 of Law no. 49/2013, for the granting of the benefit, not meriting any censure the decisions placed in question by the Claimants, being able with the same not to agree, nevertheless, the same respect the applicable tax provisions in the case in question, as well as the underlying accounting principles.

q) Only in this way can legal certainty and equality among all citizens be ensured, as well as compliance with the principle of legality, to which the AT is bound, under the scope of its mission of pursuit of the public interest, as defense of the tax revenue of the State.

r) In these terms, the assessments sub judice, as results from all the exposition, are in accordance with the law in force and the taxation undertaken does not violate, rather concretizes, taxation by real income, entirely lacking the reasons and arguments expended by the Claimant in favor of, by it, desired claim for annulment of the tax acts in question.

s) As to the right to indemnificatory interest invoked by the Claimants, with the principal request failing, the interest request will necessarily also fail; and even if, without declining, the tax acts were annulled – which were practiced by the claimants – the computation of indemnificatory interest would have as its start date the date on which the decision occurred that dismissed the administrative appeal and never, the moment indicated by the Claimant in its request (cit. Jorge Lopes de Sousa, on the Civil Liability of the Tax Authority for Illegal Acts, Áreas Editora, Lisbon, 2010, page 52).

5.1. The Respondent terminates by requesting that the present request for arbitral pronouncement be judged as not successful for lack of proof, and, consequently, be absolved of all requests, all with the due and legal consequences.

1. On 14 May 2017 a dispatch of the following tenor was issued:

"1. Because there are no reasons that justify it, the Tribunal waives the holding of the first meeting provided for in article 18 of RJAT, which it does under the principles of the autonomy of the Tribunal in the conduct of the proceedings and in order to promote celerity, simplicity and informality thereof (cf. articles 19, section 2, and 29, section 2, of RJAT);

1. The request for production of evidence presented by the Taxpayer is granted as it refers strictly to the articles mentioned;

2. The request for change to the list of witnesses is granted, replacing the witness initially enrolled, Dr. H…, with the following witnesses:

I…, Head of Asset Management of Group E…, with professional domicile; …, …, P.O. Box …/…-… Maia Portugal;

J…, Head of Asset Management of Group E…, with professional domicile; …, …, P.O. Box …/…-… Maia Portugal;

1. For the purposes of holding the judgment hearing it is designated (under article 18 of RJAT) 5 June at 10:00 hours;

2. In the meeting the questioning of witnesses will take place, who should be presented by the Taxpayer;

3. In the meeting the date will be set for written submissions, unless the parties opt for oral submissions;

4. The request for attachment of technical opinion to the file is granted.

Both parties are hereby notified of this dispatch."

1. On 5 June 2017 the judgment hearing took place, where the questioning of witnesses enrolled by the Claimant was carried out. At the end of the hearing the Claimant and the Respondent were notified to present written submissions in successive periods and the date of 9-09-2017 was set for the purpose of issuing the Arbitral Decision.

2. Claimant and Respondent submitted submissions reiterating essentially the arguments presented in previous procedural documents.

Procedural Sanitation

1. The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (articles 4 and 10, section 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

As we have seen, the request for arbitral pronouncement is presented as a coalition of claimants and in relation to the different acts of dismissal, express and implicit, of administrative appeals presented by the Claimants, regarding the acts of self-assessment of IRC for the year 2013.

According to the provision in section 1 of article 13 of RJAT, the cumulation of requests even if relating to different acts and the coalition of claimants are admissible when the success of the requests depends essentially on the examination of the same circumstances of fact and on the interpretation of the same principles or rules of law, which is verified in the case sub judice.

In these terms, the said cumulation of requests as well as the coalition of claimants do not offer any censure.

The tribunal is competent and is regularly constituted.

The proceedings do not suffer from any nullities.

No exceptions were raised.

No other circumstances are verified that impede examination of the merits of the case.

Merits

III.1. Matter of Fact

1. Established Facts

10.1. With relevance for the examination and decision of the questions of merit raised, the following facts are given as established and proven:

• The Claimants are engaged exclusively in the operation of the shopping centers of which they are owners, and are part of Group E…, the largest operator of shopping centers in Portugal;

• The locations of shopping centers held or operated by E… extend from north to south of the Country, from Viana do Castelo (B…) to the Algarve (K…), also encompassing the archipelago of Madeira and the archipelago of the Azores;

• In their entirety, the shopping centers of E… in Portugal represented, as of 31/12/2012, a total leasable area of 616,506 m2, corresponding to 1,967 shops, and a global investment of 900 million euros, employing a total of approximately 23,950 people;

• During the year 2013, and with a view to the three-year period 2014-2016, the Claimants undertook investments aimed at renovations of existing assets, in physical expansions of the shopping centers themselves, generating activity in the economy and contributing to job creation (the expansion of k…, for example, generated, in 2013, more than 100 direct jobs) - doc. no. 7 attached by the Claimants;

• The said investments amounted, respectively, to €197,955.55, €195,130.80, €48,742.01 and €35,746.66 (docs no. 8 and 9, attached by the Claimants);

• The operation of shopping centers comprises the creation, construction, promotion and management of shopping centers;

• The activity of the Claimants does not translate into the simple leasing of spaces, of "bare walls," in commercial buildings;

• The activity of group E… is not exhausted in the mere construction of a commercial space, the placement next to the public of the respective fractions for utilization and the subsequent management of the condominium resulting therefrom;

• The activity of the Claimants comprises a set of services connected with the cession of commercial spaces, both upstream, beginning with the conception of such spaces and the definition of their respective tenant-mix, as well as downstream, in the provision of security and architecture services and also, sometimes, as a financial partner;

• In the companies in the E… universe, the activity of the owners/operators reflects an integrated approach to the business of shopping centers, comprising a set of activities related to their development, holding and management, with a view to providing not a simple set of commercial spaces, but an integrated space endowed with its own rationality and life;

• The activities developed by Group E… precede the very construction of the shopping center, beginning with market studies aimed at defining the population universes that the shopping center is intended to serve and the most suitable locations for its implementation;

• Market studies assess the needs of local populations with respect to the commercial offering (consumption habits and consumer profile), needs that determine the combination of activities and shopkeepers that shopping centers will offer;

• It is sought that this combination be diverse, but balanced, encompassing the sectors of fashion, restaurants, products for the home and leisure (which include cinema complexes, food courts, and other leisure services), without forgetting the increasingly important component of services (e.g., citizen store, post office, pharmacies, banks, health clubs, etc.), which allow conferring on the undertakings the necessary aspect of a convenience hub, of high value for end consumers;

• Once the combination of activities and shopkeepers is defined, the architecture project begins, which distributes those activities throughout the available space, taking into account the technical requirements of this type of undertaking. In parallel, the process of searching for and negotiating with local, national and international shopkeepers begins, which allows realizing the pre-defined commercial offering;

• At the pre-opening moment, marketing actions are carried out that allow proper communication with the local/regional population of the offering to be made available;

• The management of shopping centers also heeds the importance of the visitor/consumer/advertiser as an "indirect" client of the owner and also direct (specifically with respect to other common areas);

• The management activity carried out by the Claimants and the other companies in the E… universe comprises: i) continuously monitoring the activity of their shopping centers, analyzing their main operational indicators, such as traffic and sales volume, in order to perceive whether their offering constantly adapts to the needs of their visitors; ii) preparing market studies to assess the level of satisfaction of customers/visitors, so that, if necessary, it be restored to desirable levels; iii) actively managing the tenant-mix, seeking to maintain diversity and introducing new concepts that energize the commercial offering; iv) encouraging, in times of greater economic uncertainty, shopkeepers to occupy spaces in shopping centers, through participation in part of their investment; v) preparing investment diagnostics, which allow identifying the actions necessary to ensure rational use of space and resources; vi) identifying expansion opportunities, which allow increasing leasable area and introducing new concepts, activities and brands; vii) striving to periodically renew the image of spaces, adapting them to new trends and having as ultimate goal the increase in comfort of visitors; viii) developing and executing dedicated promotional actions, with the objective of meeting the specific needs of consumers, aimed at encouraging visits from end users, increasing their involvement and confidence in the commercial space, such as, for example, the recent commitment to installing children's playgrounds in various shopping centers to better follow consumer trends and enhance their shopping experience;

• The operation of shopping centers is dynamic and focused on visitors thereof, as results, among other actions, from the provision of gift checks or cards usable in any store of the shopping centers of the claimants and, more recently, from the "Promofans" digital platform, whose purpose is to, through negotiation between the owners of shopping centers (negotiation conducted centrally by companies of Group E… that provide the so-called property management services) and shopkeepers, offer significant discounts to their respective users;

• The orientation of the activity of the Claimants toward the visitor of the shopping center has a particularly evident expression in "shopping center space utilization contracts," under which a mutual commitment was established between the shopkeeper and the respective owner which translates, for the former, into subjection to the commercial and management policy outlined for the shopping center and, for the latter, often, into the assumption of the success or failure of the first's business;

• Striking features of those contracts are, for example, the following contractual stipulations: i) The so-called fit-outs, or participation of the owner in the construction, adaptation of more attractive stores, such as major international chains like … or … (stores...); ii) The setting of variable rents dependent on the volume of sales of shopkeepers; iii) The obligation for shopkeepers to have their projects for work carried out in their stores previously approved by the architects of the Claimants; iv) The impossibility of transfer of their contractual position by shopkeepers without prior authorization of the Claimants; v) The need for collaboration of shopkeepers in the overall marketing policy outlined by the Claimants for the shopping centers;

• The Claimants presented the corresponding Model 22 declarations timely and effected payment of the tax resulting therefrom without any tax benefit being computed in those same declarations.

10.2. There are no other facts with relevance for examination of the merits of the case that were not proven.

10.3. Substantiation of the Matter of Fact

The examination of the facts was based on the examination of the position assumed by the Parties, the documentary evidence (which includes the administrative file) and the opinion attached to the file.

Critical analysis of the testimonial evidence produced at the judgment hearing was also taken into account [especially as regards the framing, clarification and development of the facts contained in items g) to t) of the proven matters].

The witnesses testified, in essence, coherently, in a sustained manner and revealing of mastery of the reasons of knowledge relevant to the provision of information.

III.2. Matter of Law

III.2.1. Examination of the Legality of Self-Assessments

III.2.1.A) The Question

The present request for arbitral pronouncement is formulated by a set of entities, in coalition, in relation to different acts of dismissal of administrative appeals presented by them regarding the acts of self-assessment of IRC for the year 2013, with reference to the specific context of the development of their activity and the scope of application of the legal regime of CFEI.

As we have seen, the administrative appeals that were subject to dismissal (express and implicit) relate to the same legal issue pertaining to the scope of application of CFEI, with entities that develop, in general terms, the same activity of management and operation of shopping centers and whose assets are qualified, for accounting purposes, as investment properties.

This same question is now formulated in a single request for arbitral pronouncement because the Claimants do not conform to the content of the AT's decisions, to the effect of non-application of CFEI to investments made in assets registered as investment properties.

In synthetic terms we can say that the AT, starting from a literal reading of the applicable legal provisions, alleges that "[the] tax legislator adopted accounting terminology to define the type of investments relevant within the scope of CFEI." According to the AT, the acts of self-assessment do not suffer from any error or irregularity since the investments made in real property classified for accounting purposes as investment properties would not meet the definition of tangible fixed asset contained in NCRF 7 and, thus, would not benefit from CFEI.

The Claimants allege, for this reason, that the administrative appeals were subject to dismissal without the AT, in concrete terms, taking into account the specific characteristics of the activity developed by them and the use, economic function and essentiality in the pursuit of that activity of the real property held by them.

For the Claimants the AT's examination should have started from an economic-functional and systematic perspective of the accounting normalization system and not from a partially literalist view of the accounting concepts in question, unsuitable for reflecting the legislator's intention in establishing CFEI.

The Claimants conclude that the interpretive result reached after somewhat more detailed analysis than the mere fixation on the nomen juris in the accounting of said assets demands a different decision, having regard both to the very definition of tangible asset in SNC that determines the inclusion of the assets here in question in that category, and, at a higher level, to the form of interpretation of tax law as regards tax benefits, the constitutional principle of equality, protection of competition and the tax and accounting principle of the prevalence of substance over form.

Let us see.

III.2.1.A)1. Brief Historical-Accounting Excursion on Investment Properties (IP)

III.2.1.A)1.1. At the Time of the POC

At the time of the Official Chart of Accounts (POC), in the version established by Decree-Law no. 410/89, the following was established (underlining by the tribunal):

"Class 4 - Fixed Assets

This class includes goods held with continuity or permanence and that are not intended to be sold or transformed in the normal course of operations of the company, whether they are its property, or whether they are in a financial lease regime.

41 - Financial Investments:

This account integrates financial applications of a permanent character.

414 - Investments in Real Property:

It encompasses urban buildings and rural properties that are not affected to the operational activity of the company.

(…)

42 - Corporeal Fixed Assets:

It integrates tangible fixed assets, movable or immovable, that the company uses in its operational activity, that are not intended to be sold or transformed, with a character of permanence greater than one year. It likewise includes improvements and major repairs that are to add to the cost of those fixed assets.

(…)

422 - Buildings and Other Constructions:

It pertains to factory, commercial, administrative and social buildings, comprising the fixed installations that are proper to them (water, electricity, heating, etc.).
It also refers to other constructions, such as walls, silos, parks, reservoirs, canals, roads and streets, internal railways, airfield runways, docks and wharves.

423 - Basic Equipment:

This is the set of instruments, machines, installations and other goods, with the exception of those indicated in account 425 "Corporeal Fixed Assets - Tools and Implements," with which the extraction, transformation and elaboration of products or the provision of services is carried out.

As can be observed, in the POC, in class 4, of long-term assets, a distinction was made between "real property" which was defined as "urban buildings and rural properties that are not affected to the operational activity of the company" and "buildings and other constructions" which were corporeal fixed assets, affected to operational activity.

Buildings affected to operation did not integrate the concept of real property in the accounting sense, being instead designated as "buildings and other constructions," being an integral part of corporeal fixed assets, which comprised long-term goods affected to the current or operational activity of the entities. Thus, in account 41.4, non-operation-affected assets and substantially equivalent to what is now designated as IP were distinguished.

III.2.1.A)1.2. The Emergence of the Concept of Investment Properties

In a logic of separating, on the balance sheet, land and buildings that were acquired with extra-operational purposes, i.e., as a passive application of funds, and not to be managed in the context of the operational or current activity of companies, let us begin by analyzing what the Statement of Standard Accounting Practice (SSAP) No. 19, entitled "Accounting for investment properties," issued in 1981 (when the POC, created in 1977, was taking its first steps) by the Institute of Chartered Accountants of England and Wales, refers about such concept.

Indeed, on page 4 - Explanatory note, the following characteristics are attributed to IP:

"A different treatment is, however, required when a significant proportion of the fixed assets of an enterprise is held not for consumption in the business operations but as investments, the disposal of which would not materially affect any manufacturing or trading operations of the enterprise."

That is, and translating freely, these are assets not used in the operations or current business of the company and whose "disposal would not affect the production or commercial operations of the disposing entity." They are, in sum, in their genesis, equated with portfolio investments, which are held for income-earning or speculative purposes.

In comment to such concept, G. Holmes and A. Sugden write, "Interpreting company reports & accounts," London, Prentice Hall, 1999, p. 60 that "Under SSAP 19- 'Investment properties' (i.e., properties held as disposable investments rather than for use in a manufacturing or commercial process…)," emphasizing thus the general trait of IP, which is its non-affection to an industrial or commercial activity, and rather constituting disposable investments at any moment because acquired for purposes other than operation activity.

In turn, the International Accounting Standard (IAS) 40, created in 2000, which inspired NCRF 11 - "Investment Properties," defines:

"Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes;

or (b) sale in the ordinary course of business."

Finally, NCRF 11 - Investment Properties, provides that:

Investment property: is the property (land or a building — or part of a building — or both) held (by the owner or by the lessee in a financial lease) to earn rentals or for capital appreciation or both, and not for:

(a) Use in the production or supply of goods or services or for administrative purposes;

Or

(b) Sale in the ordinary course of business.

From the normative framework exposed it is derived that the accounting norms, including among them SNC, wished to distinguish certain assets (real property and land) that do not relate to the operational activity of the entities - rather configuring goods that can be disposed of without affecting the operation of the holding companies - from those assets of the same type which, while being recognized in the patrimonial assets, have an objective linked to operation and are integrated in the operational activity.

This distinction will, as a general rule, have a corresponding economic foundation that underlies it. For example, if a shoe factory acquires land with a view to its appreciation and sale, such land is not an asset affected to operation. If that same factory acquires a building of offices for leasing to professionals, such a good will also not be an asset affected to normal activity (which is the production and sale of shoes). These are, in both examples, what is designated as assets generating income obtained in a passive manner, by "income-earning" investors, and not by their operational or active operation use.

The situation is more complex when the normal or operational activity of an entity consists of the leasing of commercial spaces and the provision of related services with a character of relevance or as being significant in the context of the business. Given the factuality proved as true, the operational activity of the Claimants points, precisely, to their fitting within this situation, as we proceed to demonstrate.

III.2.1.A)2. Classification, on the Material and Accounting Level, of the Assets and Investments in Question

From the material point of view, the answer to this question passes by elucidating an essential point, which is to know whether the assets and investments of the Claimants are goods or rights affected to a purpose lateral or secondary relative to their activity, having an income-earning or speculative nature, or whether, on the contrary, supporting their operational activity, are actively managed and constitute their regular and continuous source of income and cash flows.

At the date of the facts, SNC, in its respective NCRF 7 - "Tangible Fixed Assets" provided that: "Tangible fixed assets: are tangible items that:

(a) Are held for use in the production or supply of goods or services, for leasing to others, or for administrative purposes; and

(b) Are expected to be used during more than one period."

A tangible fixed asset has as a distinctive trait its use in the production or operation of goods and services in the course of the current or operational operations of an entity. Starting from this concept, it is verified that, in the case at hand, the investments made by the Claimants in shopping centers meet the essential requirement of constituting means affected to operation.

Indeed, it results from the matter of fact given as proven, among other things, that the activity of the Claimants begins long before the construction of shopping centers, through the carrying out of market studies so that the location and clientele adjust to the shopkeepers and clients that will come to use the spaces.

The construction of the center is done with a view to maximizing revenues, translating architectural choices that are not typical of investment properties that merely aim at the leasing of the "bare walls" type in spaces with a standard configuration and, as a rule, without specific adaptation to the business needs of the occupants.

The choice of occupants of the shops, in the case in question, is made in a selective manner, and there can even be co-investment, in anchor stores, configuring a policy according to which the dynamic, and not passive, operation of the centers constitutes the regular or operational activity of the Claimants.

The criteria for replacement of shopkeepers are discussed on a shared basis, and not in a typical landlord-tenant relationship, since E… is interested in understanding the reasons for the success or failure of shopkeepers, given that the continued and profitable operation depends on them.

On the other hand, the activity developed by the Claimants, regarding the management of shopping centers, has an active character, not being limited to the mere cession of spaces for commercial operation by third parties.

Indeed, it was also proven that, in the context of that management activity, the Claimants and the other companies in the E… universe: i) continuously monitor the activity of their shopping centers, analyzing their main operational indicators, such as traffic and sales volume, in order to perceive whether their offering constantly adapts to the needs of their visitors; ii) prepare market studies to assess the level of satisfaction of customers/visitors, so that, if necessary, it be restored to desirable levels; iii) actively manage the tenant-mix, seeking to maintain diversity and introducing new concepts that energize the commercial offering; iv) encourage, in times of greater economic uncertainty, shopkeepers to occupy spaces in shopping centers, through participation in part of their investment; v) prepare investment diagnostics, which allow identifying the actions necessary to ensure rational use of space and resources; vi) identify expansion opportunities, which allow increasing leasable area and introducing new concepts, activities and brands; vii) strive to periodically renew the image of spaces, adapting them to new trends and having as ultimate goal the increase in comfort of visitors; viii) with the objective of meeting the specific needs of consumers, develop and execute dedicated promotional actions, aimed at encouraging visits from end users, increasing their involvement and confidence in the commercial space; example of this is the recent commitment to installing children's playgrounds in various shopping centers to better follow consumer trends and enhance their shopping experience.

Also the fixing of variable rents, depending on a business to which both L… and the shopkeeper contribute, is another trait of a company (L…) that does not see itself as disconnected from the business, expecting passively the rent or the rise in the price of the space to dispose of the real property. On the contrary, there is even, in certain cases, a logic of risk sharing, in which the Claimants seek an asset management that sustains the business and consolidates its competitive position.

On the material level, we are, thus, far from the technical-economic characteristics above referred and pointed to the concept designated by Investment Properties (IP).

Indeed, recall that these are defined and characterized as assets outside the normal or operational activity of the entities, generating revenues and cash flows independent of operational activity and whose disposal does not put at risk the continuity of the main business. Now, on the material level, the traits pointed to of implementation and management of shopping centers move away from the economic logic of IP, since the operational or current activity of E… is none other than the regular operation of centers.

In sum, it is repeated that, in the present case, the investments of the Claimants in shopping centers meet the objective of constituting their means affected to operation. It is likewise demonstrated that it is not because of the fact that they generate rents that such excludes them from being, in substance, the assets that serve as a basis, or underlie, the normal and current operation of their business.

Materially, such centers are, thus, tangible assets that are used in the regular course of the business, from which results a substantial approximation and consequent equating with tangible fixed assets, used in the regular production of goods or services.

Indeed, as is stated in the opinion attached to the file, by Prof. Ana Maria Rodrigues, "as regards Investment Properties (IP) NCRF 11, in its paragraph 7 provides that: 'Investment properties are held to earn rentals or for capital appreciation or both. As a result, investment properties generate cash flows that are highly independent of the other assets held by an entity. This distinguishes investment properties from owner-occupied properties.'"

The mentioned opinion emphasizes that from the "accounting normative point of view, the notion of investment property refers to the property (land or building, part of a building or both) held (by the owner or by the lessee in a financial lease) to earn rentals or for capital appreciation or both, and not for:

"a) Use in the production or supply of goods or services or for administrative purposes; or

b) Sale in the ordinary course of business (§5 of NCRF 11 and §3 of IAS 40)".

As is emphasized in the opinion we are following, according to § 7 of IAS 40, and also according to the provisions of NCRF 11, investment properties are held to earn rentals or for capital appreciation or both. An investment property generates cash flows that are highly independent of other assets held by an entity.

These characteristics distinguish IP from owner-occupied properties. In the latter case (owner-occupied properties), real property allows the production or supply of goods or services (or the use of property for administrative purposes), and generates cash flows that are attributable not only to the property, but also to other assets used in the process of production or supply of goods and services. IP are thus assets affected to an activity that does not constitute the corporate purpose of the entity, but represents a secondary or non-principal activity. The author concludes that: "Applying the provision of §7 of IAS 40 (…)[2] to the real property held by group E…, it will always be concluded that such real property allows them to provide services when associated with all other operational assets of the entity. Such real property does not generate cash flows independent of other assets held by those entities."

And that author concludes further that "(…) the investments made in real property affected to the activity of operation of shopping centers should be classified as tangible fixed assets and not as IP," since they fall "literal and materially, within the broad notion of 'tangible fixed asset' contained in NCRF 7".

Indeed, in the case at hand, as the Claimants emphasize, the only assets and the source generating cash flows for the claimants are the shopping centers, whereby these are not, according to the criterion of the cited §7, materially, Investment Properties. In this sense, in articles 128 and 129 of the Petition it can be read: "That is, for the owners of shopping centers, the assets that they embody are the principal and tending to be the only vehicle of production of cash flows. There is no doubt that in a shopping center like those of the Claimants, cash flows are not, in any way, attributable only to the leased assets: they are attributable to the commercial unit that is the center as a whole and to its components beyond the fractions, namely, leisure areas, food-courts, restrooms, parking facilities, security installations, common sound installation, human resources affected to the management of the center as a whole, decorative elements exterior to the fractions, distinctive architectural elements, name, logo and brand of the shopping center itself."

On the other hand, the passive nature of the contracting party (landlord), which contributes little or nothing to the management of its investment, limiting itself to transfer control of the building to the tenant is determinant for the accounting classification as investment property.

In the case in question there are countless evidentiary indications that control is exercised, in this concrete case of the shopping centers analyzed here, by L…. As can be read in the opinion attached to the file "(…) who defines that days, how many hours the space is open to the public is the owner of the building in concrete and not the user of the space (tenant). A shopkeeper cannot in any circumstance sublease the space to a third party, cannot change the firm and maintain the contract without first obtaining express authorization from the owner of the building (…) any central decision on the said real property necessarily passes through the lessor and not the lessee. There is no control of the shopkeeper over the management of his store, as he must obey the criteria defined by the owner. Thus, it is easy to conclude that the actual control of the entire space is the responsibility of the lessor."

Applying the aforesaid provisions to the real property held by group E… it will be concluded, as is referred to in said opinion, that "All these indications allow concluding according to the canons of the accounting normalization in force that shopping centers could be understood as tangible fixed assets".

Indeed, the real property in question allows them to provide services when associated with all other operational assets of the entity. Such real property does not generate cash flows independent of other assets held by those entities and does not exhibit a striking trait of IP. Well to the contrary, its economic traits have an accounting translation closer to tangible fixed assets.

As the Claimants emphasize, the only assets and the source generating cash flows are the shopping centers, whereby these are not, according to the criterion of the cited §7, materially, Investment Properties.

Moreover, according to §§ 11 and 12 of NCRF 11, when the component of provision of services is significant, it can be considered that the property is "owner-occupied" – being this case approximate to the shopping centers analyzed here.

The ones mentioned in the paragraphs (underlining by the tribunal) in that NCRF 11 provide as follows:

"§11 — In some cases, an entity provides support services to the occupants of a property that it holds. An entity treats such property as investment property if the services are insignificant in relation to the agreement as a whole. An example is when the owner of an office building provides security and maintenance services to tenants who occupy the building.

§12 — In other cases, the services provided are significant. For example, if an entity owns and operates a hotel, the services provided to guests are significant to the agreement as a whole. Therefore, a hotel operated by the owner, is an owner-occupied property and not an investment property.

§13 — It may be difficult to determine whether support services are or are not so significant that a property does not qualify as investment property. For example, the owner of a hotel sometimes transfers some responsibilities to third parties under a management contract. The terms of such contracts vary greatly. At one end of the spectrum, the owner's position may, in substance, be that of a passive investor. At the other end of the spectrum, the owner may simply have sought outside some day-to-day functions, while remaining with significant exposure to risks of variations in cash flows generated by hotel operations."

In NCRF 11 it is recognized that the approach to the notion of owner-occupied property will be greater the greater the importance of the component of services provided by the lessor beyond the leasing, being admitted, for example, that a hotel can be accounted for as being "owner-occupied," to the extent that in it such other services are provided substantially.

According to those normative provisions, when the services provided by the holder (L…) were insignificant in relation to the agreement as a whole is that the real property should be recognized as investment properties.

It happens that, in the case in question, it is shown that the services that the Claimants provide are essential to the business, and are far from being insignificant or weakly relevant. The documentary and testimonial evidence showed that there is even co-investment of the Claimants with some important tenants of the spaces (the anchor stores); that is, there is a pro-active management of the stores, with no simple passive administration, typical of a mere income-earning investor.

In sum, the real property in question had, therefore, conditions to be classified as tangible fixed assets and not as investment properties, since they are the indispensable assets for the exercise of the principal activity of the Claimants; and, within the category of AFT, should the same have been classified as "basic equipment," since that is the function of the real property used by the Claimants, allowing them to develop their principal activity, in compliance with their corporate purpose.

For all the foregoing, it is necessary to conclude that the shopping centers in question fall within the scope of application of NCRF 7, whether attending to the literal text of the norm, when it defines tangible fixed assets as being those held for use or supply of goods or services, for leasing to others or for administrative purposes, in the broad terms in which it does, or to the economic substance of the assets in question (attending to the aforesaid criteria of control of leasing and of importance of the significant component of "services" of the contract).

In truth, this result is what results from a conjugated and teleologically-oriented interpretation of the norms of NCRF 7 and NCRF 11, which transcends alleged disconnections resulting from the strictly literal interpretation of the latter regarding (the concept of investment property), when the substantial and economic reality of the assets opposes it. Recall that the very norm moves away from the concept of IP its use in the production or supply of goods or services.

In the interpretation of accounting norms with tax-legal relevance, the interpreter cannot "fail to attend to the economic substance of the tax facts, this because, as is frequently emphasized, what effectively matters to tax law are the economic realities, the real situations that express the perception of income or the capacity to contribute and not the mere garbs with which, sometimes, they are presented externally" (cf. the Decision issued by the Central Administrative Court of the South, in the ambit of process no. 07918/14, of 19.02.2015).

From the definition of investment properties defended by the Respondent it results that these are inevitably acquired for purposes lateral to normal activity, and consequently generating passive rents and accessory to operational activity, or awaiting even the speculative elevation of the prices of these assets so as then to dispose of them. In other words, IP are assets that never integrate themselves in normal operation, in current activity, being attributed to them a nature of passive investments, perhaps not susceptible to generating employment or economic growth.

In the case in question, such is clearly removed from the material reality of things, having been proven that we are before assets affected to operation, that perform the same function as tangible fixed assets covered by the NCRF 7 norm, terms in which their classification and integration in that latter norm is not obstructed by an interpretation of NCRF 11 that attends to economic and substantial reality.

From the point of view of the unity and coherence of the system of NCRF and attending to the economic substance of the goods (that is, given the accounting relevance of shopping centers as principal exploitation and source of revenues of the Claimants and also as poles of their activity of provision of services), it is necessary to impose a conjugated interpretation of the said norms and teleologically oriented by the economic substance of the assets, which allows the reclassification of the shopping centers of the Claimants in the tangible fixed assets of NCRF 7.

III.2.1.A)3. The Regime of the Fiscal Credit for Investment (CFEI) provided for in Law 49/2013

In 2013 Law no. 49/2013, of 16 July (hereinafter, "LCFEI"), was published, where an extraordinary fiscal credit for investment (CFEI) was established that translates into a deduction from the IRC collection in the amount of 20% of investment expenses in assets affected to operation that were made between 1 June 2013 and 31 December 2013 and that did not exceed €5,000,000.00 per taxpayer. This deduction would be made up to the concurrence of 70% of the IRC collection determined in 2013.

The law read thus, in the part that is here relevant:

"Article 3

Tax Incentive

1 — The tax benefit to be granted to the taxpayers referred to in the previous article corresponds to a deduction from the IRC collection in the amount of 20% of investment expenses in assets affected to operation, which are made between 1 June 2013 and 31 December 2013

Article 4

Eligible Investment Expenses

1 — For the purposes of this regime, are considered investment expenses in assets affected to operation those relating to tangible fixed assets and biological assets that are not consumable, acquired in new condition and that enter into operation or utilization by the end of the taxation period that begins in or after 1 January 2014.

2 — Investments in intangible assets are also eligible subject to [continued]