Summary
Full Decision
The arbitrators Adv. Jorge Manuel Lopes de Sousa (arbitrator-chairman), Prof. Dr. Vasco Valdez and Dr. Ricardo Gomes Pedro (arbitrators), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 22-03-2017, hereby decide as follows:
1. Report
A…, S.A., NIPC…, filed a request for the constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the TAX AND CUSTOMS AUTHORITY is named as the respondent.
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 29-12-2016.
Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated the undersigned arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.
On 10-02-2017, the parties were duly notified of this appointment and did not manifest their intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11 no. 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 22-03-2017.
The Tax and Customs Authority filed a response in which it raised exceptions of incompetence of the Arbitral Tribunal, lack of suitability of the petition for arbitral pronouncement, failure to retain counsel, untimeliness, unsuitability of the procedural means, and consolidation under the legal order of the charges relating to the financial years 2003 to 2011.
Furthermore, the Tax and Customs Authority questions the value attributed by the Applicant to the case and the non-conformity between the petition formulated in the administrative claim and the petition for arbitral pronouncement, and argues that the petition should be judged inadmissible.
By order of 03-05-2017, a hearing was dispensed with and it was decided that the case would proceed with optional written submissions for a period of 10 days, with the period for the Applicant's submissions commencing upon notification of this order and the period for the Tax Authority's submissions commencing upon notification of the presentation of the Applicant's submissions, whereby the Applicant could respond to the exceptions.
The aforementioned order was notified to the Parties on the same date.
The Parties did not submit submissions within the stated period, but the Applicant ultimately submitted them on 06-06-2017, well after the 10-day period had expired.
The Applicant sent the submissions with an email message in which it states that "A…, S.A., NIF…, Applicant in Case no. 754/2016‐T, understanding that, although the 10-day period has been exceeded which proved insufficient for the preparation of the said submissions, and not accepting the exceptions invoked by the Tax Administration, hereby presents a document containing its submissions." On 07-06-2017, the Tax and Customs Authority attached the administrative file to the case, which consists solely of the administrative claim presented by the Applicant and routine documents. The documents attached with the administrative claim that may be relevant to the assessment of the case were also attached by the Applicant with the petition for arbitral pronouncement, such that the administrative file has no relevance to the decision of the case.
On the same date, the Tax and Customs Authority stated that the submissions are untimely and should therefore be removed from the file.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1 of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties have legal personality and capacity, and are entitled to proceed (articles 4 and 10, no. 2 of the same decree-law and article 1 of Ministerial Order no. 112-A/2011, of 22 March).
In the submissions presented, which are signed by counsel, the Applicant states in article 16 that, if necessary, it will ratify the proceedings.
The submissions presented by the Applicant are manifestly untimely, as a period of 10 days was set by order whose notification was sent by email on 03-05-2017 and the submissions were presented on 06-06-2017.
The Applicant itself acknowledges that the set period was exceeded and as explanation for the delay states only that the period proved insufficient for the preparation of the said submissions.
The period set for submissions has the nature of a peremptory period, such that its expiry extinguishes the right to perform the act, as follows from the provisions of nos. 2 and 3 of article 139 of the Code of Civil Procedure (CPC) subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph e), of the RJAT.
Thus, submissions could only be presented beyond the set period if just impediment occurred, as provided for in articles 139, no. 4, and 140 of the CPC.
Pursuant to article 140, "just impediment" is considered to be an event not attributable to the party nor to its representatives or mandataries that prevents the timely performance of the act, and the party alleging just impediment immediately provides proof thereof.
The Applicant neither indicates nor proves any obstacle to the timely performance of the act, and therefore it must be concluded that the conditions for allowing the submission of the submissions beyond the set period do not exist.
Being thus, the submissions cannot be considered in the part in which the Applicant pronounces itself on the exceptions regarding the substance of the case.
However, in the said submissions the Applicant includes the said statement that, if necessary, it will ratify the proceedings.
As these submissions are signed by counsel, it is understood that this affirmation expressly manifests an intention to ratify the proceedings, and therefore it is considered ratified, without further formalities, and the initial failure to retain counsel is deemed cured.
As the submissions are relevant for this purpose of curing the failure to retain counsel, which does not contravene the procedural rights of the Parties, their removal from the file is not ordered, without prejudice to not considering the submissions for the purpose of assessing the exceptions and the merits of the case.
The case is free of defects.
It is necessary to assess the exceptions beforehand, beginning with incompetence, in light of the provisions of article 13 of the Code of Procedure in Administrative Courts, applicable to tax arbitral proceedings by virtue of the provisions of article 29, no. 1, paragraph c), of the RJAT.
2. Exceptions
2.1. Exception of incompetence
The Applicant formulates the following requests:
a. The illegality of the tacit rejection of the administrative claim;
b. The correction of the Individual IRC Form 22 of the Applicant previously submitted for the financial year 2013, based on the allocation of the amount effectively increased in the sum of €6,674,653.65, amount corrected for the financial charges of 2012, decided favorably to the Applicant, changing from a loss of €3,890,566.38 to a tax loss of €10,565,222.24, also leading to the correction of the Form 22 Declaration of Income of the Group, for the same financial year of a taxable profit of €14,358,062.43 to an aggregate taxable profit of €7,682,408.57;
c. Should only the deduction of the amount increased according to the interpretation of Circular 7/2014 of 30 March be accepted, in the amount of €3,079,849.54, amount obtained after deducting the amount by reference to 2012, already decided favorably to the Applicant, the individual Declaration of Income of the Applicant previously submitted for the financial year 2013 should be corrected from a loss of €3,890,568.38 to a tax loss of €6,970,417.62, also leading to the correction of the Form 22 Declaration of the Group, for the same financial year from a taxable profit of €14,358,062.43 to an aggregate taxable profit of €11,247,212.89;
Subsidiarily;
d. Should only the right to deduct the financial charges incurred as a result of financing contracted during the period in which it was bound by the tax regime of holding companies (2003 to 2012 inclusive) be granted, for the financial year 2014, based on the amount effectively increased in the total amount of €6,674,653.86, amount corrected for the financial charges of 2012, already decided favorably to the Applicant, the respective individual Declaration of Income Form 22 of the Applicant previously submitted should be corrected from a tax loss of €6,025,783.45 to a tax loss of €12,927,437.31, also leading to the correction of the Declaration of Income Form 22 of the Group, for the same financial year from a taxable profit of €28,209,641.54 to an aggregate taxable profit of €21,534,987.68;
e. Should only the right to deduct the financial charges increased according to the interpretation of Circular 7/2014 of 30 March be granted, in the total amount of €3,079,849.54, amount obtained after deducting the amount by reference to the financial year 2012, already decided favorably to the Applicant, the individual Declaration of Income Form 22 of the Applicant previously submitted should be corrected from a loss of €6,252,783.45 to a tax loss of €9,332,632.99, also leading to the correction of the Form 22 Declaration of the Group, for the same financial year from a taxable profit of €28,209,641.54 to an aggregate taxable profit of €25,129,792.00;
f. The payment of compensatory interest in accordance with articles 43 and 100, both of the General Tax Law (LGT) and Article 61 of the Tax Procedure and Process Code (CPPT).
The competence of the arbitral tribunals operating in CAAD is, in the first place, limited to the matters indicated in article 2, no. 1 of Decree-Law no. 10/2011, of 20 January (RJAT).
This provision states that the competence of arbitral tribunals includes the assessment of the following claims:
a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source, and payment on account;
b) The declaration of illegality of acts fixing the tax base when they do not give rise to the assessment of any tax, of acts determining the taxable amount and of acts fixing property values; (amended by Law no. 64-B/2011, of 30 December)
Beyond the direct assessment of the legality of acts of this type, the fact that paragraph a) of no. 1 of article 10 of the RJAT refers to nos. 1 and 2 of article 102 of the CPPT, in which various types of acts giving rise to the period for judicial challenge are indicated, including the administrative claim, makes it clear that all types of acts capable of being challenged through the judicial challenge process will be encompassed within the jurisdiction of arbitral tribunals operating in CAAD, covered by those nos. 1 and 2, provided they have as their object one of the types of acts indicated in article 2 of the RJAT.
Moreover, this interpretation in the sense of the identity of the fields of application of the judicial challenge process and the arbitral process is consonant with the legislative authorization on which the Government based the approval of the RJAT, granted by article 124 of Law no. 3-B/2010, of 28 April, which reveals the intention that tax arbitral proceedings constitute "an alternative procedural means to judicial challenge and to actions for the recognition of a right or legitimate interest in tax matters" (no. 2).
However, it follows from the tenor of article 2 of the RJAT that tax arbitration was not implemented with regard to matters susceptible to being subject to actions for recognition of a right or legitimate interest, as it is manifest that they do not fall within any of the situations provided for.
In any event, it also follows from the said legislative authorization, particularly from paragraph a) of no. 4 of article 124, which refers to "administrative acts involving the assessment of the legality of assessment acts," that it was not intended to extend the scope of tax arbitration to the assessment of acts which, pursuant to the CPPT, cannot be subject to judicial challenge. In fact, that expression contains the exclusion of "administrative acts not involving the assessment of the legality of assessment acts" and from paragraphs d) and p) of no. 1 and no. 2 of article 97 of the CPPT the rule is inferred that the challenge of administrative acts in tax matters is made, in the tax judicial process, through judicial challenge or administrative action (which succeeded contentious review, pursuant to article 191 of the Code of Procedure in Administrative Courts) depending on whether or not such acts involve the assessment of the legality of administrative acts of assessment. ( [1] )
However, as an exception to this rule delimiting the fields of application of the judicial challenge process and administrative action, may be considered the cases of challenging acts of rejection of administrative claims, irrespective of their content, by the fact that the use of the judicial challenge process was provided for in a special rule, which is no. 2 of article 102 of the CPPT, currently repealed, from which it can be inferred that judicial challenge is always usable. ( [2] ) ([3])
In the case at hand, the Applicant filed an administrative claim which was not assessed within the 4-month period provided for in article 57, no. 1 of the LGT, whereupon tacit rejection was formed, pursuant to no. 5 of the same article.
It is this tacit rejection that the Applicant indicates as the first object of the petition for arbitral pronouncement.
With regard to tacit rejections, which are a fiction designed to ensure the challengeability in annulment contentious proceedings, such as the judicial challenge process, the question of the distinction between the fields of application of the judicial challenge process and administrative action does not arise, as it is presumed that they are always rejected for substantive rather than formal reasons. ( [4] )
Thus, this Arbitral Tribunal is competent to assess the challenge to the tacit rejection of the administrative claim.
However, as follows from article 2 of the RJAT, it is manifest that the assessment of the requests for correction of tax results formulated in paragraphs b) to e) above transcribed does not fall within the competencies of arbitral tribunals operating in CAAD.
As for the request for compensatory interest, it falls within the competencies of arbitral tribunals as a consequence of requests for declaration of illegality of annulment of acts of the types referred to in article 2, as is settled jurisprudence.
Accordingly, the exception of incompetence is well-founded with regard to the requests referred to in paragraphs b) to e) of the petition for arbitral pronouncement and is ill-founded with regard to those in paragraphs a) and f).
2.2. Exception of unsuitability of procedural means
The Tax and Customs Authority raises this exception because the requests referred to in paragraphs b) to e) of the petition for arbitral pronouncement should be made in enforcement of judgment proceedings.
Having determined that this Arbitral Tribunal is materially incompetent to assess those requests, the assessment of this exception of unsuitability of procedural means is rendered prejudicial and unnecessary.
2.3. Exception of untimeliness
The Tax and Customs Authority raises the question of untimeliness by understanding that the 30-day period provided for in paragraph b) of no. 1 of article 10 of the RJAT is applicable.
However, that period is currently applicable only to the challenge of "acts fixing the tax base when they do not give rise to the assessment of any tax, of acts determining the taxable amount and of acts fixing property values", provided for in paragraph b) of no. 1 of article 2 of the RJAT.
In the case at hand, being challenged is the tacit rejection of an administrative claim regarding an act of self-assessment of IRC for 2013, specifically the one resulting from the presentation of form 22 submitted by the Applicant in its capacity as the dominant company of the tax group it identifies (articles 11 and 15 of the petition for arbitral pronouncement).
The administrative claim was presented on 27-05-2016, whereupon it is tacitly presumed rejected on 27-09-2016 (article 57, nos. 1 and 5 of the LGT), and it is from this date that the 90-day period provided for in paragraph a) of no. 1 of article 10 of the RJAT is counted.
The petition for arbitral pronouncement was presented on 26-12-2016, such that it was presented within the legal period.
The exception of untimeliness is therefore ill-founded.
2.4. Exception of lack of suitability of the petition for arbitral pronouncement
The Tax and Customs Authority contends, in summary, that
– the Applicant identifies as the object of the petition for arbitral pronouncement "the tax act of self-assessment of IRC for 2013", raising "the declaration of illegality of a tax act";
– hence, the petition formulated by the Applicant does not concern the declaration of illegality of a tax act, but exclusively with the consideration of the tax results of the group and individually in light of the consideration of financial charges, incorrectly increased when the Income Declarations Form 22 were submitted, both individually and for the Group;
– in the petition form for constitution of arbitral tribunal itself, at no point did the Applicant proceed to identify the alleged tax act it intended to challenge, or declare its illegality.
However, as the Tax and Customs Authority itself refers to in article 39 of its response, article 10, no. 2, paragraph b) of the RJAT requires that the petition for arbitral pronouncement contain the identification of the tax act or acts being challenged.
The electronic form of CAAD is irrelevant for this purpose, since what defines the object of the proceedings is the petition for arbitral pronouncement and not the form, to which the RJAT makes no reference.
In the petition for arbitral pronouncement the Applicant identifies as the object of the case the tacit rejection of the administrative claim (fls. 1 and article 24 of the petition for arbitral pronouncement) and the act of self-assessment of IRC for 2013 (article 8 of the petition for arbitral pronouncement), specifically the one resulting from the presentation of form 22 submitted by the Applicant in its capacity as the dominant company of the tax group it identifies (articles 11 and 15 of the petition for arbitral pronouncement).
On the other hand, contrary to what the Tax and Customs Authority states, the form 22 declarations of the Applicant for the financial year 2013, both for the group and individually, are attached to the petition for arbitral pronouncement as documents nos. 3 and 4.
Thus, the alleged lack of suitability of the petition for arbitral pronouncement due to failure to identify the acts that are the object of the proceedings does not occur, such that this exception is ill-founded.
2.5. Exception of consolidation under the legal order of charges relating to financial years 2003 to 2011
The Tax and Customs Authority raises this exception stating the following, in summary:
– the Applicant "given that it was legally bound during the period between 2003 to 2012 by the tax regime of holding companies, it not being possible for it to apply a real and direct allocation between the interest on loans supported at the time and the holdings it held, now seeks to entirely deduct the total amount of €6,674,653.86 of the charges supported in the financial years 2003 to 2011, accounted for and fiscally recognized in accordance with the principle of tax result periodization";
– "that is, in one fell swoop and in the financial year 2013, the Applicant seeks to deduct the total amount of charges increased in the financial years 2003 to 2011";
– "it directly conflicts with tax law provisions regarding the expiry of the right to action in procedural and judicial forums, with the facts relating to the years 2003 to 2011 being fully consolidated under the legal order";
– the Applicant presented no administrative or judicial challenge relating to the charges for those financial years 2003 to 2011;
– thus, the request relating to the deduction of those charges violates the principle of the security of the legal order.
The grounds referred to do not constitute an obstacle to the assessment of the merits of the case; rather, they concern whether charges relating to the financial years 2003 to 2011 can be invoked in 2013, in the circumstances referred to by the Applicant.
For this reason, this exception is ill-founded, without prejudice to the arguments invoked being assessed in the assessment of the merits of the case.
2.6. Exception of non-conformity between the petition formulated in the administrative claim and the petition for arbitral pronouncement
The exception referred to concerns the requests formulated in paragraphs b) to e) of the petition for arbitral pronouncement not corresponding to those formulated in the administrative claim.
Given that it has already been decided that the Arbitral Tribunal is incompetent to assess those requests, the assessment of this question is rendered prejudicial and unnecessary, including determining whether this constitutes a matter of exception.
3. Facts
3.1. Established facts
The following facts are considered established:
· On 31 December 2013, the herein Applicant was the dominant company of a group of entities taxed under the Special Tax Regime for Group Companies ("RETGS"), which was composed of the following subsidiary companies pursuant to article 69 of the Corporate Income Tax Code (document no. 1 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein):
B…, S.A., with NIF…;
C…, S.A., with NIF…;
D…, S.A., with NIF…;
E…, S.A., with NIF…;
F…, S.A., with NIF…;
G…, S.A., with NIF…;
H…, S.A., with NIF…;
I…, S.A., with NIF…;
J…, S.A., with NIF…;
K…, SGPS, S.A., with NIF…;
L…, S.A., with NIF….
· On 28-05-2014, the Applicant submitted its individual form 22 declaration for the financial year 2013, with identification …-… -…, in which a negative tax result of €3,890,568.38 was determined (document no. 4 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· On 30-05-2014, in its capacity as dominant company, the Applicant submitted, for the financial year 2013, the Form 22 income declaration relating to the said tax consolidated group, with identification …-… -…, in which an aggregate taxable profit of €14,358,062.43 (fourteen million, three hundred and fifty-eight thousand, sixty-two euros and forty-three cents) was determined and it proceeded to pay the corresponding IRC (document no. 3 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· The Applicant was established in December 1992 in the legal form of holding company, with the legal name M…, SGPS, S.A. (article 66 of the petition for arbitral pronouncement);
· In 1997, in addition to the change in company name to N…, SGPS, S.A., there was also a reformulation of the business strategy of the herein Applicant, clearly more focused, from then on, on the acquisition and management of shareholdings, signaled as fundamental to the growth of Group O… ("Group O…") (article 67 of the petition for arbitral pronouncement);
· During the financial years 2003 to 2012, inclusive, the Applicant had the corporate profile of a Holding Company (SGPS), having in them increased its taxable profit with financial charges supported by the acquisition of shareholdings, in accordance with the provisions of article 32 of the Tax Benefits Statute (EBF);
· In the financial years 2003 to 2012, inclusive, the Applicant indicated as non-deductible financial charges relating to the acquisition of equity interests (article 72 of the petition for arbitral pronouncement and documents nos. 9 to 15 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· The amounts referred to indicated by the Applicant as non-deductible exceed those that would result from the application of the method provided for in point 7 of Circular no. 7/2004, of 30-03-2004, issued by the IRC Services Directorate (article 73 of the petition for arbitral pronouncement);
· On 25-11-2013, and in the context of a corporate restructuring operation carried out within Group O… (merger plan a copy of which was attached to the petition for arbitral pronouncement as Document no. 7, the contents of which are reproduced herein), the Applicant altered its corporate purpose, thereby losing its original legal format (SGPS), with effect from 01-01-2013;
· The Applicant proceeded, for the financial year 2013, to consider, in the context of determining its taxable profit, the gains and losses realized with the onerous transfer of equity interests and, likewise, the financial charges (expenses), net of any other financial charges, in general terms, but did not deduct the financial charges that it indicated in the declarations relating to the financial years 2003 to 2012, inclusive, as having been supported by the acquisition of equity interests (article 70 of the petition for arbitral pronouncement);
· On 27-05-2016, the Applicant filed an administrative claim regarding the self-assessment made in form 22 declaration relating to the group of companies, with identification …-… -… (document attached with the CAAD form);
· The administrative claim bore the number …2016… and no decision was rendered therein;
· The Applicant filed a request for revision of the tax act relating to the financial year 2011 (document no. 6 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· The Applicant filed an administrative claim relating to the financial year 2012 (document no. 6 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· As a consequence of the tacit rejection of the administrative claim relating to the financial year 2012, the Applicant filed a petition for arbitral pronouncement at CAAD which was judged upheld by decision rendered on 21-07-2016, in case no. 656/2015-T (document no. 21 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· The decision referred to in the preceding item was subject to appeal to the Constitutional Court, which did not take cognizance thereof (document no. 22 attached with the petition for arbitral pronouncement, the contents of which are reproduced herein);
· On 30-03-2004, the IRC Services Directorate issued Circular no. 7/2004, the contents of which are reproduced herein (document no. 5 attached with the petition for arbitral pronouncement), in which reference is made, among other things, to the following:
"Financial year in which tax corrections of financial charges should be made
6. With regard to the financial year in which financial charges should be disregarded as costs, for tax purposes, tax correction of those supported by the acquisition of shareholdings that may be capable of benefiting from the special regime established in no. 2 of article 31 of the EBF should be made in the financial year to which they relate, irrespective of whether all the conditions for application of the special regime for taxation of gains are already met. Should it be concluded, at the time of disposal of the shareholdings, that not all requirements for application of that regime are met, in that financial year, the consideration as a tax cost of the financial charges not considered as a cost in prior financial years shall be made.
Method to be used for allocation of financial charges to shareholdings
7. As to the method to be used for the allocation of financial charges supported at the acquisition of shareholdings, 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 allocation should be made on the basis of a formula taking into account the following: the remunerated liabilities of the holding companies and subsidiary companies should be allocated, in the first place, to the remunerated loans made by these to the companies in which they have holdings and to other interest-generating investments, allocating the remainder to the other assets, namely shareholdings, proportionally to their respective cost of acquisition".
· On 26-12-2016, the Applicant filed the petition for arbitral pronouncement that gave rise to the present case.
3.2. Unproven facts
It was not proven that the Applicant disposed of shareholdings for which it supported financial charges in the financial years 2003 to 2012.
3.3. Basis for establishing the facts
The established facts are based on documents attached by the Applicant with the petition for arbitral pronouncement and statements of the Applicant not questioned by the Tax and Customs Authority.
4. Legal matters
4.1. Regime applicable to financial charges supported by holding companies with the acquisition of equity interests held for at least one year
Article 31, no. 2 of the EBF, as amended by Law no. 32-B/2002, of 30 December, established the following:
2 - The gains and losses realized by holding companies and subsidiary companies through the onerous transfer, by whatever means, of equity interests of which they are holders, provided they are held for a period not less than one year, and likewise the financial charges supported with their acquisition, do not concur in the formation of the taxable profit of these companies.
With the renumbering of the EBF effected by Decree-Law no. 108/2008, of 26 June, this article 31 became article 32, having then the following wording:
2 - The gains and losses realized by holding companies, subsidiary companies and investment companies of equity interests of which they are holders, provided they are held for a period not less than one year, and likewise, the financial charges supported with their acquisition do not concur in the formation of the taxable profit of these companies.
With Law no. 64-B/2011, of 30 December, article 32, no. 2 then had the following wording:
2 - The gains and losses realized by holding companies of equity interests of which they are holders, provided they are held for a period not less than one year, and likewise, the financial charges supported with their acquisition do not concur in the formation of the taxable profit of these companies.
This provision was subsequently repealed by Law no. 83-C/2013, of 31 December.
The general regime of relevance of gains and losses and financial charges for the formation of taxable profit of entities subject to IRC was reflected in the concurrence of gains and financial charges, in full [articles 20, no. 1, paragraph h), and 23, no. 1, paragraph a) of the Corporate Income Tax Code as amended by Decree-Law no. 159/2009, of 13 July], and in the concurrence of losses in 50% [pursuant to articles 23, no. 1, paragraph l) and 45, no. 3 of the same Code].
For holding companies, article 32, no. 2 of the EBF (in addition to other situations provided for in its no. 3) established a special regime, which did not necessarily redound to benefit, which was reflected, in general, in the irrelevance for the formation of the taxable profit of holding companies of the gains and losses realized from equity interests held for at least one year, accompanied by the non-concurrence of financial charges supported with their acquisition.
4.2. Question of consolidation under the legal order of charges increased in financial years 2003 to 2011 and violation of the principle of certainty and legal security established in article 2 of the Portuguese Constitution
The Tax and Customs Authority censures the Applicant for seeking to deduct in the financial year 2013 the total amount of charges increased in the financial years 2003 to 2011.
Although, in light of the regime provided for in the EBF, gains and losses were only to be considered or disregarded for purposes of formation of taxable profit in the financial year of their realization, the Tax Administration understood, pursuant to point 6 of the said Circular no. 7/2004, that financial charges supported with the acquisition of equity interests should be disregarded as expenses (costs, in the terminology of the 2009 version of the Corporate Income Tax Code) in the financial year in which they were supported, being added to the taxable profit of each of those financial years, irrespective of whether all the conditions for application of the special regime for taxation of gains and losses were already met, which could only be determined at the time of realization.
But, as the application of this special regime depended on the verification of conditions to be determined later, the Tax Administration adopted in point 6 of Circular no. 7/2004 the understanding that "should it be concluded, at the time of disposal of the shareholdings, that not all requirements for application of that regime are met, in that financial year, the consideration as a tax cost of the financial charges not considered as a cost in prior financial years shall be made".
This understanding was judged constitutionally permissible by the decision of the Constitutional Court no. 42/2014, of 09-01-2014, rendered in case no. 564/12, which decided "not to declare unconstitutional the provision contained in article 31, no. 2 of the Tax Benefits Statute, as worded by Law no. 32-B/2002, of 30 December, to the extent that it imposes the tax non-deductibility of financial charges supported with the acquisition of equity interests as soon as these are incurred, irrespective of the realization of gains exempt from taxation with the disposal of such equity interests".
Having the said understanding been adopted by Circular no. 7/2004, it is binding on the Tax Administration, by virtue of the provisions of article 68-A, no. 1 of the LGT, which establishes that "the tax administration is bound by the generic guidelines contained in circulars, regulations or instruments of an identical nature, irrespective of their form of communication, aiming at the uniformization of the interpretation and application of tax law provisions".
Thus, in light of this understanding publicized in point 6 of the said Circular, which was adopted by the Applicant in the financial years 2003 to 2012, the disregard of financial charges supported by the Applicant with the acquisition of equity interests was conditioned on the verification of the requirements for application of this regime of non-concurrence of realized gains and losses for formation of taxable profit: if it should be found "at the time of disposal of the shareholdings, that not all requirements for application of that regime are met, in that financial year, the consideration as a tax cost of the financial charges not considered as a cost in prior financial years shall be made".
For this reason, it is manifest that the Tax and Customs Authority is not correct in referring to the consolidation of the non-deduction of financial charges during the financial years 2003 to 2012 as an obstacle to their deductibility in the financial year 2013: in fact, according to the understanding to which the Tax Administration bound itself, the disregard of financial charges was dependent on the verification, at the time of disposal of the shareholdings, of the conditions for application of that regime, such that, until such time occurred, the possibility of relevance of those charges as expenses of the financial year in which the disposal would occur was always open.
It does not correspond to reality the statement of the Tax and Customs Authority that the Applicant did not adopt the said Circular: what the Applicant states in articles 73 and 74 of the petition for arbitral pronouncement is that it did not apply the method of determination of financial charges provided for in point 7 of the said Circular no. 7/2004, but effected the disregard of financial charges, which it determined by another method, which is in harmony with what is provided for in point 6 of the said Circular.
In the case at hand, the Applicant ceased to be a holding company from the financial year 2013 onwards, inclusive, such that in this financial year it is concluded that it was no longer possible for the Applicant to be taxed with application of the regime provided for in article 32, no. 2 of the EBF.
Thus, also in that financial year it is concluded that, at the time when disposal of the equity interests may occur, the conditions for application of that regime will no longer be met, as this depends on the company having the nature of a holding company.
The doctrine of the said Circular, although it refers to the moment of disposal as that in which it can be concluded whether or not all the requirements for application of the regime are met, should be understood, by declaratory interpretation, as admitting the application of that understanding to situations in which it can be concluded, before the moment of disposal, that the regime can no longer be applied, as what is relevant to enable the deduction of charges is the certain conclusion that not all the requirements for application of that regime are met.
For this reason, it is to be concluded, in harmony with the understanding to which the Tax Administration is bound, that all financial charges supported between 2003 and 2012, inclusive, with the acquisition of equity interests held for at least one year should be relevant as expenses of the financial year 2013, the financial year in which it is established "that not all requirements for application of that regime are met" and therefore, "in that financial year, the consideration as a tax cost of the financial charges not considered as a cost in prior financial years shall be made".
By what has been set forth, the said consolidation under the legal order of charges increased by the Applicant in the financial years 2003 to 2011 does not occur, nor does its disregard in the financial year 2013 contravene the principle of certainty and legal security that flows from the principle of democratic rule of law, proclaimed in article 2 of the Portuguese Constitution.
On the contrary, what would contravene that principle, in the aspect of protection of reliance, would be not to apply the regime provided for in point 6 of the said Circular, to taxpayers who acted in harmony with the understanding that the Tax Administration decided to adopt, regarding the possibility of deducting charges when it should be verified that the said regime could not be applied.
On the other hand, it is clear the error of the Tax and Customs Authority in arguing that the Applicant cannot deduct the financial charges in 2013 for having ceased to be a holding company.
In fact, the rule applicable to the generality of companies that are not holding companies is that of the deductibility of all financial charges, pursuant to paragraph c) of no. 1 of article 23 of the Corporate Income Tax Code, as amended by Law no. 2/2014, of 16 January. For this reason, nothing prevents the Applicant, precisely for having ceased to be a holding company in 2013, from being able to deduct in this financial year the financial charges that it did not deduct in prior financial years, by the fact of having adopted the understanding upheld by the Tax Administration in point 6 of the said Circular. In fact, the non-deductibility of financial charges provided for in the latter part of no. 2 of article 32 of the EBF did not constitute a "tax benefit" that holding companies enjoyed, being instead a penalizing tax regime, when compared with the general regime of deduction of financial charges. In any case, ceasing to be a holding company, it has the right to deduct financial charges supported with the acquisition of social shareholdings, pursuant to paragraph c) of no. 1 of article 23 of the Corporate Income Tax Code.
Thus, it is concluded that the Applicant should have considered as an expense in the financial year 2013 the financial charges supported with the acquisition of shareholdings that it disregarded in the financial years 2003 to 2012, such that the self-assessment suffers from the illegality that the Applicant imputes to it.
4.3. Question of non-conformity between the petition formulated in the administrative claim and that formulated in the petition for arbitral pronouncement
The Full Chamber of the Supreme Administrative Court understood, in the decision of 03-06-2015, rendered in case no. 793/14, that "in the judicial challenge subsequent to the decision of the Tax Authority that concerns an administrative claim or request for official revision of the tax act, the judicial bodies may, and should, know of all illegalities of substance that affect the tax act being challenged, whether or not those illegalities were raised in the administrative claim phase of the dispute, with an additional duty imposed on them when such are matters of official cognizance".
For this reason, in the understanding of the Supreme Administrative Court, the object of the challenge proceedings, in this case the arbitral proceedings, is not limited by the object of the administrative claim.
In any event, the essential illegality that the Applicant imputes to the self-assessment of 2013, which is that financial charges supported with the acquisition of shareholdings were not considered as expenses therein, is identical in the administrative claim and in the present case. There is only divergence as to the values to be considered, but there is no obstacle to the amounts to be indicated having been altered specifically by the effect of subsequent administrative or judicial decisions, as is the case.
In fact, once the existence of illegality is established, the petition for arbitral pronouncement is to be judged upheld, and the determination of the charges to be considered is a matter to be ascertained in enforcement of the judgment, as was already referred to with regard to the question of incompetence raised by the Tax and Customs Authority. Moreover, in the case at hand, the decision of the proceedings relating to the financial year 2011 referred to in item m) of the established facts is not known.
4.4. Question of unconstitutionality of the interpretation defended by the Applicant
It is not clear in what terms the Tax and Customs Authority raises the question of unconstitutionality, and it appears to make an incorrect interpretation of the factual situation presented in the record.
In fact, the situation is not one in which the Applicant argues that the latter part of no. 2 of article 32 of the EBF should not be applied, but rather a situation in which the Applicant:
– applied that rule in the financial years 2003 to 2012, as the Tax Administration argues in point 6 of Circular no. 7/2004;
– given that it has been concluded, from 2013 onwards, that not all requirements for application of that regime will be able to be met at the time of disposal of the shareholdings, "in that financial year, the consideration as a tax cost of the financial charges not considered as a cost in prior financial years shall be made", as the Tax Administration also argues in point 6 of Circular no. 7/2004.
That is, it is not a situation in which the Applicant refuses to apply point 6 of the said Circular, but rather a situation in which the Applicant complied with it during the financial years 2003 to 2012 regarding the non-deductibility of financial charges, and seeks that, also in accordance with that same point 6, all those charges be deducted in 2013, since not all requirements for the regime provided for in no. 2 of article 32 can now be met.
It is in this factual context that the questions of unconstitutionality that the Tax and Customs Authority raises are to be assessed.
4.4.1. Question of unconstitutionality relating to the application of the regime of point 6 of Circular no. 7/2004
The Tax and Customs Authority raises this question by affirming that it is illegal and unconstitutional the thesis of the Applicant "should it contest the line of argument of the Applicant to the effect of the inapplicability of the provision of no. 2 of article 32 of the EBF, in the part relating to the non-deductibility of financial charges supported with the acquisition of equity interests, when it is not possible to proceed with their specific allocation" and argues "that it appears unconstitutional article 32, no. 2 of the EBF when interpreted to the effect that the exclusion of the deduction of financial charges is limited to situations in which direct and specific allocation is possible, because such is violative of the principle of tax equality and the principle of contributory capacity, inherent in articles 13, 103 and 104, no. 2 of the Portuguese Constitution".
The constitutional rules that the Tax and Customs Authority refers to as violated are "the principle of tax equality and the principle of contributory capacity, inherent in articles 13 and 103 and 104, no. 2 of the Portuguese Constitution".
In fact, the raising of this question appears to lack foundation, as what is at issue is the Applicant deducting in 2013 the financial charges that it did not deduct in the financial years 2003 to 2012 and with regard to which it is determined, in 2013, that the basis for withdrawing deductibility was not met, in light of the very understanding publicized by the Tax Administration, which is the verification of the requirements for application of article 32, no. 2 of the EBF at the time of disposal of the equity interests.
The rules of the Corporate Income Tax Code on the deductibility of financial charges, specifically paragraph c) of no. 1 of article 23, as amended in 2009, are manifestly in harmony with the principles of equality and taxation according to contributory capacity, as this regime is applicable to the generality of IRC taxpayers and charges supported to obtain income should be deducted to determine actual income.
The rule in the latter part of article 32, no. 2 of the EBF is an exception to the rules of the Corporate Income Tax Code on the deductibility of financial charges justified by the special regime for taxation of gains and losses realized by holding companies.
For this reason, if it is established in 2013 that the conditions for applying the special regime for taxation of gains and losses provided for in that article 32, no. 2 are not met, the necessary inference is not to apply also the special regime of irrelevance of financial charges, which would only be justified if that taxation regime were applicable.
What would contravene the principles of equality and taxation according to contributory capacity would be to apply the special regime of non-deductibility of financial charges without the special conditions that may justify it being met, contrary to what occurs with the generality of companies and the rule of taxation fundamentally based on actual profit (article 104, no. 2 of the Portuguese Constitution).
No violation of those constitutional rules is thus apparent, and it is certain that what is in issue is the application of the regime that the Tax Administration itself bound itself to apply in that point 6.
4.4.2. Question of unconstitutionality relating to the application of the regime of point 7 of Circular no. 7/2004
Contrary to what the Tax and Customs Authority may have understood in its response, it is not a factual situation in which the Applicant has refused to apply the regime of non-deductibility of financial charges provided for in article 32, no. 2 of the EBF, based on a hypothetical understanding of the Applicant that only direct allocation of financial charges to the acquisition of shareholdings is permitted.
In fact, precisely the opposite occurred, as the Applicant states "it was not possible to effect real and direct allocation of those charges to the purpose for which they were intended" (article 73 of the petition for arbitral pronouncement) and, nonetheless, effected the allocation that it considered appropriate, even in terms that it considers more stringent (considering non-deductible more charges, as can be inferred from the values it refers to) than those that would result from the application of the method provided for in that point 7, which it states it did "as a precaution, in light of the intense debate that occurred regarding the scope and extent of application of the said Circular" (article 72 of the petition for arbitral pronouncement).
Thus, the question of unconstitutionality raised by the Tax and Customs Authority relating to a hypothetical understanding of the Applicant to the effect that the regime of article 32, no. 2 of the EBF is only applied to situations in which direct and specific allocation of financial charges to the acquisition of shareholdings is possible, is a question that does not arise in the case at hand, as the Applicant itself acknowledges that such direct allocation is not possible (article 73 of the petition for arbitral pronouncement) and, despite this, effected it, necessarily with the use of another method.
In fact, contrary to what the Tax and Customs Authority understood, as it states in article 138 of its response, the Applicant does not repudiate the allocation it effected of charges to the acquisition of shareholdings; rather it seeks, in the first place, that it be the basis and measure of the deductibility of charges in the financial year 2013, because it has become impossible to apply the regime of article 32, no. 2 of the EBF to it.
For this reason, the question of unconstitutionality that the Applicant raises, which is that it would be unconstitutional not to apply the regime of article 32, no. 2 of the EBF when direct allocation is not viable, has no application to the situation at hand, as that position is not defended by the Applicant.
Thus, the question of unconstitutionality raised by the Tax and Customs Authority, on this point, having no application to the case of the record, is a purely abstract question of unconstitutionality, the decision of which is only permitted to the Constitutional Court (article 281 of the Portuguese Constitution), such that cognizance thereof is not taken.
The same occurs with the interpretation of no. 2 of article 32 of the EBF that the Tax and Customs Authority states it contests, in article 143 of its response, "to the effect that all and any financial charges supported with financing related to acquisitions of shareholdings are deductible, irrespective of proof promoted by that taxpayer for such purpose".
In fact, the Applicant did not argue that "all and any financial charges supported with financing related to acquisitions of shareholdings are deductible"; rather it interpreted article 32, no. 2 of the EBF, beforehand it considered the charges referred to in the established facts as non-deductible, which is why it increased them to the taxable profit of the financial years 2003 to 2012.
Furthermore, neither is the relevance of the reference that in article 148 of its response the Tax and Customs Authority makes to the "thesis that it will suffice to invoke the illegality of the provisions of Circular no. 7/2004 to petition for the acceptance as a tax expense of the entirety of financial charges" apparent.
In fact, the Applicant does not state that Circular 7/2004 is illegal; rather it seeks that it be applied, in particular its point 6.
For this reason, the question of the alleged violation of article 104, no. 2 of the Portuguese Constitution that the Tax and Customs Authority raises in article 148 of its response is also an abstract question of unconstitutionality.
4.5. Questions of prejudicial knowledge
Given that the petition for declaration of illegality of the tacit rejection of the administrative claim is to be judged upheld, due to error in the self-assessment of 2013, cognizance of the remaining questions of legality invoked is rendered prejudicial and unnecessary, such that cognizance thereof is not taken, in accordance with the provisions of article 130 subsidiarily applicable by virtue of the provisions of article 29, no. 1, paragraph e) of the RJAT.
5. Compensatory interest
The Applicant further requests the payment of compensatory interest on the amount to be refunded.
In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the claim of which there is no appeal or challenge binds the Tax Administration from the expiry of the period provided for appeal or challenge, with this Authority, in the exact terms of the granting of the arbitral decision in favor of the taxpayer and until the expiry of the period provided for voluntary execution of sentences of tax judicial courts, "to restore the situation that would exist if the tax act subject to the arbitral decision had not been performed, adopting the acts and operations necessary for such purpose", which is in harmony with the provisions of article 100 of the LGT [applicable by virtue of the provisions of paragraph a) of no. 1 of article 29 of the RJAT] which establishes that "the tax administration is obligated, in the event of total or partial granting of an administrative claim, judicial challenge or appeal in favor of the taxpayer, to immediately and fully restore the legality of the act or situation subject to the dispute, including the payment of compensatory interest, if applicable, from the expiry of the period of execution of the decision".
Although article 2, no. 1, paragraphs a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals operating in CAAD, making no reference to sentences of condemnation, it should be understood that the competencies encompass the powers which, in judicial challenge proceedings, are attributed to tax courts, and this is the interpretation that harmonizes with the sense of the legislative authorization on which the Government based the approval of the RJAT, in which it is proclaimed, as the first guideline, that "tax arbitral proceedings should constitute an alternative procedural means to judicial challenge and to actions for the recognition of a right or legitimate interest in tax matters".
The judicial challenge process, although it is essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration to the payment of compensatory interest, as can be inferred from article 43, no. 1 of the LGT, which establishes that "compensatory interest is due when it is determined, in an administrative claim or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due" and from article 61, no. 4 of the CPPT (as amended by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period for voluntary execution thereof".
Thus, no. 5 of article 24 of the RJAT, by stating that "payment of interest, irrespective of its nature, is due, pursuant to the provisions of general tax law and the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings.
It is thus necessary to assess the request for compensatory interest.
The substantive regime of the right to compensatory interest is regulated in article 43 of the LGT, which establishes, as is relevant here, the following:
Article 43
Payment of undue tax obligation
1 – Compensatory interest is due when it is determined, in an administrative claim or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.
2 – Error attributable to the services is also considered to exist in cases where, although the assessment is made based on the taxpayer's declaration, the taxpayer has followed in its completion the generic guidelines of the tax administration, duly published.
In the case at hand, the error in the self-assessment is attributable to the Applicant, which made it.
However, the illegality of the tacit rejection of the administrative claim is attributable to the Tax Administration, as it should have rendered a decision of acceptance.
Consequently, the Applicant has the right to compensatory interest, pursuant to article 43, no. 1 of the LGT and 61 of the CPPT from the date on which the administrative claim should have been accepted, which is 27-09-2016, four months following its presentation (article 57, nos. 1 and 5 of the LGT).
For this reason, the Applicant has the right to compensatory interest from 28-09-2016, on the amount that is to be refunded to it, which should be determined in enforcement of the judgment.
Compensatory interest is due at the statutory default rate, pursuant to articles 43, nos. 1 and 35, no. 10 of the LGT, article 24, no. 1 of the RJAT, article 61, nos. 3 and 4 of the CPPT, article 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April (or any other that may amend the statutory rate), from 28-09-2016 until full reimbursement.
6. Decision
Accordingly, the members of this Arbitral Tribunal agree to:
a) Judge the exception of incompetence well-founded only as to the requests referred to in paragraphs b) to e) of the petition for arbitral pronouncement and dismiss the Tax and Customs Authority from the instance as to those requests;
b) Judge the exception of untimeliness of the petition for arbitral pronouncement ill-founded;
c) Judge the exception of lack of suitability of the petition for arbitral pronouncement ill-founded;
d) Judge the exception of consolidation under the legal order of charges relating to the financial years 2003 to 2011 ill-founded;
e) Consider cognizance of the exceptions of unsuitability of procedural means and non-conformity between the petition formulated in the administrative claim and the petition for arbitral pronouncement prejudicial and unnecessary;
f) Judge well-founded the petition for declaration of illegality of the tacit rejection of the administrative claim no. …2016… and of the IRC self-assessment relating to the financial year 2013, numbered …-… -…, which is indicated in article 8 of the petition for arbitral pronouncement as the object of the petition for arbitral pronouncement;
g) Judge well-founded the petition for compensatory interest and condemn the Tax and Customs Authority to pay to the Applicant such compensatory interest at the statutory default rate, on the amount to be refunded which shall be determined in enforcement of the present decision, from 28-09-2016 until full reimbursement.
7. Value of the case
The Tax and Customs Authority questions the value of the case, by understanding that it should correspond to the alteration of the taxable matter sought and be fixed at €6,674,653.65.
When an assessment (in the broad sense, encompassing self-assessment) has occurred, the value of the challenge proceedings should be "that of the amount whose annulment is sought," in accordance with the provisions of article 97-A, no. 1, paragraph a) of the CPPT, applicable to tax arbitral proceedings by virtue of the provisions of article 29, no. 1, paragraph c) of the RJAT.
In the case at hand, the beneficial effect that the Applicant seeks to obtain is the annulment of the IRC self-assessment relating to the financial year 2013, such that the utility consists of the value of the tax corresponding to the alteration of the taxable matter that it seeks.
Being thus, the value of the case should be that of the tax corresponding to the alteration of the taxable matter sought.
In the case at hand, it was not demonstrated that the value of the tax is different from what the Applicant indicates as the value of the case, and it is clear that the utility does not correspond to the value of €6,674,653.65 proposed by the Tax and Customs Authority.
Thus, in accordance with the provisions of article 306, no. 2 of the Code of Civil Procedure and 97-A, no. 1, paragraph a) of the CPPT and 3, no. 2 of the Regulation of Court Costs in Tax Arbitration Proceedings, the value of the case is fixed at €1,501,797.12.
8. Court costs
Pursuant to article 22, no. 4 of the RJAT, the amount of court costs is fixed at €20,196.00, pursuant to Table I annexed to the Regulation of Court Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 14-06-2017
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Vasco Valdez)
(Ricardo Gomes Pedro)
( [1] ) The concept of "assessment," in the broad sense, encompasses all acts that recur to the application of a rate to a determined taxable amount and, for this reason, also the acts of withholding at source (in addition to self-assessment and payment on account acts, which do not matter for the decision of the present case).
( [2] ) In this sense, see the decision of the Supreme Administrative Court of 2-4-2009, case no. 0125/09.
( [3] ) Other exceptions to that rule may be found in special provisions, subsequent to the Tax Procedure and Process Code, that expressly provide for judicial challenge as a means to challenge a determined type of acts.
( [4] ) Essentially in this sense, see the decisions of the Supreme Administrative Court of 2-2-2005, case no. 1171/04; of 8-7-2009, case no. 306/09; of 23-9-2009, case no. 420/09; and of 12-11-2009, appeal no. 681/09.
( [5] ) This provision was introduced into the General Tax Law by Law no. 64-A/2008, of 31 December.
However, previously identical binding was provided for in paragraph b) of no. 4 of article 68 of the General Tax Law.
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