Summary
Full Decision
ARBITRAL DECISION
Arbitration in Tax Matters (CAAD)
Case No. 780/2014-T
The arbitrators in this case agree as follows:
I - Report:
- A..., SGPS, S.A., Tax Identification Number ..., with registered office in ..., ..., ..., requested an arbitral ruling on the legality of the additional corporate income tax (IRC) assessment relating to the fiscal year 2009 (assessment No. 2014...) and the respective interest (assessment No. 2014...), as well as the "statement of account reconciliation" No. 2014 ..., petitioning for its annulment.
The Claimant opted to appoint an arbitrator, designating Dr. José Alberto Pinheiro Pinto to perform such functions. The Respondent, Tax and Customs Authority (AT), appointed as arbitrator Professor Dr. Ana Maria Rodrigues, with the presiding arbitrator, Professor Dr. Rui Duarte Morais, being appointed by consensus between them.
The arbitral tribunal was constituted on 09-02-2015.
The AT duly submitted its response.
The meeting referred to in Article 18 of the RJAT took place on 10/04/2015.
The hearing of witnesses and party declarations took place on 15/05/2015, with their testimonies recorded, and oral arguments were made.
- According to the Inspection Report, which is the basis for the assessments now being challenged, the AT understood that an investment made by the Claimant, because aimed at acquiring equity interests, should have been considered as an "unremunerative asset" for purposes of Article 32 of the EBF (in the version then in force) and Circular No. 7/2004, of 30 March, that is, that the Claimant should have increased in Table 07 of Tax Form 22 the value of the financial expenses attributable to such investment, since it is a company managing equity interests.
The AT further contends that, for such credit of the Claimant to be considered a "remunerative asset," the corresponding interest should have been recognized as revenue in the fiscal year in question, by virtue of the principle of specialization of fiscal periods.
With respect to B..., S.A., the AT considered that a payment made by it does not constitute a cost demonstrably indispensable for the realization of revenues or gains subject to tax or for the maintenance of the income-generating source, given that it resulted from the fact that this company had assumed a "debt forgiveness." Thus not being understood [that is, considering that what is at issue is a debt arising from the non-payment by a customer, within the scope of the company's normal activity], such amount could only be accepted as a fiscally deductible expense provided that the provisions of Articles 35 and 36 of the CIRC (in the versions then in force) were observed, which was not the case, not least because such credit was not claimed in the insolvency proceedings of the debtor.
In its initial petition, the Claimant alleged factual circumstances regarding how the two operations in question occurred and legal grounds, which will be analyzed in due course, by which it understands the entirety of the tax assessment being challenged to be illegal.
In its response, the AT raised an objection, critically analyzed the facts alleged by the Claimant, and developed legal grounds, which will be analyzed in due course, which, in its view, lead to the conclusion that the assessment being challenged is legal.
II - Objection raised by the Respondent
The AT raises the objection of lack of timeliness of the request for an arbitral ruling, understanding that, since the request formulated by the Claimant is for a declaration of illegality (annulment) "of the tax correction acts to the taxable matter and corporate income tax assessment for the year 2009 and compensatory interest," the time limit for such would have expired on the date of submission of the initial petition.
The AT understands that, having the time limit for direct challenge of the tax assessment act (that is, the primary act) expired, the "timeliness" of the request could only be founded on the existence of some administrative remedy against the self-assessment act where a decision had been issued denying/rejecting, in whole or in part, the claims formulated therein by the tax subject (which would constitute a second-degree act).
The AT states that the present arbitral Claimant administratively claimed [timely, we add] against the assessment act and that regarding the unclaimed claim, a tacit dismissal was presumed. However, despite having made reference to and identified these circumstances, the Claimant did not formulate/present to the Court any petition aimed at the annulment of that tacit dismissal.
Ruling on the matter:
There are different understandings as to the nature of tacit dismissal—that it corresponds to a legal fiction of the commission of an administrative act and that it is merely a procedural expedient aimed at allowing interested parties to react against administrative inaction, resorting to the courts, without having to await the express decision. We uphold the latter position, for reasons we deem unnecessary to expound here.
What matters here is to point out that the question of determining the object of the proceeding, in case of raising an objection based on tacit dismissal of an administrative claim, has only theoretical interest and cannot constitute lack of timeliness of the action as claimed by the AT.
With JORGE DE SOUSA (Code of Tax Procedure and Process, vol. II, 2011, p. 197), in the challenge of the tacit dismissal of an administrative claim, this act is the immediate object of the proceeding.
However, the assessment act will continue to be subject to judicial challenge to the extent that it is considered, by presumption, confirmed by the tacit dismissal.
And the assessment act that is the mediate object of the proceeding, in cases of tacit dismissal, will even be the only one whose legality can be assessed in the judicial challenge proceeding, because the fiction that is the tacit dismissal cannot contain defects of its own, being able to derive them only from the assessment act that, by legal fiction, is its object, and any procedural illegalities of the administrative claim proceeding, aimed at ensuring the rigor of the decision, will be irrelevant if no express decision comes to be issued.
The essential difference between this procedural situation of challenging the tacit dismissal of an administrative claim and that resulting from the direct challenge of the assessment act is that in the latter case this act is the immediate object of the judicial challenge while in the former it is only its mediate object.
However, in view of the legal regime of absolute preference of judicial challenge in relation to the administrative claim and the hierarchical review of the respective decision resulting from Articles 68, No. 2, and 111, Nos. 3 and 4 of the CPPT, the identification of the object of the proceeding has only theoretical interest, because, at a practical level, in the judicial challenge proceeding only the legitimate interests of the assessment act that is the mediate object of the proceeding will be relevant.
It should be noted that these statements are not contradictory with passages from other works of the same Author cited by the Respondent in its response, as they refer to different situations in which the tacit dismissal of a claim is not at issue.
Furthermore, in the thesis that the tacit dismissal of an administrative claim would correspond to the fiction of the commission of an administrative act, this would necessarily be wholly confirmatory of the decision claimed (of the assessment), whereby it would then continue to be this (the primary act) that subsists in the legal order (Carlos Fernandes Cadilha, Mário Aroso de Almeida, Commentary on the Code of Process in Administrative Courts, 2010, p. 361).
Wherefore it is concluded that the objection raised by the AT is without merit.
The tribunal is competent (Article 2, No. 1, lit. a) of the RJAT). There are no other exceptions or preliminary matters that require consideration.
III - Unconstitutionality of Circular No. 7/2004
The Claimant petitions for a declaration of unconstitutionality of Circular No. 7/2004, understanding that, through it, the Tax Administration did not merely interpret tax law, but rather created a new rule of tax incidence, in violation of Articles 103, Nos. 2 and 3 and 165, No. 1, lit. i) of the Constitution.
The matter was recently addressed by the Constitutional Court, in terms that fully merit our agreement, whereby we merely refer to such decision (Decision of the CC No. 42/2014, of 09 January, Rapporteur Fernando Ventura):
The problem has already been raised and addressed in this Court, deciding in Decision No. 583/2009 that the prescriptions contained in the Circulars of the Tax Administration, regardless of their persuasive radiation in the practice of taxpayers, do not constitute rules for purposes of the system of constitutional review entrusted to the Constitutional Court. It is stated in that decision:
"Since Decision No. 26/85 (published in the Official Gazette, II Series, of 26 April 1985), the Constitutional Court, with a view to identifying the proper object of constitutional review proceedings, has been adopting a concept of rule functionally suited to the system of review that the Constitution entrusts to it. Within this concept of rule fall the acts of public authority that contain a 'rule of conduct' for individuals or for the Administration, a 'criterion of decision' for the latter or for the judge or, in general, a 'standard for assessing behavior.' But, as this is a concept of review finalistically ordered to ensure the system of legal protection typical of the constitutional democratic rule of law, it is not sufficient that the instrument in question binds the Administration to adopt, in the practice of individual and concrete acts of application and while not altering it, a certain criterion that it has established. It is necessary that this criterion also be binding on the other subject of the relationship (normative heteronomy) and constitute a parameter that the judge cannot fail to consider while not making an instrumental judgment of invalidity about it. If the 'criterion of decision' is of administrative origin and only binds within the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of the supremacy of the Constitution that justifies the intervention of the Constitutional Court.
Now, a frequently raised problem in tax law is that of the normative relevance of the so-called administrative guidelines. It is, as Casalta Nabais states, Tax Law, 5th ed., p. 201 (although stating that this does not deprive them of the quality of legal norms): '[...] internal regulations that, because they are addressed only to the tax administration, only it must obey them, thus being mandatory only for organs hierarchically below the organ that created them.
For this reason they are not binding on individuals or on the courts. And this is whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or modes of action, whether they are interpretive regulations, which proceed to the interpretation of legal (or regulatory) provisions.
It is true that they make dense, explicit, or develop legal provisions, previously defining the content of acts to be performed by the tax administration upon their application. But this does not convert them into a standard of validity of the acts they support. In fact, the assessment of the legality of acts of the tax administration should be carried out through direct comparison with the corresponding legal norm and not with the internal regulation, which interposed itself between the norm and the act.'
These acts, in which 'circulars' stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within their respective subjective scope (of the hierarchical relationship) that their observance is assured. They incorporate directives of future action, transmitted in writing to all subordinates of the administrative authority that issued them. They are modes of standardized decision-making, assumed to rationalize and simplify the functioning of services. Although indirectly they may protect the legal certainty of taxpayers and ensure equal treatment through uniform application of law, they do not regulate the matter they address in confrontation with these, nor do they constitute a decision rule for the courts.
The circumstance that the Tax Administration is bound (No. 1 of Article 68-A of the General Tax Law) by the generic guidelines contained in circulars that are in force at the moment of the tax event and has the duty to proceed with the conversion of binding information or other types of understanding provided to taxpayers into administrative circulars, in certain circumstances (No. 3 of Article 68 of the LGT), does not alter this perspective because it does not transform this content into a norm with external efficacy. It is true that the administered party may invoke, in confrontation with the administration, the content of the publicized administrative guidance and, if appropriate, assert it before the courts, even at the expense of the principle of legality (see Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, commented and annotated, 3rd ed., p. 344). But it is under the aegis of the principle of good faith and legal certainty, not by its normative value, that the content of circulars prevails. The administered party only complies with them if and while it suits them, for the same reasons that justify that they may invoke individual binding information that favors them (Article 59, No. 3, lit. e) and Article 68 of the LGT).
Consequently, lacking heteronomous binding force for individuals and not imposing themselves on the judge except by the doctrinal value they may possess, the prescriptions contained in the 'circulars' of the Tax Administration do not constitute rules for purposes of the system of constitutional review within the competence of the Constitutional Court.'
We fully agree with the understanding of the CC: circulars, because they are legal norms that only bind AT officials, by reason of their duty of hierarchical obedience (because they have the nature of internal regulations), are not rules for purposes of assessment of their constitutionality. They merely express the interpretation that the AT makes of a certain legal norm, thereby integrating the justification of the assessment in question. As such, it will be considered, by the Arbitral Tribunal, the said circular.
Wherefore it is concluded that the petition for a declaration of unconstitutionality of Circular No. 7/2004 is without merit.
IV - Facts Proved
The following facts are considered proved and of interest for the proper resolution of the case:
A) The Claimant is a commercial company whose purpose includes the management of equity interests in other companies, being the parent company of a group of companies, subject to the RETGS (Special Tax Regime for Groups of Companies), which includes company B..., S.A.
B) The Claimant was subjected to a tax inspection action by the Tax Inspection, with the object of analyzing the fiscal year 2009, and the following corrections were made to the taxable matter declared:
B.1) With respect to company A..., SGPS, S.A., the AT understood that the amount of € 14,829,776.73, relating to the item Other Debtors and Creditors – C…, SGPS, S.A. – should not be considered as a "remunerative asset," since it had no associated revenue, and should be classified in accounting terms as "other assets."
Accordingly, the AT considered that the financial expenses incurred and attributable to such value would not be fiscally deductible, because they related to the acquisition of equity interests (of company C…), in a total amount of € 320,808.30.
B.2) With respect to company B..., S.A., the AT made a correction that resulted in the non-deductibility of a cost (expense), in the amount of € 2,339,095.95, considered by that company as an uncollectible debt.
C) The Claimant filed, on 8 July 2014, an administrative claim against the assessment now being challenged.
D) Until the end of the deadline provided in Article 57 of the LGT, such claim was not subject to a decision.
– Facts relating to company A..., SGPS, S.A.
E) The value referred to in B.1) has its origin in the Claimant's participation in a capital increase and acquisition of treasury shares that C…, SGPS, S.A. (C...) intended to carry out, designated as a "package operation," which aimed, inter alia, to allow this company to participate, indirectly, in a capital increase of D... (D...).
F) As the first payment, of three foreseen in such operation, the Claimant delivered to C... € 14,832,526.73.
G) As a consequence of the nationalization of D... (Law No. 62-A/2008, of 11 November), a General Meeting of shareholders of C... was held on 18 December 2008, at which the following was decided: "(…) the resolutions of the Board of Directors of 30 June, 4 July and 12 August 2008 are hereby annulled and, in consequence, the capital increase of the company from the amount of € 470,925,000 to € 706,387,500 (…)"; and further that "the Company shall reimburse the Shareholders who are subscribers to the capital increase and acquirers of treasury shares of the amounts delivered by them as the first installment, less the expenses reasonably incurred, with the reimbursement being able to be deferred through recourse to a bond loan and within a maximum period of seven years, with conditions and interest to be stipulated by the Board of Directors."
H) In early 2010, the present Claimant instituted judicial proceedings against C..., seeking its condemnation, among others, for payment of the said amount of € 14,832,526.73, plus the corresponding default interest, accrued from the date of service of process until full payment, which proceeded under No. .../.... TVLSB, in the 1st Section of the 2nd Civil Court of Lisbon.
I) In September 2010, C... (now denominated E…SGPS, S.A.) unilaterally proceeded to convert the credits arising from the annulment of the "package operation" into a bond loan, convertible into shares at the option of the issuer, with a total of 14,716,833 bonds, with a nominal value of € 1.00 each, attributed to the present Claimant, which entitled the holder to the payment of interest.
J) With the respective interest having been made available to the Claimant in fiscal years 2010 and subsequent years.
K) C…/E… notified the claimant that it had proceeded with the legally required withholdings on the tax at source relating to such interest.
L) The present Claimant did not accept the decision to convert its credit into bonds, whereby it refused to receive those amounts.
M) In October 2012, in the proceeding referred to in H), a first-instance judgment was issued (not yet final) that condemned C.../E... to pay to the Claimant the amount of € 14,832,526.73, plus default interest accrued and accruing from the date of service of process until full payment, to be calculated at the legal rate in force at each moment for credits held by merchants.
– Facts relating to company B..., S.A.
N) On 5.11.2008, F…, S.A., issued a debit note, No. …, to company G..., for the sale of Ukrainian wheat, in the amount of 5,440,837.50 €, with VAT included at 5%, the due date of which was 5.3.2009.
O) Payment of this debit note was made to B..., on 7.11.2008, by H....
P) G... had entered into with H... a "contract for the provision of payment services to suppliers," a copy of which was submitted to the proceedings by the Claimant on 15.04.2015.
Q) According to such contract, H... would proceed to pay, on the dates stipulated for such, invoices of Customers of G..., up to the maximum limit, at each moment, of 35,000,000.00 USD (clauses 1st, 2nd, 3rd and 4th).
R) It was the responsibility of G... to indicate to the Bank which invoices were to be paid by it (clause 2, No. 1), with the selection of the Suppliers to whom advancement would be made, as well as the determination of the amounts of funds to be advanced, being at the exclusive discretion of the Bank (clause 4, No. 4).
S) Pursuant to No. 5 of clause 4, "the assignments of credits against the Customer made by the Suppliers to H... in accordance with the preceding numbers shall be made without recourse against the assignors"
T) Pursuant to clause 13 of that contract:
1- The Customer delivers on this date a blank promissory note form subscribed by it, with the guarantee of B..., S.A., intended to secure the Customer's liabilities to H... arising from this contract, including the amounts debited in overdraft on the account referred to in clause 7.
2- The Customer authorizes H... to fill in the document referred to in the preceding number, namely as regards the date of its issuance and due date, as well as its amount, up to the limit of the Customer's liabilities to H... on the date of completion.
U) B..., S.A., subscribed to this contract in the capacity of guarantor.
V) On 20.4.2009, the bank H... sent communication to B..., S.A., informing it that, with respect to the amount of € 5,440,837.50, which had become due on 16.3.2009, G... had only paid € 3,101,741.55, leaving outstanding the difference of € 2,339,095.95.
X) On 8.5.2009, B..., S.A., paid such difference, having for such purpose issued check No. … to the order of H....
Z) Such payment was decided by the Board of Directors of B..., S.A., on 24/04/2009, reading in the respective minutes (No. ...) "… in consequence of earlier commitments… with the bank H..., within the scope of various contracts for the provision of payment services…, which in practice enabled us the centralization of payments [and receipts] to our suppliers of raw materials, in particular G..., S.A., with us now being confronted by that banking institution to proceed with the liquidation of the amount of 2,339,095.95€, since under that type of contract, that amount was due and unpaid to the bank since 16 March 2009 by the aforementioned supplier."
"…it was unanimously decided that, with respect to the abovementioned amount and since it is not possible to negotiate another solution with the banking sector, payment to that institution must be made as soon as possible, to avoid contentious proceedings that would certainly result in a negative impact on the good image that B... has in the business market in which it operates."
AA) The accounting of B..., S.A., shows the following:
-
In the initial trial balance of 2009, the customer account of G... did not reflect any value related to debit note No. ...;
-
On 31.12.2009, account 692 – Uncollectible debts – was debited and account 2681057 – G... was credited, that is, the accounts with G... reflect the total debited equal to the total credited and the balance at zero;
-
From the customer account (21111646), in the month of December, the balance of € 381,543.53 was transferred to the doubtful collection customer account (218010) and from this to account 69.2 - uncollectible debts;
-
From the suppliers account (22110697), the amount of € 6,194,331.28 was transferred to account 69.2 Uncollectible debts;
-
From the account other debtors and creditors (2681057), the amount of € 2,339,095.95 was transferred to account 69.2 Uncollectible debts.
BB) H... was one of the most important external financiers of A..., both by reason of direct financing and leasing contracts.
CC) As a result of the payment made, B..., S.A., became subrogated in the Bank's credit right against G..., as of 16/03/2009.
DD) G... was declared insolvent on 03/06/2009.
EE) B..., S.A., did not claim this credit of hers in the insolvency proceedings of G....
V - Facts Not Proved
The reasons that motivated B..., S.A., to grant, in the capacity of guarantor, the "contract for the provision of payment services to suppliers," entered into between G... and H…, were not proved.
The fact that B..., S.A., obtained an "advancement of funds" (see N) and O) of the proved facts) is not suitable to explain the granting of a guarantee with the characteristics that were proved, not least because the granting of a guarantee is not the legal transaction adequate to achieve that objective.
The conviction of the arbitral tribunal regarding the "facts proved" results from the documentation contained in the proceeding (P.A. and documents submitted with the pleadings), with there being no true controversy about them, but only about the legal consequences that should be drawn from them.
With regard to the "fact not proved," the hearing of the witnesses called by the Claimant, who testified about the contractual relationships between B..., S.A., and G... and the relationships of these two companies with H..., was not clarifying, not least because such witnesses declared ignorance of the circumstances under which the "contract for the provision of payment services to suppliers" that formed the basis of the payment made by the first of these companies to the Bank was entered into.
VI - Ruling on the Merits
A) Correction to the taxable matter relating to A..., SGPS, S.A.
The disagreement lies in the classification to be given to the investment of € 14,829,776.73 made by the Claimant in C.... Should such value be classified as "Remunerative Asset" or as "Other Assets" for purposes of applying the formula contained in Circular No. 7/2004?
It is necessary to analyze, in a first phase, the provision in No. 2 of Article 32 of the EBF, in order to then be able to conclude on the guidelines contained in that Circular.
1- No. 2 of Article 32 of the EBF
Law No. 32-B/2002, of 20 December, which approved the State Budget for 2003, once again amended the tax regime for capital gains realized by SGPS companies upon the sale of equity interests, whereby these gains no longer contribute to the formation of taxable profit in IRC; in parallel, the deductibility of capital losses was excluded, as well as that of financial expenses incurred by such companies for the acquisition of equity interests.
The reasons underlying this legislative amendment are set forth in the Report on the State Budget for 2003. Under the heading "Main changes in corporate income tax," and the subheading "Broadening the taxable base and measures for tax fairness and neutrality," it points to the exemption from corporate income tax of capital gains realized by SGPS companies upon the sale of equity interests held for more than one year, accompanied by measures designed to prevent abusive tax planning, bringing the national regime closer to the Dutch model, a measure associated with the establishment of a regime of denial of deductibility, for purposes of determining taxable profit of such companies, of expenses of a financial nature directly associated with the acquisition of the corresponding equity interests (report accessible at www.dgo.pt).
Thus, the regime provided for in Article 32 of the EBF aimed to create a more competitive tax regime for SGPS companies, bringing the Portuguese regime closer to some international experiences considered more relevant[1], following many other legislative interventions relating to the taxation of such entities that had already occurred since the creation of their legal regime in 1988[2].
The fiscal denial of financial expenses incurred by SGPS companies with loans taken out to finance the acquisition of equity interests aimed, therefore, to counterbalance the tax benefit granted for capital gains resulting from the sale of such equity interests.
The concern for balancing underlying the provision in question, seeking to make a matching between gains/revenues (capital gains) and costs/expenses (capital losses) of SGPS companies, and the refusal to accumulate advantages, is enunciated by Luís Graça Moura in the following passage: "the legislator will have aimed at granting a benefit – total exclusion from taxation of capital gains – which, however, would be counterbalanced by the non-deductibility of certain financial expenses incurred, creating an environment of neutrality between eventual gains from certain assets (certain financial investments[3]) and the liability necessary to create the conditions for obtaining such gains, that is, the liability related to the acquisition of such equity interests. The underlying construction would be that the contracting of such loans represented, in potential, an element capable of placing the SGPS in a position to realize capital gains that it excluded from taxation (...)"[4].
The wording given by the 2008 State Budget Law to the then Article 31, No. 2, of the EBF (later renumbered as Article 32)[5], was as follows:
Article 31
Companies managing equity interests (SGPS) and venture capital companies (SCR)
1 - (...)
2 – The capital gains and capital losses realized by SGPS companies and SCR companies through the onerous transfer, in whatever manner it occurs, of equity interests of which they are holders, provided they have been held for a period of not less than one year, and likewise the financial expenses incurred with their acquisition, do not contribute to the formation of taxable profit of these companies.
3 – (...)
This is the legal basis invoked by the AT to support the correction made.
2 - Deductibility of Financial Expenses
In the context of the expanded argument presented by the Claimant, one of the questions that would be worth considering would be whether the financial expenses incurred by it with the acquisition of equity interests are or are not deductible pursuant to Article 23 of the CIRC, that is, whether they are or are not indispensable for obtaining its revenues or maintaining its income-generating source.
However, the question at issue here is not that one. What is at issue is the fiscal denial of such expenses, by virtue of a special regime that the legislator decided to provide for certain types of legal entities, namely SGPS companies.
We understand – contrary to what the Claimant advocates – that the legislator did not seek to reproduce, sectorially, the rule already contained in Article 23 of the Corporate Income Tax Code – in the version in force in 2009 – that is, the rule of non-deductibility of expenses associated with revenues not subject to corporate income tax.
The provision for the deductibility of financial expenses, set forth in lit. c) of No. 1 of Article 23 of the CIRC, does not contradict the provision in No. 2 of Article 32 of the EBF. Financial expenses are, in general, a cost (expense) indispensable for the realization of revenues/income, pursuant to Article 23 of the CIRC. Another matter is the exclusion of deductibility of certain such expenses, relating to SGPS companies[6].
In summary, the tax provision at issue cannot be understood in the context of the general guidance contained in Article 23 of the CIRC, as it is special law, applicable to SGPS companies.
3 - Circular No. 7/2004, of 30 March
Basing itself on an alleged difficulty in using the direct allocation method[7] and the possibility of its manipulation by taxpayers, the Tax Administration understood that financial expenses incurred by SGPS companies to be attributed to the acquisition of equity interests should be calculated by applying the formula provided therein.
Such formula is based on the allocation of the financing that originated the total financial expenses of the company, that is, the different types of assets held by an SGPS company. The nature of such assets would allow quantification of the value of financial expenses deductible and non-deductible for tax purposes.
As the AT states, No. 2 of Article 32 of the EBF does not establish which method should be used for purposes of allocating financial expenses to the acquisition of equity interests. Accordingly – the AT understands – Circular No. 7/2004, of 30 March, "merely intends to give effect to the law, determining the method and form of calculation of the financial expenses incurred with the acquisition of equity interests."
The calculation formula adopted in such Circular is apparently very simple, but its application results in complexity from the perspective of the assumptions used in the classification of the items to be considered, as it is based solely on the distinction between remunerative and unremunerative assets and liabilities.
Now, the classification of active and passive elements between remunerative and unremunerative finds no foundation in the legal-accounting order at the date of the facts (POC – Official Chart of Accounts), nor in the currently applicable one (SNC – System of Normalization Accounting). Hence, it appears in an innovative manner in Circular No. 7/2004. Accordingly, the AT should have defined what it understood by each of these concepts. However, it did not do so, limiting itself to listing examples of remunerative and unremunerative active and passive elements.
No. 7 of such Circular states that "given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that the same would allow, such attribution should be carried out on the basis of a formula that takes into account the following: the remunerative liabilities of SGPS companies and SCR companies should be attributed, in the first place, to the remunerative loans granted by them to the companies participated and to other investments generating interest, with the remainder being allocated to the remaining assets, namely equity interests, proportionally to their respective acquisition cost."
No. 8 of the said Circular provides an example:
"Let us consider the following active and passive values (in euros) that constitute the balance sheet of an SGPS company:
Active values:
Remunerative loans granted - 50,000
Equity interests (acquisition cost) - 20,000
Other assets - 10,000
Passive values:
Remunerative loans obtained - 90,000
According to point 7, we have:
Remunerative liabilities attributable to remunerative loans granted: 50,000
Remunerative liabilities attributable to the remaining assets: 90,000 - 50,000 = 40,000
Remunerative liabilities attributable to equity interests:
20,000 ---------------------------- 30,000
X ----------------------------------- 40,000
With X = 26,666.67
Assuming that the financial expenses incurred in the fiscal year totaled € 1,800, the portion of expenses attributable to equity interests will be:
90,000 ---------------------------------- 1,800
26,666.67 ------------------------------ X
X = 533.33"
The Circular thus proceeds to a two-part classification of assets, distinguishing between "remunerative assets" and "other assets." However, it does not define what it understands by each of these concepts.
And such definition would be imperative given that there is not, or can hardly be, a direct factual relationship between the total funds obtained, which implied the payment of interest, and the funds invested in the acquisition of equity interests.
There may be assets that have no associated revenue and that do not relate to the acquisition of equity interests.
The question that arises is, therefore, whether, within the scope of applying such formula, the interested party may be admitted to prove that it incurred financial expenses that should be associated with assets that, although unremunerative, are not equity interests and, therefore, should not be denied for tax purposes.
We believe we can find solid support for our answer in the jurisprudence of the Constitutional Court[8]:
"It is considered that in cases where there is the possibility of direct allocation, it should not be set aside, and if the ratio legis of the norm provided for in No. 2 of Article 31 of the EBF is to ensure the validity of a regime of neutrality of revenues and costs associated with capital gains excluded from taxation, ensuring that non-taxable revenue must correspondingly have the cost associated with it also be non-taxable from the fiscal perspective, then, in order to achieve such objective, any method (direct or indirect) is acceptable as long as it ensures the safeguard of the aforementioned ratio legis."
That is, for the calculation of financial expenses that are not deductible, because associated with the acquisition of equity interests, any method (direct or indirect) is acceptable as long as it ensures that costs associated with non-taxable revenues are not fiscally deductible.
It is, therefore, perfectly legitimate to use the formula contained in the Circular, but this must be "corrected" as necessary so that the ratio legis of No. 2 of Article 32 of the EBF is fully respected.
The same is to say that the adoption of the formula recommended by the Circular does not bind the taxpayer to the consequences derived from it, when these result contra legem.
In agreement with the Decision of the TCAN of 15 January 2015, Proc. 00946/09, Rapporteur Mário Rebelo: the fact that in its methodology it used the criteria recommended in circular No. 7/2004, of 30 March, in particular its points Nos. 7 and 8, does not save the legality of the operation, as the criteria and assumptions for allocating the remunerative liabilities of SGPS companies clearly exceed the content of Article 31/2 of the EBF, creating presumptions and proportional calculations that the legislator clearly did not assume or consent to.
It is manifest that the legislator "did not assume or consent to" the proposition that financial expenses incurred by an SGPS company, associated with assets that, although unremunerative, are not equity interests, would be considered as non-deductible.
Such a limitation on the deductibility of costs (such a distortion of the principle of taxation of real income) cannot be imposed by a Circular, not least because it would violate the formal dimension of the principle of legality in the creation of taxes.
4 – In the Concrete Case
In the case at hand, we have that the Claimant, as a result of the annulment of the "package operation," decided not to accept the transformation of its credit against C... into the subscription of a bond loan, with bonds subject to the payment of interest[9], opting instead for the route of requesting reimbursement of the amounts delivered.
It must first be pointed out that the Claimant will never be able to realize capital gains or losses upon the sale of the equity interests in question (those it intended to acquire within the scope of the "package operation"), since it never acquired them nor will it be able to acquire them in the future.
Therefore, the relationship provided for in No. 2 of Article 32 of the EBF will never occur. As the asset (the credit against C...) is not capable of generating a capital gain, the interest associated with the bank loan that financed this asset cannot be denied for tax purposes.
Second, from a legal perspective, everything must be treated as if the contract entered into, aimed at the acquisition of shares, never took place, given the retroactive effects that law provides for the annulment of a contract (Article 289, No. 1, of the Civil Code). With Heinrich Hoerster, The General Part of the Portuguese Civil Code, 1992, p. 590, since the effects of annulment are retroactive to the moment of conclusion of the transaction, in principle everything occurs as if the transaction had never been concluded. Wherefore the judgment of annulment, in destroying the legal effects produced (provisionally, it is true), has a constitutive character – unlike the judgment relating to a void transaction.
The application of such command of civil law is not contradicted by the provision in Article 38, No. 1, of the LGT, since the transaction entered into ("package operation") never came to produce the economic effects intended by the parties, in as much as the Claimant, despite the partial payment made, never came to be the holder of the shares that by such route it intended to acquire.
Therefore, from a legal perspective, it is irrelevant for the assessments to be made, with respect to the fiscal year in question (2009), the fact that such investment was initially directed at the acquisition of equity interests.
Finally, from an accounting perspective, we have that, after the annulment of the "package operation," on 18.12.2008, the Claimant should have reclassified in its accounts the amount delivered for the acquisition of equity interests and, as of the date of inspection, the same should have been classified as a right against third parties, and should, given its residual nature, be recognized in account 26.8 – other debtors, as it did.
It is true that this credit cannot be considered a remunerative asset, since it truly is not. It is, for what matters here, an asset that was reclassified, ceasing to be considered an investment in equity interests and becoming a credit of a general nature.
Now, as we have seen, Circular No. 7/2004 does not provide for the existence of unremunerative assets that are not equity interests. But, for the reasons already sufficiently explained, such omission cannot have as a consequence that they should be considered as "other assets" (remunerative) for purposes of calculating the fiscally deductible interest.
5 - Accounting for Interest "Owed" by C...
There remains the question of the accounting for interest owed by C....
A distinction must be made here between two types of interest.
First, we have the interest made available to the Claimant by C… (J) of the facts proved).
The existence of such interest is irrelevant to the question at issue, since their provision to the Claimant occurred in fiscal year 2010 and subsequent years and what is at issue is an assessment of corporate income tax for the year 2009. In any case, it is clear to see that, having the Claimant not accepted the conversion of the amount delivered to C… into a bond loan, it would make no sense to receive such interest (which it did not) and, much less, recognize them as revenues (income) in its accounting.
Second, we have the question of default interest.
The annulment of a contract does not imply the payment of interest with respect to amounts to be returned, as No. 1 of Article 289 and Article 290 of the Civil Code only oblige restitution, simultaneously, of what will have been provided.
The existence of the obligation to pay default interest is also not related to the nature of the transaction, whether onerous or gratuitous, as a legal transaction (that is, whether an asset is remunerative or unremunerative, in the language of Circular No. 7/2004), but rather with the late performance of an obligation.
C... was legally interpellated to proceed with the return of the amount delivered by the claimant through service of process in the action referred to in H) of the facts proved, that is, in 2010.
Only from that point forward is there able to exist default in the performance of the obligation of restitution that may fall on C... and, consequently, the obligation to pay such interest.
That is, with respect to 2009, it is not even possible to raise the question of the existence of an obligation on the part of C... to pay default interest.
In any case, the question of whether there was non-performance on the part of C... (and, consequently, whether this will be obligated to pay interest) is still an open question, since the first-instance condemnatory judgment has not yet become final.
Accordingly, we understand that, given the uncertainty associated with the right to receive default interest, the Claimant should not have considered them as financial income in each accounting period (even after 2009), as Article 18 of the CIRC, which imposes the regime of economic periodization, in obedience to the principle of specialization of fiscal periods, does not lead to the recognition of revenues that are hypothetical or merely potential, uncertain in their amount and in the moment of recognition.
B) Correction to the taxable matter relating to B..., S.A.
It is necessary to start by noting the following facts, proven as such: B..., S.A., sold wheat to G..., on credit; B..., S.A., received from H... the entirety of the respective price, on 7.11.2008.
This means that such contract of purchase and sale was fully performed, that is, as far as what is relevant here, the credit of B..., S.A. derived from such sale (its right to receive the respective price) became, definitively, extinct, by reason of the full performance of the obligation that impended on G..., it being irrelevant that such payment was made by a third party, the Bank.
The same is to say that, from the date on which the payment made by the Bank occurred, B..., S.A., ceased to be a creditor of G....
On 8.05.2009, B..., S.A., became, once again, a creditor of G..., but on a different basis and in a different amount. B..., S.A. became a creditor of G... for the amount of € 2,339,095.95 that this company still owed to H..., by reason of having proceeded to pay such amount to the Bank and, in consequence, having become subrogated in the position of creditor of G... which the Bank previously occupied (note that "the assignments of credits against the Customer made by Suppliers to H... were made without recourse against the assignors" - S) of the facts proved).
It is thus this credit – and not the previous one, already extinct – that is at issue in the present proceedings.
The question of fact that must be assessed is, therefore, as simple as this: on what grounds (for what reason) did B..., S.A. pay the Bank the amount in question?
Having determined the "cause" of the payment, it will be necessary to ascertain whether, from a tax perspective, such payment implies the existence of a "fiscally deductible expense" in the determination of the taxable matter of that company.
There is no doubt whatsoever as to the fact that such payment took place by force of the guarantee granted by B..., S.A., to G..., within the scope of the contract for the provision of services to suppliers that it entered into with H... (O) to U) of the facts proved).
B..., S.A. paid H... the amount that G... owed it because it was obligated to do so as a guarantor (it being irrelevant whether such guarantee resulted from the signature, in that capacity, of the "blank promissory note" provided for in the "contract for the provision of payment services to suppliers" or from the execution of the contract by B..., S.A., in the capacity of guarantor, as we are in the realm of immediate relationships, whereby an autonomous cartular relationship was not formed).
This is without prejudice to the fact that such contract was not provided by the Claimant to the AT when the inspection action took place, which led it to conclude – and correctly so, given the facts of which it could reasonably have had knowledge – that such payment did not have an underlying legal obligation.
No. 3 of Article 6 of the Commercial Companies Code provides: provisions of real or personal guarantees to the debts of other entities are considered contrary to the purpose of the company, except if there exists justified interest of the guaranteeing company itself or if it is a company in a relationship of domination or group.
There is no doubt that a guarantee has the nature of a personal guarantee, as well as that G... is the beneficiary of the guarantee.
It was neither alleged nor proved that G... is a company in a group relationship with B..., S.A.
It was only proved that, at that time, H... was an important financier of B..., S.A. (with a relative importance much less than it had had in prior periods) and that this company had obtained an "advancement of funds" (received, earlier, the price of the wheat sold), with nothing more having been ascertained as to the circumstances that motivated B..., S.A. to accept being a guarantor of G... in the contract in question.
Furthermore, contractually, B..., S.A., did not "guarantee obligations of itself" (which, moreover, would result contradictory in its own terms), but guaranteed, before the Bank, the performance of the obligations of G... to an indefinite universe (to be determined by G... and the Bank) of its suppliers (Q) and R) of the facts proved).
It was not, therefore, proved that justified interest of the guaranteeing company exists in the granting of the guarantee in question.
The assumption of the position of guarantor by B..., S.A. thus corresponded to the assumption of an illegal obligation.
Considering only the fiscal dimension of the question, it is obvious that the expenses incurred by a company by reason of having contracted an illegal obligation are not, by definition – necessary expenses for the pursuit of its purpose ("indispensable expenses," in the prior terminology of Article 23 of the CIRC), whereby they cannot be fiscally deductible.
We conclude, therefore, that the expense of € 2,339,095.95, in which B..., S.A. incurred, is not fiscally deductible, whereby the correction made by the AT merits no objection.
Thus, the ruling on the other questions raised by the Claimant with respect to this correction to the taxable matter is rendered unnecessary.
VI) Decision
a) The objection raised by the Respondent is declared without merit.
b) The petition for a declaration of unconstitutionality of Circular No. 7/2004 is not entertained, due to the legal impossibility of the petition.
c) The correction made by the AT to the taxable matter relating to company A..., SGPS, S.A., is declared illegal, on the understanding that the financial expenses incurred, attributable to its credit against C..., in a total amount of € 320,808.30, are fiscally deductible, whereby that part of the assessments challenged (corporate income tax and interest) resulting from such correction is annulled.
d) The correction made by the AT to the taxable matter relating to company B..., S.A., which resulted in the non-acceptance of the deductibility of an expense of € 2,339,095.95, is declared legal, whereby, as to the remainder, the assessment challenged is confirmed.
The value of the case is fixed at € 749,854.83 (seven hundred and forty-nine thousand, eight hundred and fifty-four euros and eighty-three cents).
The costs of the proceeding are the entire responsibility of the Claimant (Article 5, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings).
On 2 July 2015
Rui Duarte Morais
José Alberto Pinheiro Pinto
(dissenting in part, pursuant to the dissenting opinion attached)
Ana Maria Rodrigues
Dissenting Opinion
As this decision addresses two corrections made by the Respondent with respect to the taxable income declared by the Claimant, the dissenting opinion of the dissenting arbitrator is limited to the correction made with respect to company B…, S.A., which is part of the group of companies taxed under the special tax regime for groups of companies, whose parent company is the Claimant. The correction resulted from the non-acceptance as a fiscal expense of a loss of € 2,339,095.95 incurred by that company, as it was considered not to meet the conditions to show fiscal relevance.
I dissent from the decision taken by the majority on the grounds that it is based on an inadequate factual foundation. It was considered that "the reasons that motivated B…, S.A., to grant, in the capacity of guarantor, the 'contract for the provision of payment services to suppliers,' entered into between G... and the Bank…, were not proved" and that "the fact that B..., S.A., obtained an 'advancement of funds' (…) is not suitable to explain the granting of a guarantee with the characteristics that were proved, not least because the granting of a guarantee is not the legal transaction adequate to achieve that objective."
First of all, it is not understood why it is considered that the obtaining of an "advancement of funds" – for several months, moreover, and without any financial cost – is not "suitable" to explain the guarantee granted. Nor is it understood why the granting of a guarantee is considered not the legal transaction adequate to achieve the said "advancement of funds," all the more so as no alternative more accessible and operational is apparent.
What would have been the adequate legal transaction? Drawing a bill against the customer and its respective discount at the bank? Bank financing? Is it not true that the choice of a particular form would always have been conditioned by the Bank's willingness to accept it?
Given the situation that ultimately occurred in relation to G..., it seems perfectly reasonable to suppose that the Bank would not make an "advancement of funds" of almost 5.5 million euros without any guarantee, or would do so subject to the "with recourse" clause. And that guarantee could only come by way of the assumption of liability by B… (whether by the concrete form under consideration, by way of drawing a bill for discount, or by way of factoring with recourse), undoubtedly interested in the "advancement of funds" for such a long period and without any expense of a financial nature.
Moreover, contrary to what is stated with respect to the "fact not proved," the witnesses heard by the Court, and in particular the Official Auditor of the Claimant, were clear in the explanation of the reason that led to the granting of the guarantee by B..., S.A. and in the identification of who was the initiator of the operation. And the truth is that the credibility of those witnesses was not questioned.
On the other hand, it was not the granting of the guarantee that determined that the company incurred the cost now at issue – what determined such cost was, in fact, the non-performance by G... in paying for the supply.
If B..., S.A. had not guaranteed the operation, not only would it not have received the amount advanced by the Bank, but it would possibly not even have come to receive the portion of that amount that later it was not obligated to repay, that is, around 3.1 million euros.
Given the manner in which I view the consideration of facts as proved or not proved, different is, naturally, my understanding regarding the assessment of those facts.
The majority sense of the arbitral decision considers that the granting of the guarantee by B..., S.A. corresponds to the assumption of an illegal obligation, having in mind the provision in No. 3 of Article 6 of the Commercial Companies Code, proceeding from there to the non-acceptance of the expense for tax purposes.
In my opinion, if there are situations in which the granting of a guarantee does not constitute the assumption of an illegal obligation, it is precisely the one now at issue. There exists, in fact, an obvious explanation that does not admit of alternative for the granting of the guarantee. The testimonial evidence itself, if necessary, would clearly confirm the objective of the guarantee. But the rules of common experience would suffice.
It seems absolutely clear that the guarantee was granted in the interest of B..., S.A., which therefore took the initiative to request it, with the unequivocal purpose of receiving, albeit in conditional form, revenues from its sales. In essence, it was a matter of obtaining financing, as could have been achieved by alternative means (if the Bank so understood), as would occur in the case of drawing a bill for discount. Now, not to accept the expense based on a strictly formal reason, when it is known that, whatever the course adopted with a view to obtaining the financing, the expense would have existed, is not to respect the purpose of neutrality that Fiscal Law must preserve.
Note that we should not analyze the contract that was entered into with the participation of B..., S.A. as guarantor in an abstract perspective, as if that company were lending its guarantee to unrelated entities. Regardless of the appearance that in the abstract the contract and the guarantee may have, what must be analyzed is the contract in concreto, and the truth is that the guarantee functioned only in relation to B..., S.A. itself, and not in relation to any other creditor of G....
Finally, it is important not to forget that the expense that is at issue in no way depends on the validity or existence of the guarantee. If the guarantee had not been granted, the obvious conclusion is that the expense would have been incurred anyway, for with absolute certainty the Bank, without the guarantee, would not have advanced the money, and if G... did not pay the Bank, neither would it have paid its creditor.
Now, what is being refused is the acceptance of an expense that was undoubtedly actually incurred and that, even without the guarantee, would always end up being so. And one is not rejecting the acceptance of an expense in a given tax period, with acceptance in another, but rejecting the acceptance of that expense in a definitive way. And this, regardless of other considerations, involves in my view a clear offense against the principle of taxation of real income that is enshrined in No. 2 of Article 104 of the Constitution of the Portuguese Republic.
For the reasons just set forth, I vote in partial dissent from the arbitral ruling in the part to which I have just referred, and would have considered the action to be well founded also regarding the acceptance as a fiscal expense of the loss of € 2,339,095.95.
José Alberto Pinheiro Pinto
[1] Júlio Tormenta, Companies Managing Equity Interests as an Instrument of Tax Planning and its Limits, 2011, pp. 73 to 95.
[2] Decree-Law No. 495/1988, of 30 December.
[3] Now designated as "financial investments."
[4] Luís Graça Moura, The "New" Taxation of Income of SGPS Companies: Reflections on the Taxation of Capital Gains Within the Framework of the Principle of Legal Certainty, in Legal Journal of the Portucalense Infante D. Henrique University, No. 10, March 2003, p. 122.
[5] Republication performed by Decree-Law No. 108/2008, of 26/06.
[6] Provision whose conformity with the Constitution was affirmed by the Constitutional Court in its Decision No. 42/2014, already cited, in which it was decided "not to declare unconstitutional the norm contained in Article 31, No. 2, of the Statute of Tax Benefits, in the version given by Law No. 32-B/2002, of 30 December, to the extent that it imposes the fiscal non-deductibility of financial expenses incurred with the acquisition of equity interests as soon as these are incurred, regardless of the realization of capital gains exempt from taxation with the sale of such equity interests."
[7] Which would be that of real allocation. In practice, the use of such method would result extremely complex, as it would imply rigorous cost accounting and, even so, would be difficult to validate by those adopting it.
[9] Which would make indisputable the classification of such asset as remunerative.
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