IRC Cost Deductions & SIFIDE Tax Credit in Group Taxation – CAAD Case 84/2014-T

Decision

I – REPORT

1. On 4 February 2014, the company A..., S.A., legal entity no. ..., with headquarters on ... Street, Vila Nova de Gaia (hereinafter referred to as "Claimant"), in its capacity as the incorporating company of B... – SGPS, S.A., legal entity no. ..., with headquarters in ..., Avintes, belonging to the financial service of Vila Nova de Gaia, filed a request for constitution and arbitral pronouncement, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "RJAT").

2. The Claimant requested an arbitral pronouncement relating to the following tax facts concerning the group of companies subject to the Special Tax Regime for Groups of Companies (RETGS) whose controlling company in the 2008 tax year was B... – SGPS, S.A.:

a) Additional assessment in Corporate Income Tax no. ..., which resulted, after compensation, in a sum payable of €1,348,249.34, relating to the 2008 tax year, with 18/1/2012 set as the deadline for making voluntary payment.

b) This assessment resulting from a correction to the taxable base of the Claimant in the amount of €3,532,566.05, which increased from €1,678,200.69 to €5,210,766.74.

c) The correction to the taxable base of the group of companies resulted from the following corrections made to the following subsidiaries:

i) C... – Real Estate Company, S.A. (C...), regarding which a correction of €28,592.81 was made to the tax loss declared through non-acceptance for tax purposes, under art. 23 of the CIRC, of costs recorded as interest relating to financing by this company;

ii) D..., S.A. (D...), to which a correction of €69,411.18 was made to the tax loss declared because interest relating to financing was not accepted for tax purposes (also under art. 23 of the CIRC);

iii) E..., SGPS, S.A. (E..., SGPS), to which a correction of €460,902.57 was made, under art. 32, no. 2, of the Tax Benefits Statute, concerning costs recorded as interest;

iv) F..., S.A. (F...), to which a correction was made, under art. 42 of the CIRC, to the taxable base of 50% of the tax loss resulting from the liquidation of its subsidiary G..., S.A. (G...), totalling an amount of €2,973,659.49;

v) F..., S.A. (F...), to which a correction was made in the amount of €400,934.29 in the deduction from the tax liability consisting of the benefit, through tax credit, under the "System of Tax Incentives for Research and Development" (SIFIDE).

The Claimant noted, however, that subsequently, the Tax and Customs Authority (AT), in a Partial Approval Order of Hierarchical Appeal, considered that the correction referred to in the above-mentioned paragraph "iii)" was, in fact, not due.

1. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD on 5/2/2014, and was notified to the Tax and Customs Authority (hereinafter referred to as "AT" or "Defendant") on that same day.

2. In the request for arbitral pronouncement, the Claimant opted not to appoint an arbitrator. Pursuant to 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 31/12, the Deontological Council of CAAD appointed as arbitrators of the collective arbitral tribunal the undersigned signatories, who accepted their appointment in accordance with the legal provisions.

3. The parties were notified on 20/3/2014 of the appointment of the arbitrators, pursuant to art. 11, no. 1, paragraphs a) and b), of the RJAT, and articles 6 and 7 of the Deontological Code.

4. In accordance with 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 4 April 2014.

5. The Defendant, duly notified for this purpose, submitted its Answer and proceeded to attach to the present proceedings the Tax Administrative File.

6. The date of 30/5/2014, at 15:30, was set for the meeting provided for in article 18 of the RJAT, which was held on that date (see the minutes of the meeting of the collective arbitral tribunal contained in the present file, which are hereby considered fully reproduced). It should be noted that the arbitral order relating to the date for the aforementioned meeting provided that the parties must submit in writing the specification of the concrete facts and the precise points of fact (which should not be proved by documents) on which they intended that each of the witnesses called be examined, with the presumption that, if they did not do so, they waived the case of testimonial evidence.

7. On 27/6/2014, the Claimant requested that the request for witness examination be accepted and considered, justifying that, on one hand, it had sent, by oversight, at an earlier date, the application to proc. no. 85/2014-T and, on the other hand, because the matter of fact contained in proc. no. 84/2014-T did not entirely coincide with that of the other proceeding.

8. By order of 30/6/2014, and following the application submitted by the Claimant on 27/6/2014, the Arbitral Tribunal dispensed with the production of the testimonial evidence called, further communicating to the parties that the final decision will be delivered by 30/9/2014.

9. On 3/7/2014, the Claimant submitted a new application to the Arbitral Tribunal, expressing and justifying its disagreement with the decision delivered by the tribunal on 30 June 2014 and setting forth some facts for which it considered it important to examine the called witnesses.

10. On 8/9/2014, the Defendant declared that it waived examination of the witness it had called on the ground that the testimonies given within the scope of Proceeding no. 85/2014-T had been considered absolutely irrelevant to the decision of the disputed issues in the present proceedings.

11. On 9/9/2014, the Arbitral Tribunal reiterated its decision regarding the uselessness of the testimonial evidence called for the task indicated by the Claimant, of "interpretation of the facts and the applicable law to the concrete case", with the file awaiting the final decision with the date already set.

12. The Arbitral Tribunal is materially competent and is duly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT, and 1 of Ordinance no. 112-A/2011, of 22/3. The present proceeding does not suffer from any nullities, with no obstacle to the examination of the merits of the case.

II – MATTERS OF FACT

II.1. Facts Established as Proved

1. The Claimant A..., S.A., is the incorporating company of B... – SGPS, S.A., which in 2008 was the controlling company of a Tax Group taxed for Corporate Income Tax purposes in accordance with the RETGS.

2. In the period between 19/12/2007 and 31/12/2008, D... (one of the companies of the Group mentioned above, which sold real property on 20/3/2008 for €1,500,000.00) acquired 550,000 shares representing the capital of BCP, for the total amount of €762,024.90, and in the year 2008 losses were realized in the total amount of €3,488,530.78, arising from the sale of lots of BCP shares (totalling 2,000,000). This company incurred financial charges in the amount of €69,411.18, which resulted from the conclusion of "fund transfer contracts intended for the punctual coverage of treasury deficits" in a total amount of €5,540,000.00.

3. On 28/5/2009, B... – SGPS, S.A., in its capacity as the controlling company of a group of companies taxed under the RETGS, filed the Corporate Income Tax Return (Form 22), relating to the 2008 tax year, which resulted in a tax amount to be recovered of €1,735,510.50.

4. The present request for arbitral pronouncement is directed to the scrutiny of corrections made to the taxable base of the group of companies of which the Claimant is the controlling company, made in the conclusions of inspection procedures for the 2008 tax year.

5. On 4/11/2011, the Petitioner (at that time B... – SGPS, S.A., which was at that date the controlling company of the Group of companies taxed for Corporate Income Tax purposes in accordance with the RETGS rules) was notified of the draft corrections of the inspection report presented below, corrections relating to companies belonging to the Group:

i) Correction, under art. 23 of the CIRC, to the taxable base of this tax, of the amount of interest charged by D... to C..., to which there corresponded an increase in the taxable profit in Corporate Income Tax of the Group in the amount of €28,592.81.

ii) Correction, under art. 23 of the CIRC, to the taxable base of this tax, of the amount of interest charged by E... SGPS to D..., in the amount of €69,411.18.

iii) Correction, under no. 2 of art. 31 of the Tax Benefits Statute, to the taxable base of Corporate Income Tax, of the interest supported by E... SGPS allegedly related to financing intended for the acquisition of capital shares, in the amount of €460,902.57.

iv) Correction in F..., under no. 3 of art. 42 of the CIRC, to the taxable base of Corporate Income Tax, of 50% of the tax loss resulting from the liquidation of the subsidiary G..., totalling an amount of €2,973,659.49.

v) Correction in F..., to the tax benefits to the tax liability, relating to the adjustment of the value approved by the System of Tax Incentives for Research (SIFIDE), in the amount of €400,934.29.

1. On 27/5/2011, B... – SGPS, S.A., filed a Gracious Complaint to the effect of altering and correcting the fields 355 of tables 10 of the Individual Income Tax Return (Form 22) of Corporate Income Tax of F... (F...) and the Income Tax Return (Form 22) of the Corporate Income Tax of the tax group of which it is the controlling company, both relating to 2008, considering the amount of €994,557.80 broken down as follows:

i) €110,774.83 relating to the research and development tax credit attributed to F... under SIFIDE (an amount which in the Income Tax Returns Form 22 initially submitted was listed at €511,679.12, calculated by that company based on what it considered to be eligible expenses under SIFIDE) because it was informed of the decision approving, by the Ministry of Science, Technology and Higher Education, a tax credit for 2008 of only €110,744.83 and despite having reacted to that decision through available channels, culminating in the filing of an appeal to the highest hierarchical superior, it had not at that date been notified of the respective decision;

ii) €838,812.97, relating to three investment contracts with the Portuguese State (represented by AICEP), under Decree-Law no. 245/2007, of 25 June, and the application submitted for contractual benefits provided for in art. 41 of the Tax Benefits Statute, an amount resulting, as a deduction from the 2008 tax liability, from calculations made by the company, it being stated that the calculation attributable to each project was made so as to comply with the limitation provided for in art. 5 of Decree-Law no. 409/99, of 15/10.

In the gracious complaint, a draft of the Income Tax Return (Form 22) of Corporate Income Tax of the tax group controlled by the Claimant was submitted and the deferral of acceptance was requested of the Individual Corporate Income Tax Return (Form 22 substitution of F... relating to the 2008 tax year), as well as the acceptance of the submission of the replacement Annex F to the Annual Declaration of the Higher Education Institution of the 2008 tax year of F..., and also the Income Tax Return (Form 22) of Corporate Income Tax of the replacement tax group of the Claimant.

It should be noted that this Arbitral Tribunal was not called upon to pronounce itself on the tax benefit of F... in the amount of €838,812.97 (referred to in paragraph "ii)" of this point "6.").

1. On 22 July 2011, D... exercised the right of hearing regarding the facts that led the Tax Inspection Services of the Finance Department of Porto to propose a correction, under art. 23 of the CIRC, to that company's tax loss for the non-acceptance of interest relating to financing, in the amount of €69,411.18, requesting that those Services annul that correction proposal relating to Corporate Income Tax for 2008.

2. On 3/8/2011, in Report/Conclusions, of the Tax Inspector - Level 2 (no. 13286), the tax corrections to D... already mentioned were maintained, and this company received an Office of 9/8/2011, issued by the Chief of Division (following Order of 5/8/2011), notifying, in accordance with art. 77 of the LGT, of the corrections resulting from that inspection action (whose value was maintained).

3. The corrections referred to in point "5." were reflected in the additional assessment in Corporate Income Tax no. 2011..., of 12/12/2011, which resulted, after compensation, in a value of €1,348,249.34, resulting from the following corrections:

i) Additional collection of €883,141.51 resulting from the application of the Corporate Income Tax rate (25%) to the increase of the taxable base of the group (€3,532,566.05);

ii) Increase in Municipal Surcharge in the amount of €46,778.65;

iii) Reduction of tax benefits in €307,285.72 (€418,030.55 - €110,744.83);

iv) Determination of compensatory interest in the amount of €111,043.46.

1. Having not paid the additional assessment referred to in the previous point, in accordance with no. 2 of art. 169 of the CPPT and with a view to suspending the enforcement proceedings resulting from non-payment of this additional assessment, the Petitioner submitted on 28/2/2012 a request for fixing the amount of guarantee and consequent suspension of the enforcement proceeding. At that time, the debt in coercive collection had already reached €1,356,183.68 because, in addition to the additional Corporate Income Tax assessment and respective compensatory interest, totalling €1,348,249.34, it already included default interest of €3,364.75 and costs of €4,569.59.

2. Following Office no. 2931, dated 9 March 2012, B... – SGPS, S.A. delivered on 21/3/2012 a bank guarantee in the amount of €1,727,857.94.

3. Not agreeing with the corrections and the consequent Corporate Income Tax assessment, the Claimant (at that time B... – SGPS, S.A., which was at that date the controlling company of the Group of companies taxed for Corporate Income Tax purposes in accordance with the RETGS rules) filed a Gracious Complaint, which was received by the Finance Services of Vila Nova de Gaia 1 on 13/4/2012, and Proceeding no. ... was opened. In this Gracious Complaint, in addition to the annulment of the additional Corporate Income Tax assessment relating to the 2008 tax year and the corresponding default interest, the Claimant also requested the granting of compensation for the provision of a bank guarantee relating to the additional Corporate Income Tax assessment for the 2008 tax year.

4. On 24/8/2012, B... – SGPS, S.A. was notified by registered mail of the exercise of the right of prior hearing before the total or partial dismissal of gracious complaints, in accordance with paragraph b) of no. 1 of art. 60 of the General Tax Law.

5. B... – SGPS, S.A. did not exercise the right of prior hearing referred to in the previous point.

6. The Gracious Complaint referred to in point "12." was expressly dismissed by Order dated 17/9/2012, of the Senior Economist Assessor, by subdelegation of authority from the Deputy Director of Finance of Porto.

7. Not satisfied with the dismissal of the aforementioned Gracious Complaint, the Claimant filed a Hierarchical Appeal against it, to which proceeding the number 2012004337 was assigned on 21/6/2013.

8. The Hierarchical Appeal referred to in the previous point was partially granted by Order of 23/10/2013 of the Director of Services of Corporate Income Tax, Administrative Division, by subdelegation of authority (Partial Approval Order). Pursuant to this Order, it was considered that the previous correction to the taxable base of Corporate Income Tax of E... SGPS, in the amount of €460,902.57, was not due, and the other corrections initially described were maintained.

This decision was based on two facts: on one hand, by force of the provisions of art. 68-A of the LGT, it was admitted that the Tax Inspection Services would always have to comply with Circular no. 7/2004 of DSIRC (regardless of whether in this case it was considered possible to assess the financial charges by a direct method) and, on the other hand, the now Claimant made available to AT (already in the course of the proceeding relating to this Hierarchical Appeal, after being notified through Office 9821, of 23/05/2013, received on 27 of that month) the elements relating to the values shown in the trial balance of 30/11/2008, as this was the date closest to the liquidation of the loans whose interest was at issue, which allowed the conclusion that the aforementioned Circular was not applicable by virtue of the fact that remunerated liabilities were inferior to remunerated assets, with no remainder to which the financial charges supported could be allocated.

1. In the information of the aforementioned Order, the following was also noted: "Being certain that, as the appellant argues, despite the total inactivity of this company, there are always certain charges of an administrative and fiscal nature that must be satisfied. In this case, what occurs is a total irrationality between the overall value of these charges and the amounts of the loans contracted from which result financial charges of values much higher than the charges themselves supported. In order to assess whether the appellant is correct or not, a retrospective analysis is still required covering the 2007 period, inasmuch as the largest loan was contracted precisely in that period. We verify that in the course of the periods of 2007 and 2008 the company in question received loans from the 'parent' company in the total amount of €640,000.00, from which result financial charges that amounted, in those same periods, to €51,054.33. That is, to satisfy commitments of only €29,710.50, they bore financial charges whose amount is almost double, as we shall demonstrate:

Table 9 – Charges of Quinta da C...

This lack of economic rationality is all the more evident inasmuch as, having in the course of 2007 contracted a loan of €490,000.00, and at the end of that year the account for bank deposits showing a value of €15,053.84, this value was in itself sufficient to satisfy the commitments with third parties in which it incurred in the period of 2008, as they amounted to only €13,655.94. However, the appellant failed to identify and prove the facts that occurred in 2008 that were indispensable for the survival of the company and the maintenance of its productive source, which caused treasury deficits, remedied only through recourse to a new loan in the amount of €150,000.00." (see pages 398-9 of the hierarchical proceeding attached to the file).

1. Finally, considering that the petition was partially granted, the aforementioned Order recognized to the now Claimant the right to compensation for the charges incurred with the guarantee provided, in the proportion corresponding to the difference between what was petitioned and what was granted here, once all the charges incurred are duly proven.

II.2. Facts Established as Not Proved

With relevance to the decision, there are no facts that should be considered as not proved.

II.3. Grounds for the Matters of Fact Proved and Not Proved

With regard to matters of fact, the Tribunal does not have to pronounce itself on everything alleged by the parties, rather it is its duty to select the facts that matter for the decision and distinguish the matters proved from those not proved (cfr. art. 123, no. 2, of the CPPT, and article 659, no. 2, of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and selected in function of their legal relevance, which is established with regard to the various plausible solutions of the question(s) of Law (cfr. article 511, no. 1, of the CPC, applicable ex vi of article 29, no. 1, paragraph e), of the RJAT). Thus, taking into account the positions assumed by the parties and the documentary evidence, it was considered proved, with relevance to the decision, the facts listed above.

III – LAW

In the present case, there are ten disputed legal questions, distributed among the corrections to company "C..." (A), to company "D..." (B) and to company "F..." or "F..." (C). The following are thus decidenda:

A.1) Whether, as the now Claimant alleges, as regards the correction to company "C...", "the fact that company C... had, or had not, income does not constitute, from the perspective of the application of the provisions of article 23 of the CIRC, grounds for disregarding the costs as fiscally deductible"; A.2) whether, as the Claimant alleges, "it is not a matter of knowing whether the cost in question is the most suitable for obtaining income, but rather whether that cost falls within the company's activity and whether the same, even from a theoretical point of view, is capable of generating income, or is necessary for obtaining income, in the present or in the future [it not being the responsibility of] AT to analyze or assess whether the operation in question respects or not any economic rationality."; A.3) whether, as the Claimant alleges, "the non-obtaining of income and the fact that company C... merely manages its assets, having no operational activity, [does not have] [...] relation to the dispensability of financing for the fulfillment of obligations assumed by it, which are [understood as] necessary for its activity."; A.4) whether, as the Claimant alleges, "the presumption of truth relieves the taxpayer of the burden of proof of indispensability" and also whether "AT did not comply with its burden of proof and its duty of substantiation"; A.5) whether, as the Claimant alleges, the "disregard for tax purposes of the expense in the legal sphere of C..., without the corresponding correction being made at the level of income in company D..., [constitutes] double taxation".

B.1) Whether, as the Claimant alleges, in the context of art. 23 of the CIRC, "the legislator makes no distinction between income arising from productive activity (or operational) and income arising from speculative activity (holding of shares)"; B.2) similarly to what the Claimant alleged regarding the correction to company "C...", whether there is also, as regards this company, a case of double taxation of interest.

C.1) Whether, as the Claimant alleges, "the loss resulting from the liquidation of a subsidiary [does not fall within the provisions of art. 42, no. 3, of the CIRC], [because] there is no transmission of the shares of the company subject to liquidation, dissolution and extinction"; C.2) whether, as the now Claimant alleges, regarding SIFIDE, the "decision of the aforementioned Certifying Commission [for Research and Development Tax Incentives] that the value of the incentive was only €110,744.83" is incorrect.

Let us consider them, then.

A.1) to A.3) These questions are subsumed, essentially, in the invocation that the costs in question are indispensable in light of art. 23 of the CIRC and the invocation that the burden of proving the non-indispensability of these costs rests with AT.

In this regard, it is worth recalling here that company "C...", despite having as its corporate purpose "purchase and sale of real property, construction and promotion of real estate and tourism enterprises and any construction works", did not declare during its existence any operation inherent to the corporate purpose described.

And further, that in the years 2007 and 2008, the said company obtained financing from its shareholder in the total amount of €640,000.00 (€490,000.00 in the year 2007 and €150,000.00 in the year 2008). And finally, that the (total) value of income declared amounted, in the year of year, to €1,919.96, relating to financial income.

The questions mentioned above are placed specifically with regard to charges of a financial nature resulting from loans and their consideration by AT as "interest on borrowed capital applied in operations" (see art. 23, no. 1, paragraph c), of the CIRC). In this regard, the Claimant argues that the loan contracted is shown to be indispensable for maintenance of the productive source, as well as for obtaining income, even if future.

As referred to in this context, the following judgment: "Pursuant to art. 23 of the CIRC, only costs that are proven to have been indispensable for the realization of income or gains or for the maintenance of the productive source are considered costs of the period. Art. 17, no. 1 of the CIRC establishes that one of the components of taxable profit is the net result of the period expressed in accounting, this result being a synthesis of positive elements (income or gains) and negative elements (costs or losses). It is to define the group of negative elements that art. 23 of the CIRC enumerates, by way of example, situations that may integrate them, establishing a general criterion defining against which those that are duly proven to be indispensable for the realization of income or gains subject to tax and for the maintenance of the respective productive source will be considered as costs or losses. [...]. [Cost] is an expense with a business purpose, which does not mean that it has immediately a direct and profitable purpose, but that it has, in its origin and cause, a business purpose, granting the law to AT sufficient powers to refuse acceptance as a tax cost of expenses that cannot be considered compatible with the purposes pursued by the company. Thus, the tax relevance of a cost depends on proof of its necessity, suitability, normality or the production of the result (connection to a profitable business), and the absence of these characteristics may generate doubt about whether the causation is or is not business." (Court of Appeals Decision of 2/2/2010, proc. 3669/09).

It can be inferred from the excerpt cited above, with relevance to the present case, that: 1) cost understood as indispensable must have a business purpose, even if not immediately or directly profitable; 2) that AT can refuse as a tax cost expenses that "cannot be considered compatible with the purposes pursued by the company."

In turn, the business purpose can be assessed in the concrete case in function of "proof of necessity, suitability, normality or the production of the result". If this proof is not achieved, there are reasons to understand that the cost does not have a business purpose and, to that extent, cannot be seen as indispensable for the realization of income or gains subject to tax and for the maintenance of the respective productive source.

Note thus, with relevance and pertinence for the case under consideration, that, as refers the following judgment: "The concept of indispensability not only cannot be made equivalent to a strict judgment of imperative necessity, as has been said, but also cannot be based on a judgment about the convenience of the expense, made necessarily a posteriori. [...]. The judgment on the opportuneness and convenience of expenses is the exclusive preserve of the businessman. If he decides to make expenses with a view to pursuing the purpose of the company but is unsuccessful and those expenses prove in the end to be fruitless, they remain fiscal costs. But any expense that he accounts as a cost and is shown to be alien to the purpose of the company is not a fiscal cost, because not indispensable. We understand, therefore, that fiscally deductible costs are all expenses that are directly related to the productive process [...], namely with the acquisition of factors of production, as is the case with labor. And that, under penalty of violation of the principle of contributive capacity, the Administration can only exclude expenses not directly excluded by law under strong motivation that convinces that they were incurred beyond the corporate purpose, that is, in the pursuit of another interest that is not business, or at least with manifest excess, regarding the objective needs and capacities of the company.' Even accepting the concept of indispensability thus characterized, looking at the letter of [...] no. 1 of art. 23 of the CIRC, we must agree, however, as stated in the STA decision of 20/5/2009, rec. no. 01077/08 [...] that from this provision results that 'the costs therein provided cannot fail to respect from the outset the company itself that is the taxpayer. That is, for a given sum to be considered a cost of that company it is necessary that the respective activity be developed by it itself, not by other companies. Unless done this way, how could the exercise of the activity of another company with which it had some relationship be imputed to a company.' Now, in the case at hand, the appellant is engaged in the activity of purchase and sale of real property and is framed in the general regime for purposes of determination of the taxable base [...]. And the amounts in question correspond to interest on bank loans and stamp tax contracted by the appellant and applied in the free financing of its associated companies. Such sums are not therefore directly related to any activity of the taxpayer inscribed in its corporate purpose which is purchase and sale of real property [...] and not the management of share participations or financing of venture companies; and they do not also relate, even indirectly, to its activity. On the other hand, we are also not before interest on borrowed capital applied in the operation itself, that would indeed be provided as costs in paragraph c) of no. 1 of art. 23 of the CIRC." (High Court of Administrative Justice Decision of 30/11/2011, proc. 107/11).

From this it follows the understanding that: 1) costs must be proved, be indispensable, pursuant to art. 23 of the CIRC, and concern the company itself, having to have a connection with its corporate purpose; 2) they do not fall within the aforementioned corporate purpose costs relating to interest on financial applications, even if these are intended for the financing of associated companies; 3) cases like this do not fall within the provisions of art. 23, no. 1, paragraph c), of the CIRC.

In this specific case, the now Claimant alleged that "the financial charges supported upon the celebration of the funds transfer contract aimed at the restructuring of external debt contracted with a view to the maintenance of the productive source". But if that was so, it remains to be understood, as AT well points out, why was it that "(in the year 2008) financial charges of €28,644.08 were assumed to meet operational charges of only €13,855.94. All the more so that, as we have also already referred, the account for bank deposits at the end of the year 2007 (€15,053.84) showed a value (more than) sufficient to meet the (operational) charges supported in the year 2008 (€13,855.94)."

In summary, it can be said that the pretension of the now Claimant does not succeed, for the reasons set out above – even though the obtaining or not of income is not a ground for the application of art. 23 of the CIRC [A.1)], even though it is not the responsibility of AT to engage in judgments about the convenience or economic rationality of a given expense [A.2)], nor is it determinative that the company in question has no operational activity [A.3)].

Thus, and in light of what was said above, it is concluded that the referred (and necessary) indispensability was not proved, assessed in function of the business purpose of the charge undertaken, of its connection to the purposes pursued by the company.

Note, in this regard, the following judgment: "It is in the concept of indispensability inherent in art. 23 of the CIRC that the essential question lies regarding the consideration for tax purposes of business costs and that underlies the fundamental distinction between the cost actually incurred in the collective interest of the company and that which may result only from the interest of the shareholder, of a group of shareholders, or of third parties, or their ensemble and which cannot therefore be considered a cost. This is an expense with a business purpose, which does not mean that it has immediately a direct and profitable purpose, but that it has, in its origin and cause, a business purpose, granting the law to AT sufficient powers to refuse acceptance as a tax cost of expenses that cannot be considered compatible with the purposes pursued by the company. Thus, the tax relevance of a cost depends on proof of its necessity, suitability, normality or the production of the result (connection to a profitable business), and the absence of these characteristics may generate doubt about whether the causation is or is not business." (High Court of Administrative Justice Decision of 2/2/2010, proc. 3669/09).

A.4) As to the invocation that "the presumption of truth relieves the taxpayer of the burden of proof of indispensability", it also does not succeed.

In effect, it is the established understanding in Case Law that that presumption does not confound with this burden, whereby the first does not substitute the second.

In fact, as well reminded, for example, by the following decisions: "a cost, to be relevant for tax purposes, must be allocated to operations, in the sense that there must be a causal relationship between such cost and the company's income. But that does not mean [...] that such relationship is a necessary relationship of causality, a genuine conditio sine qua non or of concrete results obtained with the act, but rather taking into account the normal market circumstances, considering the normal risk of economic activity, in terms of economic suitability of the act to the purpose of obtaining maximized results. Being so, the question of the burden of proof of the indispensability of the cost is beside the presumption of truthfulness of correctly organized accounting (articles 78 of the CPT and 75 of the LGT) because the question is not the truthfulness (existence and amount) of the recorded expense but its relevance, given the law, for tax purposes, in this case, its qualification as a deductible cost. Hence, since correctly organized accounting enjoys the presumption of truthfulness and therefore it is AT's burden to elude that presumption by demonstrating that the recorded facts are not true, already with regard to the qualification of sums recorded in accounting as deductible costs, it is the taxpayer's burden to prove their indispensability for obtaining income or for maintaining the productive force, if AT questions that indispensability. For in such endeavor, the burden of proof must fall on whoever, alleging the corresponding fact, with greater ease, can document and clarify the operations and their connection with the income (cfr. Court of Appeals Decision of 26/6/2001, Rec. no. 4736/01)." (High Court of Administrative Justice Decision of 2/2/2010, proc. 3669/09); "If correctly organized accounting enjoys the presumption of truthfulness and therefore it is AT's burden to elude that presumption by demonstrating that the recorded facts are not true, already with regard to the qualification of sums recorded in accounting as deductible costs, it is the taxpayer's burden to prove their indispensability for obtaining income or for maintaining the productive force, if AT questions that indispensability." (Court of Appeals Decision of 30/10/2012, proc. 3956/10).

Moreover, as regards the allegation that "AT did not comply with its burden of proof and its duty of substantiation", it is necessary to recall that, as AT well states in its reply, AT "questioned/called into question that the financing obtained had in fact been applied in operations, because such 'application' did not appear evident from the Claimant's accounting."

In effect, it is stated in the inspection report that "in the period of 2008 it did not declare any values for any of the accounts of operational income (with no type of activity as already referred to in point 2.1.2 of CHAPTER II.3 of this REPORT), that is, it declared nil operational income declaring only the total value of income in the amount of €1,919.96 (financial income). Thus, in accordance with the conclusions above related, particularly the fact of not having obtained any income for tax purposes, the expense recorded as interest on loans obtained, in the value of €28,592.81, is not deductible for purposes of determining the tax result for the year 2008 because the same, in accordance with the provisions of no. 1 of Article 23 of the Corporate Income Tax Code, is not proven to be indispensable for the realization of income or gains subject to Corporate Income Tax, whereby the correction of the respective value considered for tax purposes by C... 1 will be made."

It is thus evident to verify that in its report AT presented the factuality which in its view led it to disregard recorded costs in terms that shake the presumption of truthfulness of operations recorded in the Claimant's accounting. As explained in AT's reply, for AT it was clear, "from the analysis undertaken, particularly from the weighing of the accounting elements analyzed, that the financial flows resulting from the loans obtained were not applied within what would correspond to the corporate purpose of C... 1, particularly in what is commonly understood as 'operations', because, as was evidenced, the company never engaged in any operational activity. [...]. [...] AT called into question the deductibility of the cost incurred with the loans obtained considering that they did not appear to be 'indispensable' for business purposes and in the absence of contrary demonstration, removed tax relevance from the resulting costs."

Considering the indications existing and the reasons set out above in summary, there is no doubt about the reason (and the underlying factuality) that led AT to find that the presumption of truthfulness of operations recorded in the Claimant's accounting had ceased.

In those terms, it is concluded that AT complied with its burden of proof and its duty of substantiation, with reason not assisting the now Claimant also in this part.

In this regard, see, for example, the following decision: "AT is burdened with the demonstration of the factuality that led it to disregard certain recorded costs in terms of shaking the presumption of truthfulness of operations recorded in the appellant's accounting and in the respective supporting documents which it enjoys in homage to the principle of declaration and truthfulness of accounting in force in our law – art. 75 of the LGT – passing from thereon to the competitor of the taxpayer the burden of proof that the accounting is deserving of credibility." (Court of Appeals Decision of 17/11/2009, proc. 3253/09).

A.5) and B.2) In both cases, the question arises whether the disregard for tax purposes of the expense without the corresponding correction being made at the level of income of "D..." and "E...", constitutes "double taxation".

In this regard, in view of the accrual principle of income enshrined in the Corporate Income Tax Code and the fact that the expenses now in question did not meet the requirements demanded by art. 23 of the CIRC (as was demonstrated above), we adhere, by agreeing with it, to the understanding of DSIRC which was set out in hierarchical appeal proceedings: "'In the case under consideration, there is no distribution of profits at stake. What occurs is that, on the one hand, there are certain expenses/costs that although recorded accounting by some companies and thus considered in their net result, because they do not meet the requirements demanded in art. 23 of the CIRC, cannot be considered in the negative component of the tax result [...]. But on the other hand, these values correspond to income of other entities, with no fiscal rule permitting the disregard of such income from the tax results of such entities, because under Corporate Income Tax the principle of patrimonial accrual applies [...]'."

It is concluded from the above that there is no merit to the invoked "double taxation" in both cases.

B.1) The Claimant further alleges that, in the context of art. 23 of the CIRC, "the legislator makes no distinction between income arising from productive (or operational) activity and income arising from speculative activity (holding of shares)".

It should be noted in this regard that, even though it does not make, as the Claimant refers, the aforementioned distinction, the legislator does, however, subject such activities to the interest of the company, to the existence of a justified causal relationship with the company's productive activity.

As notes António Moura Portugal, "indispensable costs are equivalent [...] to expenses incurred in the interest of the company. The fiscal deductibility of the cost should depend only on a justified relationship with the company's productive activity and this indispensability is verified whenever – through the operation of the theory of specialization of legal entities – the corporate operations are inscribed in its capacity, through subsumption to its corporate purpose and, especially, whenever they connect with the obtaining of profit even if in an indirect or mediate way." (in: António Moura Portugal, The Deductibility of Costs in Portuguese Tax Case Law. Coimbra, Coimbra Editora, 2004, p. 116.)

Now, the said causal relationship was not demonstrated in these proceedings. In effect, as highlights the information of DSIRC in hierarchical appeal proceedings: "in the period under analysis of 2008, financial applications in the acquisition of share participations amounted to the acquisition of a lot of 550,000 BCP shares for the amount of €762,024.90, therefore a value which [...] fell far short not only of the total amount of contracts celebrated – €5,540,000.00 – but equally of that which was achieved with the sale of the property – €1,500,000.00".

It would behoove the Claimant thus to demonstrate the "economic congruence" of the operation and to that extent to justify it in detail, in the context of its corporate interest – which, however, it failed to do.

In this regard, see for example the following decision: "If the tax administration, acting under the principle of legality, fundamentally raises doubt about the justified relationship of a given expense with the activity of the taxpayer, necessarily and logically, because the latter is better able for that purpose, it is incumbent on the latter an explanation on the 'economic congruence' of the operation, which is not met by the abstract and conclusive allegation that the expense is part of corporate interest and/or the existence of justified relationship with the developed activity, instead requiring that the taxpayer allege and prove concrete, ascertainable facts, capable of demonstrating the reality, truthfulness, of the business actions giving rise to the recorded expenses, in order that, among other things, the inspection function of AT not be rendered impossible" (Court of Appeals Decision of 27/3/2012, proc. 5312/12).

On the other hand, the justification that the financial charges aim at the possibility of obtaining income or the maintenance of productive capacity by way of the constitution of a "working capital", also does not succeed, given that, as refers the following decision (which reproduces identical understanding already previously set out in High Court of Administrative Justice Decisions of 7/2/2007, proc. 1046/05 and 10/7/2002, proc. 246/02): "'The mere possibility of being able to have in the future gains resulting from the application of those capitals in its associated company does not determine by itself that such investments can be framed in the concept of fiscal costs because for that it was necessary that such charges were indispensable for the realization of income or gains subject to tax or for the maintenance of the productive source. And such indispensability is far from having been demonstrated in this case. In conclusion it will be said therefore that the sums in question do not constitute costs for tax purposes'" (High Court of Administrative Justice Decision of 20/5/2009, proc. 1077/08).

C.1) In response to the Claimant's allegation, AT states in its reply that "art. 42, no. 3 (current 45, no. 3) sets out an anti-abuse rule in the broad sense" and "that all the justifying reasons of the norm of art. 42, no. 3, in the wording in force in 2008 are present in the case sub judicio".

In effect, note that the recent Court of Appeals Decision of 31/1/2012 (proc. 5097/11) only does not understand to be "applicable the theory of the anti-abuse clause [because, given the date of the facts of that proceeding,] only in 1998, with the entry into force of art. 32-A of the C.P.T., did our system assumedly come to have a general clause for prevention of the so-called indirect business in tax matters". And such temporal limitation does not apply to the case now under analysis.

However, it is the case that, as is clearly stated in the following decision, the "regime provided for in the cited article 42 of the C.I.R.C. is not applicable to cases of liquidation and distribution of companies whose procedure is provided for in articles 73 to 75 of the same statute. The norm in question intends to prevent the deductibility of [...] latent losses, thus not being applicable to cases of liquidation and distribution of companies (cfr. articles 73 to 75 of the C.I.R.C.), regime in which the calculation of actually realized losses is at issue." (Court of Appeals Decision of 17/4/2012, proc. 5315/12).

More extensively, the cited decision of 17/4/2012 further states the following: "What needs to be determined is whether the regime provided for in the cited article 42 of the C.I.R.C. is or is not applicable to cases of liquidation and distribution of companies whose procedure is provided for in articles 73 to 75 of the same statute. In our opinion, it is not. [...]. Article 42 of the C.I.R.C. (whose title is 'charges not deductible for tax purposes') for reasons solely of a tax nature comes to exclude or limit the acceptance, in the determination of taxable profit, of some charges that meet the requirements of fiscal acceptance of costs enshrined in article 23 of the same statute. That is, to the accounting profit (in the calculation of which such charges were recorded as negative components) there will be added, for determination of taxable profit, the value of the charges not deductible for tax purposes. Thus taxable profit will therefore result from a higher value (cfr. Rui Duarte Morais, Notes on I.R.C., Almedina, November 2009, p.136 et seq.; F. Pinto Fernandes and Nuno Pinto Fernandes, Code of Tax on the Income of Legal Entities, annotated and commented, Rei dos Livros, 5th edition, 1996, p. 344 et seq.). In no. 3 of the provision in examination, in the wording resulting from Law 60-A/2005, of 30/12, the legislator considers that only half of the value (50%) of losses resulting from the onerous disposal of capital shares, including their redemption and amortization with reduction of capital, as well as other losses or negative patrimonial variations relating to capital shares or other components of the capital itself, namely supplementary contributions, concur in the formation of taxable profit. In other words, article 42 no. 3 of the C.I.R.C. came to declare half of the value of losses non-deductible, regardless of the conditions of its realization. The norm in question intends to prevent the deductibility of the aforementioned latent losses, thus not being applicable to cases of liquidation and distribution of companies (cfr. articles 73 to 75 of the C.I.R.C.), regime in which the calculation of actually realized losses is at issue, as explained above, resulting from the extinction of capital shares as a consequence of the dissolution of the company (cfr. J.L. Saldanha Sanches, The Limits of Tax Planning, Coimbra Editora, 2006, p. 220 to 222; Nuno de Oliveira Garcia, Losses, losses and gains, Cases of application of specific anti-abuse rules in the Code of I.R.C., Tax Magazine, no. 29, Jan./March 2007, p. 105 et seq.)."

In these terms, agreeing that art. 42, no. 3, of the CIRC is not applicable, for the reasons mentioned above, it is concluded in the present case that there is tax relevance of the loss realized by the now Claimant, in the value of €2,973,659.49.

C.2) Although this specific correction is identified in the p.i., it was not challenged in these proceedings (rather in administrative action that the Claimant states is pending), reason for which the present Tribunal will not pronounce itself on the same.

IV – DECISION

In light of the above, it is decided:

a) To find the present arbitral petition meritorious in the part relating to the correction in the amount of €2,973,659.49 to the taxable profit of company F..., S.A., and without merit in the remaining part; annulling the assessment impugned in the part corresponding to the invalidity of such correction to taxable profit.

b) To find, consequently, the petition for compensation for provision of undue guarantee meritorious in the proportion corresponding to the difference between what was petitioned and what is hereby granted.

Value of the Proceeding

The proceeding is assigned the value of €1,216,748.33 (one million, two hundred and sixteen thousand, seven hundred and forty-eight euros and thirty-three cents), in accordance with art. 32 of the CPTA and art. 97-A of the CPPT, applicable by force of what is provided in art. 29, no. 1, paragraphs a) and b), of the RJAT, and art. 3, no. 2, of the RCPAT.

Costs

In accordance with Table I annexed to the RCPAT, costs are valued at €16,218.00 (= €4,896.00 + €306.00 × 37), to be paid by the Claimant and the Defendant in the proportion of the outcome, which is fixed at ⅓ and ⅔, respectively, in accordance with articles 12, no. 2, and 22, no. 4, of the RJAT, and art. 4, no. 4, of the RCPAT.

Notify.

Lisbon, 30 September 2014.

The collective tribunal,

Jorge Lino Ribeiro Alves de Sousa (president)

Miguel Patrício

Luís Janeiro

Text prepared by computer, in accordance with the provisions of article 138, no. 5, of the CPC, applicable by reference to article 29, no. 1, paragraph e), of the RJAT.

The wording of this decision is governed by the orthography prior to the Orthographic Agreement of 1990.