CAAD 84/2018-T: IRC SGPS Capital Gains Deductibility and Fair Value Measurement Under Art. 32(2) EBF

Arbitration Decision (consult full version in PDF)

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Fernando Manuel dos Santos Cardoso and Prof. Doctor Nuno Cunha Rodrigues, appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 17-05-2018, agree as follows:

1. Report

A... - SGPS, SA, Legal Entity no..., with registered office in ..., ... (hereinafter referred to as the "Claimant"), filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of articles 2 and 10, nos. 1 and 2, paragraph a), of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to declaring the illegality of the Corporate Income Tax assessment no. 2016..., of 28-06-2016, relating to the 2012 tax year, and the underlying corrections, which resulted in the determination of the tax loss at € 5,757,167.45, lower than the tax loss declared by the Claimant in its respective tax return form 22, € 12,114,871.32.

The Claimant also requests the annulment of the decision rejecting the administrative reclamation.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 06-03-2018.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, the Ethics Council appointed as arbitrators the signatories, who communicated acceptance of the appointment within the applicable period.

On 27-04-2018, the Parties were notified of such appointment, having expressed no intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Therefore, in compliance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 17-05-2018.

The Tax and Customs Authority responded, defending the inadmissibility of the request for arbitral pronouncement.

By order of 04-07-2018, it was decided to dispense with the holding of the meeting provided for in article 18 of the RJAT and that the proceedings proceed with optional submissions, commencing with the notification of the order the period for submissions by the Claimant and with the notification of the presentation of the Claimant's submissions the period for submissions by the TA.

The Claimant did not submit submissions within the fixed period, whereby the submission of submissions by the Tax and Customs Authority was prejudiced, as it is implicit in that order that these were dependent on the presentation of submissions by the Claimant.

The arbitral tribunal was regularly constituted and is competent.

The parties have legal personality and capacity, are legitimate (articles 4 and 10, no. 2, of the same diploma and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from any nullities.

It is necessary to decide.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

• On 31-05-2013, the Claimant presented the tax return form 22 relating to the 2012 tax year, in which it calculated a tax loss of € 12,114,871.32 (document no. 2 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• A tax inspection was carried out on the Claimant relating to the 2012 tax year, under Service Order OI2015...;

• The external inspection procedure commenced on 01-09-2015 and a letter for notification of the inspection report was issued on 22-06-2016 (document no. 3 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• By order of 27-04-2016, the scope of the inspection was changed from partial to general and the inspection period was extended by three months, which order manifests agreement with an Opinion of the same date (document no. 5 and 1st part of the administrative file, pages 16-17);

• By order of 28-01-2016, the inspection period was extended by three months in accordance with article 36, no. 4, of the RCPIT, which manifests agreement with an Opinion of the same date (document no. 4 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• In that inspection, the Tax Inspection Report was drawn up, which is contained in document no. 3 attached with the request for arbitral pronouncement, whose content is given as reproduced, in which the following is mentioned, among other matters:

III. Description of facts and grounds for purely arithmetic corrections

A1 - Financial charges not deductible

[Article 32, no. 2 of the EBF] - 2012 and 2013

1. A... SGPS SA as a society managing shareholdings integrates financial investments in companies operating in multiple business areas - real estate activity, mining extraction, metalworking construction, projects for generating electricity from renewable energy sources, among others, benefits from the application of the regime provided for in article 32 of the Tax Benefits Statute, which provides for the exclusion from taxation of gains and losses realized with the sale of shareholdings/financial investments held for a period of not less than one year, as well as the financial charges incurred with their acquisition are not deductible from the taxable result.

2. The inspection/audit procedures carried out for control/verification of the financial charges incurred with the acquisition of shareholdings which, given article 32, no. 2, of the EBF, are not deductible from the taxable result, were based on the analysis of the Management Reports and Accounts of A... SGPS SA for 2012 and 2013, the IES - Simplified Business Information and the Tax Return form 22 IRC, filed by the taxpayer, with reference to the 2012 and 2013 tax years, the standardized file for tax audit for data export SAF-T (PT) integrated, referring to those periods, exported by the taxpayer on 2016/01/29 and presented to the tax inspection services on 2016/02/25, documentary supporting records of accounting entries, inventory of financial shareholdings reported at 2012/12/31 and 2013/12/31, and the taxpayer's response to our requests for clarifications/information.

3. From the standardized file for tax audit for data export SAF-T (PT) integrated, referring to the periods of 2012 and 2013, we verified that A... SGPS SA presented liabilities arising from financing obtained as follows in the table:

[Table content preserved as in original]

1. It can be verified that this company also recorded, in the periods of 2012 and 2013, materially significant expenses with interest, stamp duty, commissions and bank charges, arising from the obtaining of financing, as detailed in the following table:

[Table content preserved as in original]

1. A substantial part of the loans obtained and the corresponding expenses with interest, stamp duty, commissions and bank charges were incurred with the acquisition of financial investments, having been verified that A... SGPS SA, in the periods of 2012/01/01, 2012/12/31 and 2013/12/31, held shareholdings in companies operating in multiple business areas - real estate activity, mining extraction, metalworking construction, projects for generating electricity from renewable energy sources, among others, which present the following acquisition values:

[Table content preserved as in original]

1. On the other hand, a significant part of the loans obtained and the corresponding expenses with interest, stamp duty, commissions and bank charges relate to loans granted and other operations to subsidiary and associated companies which, in the periods of 2012 and 2013, presented the following amounts:

[Table content preserved as in original]

1. On 2016/01/19, we notified this company, in accordance with the provisions of articles 9, 28, 29, 37, 42 and 48 of the Complementary Regime of Tax and Customs Inspection Procedure (RCPITA), and article 134 of the Corporate Income Tax Code, in the person of B..., Tax ID:..., in the capacity of Official Accountancy Technician, to send/submit to this tax inspection service, among other documents and files, the following elements relating to the periods of 2012 and 2013:

• Identify the method used - direct allocation, specific or other - for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings;

• Itemize the calculations that justify the application of the allocation method used by A... SGPS SA, referred to in the previous point, so as to enable control of financing charges incurred with the acquisition of shareholdings that do not concur in determining the taxable result, and thus comply with article 32, no. 2 of the EBF;

1. To the extent that, to date, A... SGPS SA has not proceeded to identify the method used, in the periods of 2012 and 2013 - direct allocation, specific or other – for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings, as well as has not submitted to the tax inspection services itemization of the calculations that justify the application of the allocation method used that enables control of financing charges incurred with the acquisition of shareholdings which, in accordance with article 32, no. 2 of the EBF, are not deductible from the taxable result of the periods of 2012 and 2013, allocation of the financial charges incurred by A... SGPS SA with the acquisition of financial shareholdings should be carried out through use of the formula provided for in Circular no. 7/2004, of 30 March, of the DSIRC, whose calculations were carried out on the basis of information, accounting elements and declarations presented/filed by the taxpayer with the Tax Authority, as per tables 11 and 12 below:

[Tables preserved as in original]

1. As it has been verified that in the Tax Return Forms 22 IRC filed by A... SGPS SA with the Tax Authority, relating to the tax years 2012 and 2013, no amount was entered in Table 07 Field 779 - Financial charges not deductible [article 32, no. 2 of the EBF], the corresponding increase/correction to the taxable result of 2012 and 2013 will be carried out in the amount of €5,565,353.39 and €5,435,743.07, respectively.

(...)

A3 - 50% Losses from fair value reductions in equity instruments

[Article 45, no. 3 of the CIRC] - 2012 and 2013

1. A... SGPS SA resorts to derivative financial instruments in the management of its financial risks, namely Interest Rate Swaps as a way to guarantee coverage of the risk of variability of the interest rate of loans obtained, being also holder of equity instruments in companies whose securities are admitted to trading on a regulated market, in which it holds shares representing less than 5% of the capital of such companies.

2. By application of International Accounting Standards - IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures, the taxpayer recognizes variations in fair value of derivative financial instruments Interest Rate Swaps through profits or losses, to the extent that the conditions are not met for them to be eligible for hedge accounting, as well as equity instruments in companies whose securities are admitted to trading on regulated markets are measured at fair value with counterparty of results.

3. It can be verified that A... SGPS SA recorded in account 661 - Losses from Fair Value Reductions - In Financial Instruments, in the tax years of 2012 and 2013, the amounts of €3,174,810.73 and €315,973.55, part of which relate to losses in equity instruments in companies whose securities are admitted to trading on a regulated market, corresponding to shareholding of less than 5%, and which in accordance with article 18, no. 9, of the CIRC concur in determining the taxable result.

(...)

1. However, as determined by article 45, no. 3, of the Corporate Income Tax Code [wording in force on 2012/12/31 and 2013/12/31] "the negative difference between gains and losses realized through the onerous transfer of shareholdings, including their redemption and amortization with reduction of capital, as well as other losses or negative equity variations relating to shareholdings or other components of equity, namely supplementary contributions, concur in the formation of taxable profit in only half of their value."

2. It results, thus, that losses from fair value reductions relating to equity instruments in companies whose securities are admitted to trading on a regulated market, corresponding to shareholding of less than 5%, can only be accepted for taxation purposes in 50% of their respective value, whereby the taxable result of 2012 and 2013 must be increased by the amounts of €72,936.28 [€145,872.56 x 50%] and €79,170 [€158,340 × 50%], respectively.

(...)

A4 - 50% Negative equity variations from fair value reductions relating to shareholdings deriving from transition adjustments from POC to SNC - 2012 and 2013

1. We verified that, on 2010/01/01, the date of transition from the Official Accounting Plan to the Accounting Standards System [SNC], A... SGPS SA by application of NCRF 27 - Financial Instruments, proceeded to alter the measurement of equity instruments held for trading in companies whose securities are admitted to trading on a regulated market, which were measured at acquisition cost to fair value with counterparty of results.

2. Note that, according to Accounting and Financial Reporting Standard 3 - First-time Adoption of accounting and financial reporting standards, an entity must prepare an opening balance sheet in accordance with NCRF, having to take into account certain rules, except where this standard provides for exceptions or prohibits retrospective application: a) recognition of all assets and liabilities, to the extent required by NCRF; b) derecognition of assets or liabilities which, in accordance with NCRF, are not to be recognized as such; c) reclassification of items that were recognized as a certain type of asset, liability or equity under previous GAAP, but which should be recognized as a different type in accordance with NCRF; d) measurement of all assets and liabilities recognized, in accordance with the principles established in NCRF [NCRF 3 - paragraphs 8].

3. The accounting policies that an entity uses in its opening balance sheet in accordance with NCRF may differ from previous ones resulting in adjustments that derive from events and transactions prior to the date of transition to SNC, whereby the entity must recognize those adjustments directly in retained earnings or in another equity item on the date of transition to SNC [cf. NCRF 3 - paragraph 5 and NCRF 3 - Appendix]

4. It is important to emphasize that, through Decree-Law no. 159/2009, of 13 July, which adapted the Corporate Income Tax Code to international accounting standards adopted by the European Union and to the Accounting Standards System, a transitional regime was approved in article 5 which determines that adjustments to equity resulting from the first-time adoption of SNC, which are considered tax-relevant in accordance with the Corporate Income Tax Code and related legislation, resulting from the recognition or non-recognition of assets or liabilities, or from changes in their respective measurement, concur in equal shares in determining the taxable result of the first tax period in which such standards are applied and the four following tax periods.

5. We verified that in the Tax Return Forms 22 IRC of 2012 and 2013 of A... SGPS SA - Table 07 Field 703 - positive equity variations [transitional regime provided for in article 5, nos. 1, 5 and 6 of Decree-Law no. 159/2009, of 13 July] the value of €516,435.29 was increased in the taxable result, corresponding to 1/5 of the balance of positive and negative equity variations resulting from the change in measurement of equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, which were measured at acquisition cost to fair value with counterparty of results.

6. However, as determined by article 45, no. 3, of the Corporate Income Tax Code [wording in force on 2012/12/31 and 2013/12/31] "the negative difference between gains and losses realized through the onerous transfer of shareholdings, including their redemption and amortization with reduction of capital, as well as other losses or negative equity variations relating to shareholdings or other components of equity, namely supplementary contributions, concur in the formation of taxable profit in only half of their value".

7. Given that in determining the equity variation increased in the taxable result there are adjustments/negative equity variations relating to equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, resulting from the above-mentioned transition adjustment, are only deductible for taxation purposes in 50%, in accordance with article 45, no. 3, of the Corporate Income Tax Code, the taxable result of the periods of 2012 and 2013 must be increased by the amount of €719,414.20, as per table 18 below:

[Table preserved as in original]

1. As it has been verified that, in the periods of 2012 and 2013, A... SGPS SA recorded financing charges, resulting from the acquisition of shareholdings, which are not deductible for taxation purposes under Corporate Income Tax, in accordance with article 32, no. 2, of the EBF [see A1 | 2012 | €5,565,353.39; A1 | 2013 | €5,435,743.07], as it has been found that there was non-compliance with the rule limiting the deductibility of financing charges provided for in article 67 of the Corporate Income Tax Code [see A2 | 2013 | €363,786.10], as it has been confirmed that 50% of losses from fair value reductions relating to shareholdings or other components of equity cannot be deductible from the taxable result, in accordance with article 45, no. 3, of the CIRC [see A3 | 2012 | €72,936.28; A3 | 2013 [€79,170.00], as well as as it has been verified that 50% of negative equity variations deriving from transition adjustments from POC to SNC, related to losses from fair value reductions relating to shareholdings or other components of equity, cannot be deductible from the taxable result, in accordance with article 45, no. 3, of the CIRC and transitional regime provided for in article 5, nos. 1, 5 and 6 of DL 159/2009, of 13/07 [see A4 | 2012 | €719,414.20; A4 | 2013 | €719,414.20].

2. In view of the foregoing, correction of the taxable income under Corporate Income Tax of A... SGPS SA is proposed, relating to the periods of 2012 and 2013, by force of article 17, nos. 1 and 3, and art. 45, no. 3, art. 67, of the Corporate Income Tax Code, article 32, no. 2, of the EBF, in the total value of €6,357,703.87 and €6,598,113.37, respectively, as per tables 19 and 20 below:

[Tables preserved as in original]

(...)

IX. Right of Hearing - Reasoning

Having been notified on 2016/05/18 - our letter no..., in accordance with the provisions of article 60 of the LGT and article 60 of the RCPITA, the taxpayer exercised the right of hearing, whose analysis is contained in the points that follow.

It is important to note that, contrary to what was stated in the right of hearing, the tax inspection services requested various accounting documents/files at the beginning of the external inspection procedure, on 2015/09/01, having obtained a response by 4 emails, on 2015/10/02, from the interlocutor of A... SGPS SA - Dr. C... (C...@D....com). After analysis/verification of the accounting documents/files presented, we made a request for additional elements, through personal notification of the taxpayer's OAT, on 2016/01/19, following successive postponements requested by the interlocutor Dr. C..., in the period from 16 November 2015 to 15 January 2016, as well as we notified A... SGPS, on 2016/01/28 and 2016/04/28, of the grounds for extension of the external inspection procedure period, by another three months, in accordance with article 36, no. 3, paragraph a) of the RCPITA, due to there being special complexity both in terms of investigation work and in terms of technical-legal appreciation of the facts, to the extent that significant risks of material distortion of taxable result were found relating to significant transactions with related parties, application/derogation of accounting policies that determine the measurement of assets and income in the financial statements that do not appear to be in accordance with International Financial Reporting Standards (IAS/IFRS), indicators of non-compliance with the limitation on the deductibility of financial charges incurred with the acquisition of shareholdings held by SGPS (article 32 EBF) and/or net financing charges (article 67 of the Corporate Income Tax Code). Given that these matters involve difficult judgments and potentially contentious issues, which require tax inspection to collect sufficient and appropriate audit evidence, by designing and implementing responses to the significant risks of material distortion identified, with the inspection work still not being completed at those dates.

With regard to financial charges incurred with the acquisition of shareholdings which, in light of article 32, no. 2, of the EBF, are not deductible from the taxable result, it results from the inspection work carried out and the report drawn up sufficient and appropriate evidence to support the increase/correction to the taxable result of 2012 and 2013 in the amount of €5,565,353.39 and €5,435,743.07, respectively.

Note that, in response to our notification dated 2016/01/19, A... SGPS SA did not proceed to identify the method used, in the periods of 2012 and 2013 - direct allocation, specific or other - for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings, as well as did not submit to the tax inspection services itemization of the calculations that justify the application of the allocation method used that enables control of financing charges incurred with the acquisition of shareholdings which, in accordance with article 32, no. 2 of the EBF, are not deductible from the taxable result of the periods of 2012 and 2013, whereby allocation of the financial charges incurred by A... SGPS SA with the acquisition of financial shareholdings had to be carried out through use of the formula provided for in Circular no. 7/2004, of 30 March, of the DSIRC, whose calculations were carried out on the basis of information, accounting elements and declarations presented/filed by the taxpayer with the Tax Authority.

As for the correction resulting from non-compliance with the rule limiting the deductibility of net financing charges of 2013 in the value of €363,786.10, we verified and demonstrated that A... SGPS SA altered the accounting policy for measurement of the financial shareholding held in E... SGPS SA, without observance of international accounting standards (IAS/IFRS), having collected sufficient and appropriate audit evidence that the taxpayer was prevented from measuring this financial investment at fair value, having to maintain its measurement at cost, with the result before depreciation, financing charges and taxes [EBITDA] of 2013 in the amount of €94,307,579.23 being overvalued by €186,233,200. It is important to note that in the 2013 Statutory Audit Report, the external auditor issued a modified opinion with qualifications sustaining that "(...) 7. As mentioned in Note 4 to the Annex to the Financial Statements, the financial shareholding of 50% held in the capital of E... SGPS SA, which was recorded at cost for €18,782,868, was recorded on 31/12/2013 at €205,016,068, resulting from the recognition of a gain in the amount of €186,233,200. Although the amount at which the financial shareholding was recorded was determined by the Administration on the basis of the valuation carried out by an independent entity with which the sale of 10% of the capital of that investee is being negotiated, this is an isolated change in accounting policy previously followed, whereby the asset, equity and net result for the period are overvalued by €186,233,200."

We verified and demonstrated that the net financing charges of 2013 total €3,363,786.10, after deduction of financial charges attributable to shareholdings, with the exception of stamp duty, and as it was found in the inspection work that the 2013 EBITDA is negative, these GFL 2013 can only concur in determining taxable profit up to the limit of €3,000,000, in compliance with the rule limiting the deductibility of net financing charges established in article 67 of the Corporate Income Tax Code (Budget Law 2013 wording), with the correction/increase to the taxable result of 2013 in the value of €363,786.10 thus being duly substantiated and reasoned. Note that, if financing charges due to or associated with the remuneration of third-party capital were fully deductible, the value of €5,438,417.21 should be added to the taxable result.

On the other hand, as for the correction of 50% of losses from fair value reductions relating to shareholdings or other components of equity that cannot be deductible from the taxable result, we verified and demonstrated that A... SGPS SA recorded in the tax years of 2012 and 2013, losses from fair value reductions relating to equity instruments in companies whose securities are admitted to trading on regulated markets, corresponding to shareholding of less than 5%, in the amounts of €145,872.56 and €158,340, respectively, which in accordance with article 18, no. 9, of the CIRC concur in determining the taxable result, and in compliance with article 45, no. 3, of the Corporate Income Tax Code [wording in force on 2012/12/31 and 2013/12/31], can only be accepted for taxation purposes in 50%, constituting this standard the legal basis for the increase/correction in the amounts of €72,936.28 [€145,872.56 x 50%] and €79,170 [€158,340 x 50%], respectively.

Finally, with regard to the correction of 50% negative equity variations from fair value reductions relating to shareholdings deriving from POC to SNC transition adjustments, we verified that in the Tax Return Forms 22 IRC of 2012 and 2013 of A... SGPS SA - Table 07 Field 703 - positive equity variations [transitional regime provided for in article 5, nos. 1, 5 and 6 of Decree-Law no. 159/2009, of 13 July] the value of €516,435.29 was added to the taxable result, corresponding to 1/5 of the balance of positive and negative equity variations resulting from the change in measurement of equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, which were measured at acquisition cost to fair value with counterparty of results, and as it has been verified and demonstrated that in determining the equity variation added to the taxable result there are adjustments/negative equity variations relating to equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, resulting from the above-mentioned transition adjustment, are only deductible for taxation purposes in 50%, in accordance with article 45, no. 3, of the Corporate Income Tax Code, the increase/correction of €719,414.20 is justified/reasoned, in the periods of 2012 and 2013, as contained in the Inspection Report.

The administration of A... SGPS, in exercising the right of hearing, did not present arguments that sustain the disagreement of the facts and conclusions found by the tax inspection services, and also did not present any additional documentary evidence that justifies the need for reformulation of our report, whereby we consider that the corrections/increases to the taxable result of 2012 and 2013 in the total value of €6,357,703.87 and €6,598,113.37, respectively, should be maintained.

• Following the inspection, assessment no. 2016..., dated 28-06-2018, was issued, in which the Claimant's tax loss relating to the 2012 tax year was fixed at € 5,757,167.45 (document no. 1 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• The Claimant filed an administrative reclamation of the assessment (document no. 6 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• The administrative reclamation was rejected by order of 24-11-2017 issued by the Head of Division of the Finance Directorate of ..., under delegation of competence; (document no. 7 attached with the request for arbitral pronouncement, whose content is given as reproduced);

• The decision on the administrative reclamation refers to the reasoning of an opinion, whose content is given as reproduced, in which the following is mentioned, among other matters:

IV. Opinion

1. The present administrative reclamation is inseparable from the facts analyzed in the Inspection Report and attached audit evidence.

2. The claimant exercised its prior right of hearing on 2016/06/06 in the Tax Inspection Procedure.

IV.I) Financial charges not deductible (article 32, no. 2 of the EBF)

1. With regard to the issue of financial charges related to the acquisition of non-deductible shareholdings, it is verified that no. 2 of article 32 of the EBF determined a tax regime in relation to gains and losses realized by Societies Managing Shareholdings (SGPS) in which gains and losses realized from shareholdings of which they were holders, provided they were held for a period of not less than one year, and the financial charges incurred with their acquisition, did not concur in the formation of taxable profit.

2. The claimant, as a society managing shareholdings, integrated financial investments in companies operating in multiple business areas - real estate activity, mining extraction, metalworking construction, projects for generating electricity from renewable energy sources, among others, benefited from the application of the regime provided for in article 32 of the Tax Benefits Statute.

3. Having doubts been raised as to how this regime would be applied, and having regard to the principle of collaboration, established in article 59 of the General Tax Law, the Tax Authority proceeded to publish generic guidance on the interpretation and application of the said tax norm.

4. This Circular no. 7/2004, of 30 March 2004, of the Directorate of Services for Corporate Income Tax (DSIRC) establishes a method to be used for purposes of allocating financial charges to shareholdings, a method which consists of allocating financial charges, based on the following formula: the remunerated liabilities of the SGPS should be allocated, first, to remunerated loans granted by it to the investee companies and to other interest-generating investments, with the remainder being allocated to remaining assets, namely shareholdings, proportionally to their respective cost of acquisition.

5. The claimant did not proceed to identify the method used, in the periods of 2012 and 2013 - direct allocation, specific or other - for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings, as well as did not submit to the tax inspection services itemization of the calculations that justify the application of the allocation method used that enables control of financing charges incurred with the acquisition of shareholdings which, in accordance with article 32, no. 2 of the EBF, are not deductible from the taxable result of the periods of 2012 and 2013, with the burden of proof of the facts constituting the right invoked being upon the claimant (article 74 of the LGT), which it did not discharge, whereby allocation of the financial charges incurred by the claimant with the acquisition of financial shareholdings was carried out through use of the formula provided for in Circular no. 7/2004, of 30 March, of the DSIRC, whose calculations were carried out on the basis of information, accounting elements and declarations presented/filed by the taxpayer with the Tax Authority.

6. The Circular does no more than comply with article 59 of the LGT, with no intention of regulating article 32 of the EBF, in the wording at the time of the facts, but rather to interpret and demonstrate the scope of application of the norm, with no intention of violating the principle of tax legality to which it is obliged.

7. The Inspection was right to carry out the calculations based on Circular no. 7/2004, of 30 March 2004, of the DSIRC, since as the claimant affirms in its petition, with the support of the Judgment of the Central Administrative Court of the South, of 9 May 2006, in the context of process 436/2005: "administrative circulars do not bind taxpayers, but only their respective services".

8. Now, this binding force of Circulars with the Services stems from the law itself, in this case no. 1 of article 68-A of the LGT, which stipulates that "the tax administration is bound by generic orientations contained in circulars, (...) regardless of their form of communication, aimed at ensuring uniformity in the interpretation and application of tax norms", let us say, as is the present case.

9. The claimant bases its claim on the existence of a decision of the Administrative Arbitration Centre (CAAD), relating to the 2011 tax year, alleging that it has not been taken into account by the TA.

10. It should be noted that the jurisprudence of the CAAD does not constitute an immediate source of Tax Law.

11. Although no. 4 of article 68-A of the LGT determines that the TA must review its generic orientations taking into account, in particular, the jurisprudence of superior courts, it is not observed that a decision of the CAAD can determine a change in the understanding, which was taken on the basis of legal norms in force and with the systematic organization of the CIRC.

12. The inspection/audit procedures carried out for control/verification of the financial charges incurred with the acquisition of shareholdings which, in light of article 32, no. 2, of the EBF, are not deductible from the taxable result, were based on the analysis of the Management Reports and Accounts of the claimant for 2012 and 2013, the IES - Simplified Business Information and the Tax Return form 22 IRC, filed by the taxpayer, with reference to the 2012 and 2013 tax years, the standardized file for tax audit for data export SAF-T (PT) integrated, referring to those periods, exported by the taxpayer on 2016/01/29 and presented to the tax inspection services on 2016/02/25, documentary supporting records of accounting entries, inventory of financial shareholdings reported at 2012/12/31 and 2013/12/31, and the taxpayer's response to our requests for clarifications/information.

13. From the standardized file for tax audit for data export SAF-T (PT) integrated, referring to the periods of 2012 and 2013, it was verified that the claimant presented liabilities arising from financing obtained.

14. The claimant recorded, in the periods of 2012 and 2013, materially significant expenses with interest, stamp duty, commissions and bank charges, arising from the obtaining of financing.

15. A substantial part of the loans obtained and the corresponding expenses with interest, stamp duty, commissions and bank charges were incurred with the acquisition of financial investments, having been verified that the claimant, in the periods of 2012/01/01, 2012/12/31 and 2013/12/31, held shareholdings in companies operating in multiple business areas – real estate activity, mining extraction, metalworking construction, projects for generating electricity from renewable energy sources, among others.

16. On the other hand, a significant part of the loans obtained and the corresponding expenses with interest, stamp duty, commissions and bank charges relate to loans granted and other operations to subsidiary and associated companies.

17. As it has been verified in the course of the tax inspection procedure that in the Tax Return Forms 22 IRC filed by the claimant with the Tax Authority, relating to the 2012 and 2013 tax years, no amount was entered in Table 07 Field 779 – Financial charges not deductible [article 32, no. 2 of the EBF], correction to the taxable result of 2012 and 2013 was carried out in the amount of €5,565,353.39 and €5,435,743.07, respectively.

(...)

IV.III) 50% Losses from fair value reductions in equity instruments (Article 45, no. 3 of the CIRC) - 2012 and 2013

1. The claimant resorts to derivative financial instruments in the management of its financial risks, namely Interest Rate Swaps as a way to guarantee coverage of the risk of variability of the interest rate of loans obtained, being also holder of equity instruments in companies whose securities are admitted to trading on regulated markets, in which it holds shares representing less than 5% of the capital of such companies.

2. By application of International Accounting Standards - IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures, the claimant recognizes variations in fair value of derivative financial instruments Interest Rate Swaps through profits or losses, to the extent that the conditions are not met for them to be eligible for hedge accounting, as well as equity instruments in companies whose securities are admitted to trading on regulated markets are measured at fair value with counterparty of results.

3. The claimant recorded in account 661 - Losses from Fair Value Reductions - In Financial Instruments, in the tax years of 2012 and 2013, the amounts of €3,174,810.73 and €315,973.55, part of which relate to losses in equity instruments in companies whose securities are admitted to trading on regulated markets, corresponding to shareholding of less than 5%, and which in accordance with article 18, no. 9, of the CIRC concur in determining the taxable result.

4. As determined by article 45, no. 3, of the Corporate Income Tax Code [wording in force on 2012/12/31 and 2013/12/31] "the negative difference between gains and losses realized through the onerous transfer of shareholdings, including their redemption and amortization with reduction of capital, as well as other losses or negative equity variations relating to shareholdings or other components of equity, namely supplementary contributions, concur in the formation of taxable profit in only half of their value".

5. Whereby losses from fair value reductions relating to equity instruments in companies whose securities are admitted to trading on regulated markets, corresponding to shareholding of less than 5%, can only be accepted for taxation purposes in 50% of their respective value, whereby the taxable result of 2012 and 2013 must be increased by the amounts of €72,936.28 [€145,872.56 x 50%] and €79,170 [€158,340 x 50%], respectively.

IV.IV) 50% Negative equity variations from fair value reductions relating to shareholdings deriving from transition adjustments from POC to SNC - 2012 and 2013

1. It was verified in the course of the tax inspection procedure that, on 2010/01/01, the date of transition from the Official Accounting Plan to the Accounting Standards System [SNC], the claimant by application of NCRF 27 - Financial Instruments, proceeded to alter the measurement of equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, which were measured at acquisition cost to fair value with counterparty of results.

2. Accounting and Financial Reporting Standard 3 - First-time Adoption of accounting and financial reporting standards, provides that an entity must prepare an opening balance sheet in accordance with NCRF, having to take into account certain rules, except where this standard provides for exceptions or prohibits retrospective application:

a) recognition of all assets and liabilities, to the extent required by NCRF;

b) derecognition of assets or liabilities which, in accordance with NCRF, are not to be recognized as such;

c) reclassification of items that were recognized as a certain type of asset, liability or equity under the scope of Previously Accepted Accounting Principles (GAAP), but which should be recognized as a different type in accordance with NCRF;

d) measurement of all assets and liabilities recognized, in accordance with the principles established in NCRF [NCRF 3 - paragraphs 8].

1. Decree-law no. 159/2009, of 13 July, adapted the Corporate Income Tax Code to international accounting standards adopted by the European Union and to the Accounting Standards System, approving in article 5 a transitional regime which determines that adjustments to equity resulting from first-time adoption of SNC, which are considered tax-relevant in accordance with the Corporate Income Tax Code and related legislation, resulting from the recognition or non-recognition of assets or liabilities, or from changes in their respective measurement, concur in equal shares in determining the taxable result of the first tax period in which such standards are applied and the four following tax periods.

2. In the Tax Return Forms 22 IRC of 2012 and 2013 of the claimant - Table 07 Field 703 - positive equity variations [transitional regime provided for in article 5, nos. 1, 5 and 6 of Decree-Law no. 159/2009, of 13 July] the value of €516,435.29 was added to the taxable result, corresponding to 1/5 of the balance of positive and negative equity variations resulting from the change in measurement of equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, which were measured at acquisition cost to fair value with counterparty of results.

3. As determined by article 45, no. 3, of the Corporate Income Tax Code [wording in force on 2012/12/31 and 2013/12/31] "the negative difference between gains and losses realized through the onerous transfer of shareholdings, including their redemption and amortization with reduction of capital, as well as other losses or negative equity variations relating to shareholdings or other components of equity, namely supplementary contributions, concur in the formation of taxable profit in only half of their value".

4. Given that in determining the equity variation added to the taxable result there are adjustments/negative equity variations relating to equity instruments held for trading in companies whose securities are admitted to trading on regulated markets, resulting from the above-mentioned transition adjustment, are only deductible for taxation purposes in 50%, in accordance with article 45, no. 3, of the Corporate Income Tax Code, the amount of €719,414.20 was added to the taxable result of the periods of 2012 and 2013.

5. It was verified in the context of the tax inspection procedure that, in the periods of 2012 and 2013:

I) The claimant recorded financing charges, resulting from the acquisition of shareholdings, which are not deductible for taxation purposes under Corporate Income Tax, in accordance with article 32, no. 2, of the EBF (in 2012 €5,565,353.39 and in 2013 €5,435,743.07);

II) There was found to be non-compliance by the claimant with the rule limiting the deductibility of financing charges provided for in article 67 of the Corporate Income Tax Code (2013 tax year, in the value of €363,786.10);

III) It was confirmed in such procedure that 50% of losses from fair value reductions relating to shareholdings or other components of equity cannot be deductible from the taxable result, in accordance with article 45, no. 3, of the CIRC (in 2012 in the value of €72,936.28 and in 2013 in the value of €79,170.00);

IV) It was further verified that 50% of negative equity variations deriving from POC to SNC transition adjustments, related to losses from fair value reductions relating to shareholdings or other components of equity, cannot be deductible from the taxable result, in accordance with article 45, no. 3, of the CIRC and transitional regime provided for in article 5, nos. 1, 5 and 6 of DL 159/2009, of 13/07 (in 2012 in the value of €719,414.20 and in 2013 in the value of €719,414.20).

1. Correction of the taxable income under Corporate Income Tax of the claimant was carried out by the Tax Inspection Services relating to the periods of 2012 and 2013, by force of articles 17, nos. 1 and 3, 45, no. 3 and 67 of the CIRC and article 32, no. 2, of the EBF, in the total value of €6,357,703.87 and €6,598,113.37.

2. More specifically,

Nature of Corrections to Taxable Matter of Claimant Tax Year(s)/Period(s)

Total Tax 2012 2013

Corporate Income Tax Financial charges not deductible 5,565,353.39 5,435,743.07

11,001,096.46

[article 32, no. 2 of the EBF]

Corporate Income Tax Limitation on deductibility of

financing charges [article 67 of the CIRC] 0.00 363,786.10

363,786.10

Corporate Income Tax 50% Losses from fair value reductions

relating to shareholdings or other

components of equity

[article 45, no. 3 of the CIRC] 72,936.28 79,170.00

152,106.28

Corporate Income Tax 50% Negative equity variations

From fair value reductions relating to

shareholdings or other components of

equity deriving from transition

adjustments from POC to SNC

[transitional regime provided for in

article 5, nos. 1, 5 and 6 of DL 159/2009,

of 13/07 and article 45, no. 3 of the CIRC]

                                                                         719,414.20      719,414.20

1,438,828.40

Total 6,357,703.87 6,598,113.37

12,955,817.24

1. We consider, thus, that the assessments subject to reclamation do not suffer from any defect that might compromise their validity, with no elements existing that contradict their result.

In view of the foregoing, it was proposed to REJECT the present administrative reclamation, in accordance with the grounds of the present opinion.

• The Claimant indicated the value 0.00 in field 779 of Table 7 of the tax return form 22 relating to the 2012 tax year, relating to "Financial charges not deductible (art. 32, no. 2 of the EBF)";

• On 05-03-2018, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts and Reasoning for the Statement of Facts

The facts were deemed proven on the basis of the documents attached to the initial petition and which are contained in the administrative file.

There is no dispute concerning the statement of facts.

3. Legal Matters

3.1. Order of Knowledge of Defects

Three corrections to the Claimant's taxable matter relating to the 2012 Corporate Income Tax year are at issue in these proceedings:

1. Financial charges which the Tax and Customs Authority considered non-deductible, in accordance with article 32, no. 2, of the EBF, applying the formula provided for in Circular no. 7/2004, of 30 March, of the DSIRC for their calculation;

2. Non-application by the Claimant of the 50% percentage provided for in article 45, no. 3, of the CIRC (in the version in force in 2012) to losses from fair value reductions in equity instruments relating to the year 2012;

3. Non-application by the Claimant of the 50% percentage provided for in article 45, no. 3, of the CIRC (in the version in force in 2012) to negative equity variations from fair value reductions relating to shareholdings deriving from transition adjustments from POC to SNC.

The Claimant considers the three aforementioned corrections illegal.

Furthermore, the Claimant also attributes to the disputed assessment defects for violation of articles 15, no. 1, 36, nos. 2, 3 and 4, and 60, no. 1, of the Complementary Regime of Tax Inspection Procedure (RCPIT) and lack of reasoning.

The three first defects attributed by the Claimant to the disputed assessment are founded in substantive law, while those for violation of the RCPIT are procedural in nature.

In accordance with article 124 of the CPPT, subsidiary application of which is required by article 29, no. 1, paragraph c), of the RJAT, with no defects attributed to the acts whose annulment is requested that would lead to a declaration of non-existence or nullity, nor a relationship of subsidiarity indicated, the order of appreciation of the defects should be that which, according to the prudent discretion of the judge, provides the most stable or effective protection of the interests violated.

With no defects attributed to the assessments that would lead to non-existence or nullity, nor a relationship of subsidiarity being indicated, one should begin by appreciating defects for violation of substantive norms, as these are those whose merit can provide more stable and effective protection of the Claimant's interests.

Specifically, with regard to the question of application of article 32, no. 2, of the EBF, defects for violation of law and procedural defects are attributed, whereby priority should be given to the former.

3.2. Question of Deductibility of Financial Charges Which the Tax and Customs Authority Considered Non-Deductible, in Accordance with Article 32, No. 2, of the EBF, Applying for Its Calculation the Formula Provided for in Circular No. 7/2004, of 30 March, of the DSIRC

The Tax and Customs Authority made a correction, considering an increase in taxable result in the value of €5,565,353.39, on the basis of application of article 32, no. 2, of the Tax Benefits Statute (EBF), in the wording introduced by Law no. 64-B/2011, of 30 December (to which corresponds article 31, no. 2, in the version prior to the republication effected by Decree-Law no. 108/2008, of 26 June).

Article 32, no. 2, of the EBF establishes the following:

"2 - Gains and losses realized by SGPS from shareholdings of which they are holders, provided such shareholdings are held for a period of not less than one year, and, likewise, financial charges incurred with their acquisition do not concur in the formation of the taxable profit of these companies."

The Directorate of Services for Corporate Income Tax issued, for purposes of interpretation and application of this norm, Circular no. 7/2004, of 30 March, establishing in its nos. 6 and 7 the following:

Tax year in which corrections of financial charges should be made

"6. With regard to the tax year in which financial charges should be disregarded as costs for tax purposes, the tax correction of those incurred with the acquisition of shareholdings susceptible to benefiting from the special regime established in no. 2 of art. 31 of the EBF should be carried out, in the tax year to which they relate, independent of whether all conditions for application of the special regime for taxation of gains have already been met. Should it be concluded, at the moment of sale of the shareholdings, that not all requirements for application of that regime are met, the financial charges that were not considered as a cost in previous tax years shall be considered as a cost in that tax year. ( [1] )"

Method to be used for purposes of allocation of financial charges to shareholdings

"7. As for the method to be used for purposes of allocation of financial charges incurred with the acquisition of shareholdings, given the extreme difficulty of using, in this matter, a method of direct or specific allocation and the possibility of manipulation that it would allow, such allocation should be carried out on the basis of a formula that takes into account the following: the remunerated liabilities of SGPS and SCR should be allocated, first, to remunerated loans granted by them to investee companies and to other interest-generating investments, with the remainder being allocated to remaining assets, namely shareholdings, proportionally to their respective cost of acquisition."

The Claimant, in the tax return form 22 relating to the 2012 tax year, indicated the value 0.00 in any field in Table 07 Field 779 - Financial charges not deductible [article 32, no. 2 of the EBF].

As stated in the Tax Inspection Report, the Claimant was notified to "identify the method used - direct allocation, specific or other - for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings", and "itemize the calculations that justify the application of the allocation method used by A... SGPS SA".

Having the Claimant not indicated the method used "for allocation of remunerated liabilities, both to remunerated loans granted by it to related parties and/or other active financial operations, and to remaining assets, namely, acquisition of financial shareholdings, as well as having not submitted to the tax inspection services itemization of the calculations that justify the application of the allocation method used that enables control of financing charges incurred with the acquisition of shareholdings", the Tax and Customs Authority proceeded to allocate the financial charges incurred by A... SGPS SA with the acquisition of financial shareholdings through use of the formula provided for in Circular no. 7/2004, of 30 March, of the DSIRC.

The Claimant argues, in summary, that

– its financial life "is extremely complex, being manifestly impossible to allocate, according to the TA formula, any financial charges incurred upstream with any operations carried out downstream, namely acquisition of shareholdings";

– "there is no correspondence with reality to presume, as the TA presumes in the calculations it carried out, the values of the alleged 'remunerated liabilities attributable to shareholdings' (financing obtained to acquire shareholdings, supposedly), much less the values of the alleged 'financial charges attributable to the remunerated liabilities attributable to shareholdings'";

– "the TA's calculations are based only on the accounting values on 31.12.2012 - not minimally accounting for the movements and operations actually occurred throughout the 365 days of the year 2012 and the specific moment in which they occurred";

– "part of the value of this stock of shareholdings on 31.12.2012 comes from acquisitions made throughout 2012 – cases of acquisitions of shareholdings in F..., Lda. (4% acquisition), and in D... SGPS, SA (0.056% acquisition)", which on that date did not meet the minimum one-year holding period legally imposed by article 32 no. 2 of the EBF, whereby, logically, they could not have entered, as they did, into the calculations carried out by the TA";

– "none of the financing contracted was intended to acquire any shareholdings";

– "the TA did not even bother to ascertain whether the Claimant bought and/or sold shareholdings (with the consequent determination of gains or losses on the sale of such shareholdings)";

– "in accordance with the above-mentioned article 32 no. 2 of the EBF, only the financial charges incurred with the acquisition of shareholdings subject to onerous transfer in the tax year in question could be subject to correction";

– "the TA's method does not take into account the reality of facts occurred throughout the tax year";

– "the TA's method leads to negative discrimination against SGPSs, totally unjustified, compared with other companies";

– the correction suffers from a defect of error as to the factual assumptions;

– "the 'methodology' applied in the corrections in question has no legal or legal basis whatsoever – neither in article 32 no. 2 of the EBF, nor in any other legal norm";

– "the administrative body cannot replace the legislator by 'legislating' through administrative circulars that have no legal or legal basis", whereby the correction suffers from a defect of violation of law;

– "the correction in question suffers from insufficient reasoning, by: (i) not specifying which concrete financing operations obtained are allocated to the acquisition of the transmitted shareholdings; (ii) not specifying which concrete shareholdings allegedly acquired, or which concrete operations for acquisition of shareholdings allegedly carried out with such financing; (iii) omitting any reference to shareholding holding periods; (iv) omitting whether or not special relationships existed; (v) omitting whether or not the sellers were seated in a territory subject to a more favorable tax regime; (vi) omitting whether or not the sellers of the shareholdings were subject to a special taxation regime; etc.. (cfr. article 32 no. 2 and 3 of the EBF)";

– "the Tax and Customs Authority bears the burden of proof of the verification of the factual assumptions that led it to make corrections - being incumbent upon it to demonstrate, in particular, the factuality that led it to consider that the taxpayer incurred 'financial charges with the acquisition of shareholdings' in the above-mentioned corrected values";

– the Circular method is wrong and its application may result in the allocation to shareholdings of cost exceeding its value;

– The TA should have "computed the corrections only insofar as the financial charges recorded were actually and directly related to the acquisition of shareholdings (held for more than one year) sold in 2012 and generating gains or losses realized in that same year and not subject to taxation in 2012";

– the Claimant's accounting reflects its financial situation and is presumed true;

– the charges incurred must be relevant in determining taxable profit, in accordance with article 23, no. 1, paragraph c), of the CIRC;

– article 32, no. 2, may lead to double penalization of SGPSs, in the case of existing losses, which implies violation of "the principle of proportionality and equality, in light of the unjustified restriction of rights and unfounded discrimination of SGPSs (articles 13 and 266 no. 2 of the CRP; see also articles 55 of the LGT and 5 of the CPA)";

– "indirect methods of determining taxable matter are only admitted subsidiarily by the legislator, only in exceptional cases and according to a special legal regime – as follows from articles 81 no. 1, 83, 85 and 87 to 94 of the LGT";

– "the TA is legally bound by the principles of inquisitorial procedure and discovery of material truth, having to carry out all necessary steps to discover the material truth (cfr. articles 58 of the LGT, 5 and 6 of the RCPIT)" and, in this case, did not determine any financial charges with the actual and concrete acquisition of any shareholdings, nor does it clarify to which financial charges it refers;

– article 32, no. 2, of the EBF is unconstitutional as it violates the constitutional prohibition on retroactive taxes and the principle of taxation based on capacity to contribute (article 104, no. 2, of the CRP);

– furthermore, the calculation carried out by the TA applying the Circular is not correct, as it was considered as "Asset – shareholdings [Acquisition Value]" the amount of € 49,744,009.00, which relates to the revalued acquisition price and considered only for accounting purposes - and not to the actual acquisition cost of the shareholdings;

The general regime for relevance of gains, losses, and financial charges for the formation of taxable profit of entities subject to Corporate Income Tax was expressed in the concurrence of gains and financial charges, in full [articles 20, no. 1, paragraph h), and 23, no. 1, paragraph a), of the CIRC in the wording resulting from Decree-Law no. 159/2009, of 13 July], and in the concurrence of losses in 50% [in accordance with articles 23, no. 1, in l) and 45, no. 3, of the same Code].

For SGPS, article 32, no. 2, of the EBF (in addition to other situations provided for in its no. 3), established a special regime, which was not necessarily translated as a benefit, which was expressed, in general, in the irrelevance for the formation of the taxable profit of the SGPS of gains and losses realized from shareholdings held for at least one year, accompanied by the non-concurrence in the formation of taxable profit of financial charges incurred with their acquisition.

In no. 2 of article 32 of the EBF, it is established that "financial charges incurred with their acquisition" do not concur in the formation of taxable profit, referring to shareholdings, whereby it must be concluded that its literal content indicates that only financial charges that are connected with the acquisition of shareholdings are covered by the non-deductibility established therein.

For this to be the interpretation that results from the literal wording, it is corroborated by the explanation for its introduction in the EBF that was given in the Report of the State Budget for 2003 (Law no. 32-B/2002, of 30 December).

In fact, as stated in Circular no. 7/2004, the regime of this norm was introduced in the EBF by Law no. 32-B/2002, of 30 December, which approved the State Budget for 2003, giving new wording to article 31, whose regime then appeared in article 32 following the renumbering effected by Decree-Law no. 108/2008, of 26 June.

In Bill no. 28-IX, which gave rise to the Budget Law for 2003, the text of that article 31, no. 2, appeared with wording identical to that in force in 2012 (in article 32, no. 2), with the only difference being the addition of the reference to "CIRs" (abbreviation for "venture capital investors"), which is irrelevant to the interpretation of the norm.

In the said Report of the State Budget for 2003 ([2]), after noting a decline in the 2002 execution of the Budget relating to Corporate Income Tax ([3]) the introduction of several measures is announced aimed at "broadening the tax base and measures for moralization and neutrality", among which that of non-deductibility of financial charges directly associated with the acquisition of shareholdings by SGPS, which is announced in the following terms:

"There is to be established the non-deductibility consideration, for purposes of determining taxable profit, of financial charges directly associated with the acquisition of shareholdings by SGPS";

It is unequivocal, thus, that it was intended that only financial charges directly associated with the acquisition of shareholdings would be covered by non-deductibility.

By that express reference in the Report to the need for financial charges to be directly associated with the acquisition of shareholdings (which is also expressed in the text of the norm through the reference to "financial charges with its acquisition"), it is concluded that it is not sufficient, to determine non-deductibility of financial charges, the finding that the SGPS is a holder of shareholdings and incurred financial charges, it being necessary to demonstrate that there is a direct relationship between certain financial charges and the acquisition of determined shareholdings.

It is a corollary of this interpretation, imposed by the literal content of article 32, no. 2, that, if certain shareholdings were not acquired with liabilities generating financial charges (namely, those obtained through contributions in kind or with use of own capital), they are irrelevant for the purpose of applying that norm, in the part that relates to non-deductibility of financial charges.

It is also a corollary of this interpretation that, regarding shareholdings acquired with financing generating charges, only the charges derived from the financing relating to their acquisition are non-deductible.

There is thus no legal basis for deviating from the rule of deductibility of financial charges, which appears in paragraph c) of no. 1 of article 23 of the CIRC, in relation to charges that are not directly associated with the acquisition of shareholdings.

For this reason, it is clear, in light of the letter of the latter part of no. 1 of article 32 and the explanation given in the Report of the Budget for 2003, that non-deductibility of charges applies only to those directly derived from financing used for acquisition of shareholdings.

Being this the regime provided for in law, it cannot be altered by regulatory means, as precepts created by legislative acts cannot be, with external effect, interpreted, integrated, modified, suspended or repealed by acts of another nature (article 112, no. 5, of the CRP).

Furthermore, as the Claimant argues, article 32, no. 2, of the EBF is a norm that concerns tax incidence, broadly understood, as it decisively influences the determination of taxable matter, whereby it is included in the reservation of law, in accordance with articles 103, no. 2, and 165, no. 1, paragraph i), of the CRP.

In the case at hand, it has not been demonstrated that any of the shareholdings was acquired with financing, namely, that generated charges in 2012.

With regard to shareholdings acquired in 2012, the question of applicability of the regime of article 32, no. 2, of the EBF does not arise, as they had not been acquired more than one year earlier and values of shareholdings acquired in 2012 to F..., Lda. and D... SGSP, SA.) were considered in the formula used.

Furthermore, as the Claimant argues, there is likewise no basis for it to be relevant the value of financial charges and shareholdings recorded in accounting on 31-12-2012 and not throughout the year.

In this context, the evidence produced points to shareholdings