CAAD Case 85/2018-T: IRC Deductibility of Financial Charges for SGPS Under Art. 32 EBF and Art. 67 CIRC

ARBITRAL TAX JURISPRUDENCE

Arbitral Case No. 85/2018-T

Decision Date: 2019-09-25
Subject Matter: CIT

Value of Claim: € 6,598,113.37

Topic: CIT – SGPS - Deductibility of financial charges (Art. 32(2) TBL and Art. 67 CIT Code). Fair value measurement. Transition adjustments – Reform of arbitral decision (attached to decision).

Replaces the Arbitral Decision of 26 December 2018.

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ARBITRAL DISPATCH

Following the learned Judgment delivered by the Central Administrative Court South ("TCAS"), on 25 June 2019, which has now become final, declaring the nullity of the decision rendered in the present proceedings, a new arbitral decision is hereby rendered.

Lisbon, 25 September 2019

The arbitrator-president with the agreement of all arbitrators,

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (arbitrator-president), Prof. Dr. António Martins and Dr. Cristina Aragão Seia (arbitrators-members), appointed by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to form the present Arbitral Tribunal, constituted on 17 May 2018, agree as follows:

I. REPORT

A... – SGPS, S.A., with collective person number ..., with registered office at ..., hereinafter referred to as "Claimant," filed a request for constitution of a Collective Arbitral Tribunal and for arbitral decision, pursuant to Articles 2(1), subparagraphs a) and b), and 10(1), subparagraph a), both of the Legal Regime for Tax Arbitration ("RJAT"), approved by Decree-Law No. 10/2011, of 20 January, with a view to declaring the illegality of, and consequently annulling, the dismissal dispatch issued by the Head of Division of the Finance Directorate of ..., of 24 November 2017, which was issued in relation to the administrative complaint filed against the Corporate Income Tax ("CIT") assessment No. 2016..., of 28 June 2016, for the tax year 2013.

The annulment request extends to the said tax act, which resulted in a correction to taxable income in the amount of € 6,598,113.37 and a consequent reduction of the declared tax losses from € 7,753,914.57 to € 1,155,801.20.

The Tax and Customs Authority ("AT") is the Respondent.

As the grounds for the annulment request, the Claimant alleges, in summary, the following defects:

PROCEDURAL DEFECTS IN THE INSPECTION ACTION

(a) The AT exceeded the legal period of 6 (six) months for the completion of the inspection procedure which gave rise to the corrections to CIT taxable income, due to the invalidity of the second extension, arising from the omission of the dispatch that determined it and the resulting complete lack of reasoning, pursuant to Articles 15(1) and 36 of the Complementary Regime for Tax and Customs Inspection Procedure ("RCPIT").

Additionally, the draft inspection report was notified more than 10 (ten) days after the date of conclusion of the inspection acts.

Thus, according to the Claimant, the contested assessment, as a consequence of the inspection procedure, is also voidable for violation of law, in light of Articles 133(2), subparagraph i), and 135 of the Code of Administrative Procedure ("CPA").

DEFECTS OF REASONING AND VIOLATION OF LAW RELATING TO THE CORRECTION OF DEDUCTION OF FINANCIAL CHARGES – ARTICLE 32(2) OF THE TBL

(b) The correction by the AT of the tax treatment given by the Claimant to financial charges incurred is not sufficiently reasoned – which is equivalent to the defect of its absence, pursuant to Article 153 of the CPA – and suffers from a material defect of error in the factual and legal premises.

In this context, the Claimant maintains that the AT presumed that the financial charges were incurred with the acquisition of equity interests and, thus, covered by Article 32(2) of the Tax Benefits Statute ("TBL"), correcting their deduction, without, however, demonstrating that the financing was intended for that purpose, in violation of the presumption of truthfulness and good faith of taxpayers' declarations (Article 75(1) of the General Tax Law ("GTL")).

According to the Claimant, its financial life is complex, making it impossible to allocate financial charges to specific operations, with no financing obtained aimed at acquiring equity interests. It argues that the AT did not carry out the necessary diligences to discover the material truth, thereby violating Articles 58 of the GTL and 5(6) of the RCPIT.

The unjustified disregard, by the AT, of expenses incurred in relation to its activity, for non-demonstration of their prerequisites (of Article 32(2) of the TBL, which is based on the relationship between remunerated liabilities and the acquisition of equity interests), violates the principle of taxpaying capacity and the taxation of companies on actual income (Articles 104(2) of the Portuguese Constitution ("PC"), 17(1) of the CIT Code and 4(1) of the GTL).

Article 32(2) of the TBL does not constitute a tax benefit for SGPS. This provision violates Articles 2(1) and 6(2) of the TBL, 55 of the GTL and 5 of the CPA and suffers from material unconstitutionality due to violation of the principles of equality, fiscal neutrality and proportionality, in light of the unjustified negative discrimination against SGPS and the favoring of recourse to own funds at the expense of others (Articles 13 and 266(2) of the PC). The interpretation of tax benefits should be made in the sense of extending the scope of benefits and not restricting them (Articles 11 of the GTL, 9 and 11 of the Civil Code).

Furthermore, Circular No. 7/2004, of 30 March, of the CIT Services Directorate, violates the principles of legality and typicality, by providing for the quantification of taxable income of this tax, i.e., on incidence and tax benefits, in an innovative manner and devoid of legal support (Articles 103(2) and 165(1), subparagraph i) of the Constitution ("PC")). Furthermore, the method of the Circular represents an interference in the current financial management of companies that leads to absurd results and constitutes the application of an indirect method (for determining taxable income) which is only admissible in exceptional circumstances duly justified, which was not the case, nor was it alleged by the AT. Moreover, the Claimant was not notified to exercise the right of prior hearing regarding the application of indirect methods. For all of this, Articles 61(1), subparagraph d), 81(1), 83, 85, and 87-94, all of the GTL, are violated.

Circular No. 7/2004 is retroactive by disregarding financial charges incurred with loans obtained before its entry into force, infringing the principles of legal certainty, good faith and protection of legitimate expectations, which are emanations of the rule of law principle (cf. Articles 12 of the GTL and 2 and 103(3) of the PC).

The AT's own calculations under the aforementioned Circular are incorrect for several reasons: they took into account equity stakes held for less than 1 (one) year (B..., SA); considered gross assets instead of net assets; made proportional allocation between liabilities and assets based on average cost of debt and not actual cost; and did not consider the effective acquisition cost of the investees C... SGPS SA and D..., LDA.

Even if there were doubt regarding the existence and quantification of the taxable event, the act should have been annulled, in accordance with Article 100(1) of the Tax Procedure and Process Code ("TPPC").

DEFECT OF VIOLATION OF LAW DUE TO ERROR IN LAW REGARDING THE DISREGARD OF DEDUCTION OF 50% OF LOSSES RESULTING FROM FAIR VALUE MEASUREMENT – ARTICLE 45(3) OF THE CIT CODE. PROCEDURAL DEFECT OF FAILURE TO ADOPT THE PROCEDURE OF ARTICLE 63 OF THE TPPC

(c) The correction by the AT of the tax treatment given by the Claimant to losses deducted in full, resulting from fair value measurement of financial instruments (shares) listed on the stock exchange, is based on the understanding, inapplicable to the present situation, that negative patrimony variations relating to equity instruments are deductible in only 50%, supported in Article 45(3) of the CIT Code (subsequently repealed by Law No. 2/2014, of 16 January).

These are transition adjustments relating to the transition from the Official Accounting Plan ("OAP"), approved by Decree-Law No. 410/89, of 21 November, to the Accounting Standardization System ("ASS"), approved by Decree-Law No. 158/2009, of 13 July, which entered into force on 1 January 2010, relating to shares held for trading recorded at historical cost until the entry into force of the ASS.

The differences, positive and negative, between the acquisition value of the shares and their official listing on the stock exchange resulted globally in a net positive patrimony variation, which the Claimant reflected in equity (#53) and gave to taxation in equal parts (1/5) in the year in which it occurred and in the 4 (four) consecutive years, as provided for in Article 5 of Decree-Law No. 159/2009, of 13 July, a decree that amended the CIT Code in light of the entry into force of the new accounting rules and which constitutes a special provision.

The AT further corrected the variations in the same year (2013) resulting from the oscillation of the listing of shares held for trading, recorded as expense in account #661 "losses from reduction of fair value in financial instruments," accepting them only at 50%, again by appeal to Article 45(3) of the CIT Code, which the Claimant also considers inapplicable for identical reasons.

From the Claimant's perspective, the provision of Article 45(3) does not contemplate the adjustments (expenses) resulting from the application of fair value, whose introduction was later (historical element) and which do not fit its anti-abuse intention (teleological element), given the reliability and objectivity of valuation, without the possibility of influence or control by taxpayers, which characterizes the situations covered by the fair value model in the CIT Code. In this context, it argues that the regime of Article 45(3) cannot prevail over the special discipline contained in Articles 18(9), subparagraph a); 20(1), subparagraph f); 23(1), subparagraph i); and 46(1), subparagraph b), all of the CIT Code.

The Claimant further emphasizes that Article 45(3) of the CIT Code was not altered when the ASS was introduced, presenting a precise meaning in articulation with Articles 23 and 24 of the same Code, based on distinct and autonomous concepts of expenses and losses and of negative patrimony variations, not covering its statutory hypothesis the adjustments resulting from fair value measurement.

This interpretation is confirmed by the repeal of Article 45(3) of the CIT Code, by Law No. 2/2014, of 16 January ("CIT Reform"), with the simultaneous maintenance of its Article 18(9), subparagraph a), a circumstance that reveals that these are independent and non-correlated provisions.

Additionally, for the Claimant, the AT's position is contrary to the constitutional principles of justice and proportionality, as it limits to 50% the tax deduction of objective and involuntary situations as provided for in Article 18(9), subparagraph a) of the CIT Code.

Finally, it argues that the application of Article 45(3), given its nature as an anti-abuse provision, would also require compliance with the procedure provided for in Article 63 of the TPPC, which was not the case.

DEFECT OF VIOLATION OF LAW DUE TO ERROR IN DETERMINATION OF LEGAL LIMIT FOR DEDUCTION OF FINANCING EXPENSES – ARTICLE 67 OF THE CIT CODE

(d) The Claimant invokes that the AT calculated incorrectly the legal limit for deduction of financing expenses provided for in Article 67 of the CIT Code, in the version applicable at the date of the facts, by improperly adjusting the result (EBITDA) by purging it of the "fair value" effect, in the amount of € 186,233,200.00, resulting from the evaluation, by an independent credit institution, of the financial interest held in the E... SGPS, SA company.

According to the Claimant, Article 67(8) of the CIT Code did not provide limitations regarding the consideration of fair value and EBITDA determined in accounting, so this correction suffers from a defect of violation of law and has no support in Circular No. 7/2013, of 19 August, which binds the AT in accordance with the principles of good faith, legal certainty and protection of legitimate expectations, as provided for in Articles 10 of the CPA and 266(2) of the PC.

It concludes that the new version of Article 67(8) of the CIT Code only entered into force in 2014 and is not subject to retroactive application. Thus, the financing expenses deducted by it fall within the legal limit determined by Article 67 of the CIT Code, in the version applicable at the date of the facts.

The Claimant concludes with a request for annulment of the dismissal dispatch of the administrative complaint and the CIT assessment, and for condemnation of the Respondent to payment of the arbitral fee and other costs.

It attached 16 (sixteen) documents and requested witness testimony.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and followed its normal procedural course, including notification to the AT.

In accordance with Articles 5(3), subparagraph a), 6(2), subparagraph a), and 11(1), subparagraph a), all of the RJAT, the Deontological Council of the Centre for Administrative Arbitration ("CAAD") appointed the signatories as arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the office within the applicable period.

The parties, duly notified of such appointment, did not object thereto pursuant to the combined provisions of Articles 11(1), subparagraphs b) and c), and 8 of the RJAT and 6 and 7 of the Deontological Code of CAAD.

The Collective Arbitral Tribunal was constituted on 17 May 2018, as communicated by the President of the Deontological Council of CAAD.

The Respondent filed a reply and attached the administrative file ("AF").

According to the Respondent, both the extension of the inspection procedure and the alteration of its scope complied with all requirements, including the reasoning requirement, contained in Articles 15(1) and 36(3) of the RCPIT, and the Claimant's allegation is unfounded. Furthermore, the alleged defects of the inspection procedure do not affect the validity of the CIT assessment act and the second-degree act rendered thereon. Thus, if perhaps such defects were to occur, the only consequence would be the cessation of the suspensive effect of the statute of limitations period (of the right to assess the tax), pursuant to Article 46(1) of the GTL.

It further adds that one thing is the reasoning of the act, another is the communication of such reasoning to the interested party. In the latter case, there is no defect of form of the notified act, only its effectiveness is affected. If the Claimant was not notified of the grounds for the second extension of the inspection procedure, it was incumbent upon it to use the mechanism of Article 37 of the TPPC.

As to the financial charges whose deduction was not accepted, according to the Respondent, it was the omissive conduct of the Claimant that led to the need to resort to the quantification method provided for in Circular No. 7/2004. The Claimant, notified to this effect, provided no response to the AT, nor elements that would allow identification of the method used for the allocation of remunerated liabilities to its operations and assets held.

The complexity of financial life and the difficulty in identifying financial flows do not justify, according to the Respondent's position, the non-application of Article 32(2) of the TBL, which, being a special regime, obligates the Claimant to organize accounting so as to segregate expenses and income and positive and negative patrimony variations subject to the general CIT regime and special regimes, a requirement which the Claimant failed to meet.

The Claimant deducted all financial expenses from taxable profit without observing the burden of demonstrating their existence and deductibility, pursuant to Article 74(1) of the GTL.

Furthermore, the method of Circular No. 7/2004 is a proportional allocation method that cannot be confused with indirect methods of assessing taxable income. There is no question of the recording and truthfulness of financial expenses incurred, but only of their qualification as deductible or non-deductible, with accounting not being excluded or replaced. The Claimant did not counter with another method of specific allocation, nor demonstrated that it did not incur financing charges associated with the acquisition of equity interests. It further advocates that the aforementioned method of the Circular has support in the letter and spirit of Article 32(2) of the TBL, merely concretizing one of the ways of applying it, when practical difficulties make the adoption of a specific allocation method unfeasible, and that the Claimant's minimalist interpretation, according to which the application of that provision depends on the specific allocation of obtained financing, would lead to circumscribing the command of non-deductibility of financing charges to pure holdings.

For the Respondent, the alleged violations of the constitutional principles of taxation on actual income, proportionality and equality do not occur, in line with the position endorsed in Constitutional Court ("CC") Judgment No. 42/2014, of 14 January, as there is no arbitrariness in the discrimination of SGPS. This discrimination is justified and there is no manifest violation of the prohibition on excess. For the Respondent, the interpretation that the Claimant seeks to have prevail is what leads to a result that violates the principle of equality.

Regarding the alleged violation of the principles of the inquisitorial nature and discovery of material truth, given that the Claimant deducted all financial expenses, notwithstanding its corporate purpose, it was incumbent on the AT to verify the legal conformity of this deduction. In light of the absence of accounting records of the loans segregated by allocation or by another means that would allow knowledge of their allocation, the AT resorted to the methodology disclosed by Circular No. 7/2004, with the Claimant responsible for contesting the results of the application of this methodology, which it failed to do.

On the other hand, according to the Respondent, there is no lack of support in the legal choice, which was adopted by Article 32(2) of the TBL, consisting of taxpayers having as their general regime the non-deductibility of financial charges and, at the time of realization, if any of the situations occurs that implies their exclusion (from the general regime), then making the appropriate corrections allowing them to consider for the formation of their taxable profit the financial charges incurred, as set forth in the cited CC Judgment No. 42/2014.

Regarding losses resulting from the fair value criterion, the Respondent understands that the change from OAP to ASS resulted in an amendment to the CIT Code, but differences continued to exist between accounting criteria and tax criteria, with the legislator not excluding from Article 45(3) losses and negative patrimony variations resulting from fair value reductions, differently from what it did in Article 46(1) with the exclusion of the regime of realized gains and losses. Whence it concludes that that provision continued to apply to all losses verified in equity interests, with tax relevance, as occurs with fair value variations. In the case at hand, it does not consider it a situation subsumed under the first part of the provision (and therefore subject to the tax treatment of gains and losses), but rather a negative patrimony variation resulting from the accounting adjustments made as a result of the transition to the ASS.

The formulation of Article 45(3) of the CIT Code is comprehensive, and the restrictive interpretation of the provision advocated by the Claimant based on an overvaluation of the terminological imprecision of "expenses" and "losses" is not to be accepted. On the other hand, such interpretation is erroneous insofar as one cannot attribute to the said provision the function of qualifying expenses or losses as deductible, which is entrusted to Article 23 of the CIT Code, so the alleged relationship of speciality does not arise.

The interpretation advocated by the Claimant that non-deductible financing charges are only those which are directly and unequivocally proven as such is contrary to fundamental law, by violating the principles of equality, taxpaying capacity and taxation of actual income (Articles 13, 103 and 104(2) of the PC), as it allows the deduction of financing charges incurred in an activity generating taxable income and, likewise, in activities that do not result in such generation, in addition to SGPS themselves being tempted to relieve themselves by invoking the impossibility of specific allocation.

An SGPS that carries out activities not covered by the special regime provided for in Article 32(2) of the TBL, combined with Article 17(3), subparagraph b) of the CIT Code, is bound by the duty of separation or autonomization of activities subject to different tax regimes. It is not sufficient for the taxpayer to invoke the illegality of Circular No. 7/2004 for it to be authorized to deduct taxes without such party promoting proof to that effect. The illegality of the mentioned Circular cannot constitute grounds for non-application of the regime of Article 32(2) of the TBL, under penalty of violation of the principle of taxpaying capacity, inherent in Article 104(2) of the PC.

The Respondent understands that the request for witness testimony should be rejected as only a matter of law is under discussion, and concludes for the improcedence of the request for arbitral decision and for the maintenance of the contested assessment act, with dismissal of the request with the legal consequences thereof.

By dispatch of 14 September 2018, the Tribunal determined the holding of the meeting provided for in Article 18 of the RJAT, with examination of the witnesses indicated by the Claimant, given the potential contribution to ascertaining the material truth. The meeting was postponed due to the Claimant's impediment.

On 30 October 2018, the said meeting took place, at which the witnesses F... and G... were heard, with the Claimant dispensing with one witness.

The Tribunal notified the parties for successive written submissions and extended by two months the deadline for rendering the decision, which was set for 16 January 2019, pursuant to Article 21(2) of the RJAT. Finally, it warned the Claimant that, by such date, it should proceed to payment of the subsequent arbitral fee, pursuant to the provisions of Article 4(3) of the Regulation of Costs in Tax Arbitration Proceedings, and communicate such payment to CAAD.

Claimant and Respondent submitted submissions maintaining, in essence, the arguments contained in the request for arbitral decision and the reply, respectively.

II. SANATION

The Tribunal was regularly constituted and is competent ratione materiae, given the configuration of the subject matter of the proceedings (cf. Articles 2(1), subparagraph a), and 5 of the RJAT).

The request for arbitral decision is timely, as it was submitted within the period provided for in subparagraph a) of Article 10(1) of the RJAT.

The parties have legal personality and capacity, have legitimacy, and are regularly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, no exceptions having been raised.

III. REASONING

1. FACTS

With relevance for the decision, the following facts, which are deemed proven, should be noted:

A. A... – SGPS, S.A., here Claimant, was founded in November 1994 and is engaged in the management of equity interests, as an indirect form of exercising economic activities, and in the provision of services and support to the companies of the Group in which it is inserted, which operate in multiple areas of business: real estate, mining extraction, metallurgical construction, generation of electricity from renewable energy sources, among others – cf. Tax Inspection Report ("TIR"), attached with the request for arbitral decision ("ppa") – document 3 – and with the AF.

B. The Claimant is classified under CAE 64202, in the general CIT regime and normal quarterly VAT regime – cf. TIR.

C. With reference to 31 December 2013, the Claimant presented liabilities arising from financing obtained in the amount of € 148,958,510.21 and financial charges incurred, covering interest, stamp duty, commissions and bank expenses, of € 11,024,953.92, which were allocated indiscriminately to its general activity, which is complex and composed of multiple financial movements, of short, medium and long-term, and which includes the centralization of obtaining and managing financing for the subsidiaries in a cash pooling model, with said liabilities and charges not being specifically recorded or associated with the acquisition of equity interests, either in accounting, in financial statements, or in extra-accounting schedules – cf. TIR and testimony of witness F....

D. With reference to 31 December 2013, the Claimant altered the measurement method of the financial interest held in the E... SGPS, SA company, corresponding to 50% of its capital stock, which was previously recorded (at 31 December 2012) at € 18,782,867.92, in sub-account 41110191, in accordance with the cost method. This interest was subsequently recognized at fair value, which the Claimant considered to be € 205,016,067.70, following an evaluation carried out by H..., which resulted in an accounting movement to debit in sub-account "41110191 –E...-Percentage equity" in the amount of € 186,233,199.78, by contrast with credit recording in sub-account of income 77200000 – Gains from fair value increases in financial investments – cf. TIR.

E. The Claimant's net financing expenses in 2013 amounted to € 8,438,417.21, with the result calculated before depreciation, financing expenses and taxes (EBITDA), in the amount of € 94,307,579.23, influenced by the amount of € 186,233,200.00, corresponding to the increase in value of the financial interest in E... SGPS, SA resulting from the alteration of its measurement criterion – cf. TIR.

F. With reference to the 2013 tax year, the Claimant recorded in account 661 – Losses from Fair Value Reductions – In Financial Instruments, the amount of € 315,973.55, part of which relates to losses in equity instruments in companies whose securities are admitted to trading in a regulated market, corresponding to a stake in capital stock of less than 5% – cf. TIR.

G. The Claimant added to taxable result the amount of € 516,435.29, corresponding to 1/5 of the balance (positive) of the positive and negative patrimony variations resulting from transition adjustments from OAP to ASS, pursuant to the transitional regime of Article 5(1), 5 and 6 of Decree-Law No. 159/2009, of 13 July, as a result of the alteration of the measurement of equity instruments held for trading in companies whose securities are admitted to trading in a regulated market (which were measured at acquisition cost) to fair value by contrast with results – cf. TIR.

H. On 13 August 2014, the Claimant submitted the CIT Model 22 Declaration for the 2013 tax year, in which it determined a tax loss of € 7,753,914.57, having not added financing charges in Schedule 07, either in Field 748 – Limitation to deductibility of financing expenses [Article 67 of the CIT Code], or in Field 779 – Non-deductible financial charges [Article 32(2) of the TBL] – cf. document 2 attached with the ppa and TIR.

I. On 1 September 2015, an external inspection procedure began with respect to the Claimant, for the 2013 tax year, credited by Service Order OI2015..., of partial scope – CIT – cf. TIR and document 4 attached with the ppa.

J. By dispatch dated 28 January 2016, the inspection procedure period was extended by three months, in accordance with the reasoning and proposal contained in the service information of the same date, based on the complexity, both of the investigation of facts and of technical-legal appraisal, under Article 36(3), subparagraph a) of the RCPIT. The dispatch and the information supporting it were notified to the Claimant by letter of the same date, providing for the conclusion of the inspection by 1 June 2016 – cf. document 4 attached with the ppa and AF.

K. The Claimant was notified of the alteration of scope and of a second extension of the inspection procedure period, by letter dated 27 April 2016, signed by the Head of Division (Tax Inspection Division ..., Finance Directorate of...), by subdelegation, which states:

"Pursuant to the provisions of Articles 14(1), subparagraph a), 15(1) and 36(3) and 4 of the Complementary Regime for Tax and Customs Inspection Procedure (RCPITA), you are hereby notified of the alteration of scope from partial to general, as well as of the extension, for a further three months, of the inspection action(s) in progress, with the grounds set forth in the information that follows in attachment.

The conclusion of the inspection procedure(s) is expected by 2016-09-01."

– cf. document 5 attached with the ppa and AF.

L. On the same date (27 April 2016), the corresponding dispatch broadening the scope of the inspection from partial (CIT) to general, and of (second) extension of the period for a further three months, was issued, in accordance with the information from the services, also dated 27 April 2016, which invokes the following grounds:

"Given that the external inspection procedures with respect to company A...– SGPS SA, Tax ID:..., credited by service orders No. OI2015... and OI2015..., relating to the periods of 2012 and 2013, with commencement on 2015-09-01, are in progress.

Given that the aforementioned procedures present special complexity both in terms of investigation work already conducted and in terms of technical-legal appraisal of the facts, insofar as there are significant risks of material distortion of taxable result relating to significant transactions with related parties, application/waiver of accounting policies which 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 to deductibility of financing expenses incurred with the acquisition of equity interests held by SGPS (Article 32 TBL) and/or of net financing expenses (Article 67 of the CIT Code).

Given that these matters involve difficult judgments and potentially contentious issues, which require the Tax Inspection Service to gather sufficient and appropriate audit evidence, through the design and implementation of responses to the significant risks of material distortion identified, the work on which has not yet been completed, and given the understanding that the scope of the inspection procedures in progress should be altered from partial to general, for control/verification of the taxpayer's overall tax situation, specifically concerning Stamp Duty and Value Added Tax.

And given the provisions of Article 36 of the Complementary Regime for Tax Inspection Procedure, which establishes that the inspection procedure is continuous and must be concluded within the maximum period of six months from notification of its commencement, but which provides in para. 3 that in certain circumstances such period may be extended for two further periods of three months, specifically in situations of special tax complexity.

II – PROPOSAL

In light of the foregoing, we propose, pursuant to the provisions of Articles 14(1), subparagraph a) and 15(1) to alter the scope of the external inspection procedures, credited by service orders No. OI2015... and OI2015..., relating to the periods of 2012 and 2013, from partial to general, as well as to extend the period, for a further three months, pursuant to the provisions of Article 36(3), subparagraph a) of the RCPITA, with its conclusion expected by 2016-09-01. […]" – cf. AF.

M. The Claimant was notified of the Tax Inspection Report ("TIR"), on 22 June 2016, from which resulted a correction to the taxable income declared in the 2013 tax year of € 6,598,113.37 and the consequent reduction of tax losses from € 7,753,914.57 to € 1,155,801.20, based on the grounds transcribed below (cf. document 3 attached with the ppa - TIR):

"I. Conclusions of the inspection action

Given that it has been established that, in the periods of 2012 and 2013, A... SGPS SA recorded financing expenses, resulting from the acquisition of equity interests, which are not deductible for purposes of CIT taxation, pursuant to Article 32(2) of the TBL, given that it has been determined that there is non-compliance with the rule limiting the deductibility of financing expenses provided for in Article 67 of the CIT Code, as well as given that it has been established that 50% of the losses from fair value reductions relating to equity interests or other components of equity and the negative patrimony variations resulting from transition adjustments from OAP to ASS cannot be deductible to taxable result, pursuant to Article 45(3) of the CIT Code and the transitional regime provided for in Article 5(1), 5 and 6 of Decree-Law 159/2009, of 13/07, corrections/increases to the taxable result of 2012 and 2013 result in a total amount of €6,357,703.87 and €6,598,113.37, respectively.

[…]

III. Description of facts and grounds of purely arithmetic corrections

A1 – Non-deductible financial charges

[Article 32(2) of the TBL] – 2012 and 2013

1. A... SGPS SA, as a company managing equity interests, integrates financial investments in companies that operate in multiple areas of business - real estate activity, mining extraction, metallurgical construction, electricity generation projects 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 equity interests/financial investments held for a period of not less than one year, as well as the financing expenses incurred with their acquisition are not deductible to taxable result.

2. The inspection/audit procedures conducted, for control/verification of the financing expenses incurred with the acquisition of equity interests which, given the provisions of Article 32(2) of the TBL, are not deductible to taxable result, were based on the analysis of the Management and Accounts Reports of A... SGPS SA of 2012 and 2013, of the IES - Simplified Business Information and the CIT Model 22 Income Declaration, submitted by the taxpayer, with reference to the 2012 and 2013 tax years, of the normalized tax audit export data file for SAF-T (PT) integration, for those periods, exported by the taxpayer on 2016/01/29 and presented to the tax inspection service on 2016/02/25, documentary supports of accounting records, inventory of financial interests reported to 2012/12/31 and 2013/12/31, and the taxpayer's reply to our requests for clarifications/information.

3. From the normalized tax audit export data file for SAF-T (PT) integration, for the periods of 2012 and 2013, we established that A... SGPS SA presented liabilities arising from financing obtained as set forth in the following schedule:

Schedule 7 – Loans/Financing obtained by A... SGPS SA – 2012 and 2013

ACCOUNT_ID_CA1 ACCOUNT_DESCRIPTION_BA1 OPENINGCREDITBALANCE_BA1 CLOSINGCREDITBALANCE_BA1

                           2012/01/01         2012/12/31         2013/12/31

25111070 CP –I...- CP 0.00 1,721,333.33 1,721,333.33

25111110 CP –J...– DO01 0.00 700,000.00 0.00

25111130 CP –K...– DO01 0.00 2,008,532.03 5,027,771.12

25111145 CP –H...– DO01 356,600.00 0.00 0.00

25111150 CP –L...– DO01 0.00 2,460,000.00 2,460,000.00

25111155 CP –M...– DO01 0.00 0.00 200,000.00

25111230 CC –K...– DO01 21,970,000.00 0.00 0.00

25111240 CC –I...– DO01 51,000,000.00 51,000,000.00 50,995,000.00

25111250 CC – H... 6,000,000.00 0.00 0.00

25111265 CC –L...– DO01 820,000.00 0.00 0.00

25111310 PC –J...– DO01 2,900,000.00 2,900,000.00 1,350,000.00

25111315 PC –N...– DO01 7,371,500.00 5,312,500.00 3,234,615.28

25111330 PC –K...– DO01 3,875,000.00 3,150,000.00 2,450,000.00

25112050 MLP –K...– DO01 0.00 19,961,467.97 15,327,896.89

25112051 MLP –K...–Assumption Debt ... 0.00 0.00 3,096,586.92

25112072 MLP –I... (6M)- DO01 5,164,000.00 3,442,666.67 3,442,666.67

25112076 MLP –I... (2.960M€) 2,960,000.00 2,960,000.00

25112080 MLP – H... 3,472,222.24 0.00 0.00

25112081 MLP –O...– 7.5M 7,500,000.00 0.00 0.00

25112083 MLP –H...-22.5M€ 0.00 22,500,000.00 0.00

25112090 MLP –L...– DO01 3,280,000.00 1,640,000.00 0.00

25112086 MLP –H...-48M€ 0.00 0.00 48,000,000.00

25112100 MLP –M...– DO01 0.00 0.00 400,000.00

25120010 DB_J... 996,422.34 0.00 0.00

25120020 DB_N... 10,104.71 0.00 0.00

25120080 DB_H... 4,739,416.20 0.00 0.00

25410000 Subs, assoc and joint ventures-OTCP 3,560,540.47 9,418,275.89 8,292,640.00

                           123,015,805.96  129,174,775.89  148,958,510.21

amounts in euros

Source: Normalized tax audit export data file for SAF-T (PT) integration of A... SGPS SA (2012 and 2013)

1. It can be verified that this company also recorded, in the periods of 2012 and 2013, materially significant expenses for interest, stamp duty, commissions and bank expenses, resulting from the obtaining of financing obtained, as itemized in the following schedule:

Schedule 8 – Interest, stamp duty, commissions and bank expenses incurred by A... SGPS SA – 2012 and 2013

ACCOUNT_ID_CA1 ACCOUNT_DESCRIPTION_BA1 DEBITAMOUNT_CA1_SUM

                           2012       2013

68123000 Stamp duty 963,194.98 732,419.24

69111000 Interest – Bank loans st 4,747,280.39 3,897,536.08

69112000 Interest – Bank loans lt 2,972,370.30 3,593,650.11

69113000 Interest – Advances 363,017.74 10,439.87

69116000 Interest DO/Disc Banking 20,011.20 20.16

69117000 Interest – OTCP 0.00 291,186.50

69180000 Other Interest 37,543.56 0.00

69183000 Interest on commercial paper 855,146.93 591,736.31

69184000 Interest on swaps 970,644.22 1,151,938.68

69185001 Interest on default 89,917.87 32,045.47

69880100 Banking Services 57,515.69 4,103.68

69881204 Commissions on commercial paper 70,959.16 103,320.00

69881209 Other Commissions 427,519.33 616,557.82

                           11,575,121.37    11,024,953.92

amounts in euros

Source: Normalized tax audit export data file for SAF-T (PT) integration of A... SGPS SA (2012 and 2013)

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

Schedule 9 – Financial Interests of A... SGPS SA – Tax Years 2012 and 2013

FINANCIAL INVESTMENTS A... SGPS SA ACQUISITION VALUE

            2012/01/01         2012/12/31         2013/12/31

... C... SGPS SA 36,768,353.00 36,822,170.00 36,822,170.00

... P... SGPS SA 11,611,870.00 11,611,870.00 11,611,870.00

... D... LDA 4,800.00 139,800.00 139,800.00

... Q... SA 22,750.00 22,750.00 22,750.00

... R... UNIP LDA 5,000.00 5,000.00 5,000.00

... E... SGPS SA 30,000.00 25,000.00 25,000.00

... S... SA 50,000.00 0.00 0.00

... T... LDA 1,000.00 0.00 0.00

... U...– SGPS SA 5,000.00 5,000.00 5,000.00

... V... SA 112,500.00 112,500.00 112,500.00

LU W… 1,000,000.00 1,000,000.00 500,000.00

… B… SA 0.00 0.00 15,000.00

NL X… 0.00 0.00 1,556,045.00

                           49,611,273.00    49,744,090.00    50,815,135.00

amounts in euros

Source: Inventory of financial interests and Management and Accounts Report of A... SGPS SA (2011, 2012 and 2013)

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

Schedule 10 – Loans/Financing granted and other operations – 2012 and 2013

ACCOUNT_ID_CA1 ACCOUNT_DESCRIPTION_BA1 OPENINGCREDITBALANCE_BA1 CLOSINGCREDITBALANCE_BA1

                           2012/01/01         2012/12/31         2013/12/31

26710000 Fin. Granted-Group-... 577,290.09 144,262.07 151,787.84

26720000 Fin. Granted-Group-Advances 38,930,219.33 27,535,440.60 37,881,785.29

26800000 Other operations 3,604,338.63 5,081,802.22 6,904,373.08

            TOTAL   43,111,848.05    32,761,504.89    44,937,946.21

amounts in euros

Source: Normalized tax audit export data file for SAF-T (PT) integration of A...SGPS SA (2012 and 2013)

1. On 2016/01/19, we notified this company, pursuant to Articles 9, 28, 29, 37, 42 and 48 of the Complementary Regime for Tax and Customs Inspection Procedure (RCPITA), and Article 134 of the CIT Code, in the person of Y..., Tax ID:..., in their capacity as Certified Accounting Technician, to send/present 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 the remunerated loans it granted to related parties and/or other active financial operations, as well as to remaining assets, specifically, acquisition of financial interests;
   
         Detail the calculations justifying the application of the allocation method used by A... SGPS SA, referred to in the previous point, in order to enable control of the financing expenses incurred with the acquisition of equity interests that do not contribute to the determination of taxable result, and thus to give effect to Article 32(2) of the TBL;
   

2. Insofar as, 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 the remunerated loans it granted to related parties and/or other active financial operations, as well as to remaining assets, specifically, acquisition of financial interests, nor has it presented to the tax inspection service itemization of the calculations justifying the application of the allocation method used which would enable control of the financing expenses incurred with the acquisition of equity interests that, pursuant to Article 32(2) of the TBL, are not deductible to taxable result of the periods of 2012 and 2013, the allocation of the financial charges incurred by A... SGPS SA with the acquisition of financial interests must proceed through the use of the formula provided for in Circular No. 7/2004, of 30 March, of the DSIRC, whose calculations were made on the basis of information, accounting elements and declarations submitted/delivered by the taxpayer to the Tax Authority, as follows in schedules 11 and 12:

[…]

Schedule 12 – Financial charges allocable to equity interests non-deductible for purposes of CIT taxation [Article 32(2) of the TBL] of A... SGPS SA – 2013 Tax Year

FINANCIAL CHARGES ALLOCABLE TO EQUITY INTERESTS

NOT DEDUCTIBLE FOR CIT PURPOSES ACCOUNT ASS AMOUNT OBS.

[1] TOTAL ASSETS 11 to 46 111,106,754.09 Obs1

[2] ASSETS – REMUNERATED LOANS GRANTED 267X and 268 44,724,724.91 Obs2

[3] ASSETS – EQUITY INTERESTS [ACQUISITION VALUE] 41X 50,815,135.00

[4] REMAINING ASSETS 15,566,894.18

[5] LIABILITY – REMUNERATED LOANS OBTAINED

[5.1] LIABILITY – FINANCING OBTAINED ST+LT 251X 140,665,870.21 Obs3

[5.2] LIABILITY – FINANC. OBTAINED SUBS. ASSOC AND JOINT VENTURES 254X 8,292,640.00 Obs4

[5] = [5.1] + [5.2] LIABILITY–REMUNERATED LOANS OBTAINED [CALC] 148,958,510.21

[6] FINANCIAL CHARGES

[6.1] STAMP DUTY 681X 732,419.24 Obs5

[6.2] BANK INTEREST AND/OR ADV., COMMERCIAL PAPER INT., SWAPS INT., OTHER INT. 691X 9,568,553.18 Obs6

[6.3] BANKING SERVICES AND COMMISSIONS, COMMERCIAL PAPER COMMISSIONS 698X 723,981.50 Obs7

[6] = [6.1] + [6.2] + [6.3] FINANCIAL CHARGES [CALC] 11,024,953.92

[7] REMUNERATED LIABILITIES ALLOCABLE TO LOANS GRANTED 44,724,724.91 Obs8

[8] = [5] - [7] REMUNERATED LIABILITIES ALLOCABLE TO REMAINING ASSETS 95,941,145.30

[9] = [8] X ([3]/([3]+[4])) REMUNERATED LIABILITIES ALLOCABLE TO EQUITY INTERESTS [CALC] 73,442,501.09

[10] FINANCIAL CHARGES ALLOCABLE TO EQUITY INTERESTS

[10.1] = [6.1] X ([9] / [5]) STAMP DUTY 361,111.97

[10.2] = [6.2] X ([9] / [5]) BANK INTEREST AND/OR ADV., COMMERCIAL PAPER INT., SWAPS INT., OTHER INT. 4,717,679.28

[10.3] = [6.3] X ([9] / [5]) BANKING SERVICES AND COMMISSIONS, COMMERCIAL PAPER COMMISSIONS 356,951.83

[10] = [10.1] + [10.2] + [10.3] FINANCIAL CHARGES ALLOCABLE TO EQUITY INTERESTS [CALC] 5,435,743.07

[11] MOD22IRC 2013 – ADDED VALUE Q07 C779 0.00

            CHARGES ALLOCABLE TO EQUITY INTERESTS                                               

[12] = [10] – [11] ADJUSTMENT/CORRECTION TO TAXABLE RESULT 2013 5,435,743.07

amounts in euros

Source: Inventory of financial interests of A... SGPS SA (2013); Management and Accounts Report of A... SGPS SA (2013); Normalized tax audit export data file for SAF-T (PT) integration of A... SGPS SA (2013); IES – Simplified Business Information of A... SGPS SA (2013); Income Declaration Model 22 CIT of A... SGPS (2013)

Obs1 – Measurement of equity interests at acquisition value; Obs2 – Sum balance of sub-accounts [26710000 + 26720000 + 26800000]; Obs3 – Sum of balances of sub-accounts [25111070 to 25112090] + balance of sub-account 25120080; Obs4 – balance of sub-account 25410000; Obs5 – Balance of sub-account 68123000; Obs6 – Sum balance of sub-accounts [69111000 to 69185001]; Obs7 – Sum balance of sub-accounts [69880100 + 69881204 + 69881209]; ; Obs8 – corresponds to the amount of [5] that falls within [2]

1. Given that it has been established that in the CIT Model 22 Income Declarations submitted by A... SGPS SA to the Tax Authority, for the 2012 and 2013 tax years, no amount was recorded in Schedule 07 Field 779 - Non-deductible financial charges [Article 32(2) of the TBL], there will be proceeded to the corresponding increase/correction to the taxable result of 2012 and 2013 in the amount of €5,565,353.39 and €5,435,743.07, respectively.

Audit Evidence A1

(1) – Inventory of financial interests of A... SGPS SA (2011, 2012 and 2013);

(2) – Management and Accounts Report of A... SGPS SA (2011, 2012 and 2013);

(3) – IES – Simplified Business Information of A... SGPS SA (2011, 2012 and 2013);

(4) – CIT Model 22 Income Declaration of A... SGPS SA (2012 and 2013);

(5) – Normalized tax audit export data file SAF-T (PT) Integrated of A... SGPS SA (2012 and 2013);

(6) – Notification/Request for Information/documents, pursuant to Articles 9, 28, 29, 37, 42 and 48 of the RCPITA, and Article 134 of the CIT Code of 2016/01/19.

A2 – Limitation to deductibility of financing expenses [Article 67 of the CIT Code] – 2013

1. The inspection/audit procedures conducted, for control/verification of the rule limiting the deductibility of net financing expenses of 2013, were based on the analysis of the Report and Accounts of A... SGPS SA of 2013, the Certification of Accounts of 2013, the IES – Simplified Business Information and the CIT Model 22 Income Declaration, submitted by the taxpayer, with reference to the 2013 tax year, the normalized tax audit export data file for SAF-T (PT) integration, for the 2013 period, exported by the taxpayer on 2016/01/29 and presented to the tax inspection service on 2015/05/25, of documents sent by Z... SGPS SA [now AA... SA] relating to the contracts for purchase and sale of shares of E... SGPS SA and of the H... report on the evaluation of this company.

2. It can be verified that, in the demonstration of results of 2013, A... SGPS SA declared in account 69 – Financing expenses and losses in the approximate amount of 10.29 M€, covering the balances of the sub-accounts 6911 – Interest from financing obtained and 6981 – Related to financing obtained, as well as declared in account 79 – Interest, dividends and other similar income in the amount of 1.85 M€, which integrates the balances of sub-accounts 791 – Interest obtained, resulting in evidence of net financing expenses of approximately 8.44 M€.

3. On the other hand, we verified that in the CIT Model 22 Income Declaration 2013 – Schedule 07 Field 748 – Limitation to deductibility of financing expenses [Article 67 of the CIT Code] and Schedule 07 Field 779 – Non-deductible financial charges [Article 32(2) of the TBL], the taxpayer did not add to the taxable result any amount.

4. As established in Article 67 of the CIT Code (CIT Code), in the version introduced by Article 191 of Law No. 66-B/2012, of 31 December (State Budget 2013), a new regime limiting the deductibility of financing expenses was created which replaced the previous debt-equity ratio regime provided for in this provision. Pursuant to Article 67(1) of the CIT Code, "net financing expenses are deductible up to the amount of the greater of the following limits: a) €3,000,000; or b) 30% of result before depreciation/amortization, net financing expenses and taxes." According to the transitional regime provided for in Article 192(2) of Law No. 66-B/2012, of 31 December (State Budget 2013), in the tax periods of 2013 to 2016, the percentage limit in function of EBITDA shall be 70% [2013], 60% [2014], 50% [2015], 40% [2016].

5. With respect to financing expenses that cannot be deducted in the tax period, these may still be considered in determining taxable profit of 1 or more of the 5 subsequent tax periods, provided that, added to the financing expenses of that same period, they do not exceed the legal limits provided for [cfr. Article 67(2) of the CIT Code].

6. Article 67(4) of the CIT Code provides that "net financing expenses are considered to be the amounts due or associated with the remuneration of foreign capital, specifically interest on overdrafts and loans obtained in the short and long terms, interest on bonds and other similar securities, amortizations of discounts or premiums related to loans obtained, amortizations of accessory costs incurred in connection with the obtaining of loans, financing charges relating to financial leases, as well as foreign exchange differences arising from loans in foreign currency, less similar income."

7. It is important to emphasize that the restriction on deductibility established in Article 67 of the CIT Code does not prevent the application of other conditions or legal limits for the deductibility of financing expenses, in particular, those that result from the requirements provided for in Article 23(1), the limits to deductibility of interest on advances established in Article 45(1), subparagraph j), and the transfer pricing regime contained in Article 63, all of the CIT Code, as well as the limits to deduction of financial charges incurred with the acquisition of equity interests held by SGPS pursuant to Article 32(2) of the TBL.

8. As contained in the Report and Accounts of 2013, as well as in the IES – Simplified Business Information of 2013, the individual financial statements of A... SGPS SA were prepared in accordance with International Financial Reporting Standards (IAS/IFRS), as adopted by the European Union, in force as of 2013/01/01, with the accounting policies and measurement criteria adopted in the 2013 tax year being consistent with those applied in the preparation of financial information for the previous year, presented for comparative purposes, except regarding the standards and interpretations whose effective date corresponds to tax years commencing on or after 2013/01/01, the adoption of which did not result in significant impacts on comprehensive income or the financial position of the Company, and except as regards the measurement of the financial interest held in E... SGPS SA, which as stated in Note 4, was recorded as of 2013/12/31 at the amount of €205,016,067.70 which the Management considers to be fair value and not by the amount that would result from the application of the cost method that constituted the applicable accounting policy and which had been followed [€18,782,867.92].

9. Regarding the principal valuation criteria, judgments and estimates relating to 2013, it is stated that financial investments in subsidiaries, jointly controlled entities and associates, in accordance with IFRS 1 paragraph 18, are measured at cost determined in accordance with IAS 27 or at deemed cost less any accumulated impairment loss, except as regards the financial interest held in E... SGPS SA, which as noted in Note 4, was recorded as of 2013/12/31 at the amount which the Management considers to be fair value and not by the amount that would result from the application of the cost method [cfr. Report and Accounts of 2013 and IES of 2013 of A... SGPS SA].

10. As established by International Accounting Standard – IAS 39 paragraph 46, after initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair values without any deduction for transaction costs which it may incur in selling or otherwise disposing of them, except for investments in equity instruments which do not have a quoted price in an active market and whose fair value cannot be reliably measured, which must be measured at cost.

11. IAS 39 – Appendix A – paragraph AG80 establishes that fair value of investments in equity instruments without a quoted price in an active market for an identical instrument is reliably measurable if: a) the variability of the range of measurements is not significant for that instrument; or b) the probabilities of the various estimates within the range can be reasonably assessed and used in fair value measurement.

12. However, according to IAS 39 – Appendix A – paragraph AG81, there are many situations in which the variability of the range of reasonable measurements of fair value of investments in equity instruments without a quoted price in an active market for an identical instrument will probably not be significant. It is typically possible to measure the fair value of a financial asset that an entity has acquired from an external party. However, if the range of reasonable measurements of fair value is significant and the probabilities of the various estimates cannot be reasonably assessed, an entity is prevented from measuring the instrument at fair value.

13. It should be noted that, with the exception of C... SGPS, which was (and is) a company whose securities are admitted to trading on the regulated market Euronext Lisbon, the remaining financial investments in equity instruments of subsidiary companies did not (nor do they) have a quoted price in an active market, and given the available information, the respective value cannot be measured reliably, in accordance with IAS 39, so they should not be designated at fair value through profit or loss.

14. We confirmed that the TP opted to account for, in the financial statements in which it first adopted international financial reporting standards (2012 period), investments in subsidiaries at cost, in accordance with IAS 27, and in measuring the investment at cost in its separate statement of financial position at opening, opted to measure that investment at deemed cost pursuant to IFRS 1, Appendix D – paragraphs D15 and D16.

15. It should be added that, according to IAS 39 – paragraph 50, an entity shall not reclassify a financial instrument placing it in the fair value through profit or loss category, after initial recognition.

16. Note that, at 2012/12/31, the financial investment in E... SGPS, corresponding to 50% of capital stock [25,000 shares], was measured in sub-account 41110191 at deemed cost of €18,782,867.92, corresponding to a valuation of €751.31 / per share.

17. On 2016/03/08, we made a request for elements/external confirmation from company AA... SA, Tax ID ..., pursuant to the provisions of Article 59(3), subparagraph d), and (4), and Article 63 of the General Tax Law (GTL), approved by Decree-Law No. 398/98, of 17 December, and Articles 28, 29, 37 and 48 of the RCPITA, to send/present to this Tax Inspection Service, the following elements relating to company A... – SGPS SA:

         Documentary supports of transactions for purchase of financial interests effected to A...– SGPS SA in the periods of 2011, 2012 and 2013 (option contracts, purchase-sale commitments, binding agreements, deeds, purchase-sale contracts, as well as attachments to such documents, and/or other private documents);
    
         Documentary supports of banking documents corresponding to the operations referenced in the previous point (bank transfers, checks, and/or other banking documents proving the acquisition of these financial interests).
    

18. It can be established that through a Purchase and Sale of Shares Agreement, dated 2011/01/25, entered into between A... SGPS SA, in its capacity as seller, and Z... SGPS SA [now AA... SA], in its capacity as buyer, the sale of 20,000 bearer shares, fully paid and with voting rights, with a nominal value of €1.00 / each, representing 40% of the entire capital stock of E... SGPS SA, free of any liens or encumbrances, was effected at the overall price of €24,500,000, corresponding to a valuation of €1,225 / per share. We verified that through Check No...., drawn on the BB..., dated 2011/01/25, Z... SGPS SA made the payment to A... SGPS SA of the agreed overall price of €24,500,000.

19. On the other hand, through a Purchase and Sale Option Agreement, dated 2011/02/15, entered into between A... SGPS SA, in its capacity as promising seller, and Z... SGPS SA, in its capacity as promising buyer, the taxpayer promised to sell 5,000 bearer shares, representing 10% of the entire capital stock of E... SGPS SA, free of any liens or encumbrances, at the overall price of €6,468,175, corresponding to a valuation of €1,293.64 / per share.

20. We verified that Z... SGPS SA made the payment to A... SGPS SA as earnest money in the amount of €3,405,675, through Check No...., drawn on the BB..., dated 2011/03/15, and through bank transfer from H... [ACCOUNT AA...] to I... [account A... SGPS] in the amount of €343,175.

21. On 2012/04/27, after verification of the prior conditions established in the Purchase and Sale Option Agreement [PSOA