IRC Fair Value Losses Deduction Under Art. 45 CIRC – CAAD Arbitration 89/2016-T

ARBITRAL DECISION

I – REPORT

A) The Parties and Constitution of the Arbitral Tribunal

1. A… Sgps, SA, taxpayer number…, with registered office at Rua…, no…, in …, hereinafter referred to as the "Claimant", filed a request for constitution of an Arbitral Tribunal, pursuant to the provisions of paragraph a) of no. 1 of article 2 and article 10, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT", to contest the decision to dismiss the Formal Administrative Appeal and the IRC liquidations and compensatory interest assessments underlying such decision, relating to the fiscal year 2011, in which the Tax and Customs Authority is the Respondent, hereinafter referred to as "TCA". The Claimant seeks a declaration of illegality of the self-assessment act for IRC of fiscal year 2011, following the tacit dismissal of a formal administrative appeal.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 18-02-2016.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated, on 12-04-2016, as arbitrator of the singular arbitral tribunal the undersigned, Maria do Rosário Anjos, who communicated acceptance of the appointment within the applicable timeframe. The parties were duly notified of this designation and manifested no intention to refuse the designation of the indicated arbitrator, in accordance with the combined provisions of article 11 no. 1 paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 29-04-2016.

On 03-05-2016 an arbitral order was issued and the TCA was notified to submit its defense within the legal timeframe.

1. The Tax and Customs Authority responded, arguing that the petition should be dismissed as unfounded, according to the terms and grounds contained in its Response, attached to the file, which is hereby deemed fully incorporated herein. On 27-06-2016, an arbitral order was issued with the following content:

"Considering the subject matter under discussion, as formulated in the Arbitral Petition and the TCA's Response, it is noted that the issues raised are exclusively matters of law, without production of evidence requested by the parties. It appears unnecessary to hold the meeting provided for in article 18 of RJAT, and the proceedings may proceed to written arguments and final decision. Accordingly, the parties are notified to, within a period of five days, pronounce themselves on the proposal to dispense with the holding of the meeting provided for in article 18 of RJAT. Should they consider there is interest in holding said meeting, the date for its holding is set for 22 July 2016, at 14:00 hours."

The parties pronounced themselves favorably regarding the dispensation of the meeting, and the TCA also regarding the dispensation of presentation of arguments, or alternatively, suggested the fixing of an equal and successive period for the production of written arguments. By an order issued on 12-07-2016, the holding of the meeting provided for in article 18 of RJAT was dispensed with and a period of 10 days, equal and successive, was fixed for the parties, if they so wished, to submit written arguments.

The parties did not submit arguments.

B) PROCEDURAL REQUIREMENTS

1. The arbitral tribunal was regularly constituted and is materially competent, in accordance with the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties possess legal standing and capacity, are legitimate, and are properly represented (articles 4 and 10, no. 2, of the same decree-law and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any defects and no exceptions were raised.

Thus, there is no obstacle to the examination of the merits of the case.

II. Factual Matter

A) Facts Proven

1. Based on the evidence contained in the file, the following facts are deemed proven:

a) The Claimant is a company managing shareholdings regulated by Decree-Law no. 495/88, of 30 December, whose corporate purpose is the management of shareholdings in other companies, considered as an indirect form of exercise of economic activities;

b) The Claimant timely submitted its IRC declaration, Model 22, with reference to the fiscal year in question (2011), in which it did not add or deduct any amount as a result of the transition from POC to SNC;

c) In the declaration relating to fiscal year 2009 there was recorded in the company's accounting a value of shares in the amount of €17,790.35;

d) In 2014 the Claimant was subject to a tax inspection, concerning operations resulting from "fair value adjustments", for the years 2010, 2011, and 2012;

e) The inspection focused on the facts described in item III of the Tax Inspection Report (RIT), which is hereby deemed reproduced, in this respect.

f) Within the scope of this inspection, as stated in section III.1.2 of the RIT, the TCA carried out purely arithmetic corrections, affecting the item "gains from increase in fair value recognized in transitional results (positive patrimonial variations)";

g) With relevance to the decision to be rendered in the present proceedings, with reference to fiscal year 2011, it is noted that the inspection promoted a series of corrections regarding the facts hereinafter specified, contained in the table set out in the RIT, which is hereby reproduced, namely:

Fiscal Year 2011 -------------------------------------------------------€ 79,471.52

h) Taking into account the recording in the Claimant's accounting referred to above, in paragraph c), the TCA deemed it appropriate to make a correction, in field 703 of table 07 of model 22 declaration, in the amount of €3,558.07 (50% X €17,790.35);

i) In the fiscal years covered by the inspection, including 2011, the company incurred losses from fair value reductions, which were corrected by 50%, as it was the TCA's understanding that only 50% of that value should be considered;

j) Thus, the value recorded in each of items III.1.2, III.1.3, and III.1.4 of the summary table of corrections made corresponds to 50% of the value of fair value losses recorded in the Claimant's accounting;

k) These losses relate to obligations, alienation of shares and alienation of financial investments, which the TCA corrected by considering that they are only relevant by 50%, and the Claimant had not made any addition regarding these losses;

l) The TCA made the aforementioned arithmetic corrections, considering that pursuant to no. 3 of article 45 of CIRC, the claimant should have added, in field 737 of table 07 of model 22 declaration, the amount corresponding to 50% of losses relating to capital shares or other components of equity;

m) Based on the corrections made, with reference to fiscal year 2011, the Claimant was notified of the IRC liquidation note no. 2014…, with a value to be reimbursed of €26,144.77;

n) This liquidation note was issued on 2014-10-22, with compensation date 03-11-2014;

o) The claimant, not accepting the corrections made, filed on 4-03-2015 a Formal Administrative Appeal against the issued liquidation acts, including the liquidation relating to fiscal year 2011, contested in the present proceedings;

p) The TCA analyzed the Claimant's arguments but considered it appropriate to maintain the liquidation acts by understanding that the corrections made resulted from the correct application of the applicable rule for the POC/SNC transitional regime;

q) The Claimant was notified to exercise its right to prior hearing, but did not exercise this right;

r) Thus, the proposal to dismiss the Formal Administrative Appeal became consolidated in an act dismissing said appeal, according to Confirming Office Letter No. 2016…, issued on 20-11-2015.

s) On 17-02-2016, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings, with the singular arbitral tribunal being constituted on 29-04-2016.

B) Facts Not Proven

1. There are no facts with relevance to the examination of the merits of the case that have not been proven.

C) Basis for Determination of Factual Matter

1. The facts proven are based on the documents indicated for each of the items and on agreement of the parties.

III - Matters of Law

1. As to the preliminary issue raised by the TCA, by invoking the lapse of the cursory and sporadic reference to the correction resulting from the loss with "B…SA", it must be recognized that it is entirely correct, since the arithmetic correction alleged to have occurred in 2010 with "B…SA" does not constitute the subject of the present arbitral petition, nor could it have been contested within the scope of the 2011 liquidation, for which it had no effect or contribution. The references that the TCA mentions in its Response do not translate the intention to contest this loss, not reflected in the act here contested, but mere lapse, irrelevant. Moreover, this is well evidenced in the Table presented on page 4 of the PA, where said correction appears as "00.00" in the field relating to fiscal year 2011. The presentation of a table mentioning all corrections made by the IT, respectively, in the years of 2010, 2011, and 2012, aims to clarify the issue in its broader aspect so that the question relating to fiscal year 2011 may be decided. Which in no way undermines, as the TCA itself states, the scope of the contestation raised in the present arbitral petition, which is limited exclusively to the liquidation produced with reference to the year 2011. To that extent, the correction resulting from the loss with "B… SA" is not at issue as it did not influence the act here contested.

With this issue resolved, it remains to analyze the corrections made and now contested as they contributed to the contested liquidation.

1. It results from the case file, as is evident from the synthesis of the factual matter stated above and from the Report, that the Claimant and Respondent differ only on this matter of law. The issue raised in the present proceedings concerns what fiscal treatment should be given to losses resulting from the application of the fair value model to financial instruments, the counterpart of which is recognized through results. In this case, as a result of the tax inspection conducted, with the objective of verifying the deductions of losses determined by application of the fair value method, corrections "purely arithmetic in nature" were made, as the TCA describes them in section III of the RIT, which result from the application of the so-called POC/SNC transitional regime. Specifically, it is verified that the Claimant, in fiscal year 2011, held a portfolio of shares and other securities, which, by application of the accounting criterion of fair value, underwent depreciation, corresponding to the difference between the acquisition value and its quotation in the official market. These variations described in the RIT, with reference to the year 2011, result essentially in:

a) gains from increase in fair value recognized in transitional results (positive patrimonial variations);

b) 50% of losses incurred from fair value reduction of capital shares (no. 3 of article 45 of CIRC) - these losses obtained in fiscal year 2011, were recorded by the taxpayer in account 661, for fair value reduction relating to

c) 50% of losses incurred upon alienation of capital shares valued at fair value (no. 3 of article 45 of CIRC);

d) discretionary portfolio – 50% of losses incurred from fair value reduction and alienation of capital shares (no. 3 of article 45 of CIRC).

From the foregoing it results that, in the case at hand, what is essentially at issue is the interpretation to be given to the provision of article 45, no. 3 of CIRC. The Claimant challenges the application that the Respondent made of the regime provided for in no. 3 of article 45 of CIRC to losses resulting from the application of the fair value model and the regime provided for in article 5 of Decree-Law no. 159/2009, of 13/07.

In its arbitral petition, the Claimant begins by invoking defect of lack of reasoning, violation of law, and violation of constitutional principles, requesting the annulment of the liquidation and restoration of the fiscal loss value declared by €133,237.10.

Let us see whether the Claimant's contentions are justified.

1. As to the defect of lack of reasoning, it does not appear that the Claimant is correct. In fact, the Claimant does not agree with the grounds that the TCA invoked to proceed with the said corrections, which is something different from what is intended by invoking the defect of lack of reasoning. One thing is to disagree with the grounds for the decision, another is the absence of reasoning in the decision.

In this case, given all that is presented in the Arbitral Petition and what was presented in the Formal Administrative Appeal now dismissed, it is evident that the grounds for the decision that led to the contested liquidation were well understood by the Claimant. A reading of the report that served as the basis for the contested liquidation allows one to understand the logical path that led to that result, as well as the rules invoked and whose application, carried out in accordance with a certain interpretation thereof, resulted in the corrections made.

The reference to the doctrinal sheet of case no. 39/2011, and adherence to the guidance contained therein, does not translate to a defect of lack of reasoning. Furthermore, in the RIT, the assumptions used by the IT to promote the said arithmetic corrections are invoked and even explained in detail. We may agree or disagree with this understanding, but, regardless, it cannot be said that the decision lacks reasoning.

It is uniform jurisprudence of our STA that the reasoning legally required does not need to be an exhaustive description of all the reasons underlying the decision, being sufficient that it contain a brief exposition of the factual and legal grounds, or even, "a mere declaration of agreement with the grounds of previous opinions, reports or proposals which will constitute in this case an integral part of the respective act." (In this sense, see STA Decision, in Case No. 0910/08 of 12-02-2009).

Thus, and dispensing with further development of this issue, the invocation of the defect of lack of reasoning does not succeed. In the case at hand, considering the RIT as the document substantiating the tax liquidation, it appears that the reasoning is sufficient, express, clear, sufficient, consistent, and contextual, insofar as it clearly exposes what interpretation the TCA makes of the concrete situation and of the applicable provisions, in order to allow the respective addressee to understand the logical, factual, and legal reasoning followed by the author.

It remains to determine the grounds for invalidity due to violation of law, resulting from error regarding the prerequisites, invoked by the Claimant.

1. Let us proceed, therefore, to analyze the alleged illegality of the corrections made, due to error regarding the legal prerequisites, since it is in this context that we should place the issue. It is necessary, then, to determine to what extent and in what terms the depreciations effected by the fair value model should contribute to the determination of the Claimant's taxable income. In other words, the issue truly centers on the interpretation and application of the provisions of article 45, no. 3 of CIRC.

The Claimant, as results from the list of facts above given as proven, submitted its individual IRC income declaration (Model 22) for fiscal year 2011, in which it declared a fiscal loss of €133,237.10. As a result of the corrections made during the IT, this loss was corrected, by application of the provisions of no. 3 of article 45, resulting in a corrected loss of €53,765.58 and a tax reimbursement value of €26,144.77.

The Claimant understands that, for the determination of its taxable income, the depreciations resulting from the application of the fair value model should be considered, and not only 50% of this value, as the TCA intends. In this way, what is questioned in the present proceedings is the consideration of only 50% of the accounting loss recorded in accordance with the fair value criterion applicable.

The issue is thus properly delimited, which is, therefore, whether:

• by force of application of the transitional regime of POC to SNC, the taxpayer should have determined and recorded in transitional results a fair value gain in the amount of €17,790.34, which when considered at 50%, with reference to the three fiscal years, would have a reflection of €3,558.07 in fiscal year 2011;

• whether the accounting losses resulting from the application of the fair value method, properly recorded in accordance with the applicable fair value criterion, and recognized in results, should be considered in their entirety, or only 50%.

1. The applicable normative framework, centered on article 45, no. 3 of CIRC, is broader and requires a careful analysis of the regime legally established for the correct determination of taxable income, always having as a fundamental reference the fundamental principles of tax law, namely: the principle of tax legality, material truth, tax justice, and proportionality, as results from the provisions of articles 103 and 104 of the Portuguese Constitution.

The reference provision is, primarily, article 45, no. 3, the normative invoked by the TCA in substantiating the corrections made, according to which:

"The negative difference between the capital gains and losses realized through paid assignment of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital shares or other components of equity, particularly additional contributions, contribute to the formation of taxable income in only half of their value."

1. In the understanding of the TCA, this provision applies to all losses or negative patrimonial variations relating to capital shares or other components of equity (...), which contribute to the formation of taxable income in only half of their value, in any circumstances, including those resulting from the application of the fair value model or criterion.

For its part, Decree-Law no. 158/2009, of 13 July, which came into force on 1 January 2010, approved the system of accounting standardization (SNC), revoking the Official Accounting Plan (POC), and provides that an entity must measure at fair value all financial instruments that are not measured at cost or amortized cost with a counterpart in results.

The TCA further invokes in defense of its position the wording of the provision of article 45, no. 3, which maintained its wording, given the amendments to CIRC motivated by the entry into force of SNC, as the absence of amendments to the provision in question reveals that it was not intended that the regime in question should suffer any alteration, as a function of the amendments introduced in the accounting system.

The very preamble to Decree-Law no. 159/2009 points to the approximation of accounting to taxation, and in that sense refers to the fair value model in financial instruments as appropriate for their valuation, and its impact on company results, provided that the reliability of the fair value determination is assured, pointing out that equity instruments that do not have a price formed in a regulated market should be excluded.

The fair value model has, since 2010, been accepted for tax purposes, for the purpose of determining the income for the period when gains or losses are recognized in results. As can be seen, the issue under analysis in the proceedings is rooted in the generic issue of the determination of the taxable income of IRC taxpayers. For this purpose, it is useful to recall the provision of article 17, no. 1 of CIRC, according to which:

"The taxable income of legal persons and other entities mentioned in paragraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the fiscal year and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected in accordance with this Code."

Article 18, no. 9 of the same Code provides that:

"Adjustments resulting from the application of fair value do not contribute to the formation of taxable income, being imputed as income or expenses in the period of taxation in which the elements or rights that gave rise to them are alienated, exercised, extinguished, or liquidated, except when:

a) They relate to financial instruments recognized at fair value through results, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital; or

b) This is expressly provided for in this Code."

For its part, article 20, no. 1 of CIRC provides that:

"Income is considered to include income resulting from operations of any nature, as a consequence of normal or occasional, basic or merely accessory action, namely: (...)

f) Income resulting from the application of fair value in financial instruments; (...)

h) Realized capital gains."

1. In addition to all this, it is also useful to recall the provision of article 23, no. 1 of CIRC, according to which:

"Expenses are considered to be those that are demonstrably essential for the achievement of income subject to tax or for the maintenance of the source of production, namely: (...)

i) Expenses resulting from the application of fair value in financial instruments; (...)

l) Realized capital losses."

As regards positive patrimonial variations, which are also discussed in this case, article 21, no. 1 of CIRC provides that:

"Positive patrimonial variations not reflected in the net result of the taxation period also contribute to the formation of taxable income, except: (...)

b) Potential or latent capital gains, even if expressed in the accounting, including revaluation reserves under fiscal legislation;"

Article 24, no. 1 establishes as to negative patrimonial variations that:

"Under the same conditions referred to for expenses, negative patrimonial variations not reflected in the net result of the taxation period also contribute to the formation of taxable income, except: (...)

b) Potential or latent capital losses, even if expressed in the accounting."

Article 46, no. 1 of CIRC adds that:

"Realized capital gains or losses are considered to be those obtained or incurred through paid assignment, whatever the title by which it operates, and also those resulting from contingencies or those resulting from permanent assignment to purposes unrelated to the activity exercised, relating to: (...)

b) Financial instruments, with the exception of those recognized at fair value in accordance with paragraphs a) and b) of no. 9 of article 18" (emphasis added)

All these provisions constitute, in conjunction, the regime applicable to the determination of taxable income, and the provision of article 45, no. 3 of CIRC must be applied in a logical, integrated, and consistent manner, respecting the principles established for the determination of taxable income, oriented toward the determination of real income, based on material truth and the justice that must govern taxation. In this domain, any exclusion or limitation in the consideration of losses or costs necessary and inherent to the activity assumes itself as something incompatible with the reasoning underlying the taxation of income. Thus, a correct analysis of the concrete case cannot focus on the interpretation and application of one or two provisions while disregarding the whole established in a complex normative framework oriented toward material truth. It must be added that combating evasion or tax abuse cannot lead to a situation that privileges the disregard of costs and losses that are justified and real, under penalty of subverting all tax law and respect for the correct interpretation and application of the various provisions that comprise it. The same is to say that a correct decision of the concrete case must properly take into account the systematic perspective of its integration, also considering the historical context of its genesis and establishment in law.

The current article 45, no. 3 of CIRC, which succeeded the previous article 42, no. 3, by renumbering effected by Decree-Law DL 159/2009, which already established the consideration in only 50% of the losses in question. The introduction of this principle, in 2003, is usually indicated, not precisely as a measure to combat fraud and tax evasion, but rather as a measure to broaden the tax base. However, with subsequent evolution it became determined that, especially in the current wording relevant here, the measure is today essentially pointed to as a provision to combat tax evasion and fraud, as well as a measure oriented toward budgetary consolidation.

1. The provision of article 18, no. 9 of CIRC, in enshrining the fair value model, has also been indicated as a legal provision oriented toward approximation between accounting and taxation. The fair value criterion is thus accepted with respect to financial instruments, the counterpart of which is recognized through results, but only in cases where the reliability of the fair value determination is in principle assured. Thus, excluded are equity instruments that do not have a price formed in a regulated market. The application of the realization principle is maintained with respect to financial instruments measured at fair value the counterpart of which is recognized in equity, as well as capital shares corresponding to more than 5% of capital stock, even if recognized at fair value through results. Adhering to this same principle, identified as assets covered by the regime of capital gains and losses are tangible fixed assets, intangible assets, investment properties, financial instruments, with the exception of those in which adjustments resulting from the application of fair value contribute to the formation of taxable income in the period of taxation. There is also contribution to this regime, as provided for in paragraphs f) and i) of no. 1 of articles 20 and 24 of CIRC, as well as paragraph b) of no. 1 of article 46.

It is stated in this regard in the Arbitral Decision rendered in case no. 108/2013, that "the adoption of the application of fair value as an accounting valuation criterion with tax relevance, corresponds to a Copernican alteration in the regime of taxation of income or expenses resulting from the acquisition of financial instruments. Indeed, prior to the adoption of fair value, patrimonial variations relating to financial instruments were irrelevant from the point of view of the formation of taxable income of each period, by effect of the provision of article 21/1/b) of CIRC. Only at the moment of realization of the capital gain or loss did the patrimonial variation verified assume tax relevance.

This tax framework had (as it has in the part in which it is maintained) three well-marked characteristics, namely:

• It was a one-time taxation, that is, one that occurred only once throughout the entire period of holding of financial instruments;

• It was dependent on a voluntary action by the taxpayer, insofar as the transaction of the instruments generating the patrimonial variation, a condition of its tax relevance, would only occur if and when the taxpayer so wished;

• The valuation of the patrimonial variation was fixed as a function of the concrete transaction that triggered its tax relevance.

The combination of these three characteristics that have been pointed out provided, from the start, fertile ground for accounting and tax manipulations, since the taxpayer could choose to trigger the tax relevance at the moment and terms most favorable to it from a tax perspective.

On the other hand, and given the relevance of the taxpayer's will in the mechanism of tax relevance of the patrimonial variation, the system established was suited to the adoption of mechanisms to condition that will, in order to conform it to economically more desirable behaviors, which, in this case, pass through the preference for realization of gains, to the detriment of realization of losses.

It is in this framework that the emergence of the provision of the previous article 42/3 of CIRC, which precedes the current article 45/3 of the same, is explained.

Such provision, both in its original wording, resulting from Law 32-B/2002, of 30 December, and in that given to it by Law 60-A/2005 of 30 December, is explained objectively and subjectively (that is, in light of the motivation expressed by the legislator) by needs linked to combating fraud and tax evasion and to the broadening of the tax base, directed at the desired consolidation of the budgetary accounts of public finances."

1. Having said this, the introduction and acceptance of the application of the fair value model to financial instruments, effected by Decree-Law 159/2009, of 13 July, establishes a radically different model regarding the valuation and tax relevance of patrimonial variations relating to the holding of such financial instruments.

And, in turn, article 18/9 of CIRC applicable, came to provide that, as a rule, "Adjustments resulting from the application of fair value do not contribute to the formation of taxable income, being imputed as income or expenses in the period of taxation in which the elements or rights that gave rise to them are alienated, exercised, extinguished, or liquidated." The legislator assumed, therefore, a choice coherent with the principle of realization, but with exceptions, notably when they relate to financial instruments recognized at fair value through results, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital stock."

On this point, we adhere without further consideration to the understanding set forth in the Arbitral Decision rendered in case 108/2013, which is transcribed below:

(…) "That is, and equally as assumed by the legislative entity, when "income or expenses (...) Relate to financial instruments recognized at fair value", "contribute to the formation of taxable income, provided that:

a. They are recognized "through results";

b. They concern "equity instruments";

c. "they have a price formed in a regulated market"; and

d. "the taxpayer does not hold, directly or indirectly, a participation in capital exceeding 5% of the respective capital stock."

Once these conditions are met:

a. income resulting from the application of fair value to financial instruments is considered (article 20/1/f) of CIRC); and

b. expenses resulting from the application of fair value to financial instruments are considered (article 23/1/i) of CIRC).

In this way, where before we had one-time tax relevance (one-off), at the time of transaction of such instruments, we now have continuous tax relevance. That is, given the new provisions comprising the regime of tax relevance of fair value accounting for financial instruments, income or expenses resulting from the application of fair value thereto now directly affect the formation of taxable income (articles 20/1/f) and 23/1/i) of CIRC) of the same fiscal year in which they occur, provided that determined conditions are met (article 18/9 of CIRC), which include the formation of price in a regulated market, with the patrimonial variations verified as capital gains or losses not being taxed (article 46/1/b) of CIRC).

In this framework, there cease, manifestly, to be any needs relating to combating fraud and tax evasion, not only because the tax relevance of patrimonial variations ceases to be conditioned by an act of will of the taxpayer, but also because the valuation is objectively fixed.

On the other hand, and for the same reasons, any measure to condition the will of the taxpayer also lacks sense, in order to favor economically more "desirable" behaviors and, as such, conforming to the interests of broadening the tax base and budgetary consolidation."

1. Returning to the concrete case of the proceedings, a careful and coordinated reading of the provisions relevant to the analysis of the case, already indicated above, permits the conclusion that the disregard of losses incurred with financial assets evaluated in accordance with the fair value model appears to violate the principle of taxation of real income, taking into account that the Claimant, as a SGPS, has a special corporate purpose and only indirectly exercises economic activity, since its role is to manage shareholdings.

The jurisprudence of our superior courts has come to recognize this need to consider in the determination of fiscal income losses with financial assets, provided they are compatible with the fair value model. See in this regard the Decision of the Administrative Court of Appeals South, of 31.01.2012, rendered in Case no. 5097/11, in which the Court states that:

"In the case at hand, in which there are at issue costs corresponding to losses resulting from the extinction of companies taking into account the acquisition price of their shareholdings by the Appellants and that such elements formed part of the assets of the companies, insofar as the same incurred a cost in their acquisition which they had to record, a cost that was not challenged in accordance with article 23 of CIRC, the loss resulting from the dissolution and liquidation of the companies pointed out above cannot be disregarded on the basis of the cited article 23 of the IRC Code."

But, to an identical conclusion came the collective Arbitral Tribunal that decided case no. 108/2013, to which one cannot fail to refer, given the similarity of the fundamental legal issue under consideration. Also there, the collective Arbitral Tribunal understood that, although an analysis focused on no. 3 of article 45 could lead in the direction of considering only the values in only 50% of what was actually incurred, the Tribunal considered that a more careful assessment and one that appeals to the correct interpretation and application of all relevant provisions, namely that of article 23 of CIRC, imposed a different decision.

Thus we understand also in the present case.

In fact, article 45, no. 3 of CIRC, in the wording in force at the time of the tax facts, provided that "the negative difference between capital gains and losses realized through paid assignment of capital shares, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital shares or other components of equity, particularly additional contributions, contribute to the formation of taxable income in only half of their value."

As well stated in the Arbitral Decision no. 108/2013, already cited above:

"Analysis of this normative text reveals with clarity that the legislator chose, in order to include therein, three types of situations that should be understood, in light of the presumption of good legislative drafting, as distinct, namely:

a. "The negative difference between capital gains and losses realized through paid assignment of capital shares";

b. "other losses (...) relating to capital shares or other components of equity";

c. "other (...) negative patrimonial variations relating to capital shares or other components of equity".

Let us see, then, whether the situation of the proceedings is reduced to any of the listed situations.

The apparent indiscriminate scope of the provisions in question could, however, be reasonably mitigated if one notes that "losses" and "other negative patrimonial variations" are concepts that are not redundant, but endowed with their own and distinct meaning.

To understand this fact, it will be necessary to go back to articles 23 and 24 of the same Code, noting the terminological evolution effected by article 159/2009, of 13 December.

a. Expenses;

b. Losses;

c. Negative patrimonial variations not reflected in the net result of the fiscal year.

The provision of article 42/3 (predecessor of the current 45/3) should thus be considered as referring to these concepts, defined in articles 23 and 24. In this way, and for obvious reasons, from the provision of that provision should be excluded the expenses relating to "capital shares or other components of equity," including therein only the losses (as defined in article 23) and negative patrimonial variations (as defined in article 24), relating to those shares."

And that this is so, that is, that the expression "other losses or negative patrimonial variations" used in the current article 45/3 of CIRC does not have an indiscriminately broad sense, but rather a precise sense, defined in articles 23 and 24, results from the very fact that the legislator employed the same distinction.

Furthermore, the inclusion within the scope of the provision in question, not only of losses (as defined in article 23) and negative patrimonial variations (as defined in article 24), but also of expenses (as defined in article 23), would lead to the acquisition cost of capital shares only contributing half of its respective value to the determination of taxable income, which would obviously be inconceivable in a minimally reasonable legislator.

The normative amendment implemented by Decree-Law 159/2009, of 13 July, did not alter anything of relevance on the subject in question. Indeed, notwithstanding the body of article 23 having come to refer only to expenses, the fact is that CIRC continues to use the expression "losses," including within article 23 itself (see no. 1, paragraph h)). This occurs in coherence, moreover, with SNC, which pursuant to section 2.1.3.e) of the annex to Decree-Law 158/2009 of 12 July, maintains the distinction between "expenses" and "losses"

(…) "losses," to the light of CIRC, are not included within the scope of the provision in question, even if relating to capital shares or other components of equity. The TCA itself recognizes this, insofar as, in the "Manual of Completion of Table 07, Model 22", regarding field 737, states that in that field are recorded, at 50%, the amounts relating to other losses (which are not capital losses, given that these follow the "mechanism" of capital gains and losses) relating to capital shares or other components of capital equity. Amounts corresponding to 50% of losses from fair value reductions are, for example, added in this field 737, when they fall within the scope of article 23, no. 1, paragraph i), by force of the provision of article 18, no. 9, paragraph a)". It happens that article 23/1/i) of CIRC does not refer to the amounts in question as "losses," but as "expenses," whereby their inclusion in the field in question would be incorrect.

Moreover, and should there be any doubt, had the legislator, upon the entry into force of Decree-Law 159/2009 of 13 December, intended to encompass the situations listed in article 18/9/a) of CIRC, within the scope of article 45/3 of the same, it would have:

• included the "Expenses resulting from the application of fair value in financial instruments," not in article 23, but in article 24 of CIRC; or

• referred to such situations as "losses resulting from the application of fair value in financial instruments" and not as "expenses".

1. For all that has been set forth, and without need for further consideration, this Tribunal considers that, in accordance with the legal framework described and analyzed above, Decree-Law 159/2009, of 13 July introduced, with respect to the portion covered by acceptance of the application of the fair value model to financial instruments, a special regime of relevance for the computation of taxable income, justified both by its own objectivity and by the confessed intention to approximate accounting to taxation. Thus it is that article 45, no. 3 has underlying the realization of losses resulting from a voluntary action by the taxpayer corresponding to the realization thereof, making sense thus the limitation of the deduction to 50% as a measure of control and disincentive. Concerns that do not arise in the case of the situations covered by article 18, no. 9, applicable in the case we are treating since these are situations resulting from positive patrimonial variations and losses determined by application of the fair value method. Here we are faced with the possibility of effecting adjustments resulting from the accounting for fair value, determined by objective criteria (with "a price formed in a regulated market"), which occur or occurred not by the will of the taxpayer but by market vicissitudes. In this context, penalizing the taxpayer with a disregard of 50% of the incurred expense would be entirely unjustified, both from an economic point of view and from the point of view of material truth and justice that bind the tax authority's actions.

2. For all this, in obedience to the hermeneutical principles contained in article 9 of the Civil Code, which imposes an interpretation of the legal rule that does not confine itself to the letter of the law, but reconstructs from the texts the legislative thought, taking especially into account the unity of the legal system, the circumstances in which the law was drafted, and the conditions specific to the time in which it is applied, and which the legislator enshrined the most appropriate solutions and knew how to express its thought in adequate terms, it is understood that no. 3 of article 45 of CIRC should be interpreted in the sense that its provision does not include the expenses resulting from the application of fair value in financial instruments that are relevant to the formation of taxable income in accordance with paragraph a) of no. 9 of article 18 of CIRC.

Having reached this point, the Tribunal understands that the illegality of the liquidation and the dismissal of the Formal Administrative Appeal result from the law itself, without need to address other arguments raised by the Claimant, namely as regards the unconstitutionality invoked.

In the circumstances concretely revealed in the present proceedings and subject to examination by this Tribunal, the TCA, in interpreting and applying differently the aforementioned provisions, both as regards positive patrimonial variations and as regards losses recorded in financial assets by application of the fair value criterion, reducing them to 50% of the value verified, decided in violation of law, due to error regarding the prerequisites underlying the application of that legal provision. Therefore, the petition formulated by the Claimant is entirely sustained, and consequently the contested liquidation must be annulled.

IV. Decision

In these terms this Arbitral Tribunal decides:

a) To judge as sustained the petition for declaration of illegality of the act dismissing the Formal Administrative Appeal and the IRC liquidation, relating to the year 2011, determined as a result of the Tax Inspection carried out, due to defect of law due to error regarding the prerequisites for application of the regime of article 45, no. 3 of CIRC;

b) In accordance with this decision the contested liquidation shall be annulled and the value of the fiscal loss declared by the Claimant shall be restored, with the legal consequences thereof.

c) To condemn the Respondent to pay the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €26,144.77 in accordance with article 97-A, no. 1, a), of CPPT, applicable by force of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at €1,530.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was entirely sustained, in accordance with articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the cited Regulations.

Lisbon, 14 October 2016

Let it be notified.

The Singular Arbitral Tribunal,

(Maria do Rosário Anjos