Constitutional Court
Judgment No. 42/2014, published on 11 February 2014 ?
Case No. 564/12

In this Judgment, the Constitutional Court held that the part of the provision set out in former Article 31(2) of the Tax Benefits Code (as amended by Law No. 32 -B/2002 of 30 December), whereby a SGPS (holding company) cannot deduct financial charges borne with the acquisition of holdings as soon as these are incurred , regardless of it obtaining tax-free capital gains with the sale of those holdings, is not unconstitutional .

The court also held that the said provision was not unconstitutional if interprete d as meaning that it imposes the application of the same non deductibility rule to financial charges arising from commitments taken prior to the introduction of this limitation by the above mentioned Law No. 32 -B/2002 of 30 December.

In the case under consideration, the Appellant requested the review of the constitutionality of the above mentioned provision of the Tax Benefits Code in that the latter sets out the non deductibility of financial charges borne with the acquisition of holdings as soon as these are incurred (that is, irrespective of the possible application of exemption to the capital gains generated by the holdings to which the above mentioned financial charges related).

Accordingly, the Appellant claimed its unconstitutionality in light of t he principles of equality, of tax-paying capacity, of taxation based on actual income  and  of proportionality (Articles 2, 13, 18(2) and (3), 103(1) and 104(2) of the Portuguese Constitution).

In this respect, the Constitutional Court considered that according to the Constitution the taxation of the income of companies must not mandatorily follow the profits, costs and losses made or incurred in each taxation period, always, at the time of and in accordance with the accounts of the positive and negative financial flows.

Therefore, a tax scheme that, in favour of tax neutrality – where the profit is not subject to taxation, the cost associated thereto must not be subject to taxation either -, provided for the non deductibility of a cost based on the likeli hood of tax-free capital gains, which are likely or expected to arise in the future, did not breach the principle of taxation of companies for their real profit.

Also the court did not consider excessive and intolerable this scheme under which the non-deductibility of financial charges operates ex ante, in each taxation period, taking  into account the measure which puts it into balance, which is preserving the possibility of making (effective and future) tax-free capital gains.

The Appellant also requested the review of the constitutionality of the provision establishing a similar limitation for the deductibility of financial charges, in this case, on grounds of the breach of the principle of tax retroactivity and of the principle of trust , embedded in the principle of State based on the rule of law, enshrined in Article 2 of the Portuguese Constitution, since Law No. 32-B/2002 of 30 December, which introduced the said limitation, does not exclude from the new tax scheme the financial commitments and charges arising therefrom, undertaken prior to its effective date .

Concerning this question, the Constitutional Court emphasised that the new law did not imply any effect with regard to the financial charges incurred and to capital gains made in economic years prior to 2003. In its specific area of regulation, the legislation in question regulated exclusively future occurrences — capital gains or losses made after its effective date as well as financial charges also borne after 1/1/2003 — without affecting in any degree the legal and tax effects brought about prior to its effective date . Accordingly, there wasn’t, in this case, any type of retroactivity .

The court also considered that the change of the scheme in question did not breach the principle of the protection of legitimate trust, inasmuch as, to begin with, there was no reason to sustain that the State had permitted to create expectations that the previous scheme would be maintained.

On the other hand, the court observed that based on the factual background c onsidered to have been proven there was no reason to consider that the Appellant had moulded its activity and investment on the assumption of the continuation of the scheme of deductibility of financial charges applicable to holding companies .

Finally, the court highlighted that, even if the set of requirements to conclude that we were dealing with a situation of trust worthy of protection were fulfilled, the legislative intervention in question was founded on reasons of overriding public interest (to preserve the attractiveness of the tax scheme applicable to holding companies, while reaching a fair and balanced distribution of the tax charges among the several taxpayers), for which reason, it was not even clear that the protection of the expectation that the previous scheme would continue should prevail , in this case, over the protection of the public interests underlying the change.

Supreme Administrative Court Judgment of 5 February 2014 Case No. 01041/13

The Supreme Administrative Court (“SAC”) was requested to rule on the legality of assessments of Municipal Tax on Real Estate Transfer (“IMT”) and Stamp Duty (“IS”), in the case of acquisition of accommodation units in a tourist development, intended for tourist operation.

In the case under consideration, the legality of the additional assessment of IMT and IS was challenged in court, on grounds that, as it was a first purchase of a unit in a tourist development, carried out with the express option of allocating the unit to tourist operation in the context of that development, the same would fall within the condition of Article 20(1) of Decree-Law No. 423/83 of 5 December, and therefore benefit from exemption from IMT and a 4/5 IS reduction.

Analysing the question, the SAC subscribed the opinion of the case law set forth in the judgment No. 3/2013 of 23 January 2013, settling the case law, considering that the acquisition of  accommodation units  in a  tourist development ,  albeit included in the development in question, and therefore, allocated to tourist operation, cannot benefit from the above mentioned exemptions.

The SAC clarified that the concept of “establishment”, for the purposes of the benefits provided for in Article 20(1) of Decree-Law No. 423/83 of 5 December, only respects to the acquisition of buildings or of autonomous units, for the construction of tourist developments, after the corresponding urban projects.

Thus, the court highlights that this benefit aims to benefit the companies engaged in the business of promotion or creation of tourist developments rather than the purchasers of autonomous units in developments built or existing under the plural ownership scheme, since this would have to do with the “operation” and not with the “establishment”.

Administrative and Tax Arbitration Centre
Arbitration Award of 30 January 2014
Case No. 160/2013-T

The Tax Arbitration Tribunal ruled, in particular, on the legality and possibility to use the method of comparable market price to determine the transfer price by reference to a notional cash pooling contract.

In the case under consideration, the Tax Authority considered that there was a breach of the arm’s length principle, and corrected the taxable profit of the Applicant in the amount of €747,911.33.

The TCA sustained that, in the case under consideration, from the terms of the cash pooling contract entered into followed that the Applicant, in addition to providing a guarantee, ended up financing the activity of the mother company in terms less favourable  to  it  than  those  that  would  be  agreed  in  the  absence of a special subordination relation. Accordingly, the TCA considered that the transfer price scheme had been correctly applied, through the normal market price, using as comparison a bank guarantee already existing internally, provided by Bank X in favour of Bank Z.

Analysing the cash pooling contract in question, the Arbitration Tribunal considered that this contract did not translate in a mere virtual fusion of balances for the optimisation of interest received and interest on debt, since it contained clauses establishing a real guarantee relation provided by the Applicant to the mother company, as sustained by the Tax Authority.

However, the court continued its analysis, in order to establish whether the conditions for the application of the criterion of the comparable market price for finding the transfer price were met.

In this connection, the court considered that the use of this method is only legal if there is the higher level of comparability, which does not happen in this case, since the risk undertaken by the Applicant, which is variable and can be eliminated at any time , was clearly less than the one assumed for the whole duration of a long term loan. The Arbitration Tribunal clarified that the guarantee arising from placing in common bank balances and the obligation to keep a positive global balance, was not the same as nor comparable to a guarantee provided by a Bank, which comparison the court had used in its correction.

Accordingly, the Arbitration Tribunal concluded that, in this case the decision challenged should be considered illegal, on grounds that it breached the provisions on the use of the method of comparable market price for the calculation of the transfer price .