Portugal vs “A Bank SGPS, S.A.”, November 2021, Supremo Tribunal Administrativo, Case No JSTA00071308

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The Tax Authority had made a transfer pricing adjustment for FY 2007 in the amount of €262,500.00 arising from the provision of a guarantee for payment granted under a credit agreement between a bank and its subsidiary. The adjustment had been determined using a CUP method where the pricing of the controlled transaction had been compared to the pricing of uncontrolled bank guarantees.

The Court of first instance held that “it cannot be concluded that the transactions at issue here are comparable on the basis of the criterion adopted by the Tax Authorities referred to above. In fact, although the guarantee and the independent bank guarantee may share common features, the way in which the risk falls on the guarantor and on the guarantor of the independent bank guarantee potentially generates differences that significantly affect their comparability.”

An appeal was filed by the tax authorities.

Decision of Supreme Administrative Court

The Court dismissed the appeal of the tax authorities.

In accordance with article 58 of the CIRC (wording at the time of the facts), the AT could make the corrections that are necessary for the determination of the taxable profit whenever, by virtue of special relations between the taxpayer and another person, subject or not subject to IRC, different conditions have been established to those that would normally be agreed upon between independent persons, leading to the profit ascertained on the basis of accounting being different from that which would be ascertained in the absence of such relations.

The Tax Authority has the burden of proving the existence of those special relations, as well as the terms under which operations of the same nature normally take place between independent persons and under identical circumstances, and the act must be annulled if that proof is not provided, which means that the correction referred to in Article 58 of the CIRC cannot therefore be based on indications or presumptions, the AT having to prove the abovementioned legal requirements in order to be able to correct the taxpayer’s taxable amount under that regime.

The provision of a guarantee by the Defendant constitutes a situation that has no equivalent between independent entities, since this type of provision is proper of related entities and to that extent there is no term of comparison between the situation of a guarantee provided by a bank and the guarantee provided by the dominant company in favour of its subsidiary and as follows from the provisions of article 6, paragraphs 1 and 3 of the Commercial Companies Code, the provision of real or personal guarantees for the debts of other entities is, as a general rule, considered to be contrary to the pursuit of the company’s purpose (profit), and operations relating to the provision of (remunerated) guarantees may only be carried out by credit institutions and financial companies.

Bearing in mind the fact that the bank guarantee has its own characteristics that differentiate it from the guarantee, as profusely explained in the judgment appealed against, leads us to conclude that the conditions for the provision of a bank guarantee by a banking institution cannot serve as a model of comparison for the purpose of determining the remuneration to be fixed for the guarantee provided by the Appellant since the two transactions are not sufficiently comparable, in accordance with the provisions of Article 4(3) of Order in Council No 1446-C/2001, particularly since part of the benefits which the defendant expects to gain from the provision of the guarantee in favour of its subsidiary arise from its status as a shareholder, a situation which has no economic equivalent in the case of the provision of a bank guarantee by a bank.

Furthermore, for a transaction to be considered comparable it must have economic characteristics similar to those of non-binding transactions. It therefore “it seems unquestionable that the assumption of a payment guarantee by the parent company (for the debts of a controlled company) does not alter, in a significant manner, the liability regime already applicable to it by virtue of the provisions of articles 501 and 491 of the Commercial Companies Code.

In summary, in view of the reality of the situation in the case, the conclusion of the sentence appealed must be followed in the sense that, in view of what article 58, nos. 1 and 2, of the Corporate Income Tax Code and article 5 of Ministerial Order no. 1446-C/2001 establish as regards the liability regime of the company in question, the conclusion of the sentence appealed must be followed. no. 1446-C/2001 establish as to the factors to be assessed in order to ascertain the comparability of the transactions, we conclude that the Tax Authorities failed to demonstrate that, in the specific case, the provision of the guarantee by the Impugnant and the provision of autonomous bank guarantees whose expenses were borne by the Impugnant meet the conditions to be considered comparable, as they present relevant economic and financial characteristics that are sufficiently similar, and ensure a high degree of comparability, so as to correct the taxable amount through the transfer pricing regime provided for in article 58, no. 1, of the IRC Code.

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Portugal nov 2021 JSTA00071308

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