“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group.
The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose.
The assessment was later upheld by the tax court in decision no. 827/2019-T.
An appeal was then filed by “A…, Sociedade Unipessoal LDA” with the Supreme Administrative Court.
Judgment of Supreme Administrative Court
The Court dismissed the appeal and upheld the decision of the tax court and the assessment issued by the tax authorities.
Experts
“35. In general, a transaction is considered to have economic substance when it significantly alters the taxpayer’s economic situation beyond the tax advantage it may generate. Now, the analysis of the relevant facts leads to the conclusion that neither A… nor the financial position of the Group’s creditors knew any significant economic change, nor any other economic consequence resulted or was reasonably expected to result beyond the additional increase in interest payable on intra-group loans, certainly with a view to increasing deductions and reducing the taxable profit. Even if there is a business purpose in the transaction – which is not certain in view of the permanence of the underlying economic reality – the objective of reducing the tax exposure, with the consequent reduction of the tax base, appears manifestly preponderant (principal purpose test).
36. Despite the existence of a general clause and special anti-abuse clauses, as well as specific rules on transfer pricing, earnings stripping or thin capitalization, all tax legislation must be interpreted and applied, in its systemic unity, so as to curb the erosion of the tax base and the transfer of profits. This involves a teleological interpretation that is attentive to the object, purpose and spirit of the tax rules, preventing their manifestly abusive use through sophisticated and aggressive tax planning operations. This can only be the case with rules on deductible expenses, as in the case of article 23 of the CIRC, which must be interpreted and applied in accordance with the anti-avoidance objectives that govern the entire national, European and international legal system, in order to prevent the erosion of the tax base.
37. On the other hand, where the deductibility of expenses and losses is concerned, the burden of proof lies with the taxpayer, as this is a fact constituting the claimed deduction (Art. 74, 1 of the LGT). Therefore, the accounting expenses groundedly questioned by the AT, in order to be tax deductible, would have to be objectively proven by the taxpayer who accounted for them. The excessive interest expenses are not objectively in line with the criteria of reasonableness, habituality, adequacy and economic and commercial necessity underlying the letter and spirit of Article 23(1) and (2)(c) of the CIRC, against the backdrop of business normality, economic rationality and corporate scope. We are clearly faced with a form of interest stripping, in fact one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid in the framework of the financing operations analysed must be considered as “disqualified interest” (disallowed interest).
38. The setting up of credit operations within a group in order to finance an acquisition of shareholdings already belonging to the group, sometimes with interest rates higher than market values and generating chronic problems of lack of liquidity in the sphere of the taxpayer, can hardly be regarded as a business activity subject to generally acceptable standards of economic rationality, and as such worthy of consideration under tax law. The possibility of deducting the respective financial costs was or could never have been conceived and admitted by the tax legislator when it chiselled the current wording of Article 23 of the CIRC. Legal-tax concepts should always be understood by reference to the constitutionally structuring principles of the legal-tax system, to all relevant facts and circumstances in the transactions carried out and to the substantial economic effects produced by them on taxpayers, unless the law refers expressly and exclusively to legal form. In the interpretation and application of tax law the principle of the primacy of substance over form shall apply.
39. The AT is entrusted with the important public interest function of protecting the State’s tax base and preventing profit shifting. In interpreting and applying tax rules, it should seek to strike a reasonable, fair and well-founded balance between the principles of tax law and legal certainty and the protection of legitimate expectations, on the one hand, and, on the other, the constitutional and European requirements of administrative and tax responsiveness in view of the updating and deepening of understanding and knowledge of tax problems, on a global scale, due to the latest theoretical, evaluative and principal developments which, particularly in the last decade, have been occurring in the issue of tax avoidance.
40. The facts in the case records do not allow for the demonstration of the existence of a (current or potential) economic causal connection between the assumption of the financial burdens at stake and their performance in A…’s own interest, of obtaining profit, given the respective object. Hence, the non-tax deductibility of the interest incurred in 2015 and 2016 should be considered duly grounded by the AT, as the requirements of article 23, no. 1, of the CIRC were not met, as this is the only legal basis on which the AT supports the correction resulting from the non-acceptance of the deductibility of financial costs for tax purposes, and it is only in light of this legal provision that the legality of the correction and consequent assessment in question should be assessed.
A careful reading of both decisions clearly shows that the fact that different wordings of Article 23 of the CIRC were taken into consideration was not decisive for the different legal solutions reached in both decisions.
In both decisions the freedom of management of the corporate bodies of the companies is accepted, and it is certain that in the appealed decision it is even considered that the wording of the provisions of Article 23 that was considered is even less demanding than the wording considered in the fundamental decision.
The divergence between the two decisions is essentially limited to the fact that the contested decision went further than the decision on which the case was based, namely in the assessment of the specific contours of the business carried out.
While in the grounding decision it was concluded, as already concluded in arbitral proceeding no. 614/2015-T, that the mentioned financings were contracted in the interest of the Applicant, and therefore the indispensability requirement required by article 23, no. 1, of the CIRC for the transaction to be performed is verified. º 1 of the CIRC for the deductibility of the financial costs incurred in 2012 attributable to the acquisition of 70% of the share capital of J… there being a link between such expenses and the pursuit of the economic activity of the Claimant itself, even with the potential to generate equity increments in its legal sphere, which would not be generated without the acquisition of the shareholding in question, the appealed decision concluded that On the other hand, in terms of deductibility of expenses and losses, the burden of proof falls on the taxpayer, since it is a constitutive fact of the claimed deduction (art. 74, no. 1 of the LGT). Therefore, the accounting expenses groundedly questioned by the AT, in order to be tax deductible, would have to be objectively proven by the taxpayer who accounted for them. The excessive interest expenses are not objectively in line with the criteria of reasonableness, habituality, adequacy and economic and commercial necessity underlying the letter and spirit of Article 23(1) and (2)(c) of the CIRC, against the backdrop of business normality, economic rationality and corporate scope. We are clearly faced with a form of interest stripping, in fact one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid in the framework of the financing operations analysed should be considered as disqualified interest (“disallowed interest”) .
In other words, the appealed decision, in a more simplistic manner, did not expressly and specifically rule on the issue of whether the amount of interest paid, e.g. the respective rate, could or could not constitute excessive interest, and therefore not be accepted for tax purposes, but only considered that such expenses were effectively incurred and were still within the economic activity carried out by the taxpayer.
Therefore, as the different decisions do not expressly address the same issue from the same perspective, but rather address it from different perspectives, it cannot be concluded that there is an effective opposition of decisions, but rather a merely apparent opposition.
For all the above reasons, the judges who make up the Full Bench of the Chamber of Tax Litigation of the Supreme Administrative Court agree not to hear the appeal.
The appellant shall pay costs and the remainder of the judicial fee shall be waived.”
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