1. General considerations. Since the international financial crisis of 2008, the problem of tax evasion has been raised more and more, mainly due to the strong increase in state public debts, which currently reach levels not seen since the last world war. It is, therefore, natural that the efficiency of tax systems and the fight against aggressive tax planning has become an ever-present topic in the public sphere. In the European domain, the theme is of particular significance, as it directly affects the proper functioning of the tax system and the ability of Member States to meet the objectives foreseen in the Stability and Growth Pact of the Economic and Monetary Union.
It is essentially in this context that the discussions around the general anti avoidance rule (GAAR) take place, although this legal mechanism has a longer history among us. Anticipating the current movements of international tax law, it was due to the growing complexity of the tax system and mostly driven by the OECD, that in 1999 Portugal adopted its own GAAR. Its open texture required, however, a long process of jurisprudential, doctrinal and even administrative maturation. After an adjustment phase, the first judicial decision to be published on the subject was TCAS ruling of 15/02/2011 (proc. 04255/10), which was eventually followed by many others until the levels of regularity in its application that we see today, a movement that does not show a tendency to slow down, quite the contrary.
The GAAR is today foreseen in article 38º no. 2 of the Portuguese the General Tax Law (LGT), which (in accordance with Council Directive (EU) no. 2016/1164 of 12 July 2016), establishing that: “The arrangement or series of arrangements which, having been carried out for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are carried out with abuse of legal forms or are not genuine, with regard to all relevant facts and circumstances, are disregarded for tax purposes, taxation is carried out in accordance with the rules applicable to the dealings or acts that correspond to the substance or economic reality and without the desired tax advantages”.
Following the analysis by Sérgio Vasques (cfr. Manual de Direito Fiscal, Almedina, 2018, pp. 375-376), its application essentially depends on the verification of three cumulative elements: first, the arrangement or set of arrangements expresses abuse of legal forms or is not genuine, that hide their true purpose and to which is given a notoriously anomalous use compared to what is regarded as common practice. Second, it is required that they have been carried out for the main purpose or one of the main purposes of obtaining a tax advantage. Third, it is required that from the law the unequivocal intention to tax such arrangements arises, as it would have been if the taxpayer had resorted to the most common legal forms and business practices.
According to another more widespread analytical scheme, introduced among us by Gustavo Lopes Courinha (cf. A Cláusula Geral Antiabuso no Direito Tributário – Contributos para a sua Compreensão, Coimbra: Almedina, 2009), and widely embraced by our jurisprudence, that rule has been broken down into the following five essential elements: means used, end result, intentional, normative and sanction (cfr. TCAS ruling of 15/02/2011 (proc. 04255/10), CAAD judgments no. 377/2014-T, of 05/22/ 2015, no. 143/2014-T, of 07/21/2014 and no. 208/2014-T, of 07/22/2014, among many others).
The last of these five elements corresponds to the statute of the norm (sanction), stating that when a transaction is considered abusive, “taxation is carried out in accordance with the rules applicable to businesses or acts that correspond to the substance or economic reality and without the desired tax advantages”, thus disregarding the tax effects of the adopted business schemes. The remaining four elements are a set of cumulative tests resulting from long jurisprudential evolution, requiring for the triggering of the sanction, that:
- a transaction occurs, isolated or carried out by several planned steps with a sequential logic (means used element). The acts in question must be seen in their entirety as a unitary whole, only thus gaining full meaning (step-transaction doctrine);
- these arrangement or series of arrangements, when compared to others with similar substance or economic reality allow obtaining a tax advantage that would not be achieved without the use of such means (end result element). For this purpose, it is necessary that, resorting to an analysis that makes substance prevail over the form (substance-over-form doctrine), a relation of functional equivalence is established between the more heavily taxed means which in normal conditions would have been used for the same purpose and the fiscally less onerous arrangement used to reach a similar end;
- the main purpose or one of the main purposes of the set of arrangements carried out is not due to any valid commercial reasons which reflect economic reality (principal purpose test), but rather is aimed at obtaining a tax advantage (intentional element);
- finally, it is necessary that the arrangements in question correspond to a sham transaction (sham transaction doctrine) aiming to disguise or replace the effectively intended transaction. This concealment or simulation must be put into practice through means that, taking all the relevant facts and circumstances into account, are considered non-genuine or abusive of legal forms (normative element). These criteria intend to express an exploitation of an unintentional gap in the legal tax system, meaning that the sham transaction in place is considered a purely artificial and inadequate arrangement that correspond to a merely formalistic and cunning use of tax rules. A use that “defeats the object or purpose of the applicable tax law” and is therefore worthy of censure from a systematic point of view.
Once these four tests are verified, the administration has the power to disregard the abusive arrangements and bring to light the effective economic substance of such arrangements, and tax its agents in terms consistent with such alternative arrangements they sought to hide, in accordance with the applicable rules.
These are situations that can be defined as an abuse of the taxpayers right to tax planning. In order to distinguish these situations from a legitimate exercise of the right to conclude the fiscally less onerous transaction, it is required that the administration detects and substantiates the existence of an unintentional gap in the tax system, capable of generating artificial distortions to its neutral and equitable functioning. In doing so, the GAAR judge or applicator must postulate a norm that, although lacking a truly innovative nature or substantial change to the applicable tax law, translates an already existing normative-systematic disapproval regarding such non-genuine arrangements or abusive of legal forms, thus defeating the object or purpose of the tax system.
This is therefore not a clause designed to target behaviours that border legality, but rather situations that, although not expressly provided for in the law, unjustifiably interfere with tax equality and are therefore deemed repugnant to the general legal conscience. In short, situations that, once detected, cannot seriously fail to be considered covered by the spirit of the law in view of the systematic unity and coherence of the tax system seen as a whole. As can be read in the arbitral court decision in case no. 324/2017-T, the creation of the GAAR represents a manifestation of the realism of tax law, and the realization that this branch of law is not indifferent to the economic effects intended by the parties, nor to the substantial economic consideration of tax relevant arrangements.
2. The specific case of the concealed dividend-distribution scheme. A specific and common case to which the GAAR has been applied is that of the hidden or concealed dividend-distribution scheme, which for several years now has been taking attention of the administration, justifying the disregard for tax purposes of several arrangements qualified as such. In general terms, we can characterize these schemes as the set of arrangements in which:
- the shareholders of a company in good financial condition and with the ability to distribute profits (Company A) proceed to incorporate a new company (Company B) of which they are also shareholders;
- at a second moment, the shareholders of the first mentioned company (Company A) transfer their shares to the newly incorporated company (Company B), while deferring payment of the corresponding purchase price to a later date;
- the newly incorporated company (Company B) has the distribution of profits approved by the first mentioned company (Company A), and benefits from the participation exemption regime intended for the elimination of economic double taxation of distributed profits, thus paying its debt to the sellers in the amount of the deferred price.
This arrangement may naturally be considered artificial, abusive of legal forms and non-genuine for a simple reason: (i) along with the distribution of profits from one company to its new shareholder, and the concurrent payment of such illiquid amounts to the sellers of such shares – therefore avoiding retention at source of such amounts at the rate of 28% – the truth is that (ii) in the organizational structure of the group nothing changes, as there is no substantial modification in the detention of shares and no obvious organizational advantages result from the above arrangements. In short, in situations of concealed distribution of dividends, the following two conditions need to occur:
- in all of them the sellers of shares are at the same time shareholders – usually in the same proportions – of the purchasing newly incorporated company;
- and in all these situations, taking into account all relevant facts and circumstances, there are few if any valid commercial reasons which reflect economic substance for those arrangements, other than to prevent the taxation of income.
In the decisions in which this type of arrangements were at stake (notably, the arbitral decisions no. 162/2017-T, 324/2017-T, 317/2019-T, among others), between the initial shareholders and the profit-distributing company [A], a newly incorporated company [B] was put in place, also wholly owned by the same shareholders. With the exception of the obtained tax effect, in all such arrangements the parties involved remained in a position essentially identical to the original one. So much so that the arbitration decision no. 141/2020-T considered that, “in schematic terms, being A the unused course of action, and B the course of action used [by the shareholders], it is necessary that the tax authority demonstrates, as to this requirement, that – B is fiscally more beneficial than A; and that – B produces the equivalent economic effects as A.”.
As can be read in the first of the mentioned decisions, “the reorganization of the group through the constitution of A… SGPS (…) is hardly plausible in the light of a purely economic and business logic. (…) Underscoring this understanding, the following arguments were especially relevant and cogent: a) The transaction in question involved two related companies and their shareholders common to both; the shares held by the shareholders in B… were sold to A… SGPS which they also control” (proc. 162/2017-T).
In another decision, it was found that the “creation of a structure (…) between legally separated entities, but economically and de facto controlled by the same person” and “the acceptance of a high amount debt in its liabilities, when it had no structure as support, was only possible (…) taking into consideration the existing special relations between the seller and the shareholder of C… [buying company] (is the same person). (…) We are before one of many textbook examples of the sham transaction doctrine which (…) is one of many studied modalities of concealed or disguised dividends” (proc. no. 317/2019-T).
3. Related cases not covered by the general anti avoidance rule. Having the hidden dividend-distribution scheme been configured and its main elements described, it is necessary to distinguish it from other situations which, despite the similarities, cannot be taken as equivalent. Notwithstanding other possible scenarios (of which the reader may also be aware), this will surely happen in two easily conceivable situations, which we now characterize below.
The first is that of a group of shareholders who own a set of companies which they intend to manage as the same corporate group, and proceed with its corporate restructuring, placing them all under the unitary management of the same holding company, thus rationalizing resources, eliminating redundancies, centralizing decisions, optimizing processes.
This is what was found to be the case under cases nos. 141/2020 and 222/2020-T, where it was observed that both the intentional and the normative elements were not present. It was therefore namely due to the lack of systematic disapproval concerning arrangements carried out with the purpose of reorganizing the company, as in many cases the economic substance of holding companies, held for the common exercise of managing shareholdings, is undeniable.
The second situation, perhaps the more obvious one, is the situation in which: (1) the shareholders of a company in good financial standing sell their shares outright, (2) these shares are acquired by a company set up for the joint ownership and management of such shares, and (3) being contractually determined that, due to lack of immediate liquidity, payment of the price is deferred to a certain future date after the necessary liquidity for the purpose is obtained.
In such cases – which curiously the tax authority has also targeted in the past – both substance and form agree that what takes place is an authentic sale of shares and not any artificial reorganization or any unusual, anomalous or inappropriate arrangement. The transferors no longer have interest in the company issuer of the shares, nor do they have any interest in the company acquiring such shares. The purchasing company, not having the necessary liquidity, but knowing the equity situation of the acquired company – and possibly assured by the acquisition of a qualifying shareholding – can conceivably require to defer payment of the purchase price to a later date.
4. Closing thoughts. As mentioned above, the GAAR is a legal mechanism that grants tax authority with the power to express implicit rules immanent to the tax system with the purpose to fight tax evasion schemes. It is not intended to allow any administrative-generated innovations which, if taken place, would directly contend with the parameters of the rule of law, a principle that is especially stringent in tax matters. Because of its complexity, it requires an active and functional judiciary oversight allowing that effective legal discourses actually take place between legislator, taxpayers, courts and administration, in a continual back-and-forth without which it could become a gratuitous tool for arbitrary coercion.
José Avilez Ogando
January 2023