The tax authorities had issued an assessment in which the value of shares transfered between related parties had been adjusted by application of the arm’s length principle. The assessment was appealed to the Administrative Court, which upheld the assessment. An appeal was then filed with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the judgement issued by the Administrative Court and decided in favour of the tax authorities. Excerpt “It should be remembered here that at the time of the facts the law did not provide for the use of any method, although there were already some guidelines from the OECD to this effect, and the Tax and Customs Authority researched and used a methodology close to the “comparable price” of the sale of shares closest to a shareholder to the company, making reference to the fact that this shareholder tried to sell the shares on the market. In its appellate submissions and conclusions, the appellant puts forward arguments for its dismissal based on the unreliability of the values thus obtained, giving reasons for not taking into account the values set in the deal with the shareholder M…, concluded in the same year, 1997, namely due to the animosity of relations between this partner, the company and the members of the management bodies, but the truth is that it does not effectively rule out the fact that the shareholder had previously tried to sell the shares in a fully competitive market or that this had an influence on the price reached. In fact, although the Appellant emphasises the differences between the deals concluded, the first with the shareholder M…and the others at issue here, with the Carreira C…and M… families, the truth is that both acquired their own shares and for very different amounts, but it is true that, contrary to what the Appellant argues, the objects of the deals are in themselves comparable: the sale of shares. Therefore, the judgement under appeal does not deserve censure when it disregards the values ascertained in the expert report carried out more than 25 years after the facts, in a context of significant time lagsand which uses the equity method and validates the result calculated using the methodology used by the Tax and Customs Authority, for the reasons described above. In fact, in addition to not really calling into question the conclusions and methods used by the Tax and Customs Authority, the figures found in the expert’s report are not intended to replace the reasoning behind the corrections it made, nor to lead to new formulas for determining the tax base. The truth is that the factual situation described in the STA judgement cited by the Appellant is very different from the case under consideration in the present proceedings, since in addition to the fact that the existence of relationships different from those that would normally be agreed between independent peopleIn addition, the values that served as the basis for the contested settlement were not corrected on the basis of the application of the coefficient of monetary correction to the acquisition price of shares. Thus, and with greater assertiveness or development, we cannot see how the interpretation accepted violates the principle of taxing companies on their real income (article 104/2 of the Constitution), given that the law, in the aforementioned article 57/1 CIRC, allowed the Tax Authority to make corrections to the declaration [see conclusion Y) of the pleadings on appeal]. In fact, this is not about the presumption of veracity enjoyed by the Impugnant’s and now Appellant’s accounts, but rather about preventing the erosion of the tax base and tax avoidance through price manipulation by verifying the existence of special relationships between the people involved in the deal with the ability to influence the conditions and the way in which the price was determined. The Appellant is therefore wrong on these points.” Click here for English translation. Click here for other translation ...