A Const S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1990 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 4 February 2004, the appeal was also dismissed at this instance. Dissatisfied with that decision A Const S.A. filed an appeal with the Constitutional Court. Grounds for the appeal was stated as follows “In compliance with the provisions of nº 2 of art. 75-A of the LTC it is moreover expressly stated that the present appeal is based on the concrete review of the constitutionality of art. 57 of the CIRC (in the wording in force on the date of the facts of the case, applicable in casu) taking into account its applicability in the contested decision: a. either because it is a blank provision, containing vague and imprecise concepts, without any definition of criteria of positive law for its concretisation, its application being based on the arbitrary filling by the Tax Authorities of indeterminate general clauses, which violates the constitutional principles and rules of tax legality (art. 106, no. 2, CRP, in the wording in force at the time of the facts of the case, applicable in casu), certainty, legal security and confidence (art. 2 of the CRP); b. because the contested decision, in its interpretation and application of the aforementioned rule (Article 57 of the CIRC) violated the constitutional principles of certainty, legal security, confidence, good faith, equality and impartiality enshrined in Articles 2, 13, 266(1) and (2) of the Constitution.” Decision of Constitutional Court The Court dismissed the appeal of “A Const S.A.” and concluded that the rule contained in no. 1 of article 57 of the Corporate Tax Code, in the original wording, in force at the time of the facts of the case, was not unconstitutional. Excerpts “… In fact, although the delimitation of the assumptions for the application of that regulation depends on a judgment of interpretation and valuation of elements of a technical nature – existence of “special relationships” and a deviation from “normal” prices – and the use of maximum of experience, it does not appear that, as stated in the aforementioned judgment n.º 233/94, “from the constitutional imposition contained in the principle of tax legality, it follows that such presuppositions for the application of the contested regulations legally established are shown to be insufficiently densified, taking into account the specificities of the tax field, where often, and in the exercise of control powers, if will have to resort to indeterminate legal concepts and the contribution of elements of a technical nature to base the decisions of the Administration in the pursuit of the public interest expressed in the correct taxation of economic agents ”. In fact, in this case, the individual knows, in view of the normative postulate, that not every situation will justify the realization of the necessary corrections to determine the taxable profit: this will only happen when we are faced with situations that, terms of the law, whether arising from the existence of special relationships of dependence , causing distortion in relation to market prices and having a direct influence on the determination of that profit. Furthermore, since the criterion adopted by the legislator is objectively related to the market, the administration is left tax, which is responsible for determining the taxable amount under the terms of article 57 of the CIRC, linked to the establishment of the arm’s length price, and this criterion does not include subjective assessments. And if it is true that the questioned rule, similarly to what also happens in other legal systems, does not materialize the valuation criterion that will govern the determination of the arm’s length price, the fact is that the reference to the prices established between independent entities it ends up establishing the objective limits within which such a criterion can be set. In fact, this is what the new transfer pricing regulation – Article 58 of the CIRC- came to clarify, bringing a greater degree of certainty, security and, above all, greater efficiency to the action of the tax administration. However, this does not imply that, previously, article 57, no. 1, of the CIRC did not have sufficient density for taxable persons to determine the presuppositions for the performance of the Administration and for the Courts to proceed with the control of the adequacy and proportionality of the administrative activity. Therefore, it must be concluded that the questioned rule allows the taxable person to fully know and control which quantitative expression of the tax fact is taken into account. It contains a sufficient normative density that conditions administrative activity and binds the administration to the verification of its application assumptions, allowing that the courts can syndicate the administrative decision that this norm makes application. In addition, article 80 of the Tax Procedure Code in force at the time of the facts of the case, which already contained additional requirements for reasons (currently included in article 77, paragraph 3, of the General Tax Law) for cases in which the Administration proceeds to carry out corrections motivated by the existence of special relationships, ends up reinforcing the guarantees that the principle of legality, namely in its dimension of tax typicality, postulates. … Pursued from the knowledge of the appeal, by a decision passed in the meantime, the assessment of the unconstitutionality of the contested decision, for violation of the ” constitutional principles, certainty, legal certainty, trust, good faith, equality and impartiality, enshrined in arts. 2, 13, 266, nº 1, nº 2, of the Constitution”, the appellant, who, in the application for filing an appeal to this Court, had invoked the violation, by the questioned rule – art. 57, no. 1, of the CIRC , in the wording in force at the time of the facts of the case -, of the principles of certainty, legal certainty and trust (art. to this same rule the violation of “constitutional principles of taxation of real income, ...

ALP S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1992 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 6 June 2001, the appeal was also dismissed at this instance. Dissatisfied with that decision ALP S.A. filed an appeal with the Constitutional Court. ALP S.A grounds for the appeal was: By virtue of the Principle of Tax Legality, the rules of incidence must be predetermined in their content, and the elements that comprise it must be formulated in a precise and determined manner. Determining the content of the levy tax rule excludes the use of undetermined concepts, as well as certain normative concepts, whose application to the specific case is based on subjective or personal assessment of the enforcement body, under penalty of postponing legal certainty. According to Nuno Sá Gomes, in Manual of Tax Law, Vol. II, 2000, p. 39, “… In turn, it is said that we are facing an absolute reservation of the law when it is established, as among us, that the formal law must contain not only the foundation of the administration’s conduct, but also the criteria for decisions in concrete cases. , not giving rise to any discretion or availability of a tax type by the tax administration ”. In the specific case, the corrections made result from the application of art. 57.º, no. 1, of the CIRC and the understanding by the tax administration agent of the existence of special relationships between the taxpayer and another person as a result of that legal precept. However, “special relationships” and “relationships that establish conditions different from those agreed between different persons” are vague, undetermined concepts that give the tax administration discretionary powers to correct the taxable amount. However, this is not a matter of technical discretion, as the law does not call for its application to non-legal or artistic or professional scientific knowledge, but to the appreciation of established relationships, whether the profit presented is different from normal and how the actual amount on which the correction was based is quantified. It is the ordinary law – art. 103, nos. 2 and 3, and art. 268 of the CRP – which must establish the parameters in which this activity is regulated under penalty of unconstitutionality. And these criteria do not exist nor are they established by law, so the great breadth and indeterminacy of the content of those concepts allow the enforcement agency to include any and all gains in the norm, thus sacrificing legal certainty!!! Thus, the rule of art. 57.º, no. 1, of the CIRC, being formulated in vague and imprecise terms, using pure normative concepts, without any concreteness and determination, it is a materially unconstitutional norm for breach of the principle of legality and tax typicality. According to Nuno Sá Gomes, ob. cit., p. 193 “…the aforementioned art. 57.º does not clarify what is to be understood by special relationships, only touching on the criterion of dependence, therefore, it seems that there are special relationships whenever the entities in question are dependent on each other”. Hence, from the outset, a broad indeterminacy that amounts to attributing to the tax administration the discretionary power to decide when there is a special relationship of dependence, which, as we said, is unconstitutional. The fact that the tax law does not define what is to be understood by SPECIAL RELATIONS and the vague, elastic nature of this concept leads us to conclude that the formula used, right there, violates art. 106, no. 2 of the CRP, which requires that “the law determines… the incidence”. Thus, while the tax legislation does not set out the following criteria, it must be considered that art. 57 of the CIRC is unconstitutional, as it gives the Tax Administration discretionary powers to correct the taxable matter. Therefore, the norm of paragraph 1 of art. 57 of the CIRC be declared unconstitutional!” Decision of Constitutional Court The Court dismissed the appeal of ALP S.A. Following a thorough description of the provisions forming the basis for application of the arm’s length principle in other countries, the Court concluded that the  “arm’s length principle” as implemented in Portugal in art. 57 of the CIRC was not unconstitutional. Excerpts “… Thus, in the specific case, taking into account the above considerations, it will have to be concluded that the union norm not only presents a sufficient normative density – in terms of containing, in its formulation, a sufficient significant aptitude, capable of cutting a framework of administrative action legally presupposed and conditioned -, as it allows the courts to syndicate the goodness and correctness of administrative judgment. In other words, it can be said that the legally outlined framework does not allow the determination of the practical-normative meaning of the precept, materialized in its application, as a result of the consideration of the problem, to be carried out outside the legal command set out in the norm, as a result , therefore, of a freedom of administrative action that is judicially indiscriminate. On the contrary, the rule does not reflect any juridical-political option of the legislator for the granting of discretionary powers, it also refers the administrative decision to the (linked) verification of the application assumptions from the consideration of the concrete legal problems, being able, therefore, in this measure, the tax courts assess the verification of the assumptions of administrative action and determine, in the face of a specific problem, We can thus conclude, in summary, that we are dealing, in this case, with undetermined concepts whose content does not demand the attribution of any constitutive power to the tax administration in terms of determining the taxable amount, since only that objective meaning that results from directly from tax law. This, contrary to what happened in the rule indicated by Judgment no. of taxation. On the other hand, the tax administration is now only recognized with a competence of ...