Process: 107/2014-T

Date: September 30, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 107/2014-T) concerns the temporal application of tax law to securities capital gains under Portuguese IRS (Personal Income Tax). The taxpayers challenged an additional IRS assessment of €980,013.56 plus €92,720.28 in compensatory interest for fiscal year 2010. The dispute arose from the Tax Authority's arithmetic correction to the taxable base, adding €4,917,819.42 in capital gains from the sale of 102,000 shares sold on March 30, 2010, for €5,038,272.40. The central legal issue was whether Law 15/2010 of July 26, which repealed Article 10(2) of the IRS Code and modified the autonomous taxation rate in Article 72(4) to 20%, applied retroactively to capital gains realized before the law's entry into force. The taxpayers had held these shares for more than 12 months, having acquired them on various dates between 1977 and 2008 using FIFO allocation methodology. The Tax Authority conducted a tax inspection under Service Order OI2, concluding that the new legal framework applied to pre-existing gains. The taxpayers paid the assessed amount under the Extraordinary Debt Regularization Regime (Decree-Law 151-A/2013), which exempted them from compensatory and default interest. The arbitral tribunal, constituted under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011), examined whether the Tax Authority's retroactive application of the amended tax regime violated principles of temporal application of tax law and legal certainty. The case demonstrates the critical importance of determining when tax law changes take effect and whether they can be applied to transactions completed before their enactment.

Full Decision

ARBITRAL AWARD

CAAD: Tax Arbitration

Case No. 107/2014 – T

Subject Matter: PIT – Securities capital gains; Temporal application of law.

The arbitrators Jorge Lino Ribeiro Alves de Sousa (president), Eduardo Paz Ferreira, and José Pedro Carvalho, designated by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby render the following arbitral award.

I – REPORT

"A", taxpayer number …, holder of a Citizen Card with civil identification number …, and his wife, with whom he is married under the community of acquisitions regime, "B", taxpayer number …, holder of a Citizen Card with civil identification number …, both residents at Street …, …, …-… Porto, hereinafter referred to as the Applicants, have filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral decision, pursuant to the provisions of Articles 2º no. 1 a) and 10º no. 1 a), both of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as RJAT), requesting the declaration of illegality of the additional Personal Income Tax assessment for the fiscal year 2010, No. 2013… of 2013-11-07, in the amount of €980,013.56, and the corresponding compensatory interest assessment bearing No. 2013… in the amount of €92,720.28.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 13-02-2014.

Pursuant to the provisions of item a) of no. 2 of Article 6º and item b) of no. 1 of Article 11º of the RJAT, in the wording introduced by Article 228º of Law No. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal those already mentioned, who communicated acceptance of the appointment within the applicable timeframe.

On 28-03-2014 the parties were duly notified of this designation and expressed no intention to refuse the designation of the arbitrators, in accordance with the combined provisions of Article 11º no. 1 items a) and b) of the RJAT and Articles 6º and 7º of the Deontological Code.

Thus, in conformity with the provision set forth in item c) of no. 1 of Article 11º of the RJAT, in the wording introduced by Article 228º of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 14-04-2013.

The Tax and Customs Authority replied, arguing that the request should be judged as unfounded.

Given that the circumstances of the case do not present any of the purposes legally entrusted to it, the parties dispensed with the holding of the meeting provided for in Article 18º of the RJAT, which was accordingly waived.

The arbitral tribunal was duly constituted and is materially competent, in light of the provisions of Articles 2º, no. 1, item a), and 30º, no. 1, of Decree-Law No. 10/2011, of 20 January.

The parties possess legal personality and capacity, have legitimate standing and are represented (Articles 4º and 10º, no. 2, of the same statute and Article 1º of Regulatory Order No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions were raised.

Thus, there are no obstacles to the examination of the merits of the case.

Having considered everything, it is appropriate to render judgment.

II. DECISION

A. MATERIAL FACTS

A.1. Facts Established as Proven

The assessments challenged have their origin in a mere arithmetic correction to the taxable base in PIT for 2010, due to the omission from the tax return of capital gains obtained from the sale of shares on 30/03/2010, which were held by the Applicants for more than 12 months.

The Tax Authority determined an increase to the taxable base in the amount of €4,917,819.42, to which it applied the autonomous taxation rate of 20% provided for in no. 4 of Article 72º of the PIT Code (in the wording in force on 31/12/2010).

As the basis for this assessment, the Tax Authority considered that the amendment to the PIT Code introduced by Law No. 15/2010 of 26 July is applicable to capital gains from the sale of shares obtained before its entry into force, namely with regard to the repeal of no. 2 of Article 10º of the PIT Code and the modification of the taxation rate set forth in no. 4 of Article 72º.

The assessment in question was issued on the basis of a Tax Inspection Report, conducted pursuant to Service Order 0I2…, notified to the Applicant by Official Letter No. …/… dated 2013/10/30.

The assessment in question gave rise to the account settlement statement No. 2013… which had a voluntary payment deadline until 18/12/2013.

On 18/12/2013 the Applicants paid the tax owed under the Extraordinary Regime for Regularization of Debts established by Decree-Law No. 151-A/2013, whereby they were exempted from payment of compensatory and default interest, with the amount paid by the Applicants on 18/12/2013 totaling €980,013.56.

At the beginning of 2010, the Applicant held 102,000 shares of the joint-stock company "C, S.A.", with NIPC …, representing 25.5% of its share capital.

The company in question was incorporated on 14/12/1977 as a private limited company and transformed into a joint-stock company on 19/11/2004.

The 102,000 shares sold on 30/03/2010 formed part of a larger batch of shares that came into the ownership of the Applicant between 1977 (upon the incorporation of the company) and 2008 (when he acquired a final batch of 5,175 shares by way of exchange).

Considering that shares derived from the transformation from a private limited company assume the acquisition date of the quotas that gave rise to them, the shares of the company that the Taxpayer husband held over time were acquired on the dates set forth in the Table contained at the end of page 3/15 of the Tax Inspection Report:

On 14/12/1977 he acquired, upon incorporation of the company, the equivalent of 20,000 shares (that is, the respective quotas) for the total price of 20,000$00;

On 16/10/1998 he purchased the equivalent of 310,000 shares (in corresponding quotas) for the total price of 310,000$00;

On 14/10/2002 he sold the equivalent of 60,000 shares for the total price of €84,375.00;

On 19/11/2004, at the time of the company's transformation into S.A., he acquired 20,523 shares by way of incorporation of reserves;

On 31/05/2006 he sold 4,800 shares;

On 05/03/2008 he acquired, by way of exchange, 5,175 shares;

On 07/03/2008 he sold 86,858 shares;

On 07/05/2009 he sold 40 shares;

On 13/10/2009 he sold 102,000 shares.

Thus, following the last of the operations described, the Applicant held a final batch of 102,000 shares, which were subsequently sold on 30/03/2010 to the company "D SGPS, S.A." for the total price of €5,038,272.40.

The acquisition value of these shares, sold on 30/03/2010, taking into account the first-in-first-out (FIFO) allocation method, is set forth in the Table at the end of page 10/15 of the Tax Inspection Report, namely:

96,825 shares have an acquisition unit value of €0.0046783, for a total of €452.98 for this batch;

5,175 shares have an acquisition unit value of €23.188406 for a total of €120,000.00 for this batch.

Total acquisition value for the 102,000 shares sold amounts to €102,452.98.

The dates of their respective acquisition by the Applicant were as follows:

76,302 shares on 16/10/1998;

20,523 shares on 19/11/2004;

5,175 shares on 05/03/2008.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning Regarding the Proven and Not Proven Material Facts

With respect to the material facts, the Tribunal need not rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven facts from those not proven (see Article 123º, no. 2, of the Tax Code of Procedure and Process and Article 659º, no. 2 of the Code of Civil Procedure, applicable by virtue of Article 29º, no. 1, items a) and e), of the RJAT).

In this manner, the pertinent facts for judgment of the case are selected and delineated according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see Article 511º, no. 1, of the Code of Civil Procedure, applicable by virtue of Article 29º, no. 1, item e), of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence and the administrative file attached to the proceedings, the facts listed above were considered as proven, with relevance to the decision, and moreover were consensually recognized and accepted by the parties.

B. ON THE LAW

The question that arises in these proceedings is singular and straightforward: whether capital gains obtained in 2010, but before the entry into force of the amendments introduced to the PIT Code by Law No. 15/2010, of 2 July (which occurred on 27/07/2010), do or do not contribute to the balance referred to in Article 43º of that Code.

Let us examine this.

The Applicants argue that the answer to the question posed should be in the negative.

They take the position that, in light of the content of no. 2 of Article 12º of the General Tax Law[1], the regime resulting from the new law (in this case Law No. 15/2010, of 2 July) will not be applicable to them.

The Applicants cite, in support of their thesis, arbitral jurisprudence (award rendered in case 25/2011T of CAAD[2]) and tax court jurisprudence (award of the Administrative Court of Tax Cases of 03/12/2013, rendered in case 1582/13[3]).

They invoke, finally, the constitutional principle of protection of legitimate expectations, flowing from the principle of the Democratic Rule of Law contained in Article 2º of the Portuguese Constitution, which they contend is violated by the assessment that is the subject of these proceedings.

The Tax Authority, in contradiction to the Applicants, points out that Law No. 15/2010, of 26 July, repealed the previously applicable regime without creating any transitional law provision that would safeguard possible tax facts still in formation.

The Tax Authority also states that the income in question in these proceedings constitutes one of the categories of income that integrate the real or objective incidence of Personal Income Tax (PIT), whereby the tax-generating event occurs on 31 December of each year, only thus being comprehensible the unitary and global character of income taxation, even though there is an analytical breakdown of the various categories of income in accordance with their source.

The same Authority concludes that the tax-generating event is not even the gain resulting from the sale but the positive balance determined in a given taxation period between the capital gains and losses realized.

The defendant entity further suggests that the interpretation sustained by the applicants will violate the constitutional principle of equality, contained in Article 13º of the Portuguese Constitution and also in no. 1 of Article 104º of the same Fundamental Law.

If the question to be resolved in these proceedings is of simple formulation, less simple is certainly the statement of the two paths to be taken for its respective resolution.

In effect, fundamentally, it must first be ascertained whether the tax fact underlying the taxation of capital gains resulting from the onerous sale of equity interests is an instantaneous fact or, rather, a fact of successive formation.

The Administrative Court of Tax Cases, in the award cited by the Applicants[4], concludes that the tax fact in question is of instantaneous nature, whereby the regime resulting from Law No. 15/2010, of 26 July, would only apply to capital gains occurring after its entry into force.

This – in fact – is the crux of the solution to be given to the question at hand, being that the understanding of the award(s) referred to.

With all (due) respect reserved, it is nonetheless understood that the tax fact sub iudice will not be of instantaneous nature, contrary to what the jurisprudence in question understands, but rather a complex fact of successive formation, whereby, given the essential nature of this question, nothing remains but to diverge from that jurisprudence.

Indeed, it is understood that the situation before us (taxation of capital gains) is similar to that judged by the Constitutional Court in Decision 399/10 (change of the PIT rate in the course of the very year to which the change applies) and distinct from that judged by the same Court in decisions relating to autonomous taxation.

Each capital gain realized shall thus be analogous, for example, to a salary, and not to an expense subject to autonomous taxation, which results, for example, from the fact that the balance of capital gains and losses is taxed, and not each of the individual capital gains realized and divorced from the remaining patrimonial variations of the same kind.

See, for example, that in autonomous taxation it is not the balance for which the expenses subject to it concur that is taxed, but rather each of the expenses individually, in themselves, divorced from the others. If the regime of capital gains and losses were of the same nature, each capital gain should be taxed per se, independently of the remaining capital gains and, above all, losses recorded in the same period.

That is, and in sum, if the situation were in fact analogous to autonomous taxation, from the outset, each capital gain would always be taxed, regardless of any losses that might exist, which is not the case.

What has just been said will be further evidenced by the possibility of aggregation. In fact, in that circumstance (where the taxpayer opts to aggregate the capital gains income with his remaining PIT income) it would not be understood how, for example, the income from salaries earned at the beginning of the year would be subject to the increased rate in the middle of that same year, while capital gains aggregated with those would escape the "retrospectivity" of that rate and the delimitation of the taxable base.

And note that no reason is apparent for distinguishing capital gains subject to aggregation from those that are not, since, moreover, the option of aggregation only occurs at the end of the year/period, whereby one would be "conditioning" the nature (instantaneous or successive) of the tax-generating event to an option subsequent to its occurrence.

It is thus concluded, also along the same line of reasoning, that the legislature's choice to tax the capital gains of the year 2010, realized before the entry into force of the amendment to its regime, given the non-instantaneous nature of the respective tax-generating event, will not be unconstitutional, fundamentally for the same reasons that the application of the increased rates to the remaining PIT income, under the same terms, was not.

The reasoning just expounded, however, is restricted to the constitutional level, which is naturally that which was the subject of ruling by the Constitutional Court. That is, it is concluded, in sum, based on the same grounds that supported Constitutional Court Decision 399/10, that it will not be contrary to the Portuguese Constitution[5] the application of the regime resulting from the repeal of no. 2 of Article 10º of the PIT Code, in the course of 2010, to capital gains earned in the course of that same year[6].

Not being unconstitutional, it then remains to ascertain whether such application will be legal.

The first question that may be raised now will arise from the provision of Article 10º of the PIT Code, which states: "Gains are considered obtained at the moment of performance of the acts provided for in no. 1."

This norm, however, should be understood as having solely the purpose of fixing the taxation period to which the gain should be attributed, and not of taking a position as to the nature of the tax-generating event, being, for example, analogous to Article 24º/4 of the PIT Code, which has wording similar to that Article 10º/3[7], but in relation to which it will surely not be questioned that it pertains to tax-generating events of the same nature as the remaining ones subject to PIT, and not to instantaneous events.

Another, more substantial question may emerge from Article 12º/2 of the General Tax Law, which states that "If the tax-generating event is of successive formation, the new law only applies to the period elapsed from its entry into force."

Indeed, the alternative to considering that the income that is the subject of these proceedings is an instantaneous tax-generating event (as the Administrative Court of Tax Cases considered in the terms addressed above) will be to consider it, then, a tax-generating event analogous to the remaining income subject to PIT, that is, a tax-generating event of successive formation.

Being that the case, as there do not appear to be reasonable doubts that it is, the provision of Article 12º/2 of the General Tax Law will be satisfied.

However, properly interpreted the legal regime for the taxation of capital gains resulting from the entry into force of the amendments to the PIT Code introduced by Law No. 15/2010, of 2 July, as explained in the dissenting opinion rendered in case 135/2013T of CAAD[8], it is concluded that the intentionality of this is to tax the balance resulting from the entirety of capital gains and losses realized in the taxation period in progress on the date of entry into force of that law.

As it was written, moreover, in the said dissenting opinion, "The text of the proposed law corresponds, in this respect, entirely to the text approved that came to form part of Law No. 15/2010. It is therefore necessary to conclude that the objective of the legislature was to subject all capital gains obtained from the sale of equity interests in 2010 to the new regime (tax and exemption regime)." Indeed, reinforcing all the laboriously developed points in that same dissenting opinion, it may be said that it would make no sense, nor would it be coherent, for the legislature to intend, as was peacefully accepted since the publication of Constitutional Court Decision 399/10, that the PIT rate introduced in the course of 2010 had a "retrospective" efficacy, and not to treat the matter before us in the same manner, produced precisely in the same context and with the same purposes.

It is thus concluded, here as there, that "that provision of no. 2 of Article 12º comes into contradiction with the determination resulting from Article 43º, no. 1 of the PIT Code," in the sense emerging from the normative framework resulting from the entry into force of the amendments introduced to the PIT Code by Law No. 15/2010, of 2 July, "as well as with the general principle of its own no. 1 of Article 1º of the PIT Code," that is, that such norms "collide in their prescriptive sense or in the legal consequences they produce," detecting therefore a normative antinomy.

Recognizing this, and taking into account the doctrinally established criteria of hierarchy, specialty, and chronology, one shall conclude, as is once more demonstrated in detail in the cited dissenting opinion, that only the criterion of specialty can resolve the antinomy discovered, given that neither is there any relation of hierarchy between the General Tax Law and the PIT Code, nor is Article 12º/2 of that General Law subsequent to the legal regime for taxation of capital gains in PIT, resulting from the entry into force of Law No. 15/2010, of 2 July.

Now, in light of that referred criterion – of specialty – there will be no doubt that the PIT Code regime is special in relation to the General Tax Law regime, whereby the application of the norm of that law, invoked in this case, must be set aside.

Thus – in conclusion – understanding that the legal regime for PIT taxation of capital gains resulting from the amendments to that Code introduced by Law No. 15/2010, of 2 July, was aimed at subjecting to the new regime the entirety of capital gains earned in 2010, and that such legislative command does not suffer from any unconstitutionality, nor is it set aside by any other legal norm with which it stands in a relation of antinomy, the tax act that is the subject of these proceedings must be confirmed, and the arbitral requests must be judged as – entirely – unfounded.

C. DECISION

For these reasons, this Arbitral Tribunal hereby decides:

To judge as entirely unfounded the arbitral requests formulated;

To order the Applicants to pay the costs of the proceedings in the amount of €13,770.00, taking into account the amount already paid.

D. Value of the Proceedings

The value of the proceedings is fixed at €980,013.56, pursuant to Article 97º-A, no. 1, a), of the Tax Code of Procedure and Process, applicable by force of items a) and b) of no. 1 of Article 29º of the RJAT and no. 2 of Article 3º of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €13,770.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the Applicants, since the request was entirely unfounded, pursuant to Articles 12º, no. 2, and 22º, no. 4, both of the RJAT, and Article 4º, no. 4, of the aforementioned Regulations.

Notify the parties.

Lisbon

30 September 2014

The Arbitral Tribunal,

(Jorge Lino Ribeiro Alves de Sousa)

(Eduardo Paz Ferreira)

(José Pedro Carvalho)

Text prepared by computer, pursuant to no. 5 of Article 131º of the Code of Civil Procedure, applicable by remission of item e) of no. 1 of Article 29º of Decree-Law No. 10/2011, of 20/01.

The present decision is written in accordance with the old Portuguese orthography.

[1] "If the tax-generating event is of successive formation, the new law only applies to the period elapsed from its entry into force."

[2] Available at www.caad.org.pt.

[3] Available at www.dgsi.pt.

[4] Reaffirmed by an award of the same Court of 08/01/2014, rendered in case 01078/12, also available at www.dgsi.pt.

[5] Including the constitutional principle of protection of legitimate expectations, flowing from the principle of the Democratic Rule of Law, contained in Article 2º of the Portuguese Constitution.

[6] An identical conclusion had been formulated by the Ombudsman, in his Opinion R-3736/10, available for consultation at http://www.provedor-jus.pt/archive/doc/sumula__maisvalias_15122010.pdf.

[7] "The gains referred to in no. 7) of item b) of no. 3 of Article 2º are considered obtained, respectively:..."

[8] Available for consultation at www.caad.org.pt.

Frequently Asked Questions

Automatically Created

How are capital gains on securities (mais-valias mobiliárias) taxed under Portuguese IRS?
Capital gains on securities (mais-valias mobiliárias) under Portuguese IRS are taxed autonomously at specific rates depending on the holding period and applicable legislation. Under the regime challenged in this case, Law 15/2010 modified Article 72(4) of the IRS Code to apply a 20% autonomous taxation rate to securities capital gains. The taxable base is calculated as the difference between the sale price and the acquisition value, determined using FIFO (first-in-first-out) methodology when shares were acquired at different times. Securities held for more than 12 months may benefit from different tax treatment depending on the temporal application of law, which was the central issue in this arbitration.
What is the principle of temporal application of tax law in Portuguese capital gains taxation?
The principle of temporal application of tax law in Portuguese capital gains taxation determines which legal regime applies to a specific transaction based on when the taxable event occurred. The fundamental question is whether new tax legislation applies retroactively to gains realized before its entry into force or only to subsequent transactions. In this case, the dispute centered on whether Law 15/2010 of July 26, which repealed Article 10(2) and modified Article 72(4) of the IRS Code, could be applied to shares sold on March 30, 2010, before the law's enactment. Portuguese tax law generally follows the principle that tax law applies to facts occurring during its period of validity, raising questions about retrospective application and legal certainty for taxpayers who completed transactions under prior legal frameworks.
Can taxpayers challenge additional IRS assessments on securities capital gains through CAAD arbitration?
Yes, taxpayers can challenge additional IRS assessments on securities capital gains through CAAD (Centro de Arbitragem Administrativa) arbitration. Under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011), taxpayers have the right to request constitution of an arbitral tribunal pursuant to Articles 2(1)(a) and 10(1)(a) to contest the legality of tax assessments. In this case, the taxpayers successfully filed for arbitration to challenge both the additional PIT assessment of €980,013.56 and the corresponding compensatory interest assessment of €92,720.28. The CAAD arbitral tribunal, composed of three arbitrators designated by the Deontological Council, has material competence under Articles 2(1)(a) and 30(1) of Decree-Law 10/2011 to review the legality of IRS assessments related to capital gains taxation.
What are the legal grounds for contesting an IRS liquidation of nearly €1 million on mobile capital gains?
The legal grounds for contesting an IRS liquidation of nearly €1 million on mobile capital gains include challenging the temporal application of tax law, particularly whether amended legislation can be applied retroactively to transactions completed before its entry into force. In this case, taxpayers argued that Law 15/2010, which repealed Article 10(2) and modified the taxation rate in Article 72(4) of the IRS Code to 20%, should not apply to shares sold on March 30, 2010, before the law's enactment on July 26, 2010. Additional grounds include challenging the Tax Authority's legal interpretation, the arithmetic calculation of the taxable base (€4,917,819.42), the application of FIFO methodology for determining acquisition values, and potential violations of principles of legal certainty and legitimate expectations. Taxpayers can also contest procedural irregularities in the tax inspection process and the legal basis for the assessment issued under Service Order OI2.
How does the CAAD arbitral tribunal assess the legality of additional IRS tax assessments and compensatory interest?
The CAAD arbitral tribunal assesses the legality of additional IRS tax assessments and compensatory interest by examining whether the Tax Authority correctly applied substantive and procedural tax law. The tribunal's analysis includes: (1) verifying material competence under RJAT and proper constitution of the arbitral tribunal; (2) confirming parties' legal personality, capacity, and legitimate standing; (3) establishing proven material facts based on documentation and inspection reports; (4) analyzing whether the legal framework was correctly applied, particularly regarding temporal application of law; (5) determining if the taxable base calculation was arithmetically and legally correct; (6) evaluating whether the applicable tax rate was properly identified; and (7) assessing if compensatory interest was legally due. In this case, the tribunal examined whether Law 15/2010 could be applied to capital gains realized before its enactment, following the principle that the tribunal must select facts relevant to the decision and distinguish proven from unproven facts pursuant to Article 123(2) of the Tax Procedural Code.