Process: 134/2013-T

Date: February 27, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 134/2013-T) addresses whether the Portuguese Tax Authority can correct the declared sale price of real property for IRC purposes. Company A sold a property lot with a notarized deed price of €75,000, but the buyer issued two checks: €70,000 to the company and €55,000 to the company's representative, both deposited in the representative's account. The Tax Authority presumed the actual sale price was €125,000, making IRC corrections of €50,000 for 2006, resulting in assessments of €5,311.32 (2006) and €16,742.84 (2007). The company challenged these assessments, arguing the deed price was accurate, invoking unintelligibility, lack of reasoning, and duplicate taxation. The arbitral tribunal confirmed established jurisprudence (STA decisions 089/03 and 01757/02) that Article 39 of the LGT permits the Tax Authority to correct declared property values and tax based on presumed higher prices when indications of lack of veracity exist. The tribunal found that the €55,000 payment to the representative, combined with the absence of proven loan agreements, constituted sufficient grounds for the Tax Authority's presumption. Critical unproven facts included whether the company received amounts beyond €75,000 and whether a legitimate €55,000 loan existed between the parties. The decision establishes that notarized deed prices do not automatically prevail over Tax Authority valuations when objective evidence suggests underreporting, and taxpayers bear the burden of proving the accuracy of declared values in IRC property transactions.

Full Decision

Arbitral Decision

Case no. 134/2013-T

Claimant / Applicant: A…
Respondent: Tax and Customs Authority (hereinafter TA)

  1. Report

On 11-06-2013, the company A..., tax identification number …, with registered office at …, with permanent establishment in …, submitted to the Administrative Arbitration Center (CAAD) an application for constitution of an arbitral tribunal aimed at annulment of the IRC assessments no. … dated 24-02-2010 for the year 2006 in the amount of €5,311.32, and no. … dated 25-01-2010 for the year 2007 in the amount of €16,742.84. It further requested reimbursement of the amounts paid plus interest.

The Claimant contends that the corrections made at the level of IRC for the years 2006 and 2007 are illegal, because the lot … in question was sold for €75,000, as stated in the public deed executed, and not for €125,000 as the Tax Authority contends. It further invokes unintelligibility of the assessment, lack of reasoning of the assessment, and duplication of collection.

The TA submitted its response on 30-09-2013, contending that the IRC assessments for the years 2006 and 2007 do not suffer from any defect of violation of law. Regarding unintelligibility, the TA invoked the regime of article 37, no. 1 of the CPPT, contended that the Claimant would not be an "average" taxpayer, and that there would be no duplication of collection.

Suzana Fernandes da Costa was appointed as sole arbitrator on 26-07-2013.

In accordance with the provisions of article 11, no. 1, paragraph c) of the RJAT, the sole arbitral tribunal was constituted on 13-08-2013.

The arbitral tribunal meeting was held on 06-11-2013, in accordance with the terms and objectives provided for in article 18 of the Tax Arbitration Regime. As there were no corrections to be made to the procedural documents nor exceptions to be heard, the tribunal decided to notify the Respondent to specify, within 10 days, the points of matter of fact on which it intended to examine witnesses. The date of 10-01-2014 was set for the examination of witnesses and oral arguments.

On 13-11-2013, the TA indicated that the testimony would concern points 31 and following of the TA's response.

On 06-01-2014, an order was issued rejecting the examination of … and …, as they were administrators of the Claimant and could not testify as witnesses. On the same date, the examination of witness … was granted, and CAAD was requested to notify them. The date of 10-01-2014 for the examination of the witness was cancelled in order to allow for timely notification. On 07-01-2014, a new date was scheduled for the examination of the witness and for oral arguments, which was set for 20-01-2014.

On 20-01-2014, it was found that the witness had not been formally notified to appear, and a new date was set for examination and oral arguments: 10-02-2014. The date for rendering the final decision was also extended to 27-02-2014.

On 10-02-2014, the witness ..., notified for that purpose, did not appear, and it was determined that the proceedings would continue. The parties waived oral arguments.

On 13-02-2014, justification for the absence of witness ... was submitted to the file, and the arbitral judge chose not to examine them on the basis of the principle of procedural expediency.

The parties enjoy legal personality and capacity and are qualified (articles 4 and 10, nos. 1 and 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

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

In light of the foregoing, it is important to delimit the main issues to be decided, namely:

Whether the property registered in the property register of …, under article …, lot …, was sold by the Claimant for €75,000, as stated in the deed of sale attached to the file, or whether it was sold for €125,000.

Whether there was omission of income in the sphere of the Claimant, which would justify the value of the assessments whose annulment it requests.

  1. Matter of Fact

2.1. Proven Facts

Having analyzed the documentary evidence produced, the following facts are considered proven and material to the decision of the case:

  1. Between late 2008 and early 2009, the Claimant was subject to a tax inspection for the fiscal years 2006 and 2007.

  2. From this inspection action resulted for the Claimant corrections to IRC, in 2006, in the amount of €50,000, relating to the sale of the property registered in the property register of …, under article …, the aforementioned lot ….

  3. As a result of these corrections, the taxable profit declared by the Claimant in 2006 was changed from €254,259.06 to €304,259.06.

  4. Moreover, as a result of the deduction of tax losses in the amount of €219,019.06 in 2006, the taxable base of the Claimant became €35,240.

  5. With the aforementioned tax correction, €33,678.92 of accumulated tax losses, which had been deducted by the Claimant in 2007, were also corrected and cancelled.

  6. The Claimant was notified of the IRC assessment no. ... for the year 2006, in the amount of €5,311.32.

  7. The Claimant was also notified of the IRC assessment no. ... for the year 2007, in the amount of €16,742.84.

  8. The Claimant submitted an administrative complaint against said IRC assessments, which was rejected.

  9. Dissatisfied with the rejection of the administrative complaint, the Claimant filed a hierarchical appeal.

  10. The hierarchical appeal was rejected on 13-03-2013.

  11. The Claimant is engaged in the purchase and sale of real property.

  12. On 24-03-2006, the Claimant, through its proxy …, executed on behalf of the Claimant, a deed of sale for the lot of land for construction ..., registered in the urban property register of …, under article …, with Mr …, for the declared value of €75,000.

  13. The buyer … delivered two checks, one in the name of the Claimant company, in the amount of €70,000, and another in the amount of €55,000, in the name of …, dated 27-03-2006.

  14. Both checks were deposited into the bank account of …, as the €70,000 check was endorsed to them.

  15. With reference to the fiscal year 2007, late payment interest of €9,140.22 was assessed against the Claimant, relating to the assessment object of the arbitration request.

2.2. Unproven Facts

It was not proven that the Claimant did not receive any other amount beyond the €75,000 for the sale of the lot … to Mr ….

It was not proven that a loan contract for €55,000 existed between Mr. … and Mr. ….

2.1. Reasoning of Proven and Unproven Matters of Fact

Concerning the proven facts, the arbitrator's conviction was based on the documentary evidence attached to the file and on the parties' agreement with respect to the facts taken as established. Concerning the unproven facts, the arbitrator's conviction is based on the documents attached to the file and on the fact that the loan contract for €55,000 is a contract subject to the form of a public deed, and alternative proof by private document is not admissible.

  1. Matter of Law

3.1. Object and Scope of These Proceedings

It is a matter to be decided in these proceedings whether the Tax Authority may make corrections relating to the declared sale price of a real property and presume as income the amount paid by the buyer of the property to the representative of the company.

As to the first point, it is a matter extensively decided by case law and legal doctrine that the Tax Authority may correct the value declared in the deed of sale of a real property if it has indications of the lack of veracity of the declared value. See, inter alia, decision no. 089/03, of 26-02-2003, of the STA, and 01757/02, of 19-02-2003, of the STA. In the latter it is stated that "article 39 of the LGT does not prevent the TA from, in the face of a public deed which contains a certain sale price, taxing in PIT the corresponding income, considering, by presumption, a price higher than declared".

In the case at hand, it is necessary to take into account the general rules of the burden of proof resulting from article 74 of the General Tax Law. Under this article:

"1 - The burden of proof of facts constituting the rights of the tax administration or of taxpayers rests upon whoever invokes them".

The Tax Authority contended that indications existed of the sale of a real property for a price higher than that declared in the public deed.

The indications collected included copies of two checks issued on 27-03-2006, that is, three days after the deed, by … (one in the amount of €70,000, issued in favor of the Claimant, and another for €55,000, issued in favor of …), as well as statements taken during the inspection of the aforesaid …. The TA further determined that the two checks had been deposited into the account of the aforementioned ….

The divergence between the price paid by the buyer and the value of the amounts delivered to … was explained by the buyer of the land during the inspection process as being a loan. However, as this is a transaction subject to a public deed, it could only be evidenced by this type of document and proven by presentation of the said public deed, therefore the Claimant failed to prove the existence of the said loan contract between the buyer of the property and the representative of the Claimant. As follows from no. 1 of article 364 of the Civil Code: "1. When the law requires, as a form of declaration of will, an authentic, authenticated or private document, it cannot be replaced by another means of proof or by another document that does not have superior probative force". It is a formal requirement of substance, and without it, the transaction is not valid, and the deed cannot be replaced by any other means of proof.

In the case at hand, it was incumbent upon the Claimant to prove that the acquisition price of the property was as declared in the public deed, but it did not do so.

The Claimant alleges in its application for constitution of an arbitral tribunal that the assessments are unintelligible. With due deference, it does not appear to us that the Claimant is correct. The reasoning of the assessments results from the combined analysis of the inspection report and the assessments and subsequent account settlement statements, and from the totality of these documents it is possible to reconstruct the factual and legal reasons that formed the basis of the value determined by the TA.

On the other hand, the alleged lack of intelligibility did not prevent the Claimant from forming – as it did – a judgment as to whether it should comply with the decision in question or request its review by the arbitral tribunal, thereby demonstrating that it understood its contents (Decision, TCA North no. 731/09.0BEPNF, of 24-05-2012).

On the other hand, the assessment act is sufficiently reasoned if the conclusions of the inspection report clarify, at a minimum, to the taxpayer who was notified of it the factual and legal reasons that led the TA to assess the tax in question (in that sense see Decision, TCA North 731/09.0BEPNF, of 24-05-2012).

We therefore find that there is no unintelligibility of the assessments or lack of reasoning thereof. It is further noted that if there had been lack of reasoning, the Claimant should have used the mechanism provided for in article 37 of the CPPT, which did not occur. In the absence of such request by the Claimant, the defect would have been cured – see Decision, TCA North no. 62/06.7BEBCR, of 08-04-2011.

As to the alleged duplication of collection: it is a ground for opposition to enforcement (article 205 of the CPPT) and not for a request to constitute an arbitral tribunal. But it does not occur, in our view, in the concrete case. Indeed, "for duplication of collection to occur, it is necessary that the factual reality underlying the plurality of assessments be the same, which will not be the case, for example, in the case of additional assessments, where it is intended to collect a tax that, incorrectly, was not initially assessed" (TCA North, 01128/05.6BEPRT, of 08-11-2012). The technique used by the TA to make the additional assessment is correct, as it could not have calculated the missing tax without taking into account the other elements that form part of the taxable base of the Claimant for the year 2006.

On the other hand, and as to the sphere in which enrichment occurred, the checks issued – the €70,000 and €55,000 checks – were issued on the occasion of a single legal transaction: the sale of the property. The check issued in favor of the Claimant's proxy would have been to pay an alleged loan transaction, not proven. Thus, and applying the rules of burden of proof and the rules of experience, it appears that the payment in question must have been payment of part of the price of the property transmitted, which should have been declared as income in the sphere of the company.

Therefore, we consider that the TA may presume that both relate to the sale of a property by the company, since the supposed loan between the buyer of the property and Mr …, subject to formal requirement of substance, was not proven.

As to the alleged violation of article 104, paragraph 2 of the CRP. The adverb "fundamentally" allows for exceptions to the taxation of companies on actual profit, provided they are founded. Thus, the accounting result that serves as the basis for tax assessment can be corrected by the Tax Authority, particularly when there are indications of lack of veracity of what was declared.

With respect to late payment interest, since it relates to the IRC assessments for 2006 and 2007, subject to the arbitration request, and in light of the above, such interest should not be annulled.

  1. Decision

In light of the foregoing, it is determined:

  • to dismiss the request for annulment of the IRC assessments no. ... dated 24-02-2010, for the year 2006, in the amount of €5,311.32, and no. ... dated 25-01-2010 for the year 2007 in the amount of €16,742.84.

  • to dismiss the request for reimbursement of the amounts already paid plus interest.

  • to dismiss the request for annulment of late payment interest, since it relates to the IRC assessments for 2006 and 2007 which were not annulled.

Value of the Case:

In accordance with the provisions of article 315, no. 2, of the CPC and 97-A, no. 1, paragraph a) of the CPPT and article 3, no. 2 of the Regulation of Costs in Arbitration Proceedings, the value of the case is fixed at €22,054.16.

Costs:

Under article 22, no. 4, of the RJAT, and Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €1,224.00, to be borne by the Claimant.

Notify.

Lisbon, 27 February 2014.

Text prepared by computer, in accordance with article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by reference from article 29, no. 1, paragraph e) of the Tax Arbitration Regime, with blank lines and revised by me.

The Sole Arbitrator

(Suzana Fernandes da Costa)

Frequently Asked Questions

Automatically Created

Can the Portuguese Tax Authority correct the declared sale price of a property for IRC purposes?
Yes, the Portuguese Tax Authority can correct the declared sale price of a property for IRC purposes. According to established jurisprudence cited in this decision (STA cases 089/03 and 01757/02), Article 39 of the LGT (General Tax Law) allows the Tax Authority to use presumptions to correct declared values in notarized deeds when there are objective indications of lack of veracity. In this case, the fact that the buyer paid €70,000 to the company and an additional €55,000 to the company's representative provided sufficient grounds for the Tax Authority to presume the actual sale price was €125,000 rather than the €75,000 stated in the deed.
What legal grounds exist to challenge IRC assessments based on property sale price corrections?
Legal grounds to challenge IRC assessments based on property sale price corrections include: (1) illegality of the corrections if the Tax Authority lacks sufficient factual basis for its presumptions; (2) unintelligibility of the assessment under Article 37(1) of the CPPT, requiring clear explanation of the correction; (3) lack of proper reasoning in the assessment decision; (4) duplicate taxation (duplicação de coleta) when the same income is taxed multiple times; and (5) challenging the factual evidence supporting the Tax Authority's presumption. In this case, the claimant invoked all these grounds, arguing the deed price was accurate and that corrections to 2006 income improperly affected 2007 tax loss deductions.
Does a notarized deed sale price prevail over the Tax Authority's estimated value in IRC disputes?
No, a notarized deed sale price does not automatically prevail over the Tax Authority's estimated value in IRC disputes. The Supreme Administrative Court (STA) has ruled that Article 39 of the LGT permits the Tax Authority to tax based on a presumed price higher than declared in public deeds when objective evidence suggests underreporting. However, the Tax Authority must base its correction on concrete indications of lack of veracity—not mere speculation. In this case, the payment structure (€70,000 to the company plus €55,000 to the representative) provided objective grounds for the presumption. Taxpayers can rebut this presumption by proving the accuracy of the declared value, such as demonstrating legitimate reasons for separate payments.
What constitutes duplicate taxation (duplicação de coleta) in IRC property sale corrections?
Duplicate taxation (duplicação de coleta) in IRC property sale corrections occurs when a single economic transaction is taxed multiple times due to cascading effects of corrections. In this case, the Tax Authority corrected 2006 taxable income by adding €50,000 to the declared profit of €254,259.06, increasing it to €304,259.06. After deducting tax losses of €219,019.06, the taxable base became €35,240. However, this correction also cancelled €33,678.92 of accumulated tax losses that the company had deducted in 2007, resulting in an additional assessment for that year. The claimant argued this constituted duplicate taxation because the same €50,000 correction affected both the 2006 tax calculation and the 2007 tax loss utilization.
How does CAAD arbitration handle disputes over real estate valuation differences between taxpayers and the Tax Authority?
CAAD arbitration handles real estate valuation disputes by examining whether the Tax Authority's presumptions are legally and factually well-founded. The arbitral tribunal reviews: (1) the sufficiency and reliability of evidence supporting the Tax Authority's valuation correction; (2) whether the assessment is properly reasoned and intelligible under Article 37 of the CPPT; (3) the burden of proof, requiring taxpayers to demonstrate the accuracy of declared values when the Tax Authority presents objective indications to the contrary; (4) whether procedural safeguards were respected; and (5) whether the correction resulted in duplicate taxation. In this case, the tribunal analyzed payment documentation (two checks totaling €125,000), examined whether a legitimate loan agreement existed to explain the €55,000 payment to the representative, and evaluated whether the company proved it received only €75,000.