Process: 148/2018-T

Date: October 26, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 148/2018-T) addresses the IRC (Corporate Income Tax) treatment of real estate transfers through datio in solutum (payment by property transfer). The claimant company, A... SA, contested an additional IRC assessment of €11,509.29 for fiscal year 2015, arguing it violated a binding prior decision by the Portuguese Tax Authority (ATA). The dispute centered on Article 64 of the CIRC, which requires adjustments when real estate is transferred at values below its Tax Patrimonial Value (VPT). The company initially reported a €189,936.11 increase (difference between €460,056.11 VPT and €270,200.00 attributed value) in field 745 of Table 7 in its Model 22 tax return. After filing a substitute declaration removing this adjustment, the company argued the total consideration (property value plus €252,647.74 debt forgiveness) exceeded the VPT, eliminating the need for Article 64 adjustment. The ATA dismissed the company's gracious complaint as moot after processing the substitute declaration, but later issued an additional assessment following inspection. The central legal question was whether the ATA's dismissal constituted a binding decision preventing subsequent contrary assessments, and whether Article 64 of the CIRC properly applied when total transaction consideration exceeded the property's VPT. This case illustrates critical issues in Portuguese corporate taxation regarding asset valuation methods, the binding nature of administrative tax decisions, and the interplay between self-assessment corrections and subsequent tax inspections.

Full Decision

ARBITRAL DECISION

I – REPORT

A..., SA, Tax Identification Number [NIPC][1]..., with registered office at Rua ... nº..., ...-... –..., area of the ... tax office of ..., filed a request for arbitral pronouncement, under the provisions of paragraph a) of no. 1 of Article 2, of no. 1 of Article 3 and of paragraph a) of no. 1 of Article 10, all of the Legal Framework for Tax Arbitration [RJAT][2], requesting the Tax Authority and Customs Administration [ATA][3], with a view to annulling the additional Corporate Income Tax [IRC][4] assessment no. 2017..., relating to the additional assessment for the financial year 2015, with all legal consequences, namely, the payment of compensatory interest at the legal rate.

That the request was made without exercising the option to designate an arbitrator, being accepted by His Excellency the President of the Administrative Arbitration Centre [CAAD][5] on 27/03/2018 and notified to the ATA on the same date.

Pursuant to and for the purposes of the provisions of no. 2 of Article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the legally applicable periods, on 17/05/2018, Arlindo José Francisco was appointed arbitrator of the Court, who communicated acceptance of the appointment within the legally stipulated period.

The Court was constituted on 07/06/2018 in accordance with the provisions contained in paragraph c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December.

With its request, the claimant seeks the annulment of the aforementioned assessment, inasmuch as it violates a binding decision of the ATA which had previously analysed the issue in a manner contrary to that reflected in said assessment.

It supports its point of view, in summary, on the fact that it had filed a gracious complaint regarding self-assessment, since it had erroneously considered an increase in field 745 of Table 7 of the model 22 tax return for the 2015 financial year, in the amount of € 189,936.11, which corresponds to the differential between the sum of the Tax Patrimonial Values [VPT][6] € 460,056.11 and the value attributed to the real property € 270,200.00, in the datio in solutum (payment by transfer) entered into between the claimant and B...[7] on 31/12/2015.

But having noticed that the amount of € 252,647.74, representing income resulting from the extinction of part of the debt, as a consequence of the datio of the real property, the total benefit/income from the transfer of the real property (value of the datio plus the value of the debt forgiveness) exceeds the sum of its VPT, it considers that there is no reason to add any difference, under Article 64 of the Corporate Income Tax Code [CIRC][8].

The self-assessment was corrected following the filing of a substitute declaration and the gracious complaint was filed for dismissal due to supervening mootness of the dispute, inasmuch as the ATA considered that the claimant's claim had already been satisfied by virtue of the fact that the system had already processed the annulment of the assessment and replaced it with another one resulting from the substitute declaration.

It considers that the decision on the gracious complaint has a binding character, and the ATA cannot, in the course of an inspection, decide on the same matter and even less in the opposite sense.

At the same time, it understands that Article 64 of the CIRC does not apply to the present case, since the consideration provided for in the contract exceeds the VPT of the real property, and therefore the illegality of the IRC assessment here in question should be declared.

In its response, the defendant, also in summary, states that the IRC assessment here in question should be maintained in the legal order since it is based on the factuality described in the inspection report to which it refers.

It states that the Taxpayer [SP][9] submitted, on 24/05/2016, a model 22 IRC tax return for the 2015 financial year, in which it evidenced a taxable profit of € 185,998.92, resulting from the positive difference between the VPT of the real property and the value attributed to it in the transfer contract which amounted to € 189,936.11, which it increased in field 745 of Table 7 of said assessment, which it ceased to do in the substitute declaration, considering that the procedure practised in the 1st declaration was required by virtue of the provisions of Article 64 of the CIRC.

Regarding the dismissal of the Taxpayer's complaint for supervening mootness of the dispute, it states that the complaint was filed subsequent to the annulment of the self-assessment, and therefore the decision to dismiss it is supported by the fact that the Taxpayer's claim was satisfied and that the correction by the inspection services was based on the Taxpayer's non-compliance with the provisions of Article 64 of the CIRC in the respective substitute declaration.

It considers that the Taxpayer does not make a correct interpretation of Article 64 of the CIRC and that the substitute declaration reflects this, producing effects centrally before the filing of the gracious complaint, having the services, when they evaluated it and compared it with the assessment resulting from the substitute declaration, issued a dismissal order without evaluation of the matter declared, this being a dismissal by nature which implies the non-evaluation of the merits, and therefore the ATA did not issue any pronouncement, so one cannot speak of a binding decision of the ATA, and therefore the request should be judged without merit, with the impugned acts remaining in the legal order and the defendant being absolved of the claim.

II - CASE MANAGEMENT

The Court was regularly constituted.

The parties have legal personality and capacity to sue, are properly legitimated and are regularly represented in accordance with Articles 4 and 10, no. 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

In response to the defendant's reply, the Court issued, on 16/07/2018, the following order: "Considering that there are no exceptions to be evaluated and that although a witness was listed by the claimant, the Court finds no need for its hearing, given that there is no controversy over the facts. In this perspective and having regard to the principles of court autonomy in case management, expedition, simplification and procedural informality (Articles 19 no. 2 and 29 no. 2 of the RJAT), the holding of the hearing provided for in Article 18 of the RJAT is dispensed with, as well as the hearing of the listed witness, proceedings continuing with optional written submissions for a period of 10 days which shall commence with notification of this order for the claimant's submissions and with notification of its presentation for the defendant's submissions.

The date of 26/10/2018 is set for the issuance of the arbitral decision, by which date the claimant must provide proof to the CAAD of payment of the subsequent court fee.

Notify".

The claimant, once the allowed period had elapsed, produced no submissions, with the ATA in a request dated 09/09/2018 stating that it maintained what had been alleged in the response duly submitted.

Thus, the proceedings being free from nullities, it is incumbent to decide.

III - REASONING

– The issue to be resolved, of interest to the proceedings, is as follows:

Whether the additional Corporate Income Tax assessment and compensatory interest in the amount of € 11,509.29, for the financial year 2015 with number 2017..., should be declared illegal for violating a binding decision of the ATA in the opposite sense and the annulment be increased by compensatory interest, or whether it should be maintained in the legal order for complying with the applicable legal norms, namely Article 64 of the CIRC, the request for pronouncement made herein being without merit.

2 – Factual Matters

The additional Corporate Income Tax assessment with number 2017..., in the amount of € 11,509.29, resulting from an inspection action, relates to the financial year 2015, and was paid on 18/12/2017.

The ATA's inspection services made arithmetic corrections to the taxable matter in the value of € 189,943.23, calculating the corrected taxable matter in the amount € 55,801.84, after deduction of tax losses.

Such corrections resulted from the comparison between the value attributed to the real property identified in the petition and in the inspection report, in the datio in solutum, included in the debt regularization agreement, and the respective VPT, in accordance with no. 2 of Article 64 of the CIRC.

The claimant in the model 22 tax return for the 2015 financial year increased in Table 7 of field 745 the value of 189,936.11, a value corresponding to the difference between the value attributed in the datio in solutum and the respective VPT of the real property subject to datio.

On 27/10/2016, the claimant filed a model 22 substitute tax return for the 2015 financial year, in which it did not include the value of € 189,936.11 corresponding to the aforementioned differential, presenting a loss for tax purposes of € 3,937.19.

On 02/11/2016 the claimant filed a gracious complaint regarding the self-assessed Corporate Income Tax calculated with the filing of the first model 22 return on 24/05/2016, which was dismissed by order of 09/12/2016, notified by registered mail [AR][10] of 14/12/2016, with the corresponding enforcement proceedings being discontinued, corresponding to the amount of self-assessed IRC.

The said notification contained the possibility of, within the periods established in no. 2 of Article 66 of the Tax Procedure and Process Code [CPPT][11] and paragraph b) of no. 1 of Article 58 of the Administrative Courts Procedure Code [CPTA][12], filing an administrative appeal or contesting administrative acts, respectively, periods counted in accordance with no. 3 of Article 39 of the CPPT.

The assessment here in question resulted from an inspection procedure of the ATA, initiated on 13/07/2017 for the year 2015 and on 10/08/2017 for the year 2016, in accordance with service order OI2017.../..., notified to the claimant by official communication of 02/11/2017.

The claimant owed B... a debt of € 522,847.74 which was extinguished by the transfer of real property to which was assigned the value of € 270,200.00, with forgiveness of the remainder of the debt, being € 252,647.74.

Proof of these facts results from the documents attached to the proceedings which were not contested by the parties, as well as from the content of the attached administrative files.

There are no facts relevant to the decision that have not been proven.

3 - Legal Matters

The claimant, in compliance with the provisions of no. 1 of Article 120 of the CIRC, filed the model 22 return on 24 May 2016, for the 2015 financial year, in which it increased in Table 7 of field 745 thereof the amount of € 189,936.11, a value corresponding to the differential between the sum of the VPT (€ 460,056.11) of the real property subject to datio and the value assigned to it therein (€ 270,200.00), thus complying with the provisions contained in Article 64 of the CIRC.

Subsequently, on 27/10/2016, it filed, under Article 122 of the CIRC, a model 22 substitute return for the 2015 financial year, without increasing the aforementioned differential, since it considered that the datio had a positive impact on the tax results of said financial year in the amount of € 522,847.74, a value exceeding the VPT of the real property involved in the datio in solutum, with the situation provided for in the aforementioned Article 64 of the CIRC not occurring, in its view.

Subsequently it filed a gracious complaint under Article 131 of the CPPT, which was dismissed due to supervening mootness of the dispute, given that the ATA considered that the claimant's claim had already been satisfied, a decision notified to the claimant, in accordance with official communication ... of 14/12/2016, attached to the proceedings.

The ATA, through an inspection action, in accordance with service order O12017.../..., commenced on 13/07/2017, proceeded to re-analyse the situation, from which resulted IRC payable in the amount of € 11,509.29, relating to the 2015 financial year, assessment ..., here in question in the present proceedings.

The claimant, in addition to considering that the VPT of the real property involved in the datio is less than the value of the benefit/income arising from its transfer, with therefore no place for the application of Article 64 of the CIRC, also understands that the decision taken by the ATA, in the context of the gracious complaint, is binding on the parties, with the assessment here in question being illegal.

The defendant considers that there was no substantive evaluation of the claimant's complaint, but merely a dismissal order, without the request having been analysed, and that the annulment of the tax initially self-assessed resulted only from the filing of a substitute declaration, model 22 IRC return, within the period referred to in Article 122 of the IRC. This annulment occurred in the system on 31/10/2016, a date prior to the filing of the gracious complaint (02/11/2016), and therefore the additional assessment here in dispute was issued in strict compliance with the law, given that the value attributed to the real property in the datio in solutum is less than its VPT and the debt forgiveness in no way affects its value, with therefore place for the application of the provisions contained in Article 64 of the CIRC.

Regarding the filing of a gracious complaint which obtained a decision favourable to the claimant, although it considers "juridically unfortunate the forced conclusion of the dismissal decision due to supervening mootness of the dispute of the complaint," it concludes that this is a dismissal by nature and, with no evaluation of the merits, one cannot speak of a violation of a "binding decision."

Having reviewed, albeit succinctly, the points in dispute, the Court verifies that the model 22 substitute IRC return, in contrast to the initial model 22 declaration, considered that the situation referred to in Article 64 of the CIRC did not obtain, with the system having assumed the annulment of the IRC initially calculated and the discontinuation of the respective enforcement proceedings, solely and only on the basis of the declarations of the taxpayer which enjoy the presumption of truthfulness provided for in no. 1 of Article 75 of the General Tax Law [LGT][13], but which the ATA could correct, as permitted by no. 1 of Article 48 of the CPPT.

But, even so, the claimant took care to question the validity of its procedure with the ATA, considering that the sum of the value of the real property assigned in the datio and the debt forgiveness exceeded its VPT, which would preclude the application of the norms provided for in Article 64 of the CIRC, filing, days after the introduction into the system of the model 22 substitute return, the competent gracious complaint for such purpose.

Upon examination of the ATA's communication of 07/12/2016, the Court concludes that an evaluation was made of the legitimacy and timeliness as well as the issue of the sum of the value assigned to the real property in the datio and the forgiveness of debts was examined, as can be understood from the transcription of said communication:

"II - Analysis of the Claim -

The claimant filed the 1st IRC model 22 return on 24/05/2016, from which resulted the tax assessment now complained of.

However, on 27/10/2016, it filed a substitute declaration, in which it made the corrections sought in this complaint, removing from field 745 of Table 07 the amount of € 189,936.11 (positive difference between the definitive tax patrimonial value of the property and the value contained in the contract – Article 64 no. 3 para. a)), which does not apply if the value contained in the contract is less than the definitive VPT of the property, this being the value to be considered by the transferor and transferee for the determination of taxable profit, as provided for in no. 2 of that same Article 64.

Such substitute declaration came to be assessed by the Services, giving rise to a tax assessment of the amount € 107.26 (autonomous taxation), thus annulling the complained of tax of € 7,044.14 (€ 6,992.87 of tax and € 51.27 of default interest).

III - Conclusion

In such terms, considering that the claimant's claim has already been satisfied, it is my understanding that this complaint should be dismissed for supervening mootness of the dispute, notification of such fact being given to the claimant."

This conclusion came to merit the order of "I Agree" of 09/12/2016, with notification to the claimant by official communication registered with AR of 14/12/2016, from which contains the possibility of administrative appeal of the decision within a period of 30 days, under nos. 1, 2 of Article 66 CPPT, or the filing of a contest of administrative acts in accordance with Article 50 of the CPTA within the period referred to in paragraph b) of no. 1 of Article 58 of the same legal instrument.

The ATA has always held in its possession all the elements to evaluate the issue definitively and pronounce on all of them, as Article 56 of the LGT imposes upon it, with no verification in the present case of any of the exclusions to which no. 2 of that same rule refers, the Court concluding, through the communication that supported the dismissal order of the complaint and its notification, that this evaluation was made in the manner verified in the transcription.

It should not now be said that "dismissal by nature" does not imply evaluation of the merits and that no pronouncement was issued, given that it results from the cited ATA communication the evaluation of the claimant's claim, conforming with the result produced by the model 22 substitute IRC declaration and considering a more exhaustive evaluation unnecessary, accepting such result and dismissing the complaint for supervening mootness of the dispute.

In the notification of the dismissal of the complaint, periods were granted to the claimant to appeal administratively from the decision or contest the respective administrative act, but, as the ATA rightly said, the claimant's claim was satisfied, it did nothing, and once the aforementioned periods had elapsed, there was consolidation of the legal framework of the facts in the manner sought by the claimant with which the ATA conformed. It is clear to the Court that the decision dismissing the complaint for supervening mootness of the dispute became consolidated in the legal sphere of the parties, with the same being bound by the effects and the reasons which led to such decision.

On the other hand, the complaint subsequent to the filing of the model 22 substitute IRC return sought to have the ATA evaluate the correction made with its filing, in the part in which it ceased to add the value of € 189,936.11 to the respective Table 7 of field 745, considering that the accounting result had already reflected positively an accounting value of € 522,847.74, well above the VPT of the transferred real property.

Now the ATA, not only conformed with this procedure, making no correction to the substitute declaration in question, as already stated, the final part of no. 1 of Article 48 of the CPPT allows it, but also proceeded with the respective tax assessment, annulling the complained of tax with the discontinuation of the respective enforcement proceedings and, in the context of the complaint, did not fail to consider the issue of the difference of VPT of the real property and the contract value (see ATA communication already transcribed) and decide on the claimant's procedure with the filing of the model 22 substitute IRC return, conforming with it and dismissing the complaint for supervening mootness of the dispute, as already seen.

It is clear to the Court that the ATA, when providing the communication which led to the dismissal of the complaint, knew all of the claimant's motivation and conformed with it and with its result, issuing a dismissal decision on the understanding that the claimant's claim had already been achieved, a decision that is legally consolidated as of the time of the inspection carried out by the ATA and which binds the parties.

In this perspective, the Court considers that the additional Corporate Income Tax assessment for the year 2015, with number..., in the amount € 11,509.29 is tainted with illegality and shall be annulled.

4 – Request for Compensatory Interest

As to the claimant's request for compensatory interest, inasmuch as it paid the amount of IRC in question, Article 43 no. 1 of the LGT provides that compensatory interest is due when it is determined that there was error attributable to the services from which results payment of the tax debt in an amount exceeding what is legally due.

In the concrete case of the proceedings, the illegality of the assessment results from a procedure of the ATA, which practiced the assessment act without the necessary legal support, and therefore the claimant is entitled to be reimbursed the amount wrongfully paid plus payment of compensatory interest by the defendant, from the date of payment of the sum until reimbursement, at the supplementary legal rate, in accordance with Articles 43 nos. 1 and 4 and 35, no. 10 of the LGT, Article 559 of the Civil Code [CC][14] and Ordinance 291/2003 of 8 April.

IV – DECISION

Thus the Court decides:

1. To declare the request for arbitral pronouncement with merit, with the consequent annulment of the additional Corporate Income Tax assessment no. 2017..., relating to the year 2015 in the amount of € 11,509.29 and the consequent reimbursement, plus compensatory interest, from the date of wrongful payment until its reimbursement.

2. To fix the value of the case at € 11,509.29, in accordance with the provisions contained in Article 299, no. 1 of the Code of Civil Procedure [CPC][15], Article 97-A of the CPPT, and Article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings [RCPAT][16].

3. To fix the costs, under no. 4 of Article 22 of the RJAT, in the amount of € 918.00 in accordance with the provisions of Table I referred to in Article 4 of the RCPAT, which shall be borne by the defendant.

Lisbon, 26 October 2018

Text prepared by computer, in accordance with Article 131, no. 5 of the CPC, applicable by referral of Article 29, no. 1, paragraph e) of the RJAT, with blank lines and reviewed by the Court.

The Arbitrator

Arlindo José Francisco

[1] Acronym for Tax Identification Number (Número de Identificação de Pessoa Coletiva)

[2] Acronym for Legal Framework for Tax Arbitration (Regime Jurídico da Arbitragem em Matéria Tributária)

[3] Acronym for Tax Authority and Customs Administration (Autoridade Tributária e Aduaneira)

[4] Acronym for Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Coletivas)

[5] Acronym for Administrative Arbitration Centre (Centro de Arbitragem Administrativa)

[6] Acronym for Tax Patrimonial Value (Valor Patrimonial Tributário)

[7] Acronym for Commercial Bank of Portugal (Banco Comercial Português)

[8] Acronym for Corporate Income Tax Code (Código do Imposto sobre o Rendimento das Pessoas Coletivas)

[9] Acronym for Taxpayer (Sujeito Passivo)

[10] Acronym for Registered Mail (Aviso de Receção)

[11] Acronym for Tax Procedure and Process Code (Código de Procedimento e de Processo Tributário)

[12] Acronym for Administrative Courts Procedure Code (Código de Processo nos Tribunais Administrativos)

[13] Acronym for General Tax Law (Lei Geral Tributária)

[14] Acronym for Civil Code (Código Civil)

[15] Acronym for Code of Civil Procedure (Código de Processo Civil)

[16] Acronym for Regulation of Costs in Tax Arbitration Proceedings (Regulamento de Custas nos Processos de Arbitragem Tributária)

Frequently Asked Questions

Automatically Created

How is the value of real estate determined for IRC purposes in a dation in payment (dação em cumprimento)?
In a datio in solutum (dação em pagamento), Article 64 of the CIRC requires that real estate transferred at values below its Tax Patrimonial Value (VPT) be adjusted for IRC purposes. The law mandates that when property is transferred for consideration lower than its VPT, the difference must be added to taxable income in field 745 of Table 7 of the Model 22 tax return. However, the total consideration must consider all elements of the transaction, including debt forgiveness or other benefits received. If the combined value of the property transfer plus any debt extinction exceeds the VPT, no adjustment under Article 64 may be required.
Can the Portuguese Tax Authority (ATA) override a previous binding decision made in a gracious complaint (reclamação graciosa) through a tax inspection?
The binding nature of ATA decisions in gracious complaints depends on whether the authority actually ruled on the merits of the case. A dismissal for supervening mootness (extinção da instância por inutilidade superveniente da lide) occurs when the taxpayer's claim has been satisfied before the decision, typically through processing of a substitute declaration. Such procedural dismissals do not constitute substantive rulings on the merits and therefore do not create binding precedent that prevents the ATA from subsequently examining the same matter during a tax inspection. The ATA retains authority to verify compliance with tax law provisions regardless of prior procedural dismissals, particularly when substitute declarations are filed.
What is the role of Article 64 of the CIRC (Corporate Income Tax Code) in property transfer valuations?
Article 64 of the CIRC establishes that when assets, including real estate, are transferred for consideration below their tax-relevant value (particularly the VPT - Valor Patrimonial Tributário), the difference must be added to taxable income. This provision prevents taxpayers from artificially reducing taxable gains by undervaluing transferred assets. The article applies specifically when the attributed value in the transfer contract is lower than the VPT. However, proper application requires analyzing the entire transaction consideration, including any debt forgiveness, offsetting values, or other economic benefits received. Courts examine whether the total economic benefit exceeds the VPT before determining if an adjustment is legally required.
How does the difference between the taxable asset value (VPT) and the assigned property value affect IRC additional tax assessments?
The difference between VPT and assigned property value directly impacts IRC assessments under Article 64 of the CIRC. When real estate is transferred at a value below its VPT, the positive difference constitutes taxable income that must be reported in field 745 of Table 7 of the Model 22 IRC return. This adjustment increases the taxable base, resulting in additional IRC liability. However, taxpayers must consider the total transaction value, including debt forgiveness (perdão de dívida) or other considerations. If total consideration exceeds the VPT, no adjustment may be necessary. Additional assessments (liquidações adicionais) can be issued when tax inspections identify failure to properly apply Article 64, even after substitute declarations are filed.
What are the legal consequences when a tax self-assessment (autoliquidação) is corrected through a substitute declaration in Portugal?
When a substitute declaration (declaração de substituição) is filed in Portugal, it replaces the original self-assessment and triggers automatic processing by the tax system. The ATA may annul the original assessment and issue a new one reflecting the substitute declaration's values. However, filing a substitute declaration does not immunize the taxpayer from subsequent inspection. Tax authorities retain the right to verify the accuracy and legal compliance of substitute declarations through audit procedures. If inspections reveal the substitute declaration incorrectly applied tax law (such as Article 64 of the CIRC), additional assessments can be issued. Gracious complaints filed after substitute declaration processing may be dismissed as moot if the system has already processed the requested changes, but such dismissals are procedural and do not prevent substantive review of tax law compliance.