IRS Capital Gains Tax on Sale of Shares in Micro and Small Enterprises – Article 43 CIRS – CAAD Ruling 155/2013-T

Case No. 155/2013 - T

The arbitrators Dr. José Poças Falcão (arbitrator-president), Professor Doctor Jorge Bacelar Gouveia and Dr. Amândio Amadeu Fernandes Silva, designated by the president of the Ethics Council of the Administrative Arbitration Centre to form this Arbitral Tribunal, constituted on 3-9-2013, hereby agree on the following:

I - REPORT

A and B, (hereinafter referred to as Claimants), taxpayers nos. ... and ..., with tax residence in …, requested, on 4 July 2013, the constitution of an arbitral tribunal, in accordance with the provisions of paragraph a) of no. 1 of article 2 and paragraph a) of no. 1 of article 10 of Decree-Law no. 10/2011, of 20 January (hereinafter, Legal Framework for Tax Arbitration or RJAT), with a view to:

(i) The partial annulment of the IRS assessment no. …, relating to the year 2010 [€240,916.92] and respective assessment of compensatory interest no. … [€15,291.86], in the part referring to 50% of the capital gain obtained with the onerous alienation of C;

(ii) Consequent reimbursement of IRS resulting from the partial annulment; and

(iii) Payment of indemnificatory interest.

The request for constitution of the arbitral tribunal was accepted and notified to the Tax Authority (hereinafter Respondent).

In the request, the Claimants opted not to designate an arbitrator.

The tribunal is properly constituted to hear and decide upon the subject matter of the proceedings.

Grounds for the Request

The claimants argue and/or conclude in summary:

1. They alienated, in the year 2010, shares of company C, with registered office in Cape Verde, for the amount of € 2,992,892.00, which they had acquired, in 2009, for the price of € 581,432.00.

2. From this alienation, a capital gain of € 2,411,460.00 resulted.

3. In the IRS declaration, the Claimants entered, for purposes of taxation, the amount of € 1,205,730.00, corresponding to 50% of the capital gain, by application of the provisions of no. 3 of article 43 of the IRS Code.

4. The requirements of article 2 of the Annex to Decree-Law no. 372/2007, of 6 November, are fulfilled, namely:

(i) the enterprise had no employees;

(ii) the enterprise had no volume of business;

(iv) It possessed a total annual balance of € 5,157,140.00;

(v) It was not listed on a regulated market.

1. Thus, as it is a small enterprise, the capital gain obtained is taxed at only 50% of its value.

2. The disregard of this partial exclusion from taxation by the Tax and Customs Authority is based essentially on the fact that the enterprise is registered in Cape Verde.

3. However, the Claimants consider that there is no limitation in the law - whether in its spirit or in its letter - to its application by reason of the residence of the company.

4. As to the spirit of the law, the current wording of no. 3 of article 43 was introduced by Law no. 15/2010, of 26 July, which revoked the exemption of capital gains relating to the alienation of shares held by their holder for more than 12 months and created, in addition to the regime under analysis, an exemption regime for capital gains for small investors provided for in article 72 of the Tax Benefits Statute (later revoked by Law no. 66-B/2012, of 31 December).

5. The legislator, when revoking a traditional exemption for capital gains from shares and bonds, wished to simultaneously establish measures that would reduce the taxation of small stock market gains and also gains arising from the sale of equity interests in small enterprises.

6. To that extent, it is irrelevant for the exemption provided for in the Tax Benefits Statute what the registered office of the enterprises to which the equity interests or bonds relate, just as it is irrelevant where the SME has its office in the case of the tax reduction provided for in article 43 no. 3.

7. In other words, the favourable regime is directed not at enterprises but at the investor or shareholder.

8. It is further added that a regime that was directed exclusively to the sale of equity interests in national enterprises would violate the principle of freedom of establishment provided for in the Treaty on European Union, which suggests that there could not have been and could not be any limitation by reason of the tax residence of the enterprise.

9. The reference to the annex to Decree-Law no. 372/2007, of 6 November, is also revealing that the intention of the legislator was not to limit the regime to national SMEs: the reference is not to the certification to be granted by IAPMEI but only to the concepts of micro and small enterprise provided for in the respective Annex.

10. In conclusion: as there is no legal limitation to the application of the exclusion provided for in no. 3 of article 43, the additional assessment that is the subject of the present proceedings must be annulled, and the Tax Authority must further be condemned to pay indemnificatory interest.

Summary of the Response and Conclusions of the Respondent

1. As a preliminary issue, the Respondent raised the incident concerning the value assigned to the case [arts. 4 to 6 of the response];

2. As to the merits, the question is whether the reduction in the taxation of capital gains provided for in no. 3 of article 43 of the IRS Code for micro and small enterprises can benefit enterprises registered in Cape Verde.

3. In the view of the Tax Authority, such possibility constitutes an erroneous interpretation of the legal norms.

4. In the first place, the Portuguese State has no jurisdiction over the territory of Cape Verde, so it cannot be for national legislation to define the concept of micro and small enterprises located outside the limits of its jurisdiction, and as such, subject to the sovereignty of another State.

5. Moreover, Cape Verdean legislation establishes, in Decree-Law no. 40/90, of 6 June, its concept of SME: "all those that meet the following characteristics: to have more than 5 workers and fewer than 50 working on a permanent basis; annual revenues do not exceed two hundred million escudos; its share capital is held in more than 75% by investors of Cape Verdean nationality; it does not hold financial interests in other enterprises that are not national SMEs."

6. Since it is for each State to define its concept of SME, the requirements for the qualification of small and medium enterprises provided for in Decree-Law no. 372/2007, of 6 June, apply only within national territory.

7. Furthermore, according to no. 2 of this decree-law, the definition of SME and other concepts correspond to those provided for in Recommendation no. 2003/361/EC, of the European Commission, of 6 May, "applied within the Community and the European Economic Area" (article 1), which reinforces the argument for the application of those rules only to national entities.

8. On the other hand, the benefit under analysis is not similar to the incentives for internationalization provided for in Decree-Laws nos. 249/2009, of 23 September and 250/2009, of 23 September, because, in this case, these are tax incentives granted by the State to micro and small enterprises of its country.

9. Contrary to what was stated by the Claimants, the benefits provided for in nos. 3 and 4 of article 43 of the IRS Code are aimed at benefiting, promoting and developing micro and small enterprises and not at granting a benefit to the investor.

10. Indeed, from the literal analysis of these norms it follows that the requirements established relate to the size of the enterprises and not to the quality of the businesspersons.

11. As this is an exceptional norm that establishes a tax exclusion, abuses should be avoided that would lead to the granting of an excessive advantage given the objectives of the norm, burdening the Portuguese State with a tax expenditure with non-resident entities.

12. Thus, the Tax and Customs Authority merely complied with the principle of legality provided for in article 266 of the Constitution of the Portuguese Republic and implemented in articles 55 of the General Tax Law and article 3 of the Administrative Procedure Code.

13. Even if this were not the case, it would always be incumbent upon the Claimants to prove that they meet the requirements upon which the claimed tax benefit depends, which they have failed to do.

On 25 October 2013, the meeting provided for in article 18 of the RJAT was held, in which the Tribunal decided that the incident concerning the value of the claim would be decided finally [see the respective minutes].

The parties renounced the production of oral arguments, provided for in no. 2 of article 18 of the RJAT, and the Tribunal granted a successive deadline of 10 days for the submission of written arguments.

In their written arguments submitted within the aforementioned deadline, the Claimants reaffirm what was requested in the initial petition and clarify, with respect to the allegation of the Respondent that it had not been proven that the requirements provided for in the Annex to Decree-Law no. 372/2007, of 6 June were met, that the financial information of the company in question for the year 2010 was attached to the request for arbitral determination and, by comparison, from the exercise of 2009, which makes it possible to verify that the enterprise does not exceed the thresholds defined in the aforementioned decree-law.

Furthermore, a statement from the Cape Verdean Authorities was attached confirming that information [see doc 3, attached with this request for arbitral determination].

They further add that the enterprise was operating at that time, and continues to operate, an economic activity of exploitation….

In 2009 and 2010, after the acquisition of the land, the enterprise was awaiting licensing by the Municipality … for the construction of the development, which explains the nil results and the absence of contracted persons.

It further reiterates that the thesis of the Respondent regarding the limitation of the benefit to resident companies and the necessity of certification by IAPMEI have no adhesion or verbal correspondence in the letter of the law.

By way of example, it describes the reinvestment regime of no. 5 of article 10 of the IRS Code where the legislator defined exactly the territorial limits, which makes it possible to conclude that the law could have restricted the benefit to investments in enterprises resident in the EU but chose not to do so.

It concludes, finally, that we are facing a benefit to the investor, regardless of the location of the registered office of the company whose equity interests were alienated.

For its part, in its final arguments, the Respondent considers that article 43 nos. 3 and 4 of the IRS Code requires the verification of two cumulative requirements: the first, of a material nature, which is the fulfillment of the requirements of the annex to Decree-Law no. 372/2007, of 6 November; the second relates to the necessity that the respective status of micro or small enterprise be certified by IAPMEI.

It adds, in this sense, that "analyzing the ratio of the regime established in the IRS Code, we conclude, in a peremptory manner that the intention of the tax legislator was to subordinate the application of the regime provided for in no. 3 of article 43 of the IRS Code not only to the verification of material presuppositions but also to the formal requirement embodied in the possession of the SME certificate issued by IAPMEI".

On the other hand, for the proof of these requirements, it is incumbent upon the passive subject to present the elements necessary for the proof and confirmation of its tax situation, in accordance with article 59 no. 2 of the CPPT and 75 no. 3 of the General Tax Law (see in this sense the Decision of the CAAD, Case no. 40/2013-T, of 10 October).

Now, the IAPMEI certification is only issued to entities resident in Portugal, which, in the concrete case, prevents the enterprise whose interests were alienated from obtaining that certificate.

As a consequence, the legal conditions required for the application of the exclusion provided for in no. 3 of article 43 of the IRS Code are not met, and therefore the claim for arbitral determination is unfounded.

The arbitral tribunal was properly constituted and is competent.

The parties enjoy legal personality and capacity and are legitimate (arts. 4 and 10, no. 2, of the same decree-law and art. 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not vitiated by any nullities.

Incident Concerning the Value of the Case:

The Respondent raises the question of the value of the case (arts 4 et seq, of the response)

It alleges, in summary, that the claimants indicated as the value of the case the amount of €256,208.78 but as this is the total value of the tax assessment act, only 50% of that value will be subject to challenge since the question is one of the applicability or non-applicability of article 43-3 of the IRS Code.

It therefore requests that the value of the case be fixed at half of € 256,208.78 [€128,104.35].

Heard, the claimants pronounced themselves, also in summary, in the sense of maintaining the value indicated in the initial petition, arguing that this is the value corresponding to 50% of the taxation of the capital gain and it is this [€256,208.78], as a consequence, the value whose reimbursement is sought.

It is necessary to assess and decide this incident.

From the provision of article 97-A of the CPPT, applicable ex vi article 29-1/a) of the RJAT, it follows that the value of the case is, in fact, corresponding to the amount whose annulment is sought, being that of the assessment itself, if total annulment is requested or the value of the part challenged, if only partial annulment is sought.

Now, from the record it follows, on the one hand, that annulment is sought, on grounds of illegality, of the IRS assessment 2010 no. 2013 … "(…) and consequently the Tax Authority be condemned: a) To proceed with the annulment of the said IRS assessment of 2010 (…) in the amount of 256,208.78 Euros (…)"

On the other hand and as was also alleged by the claimants, the value indicated by them relates to the value of the additional taxation of capital gains at 50%, whereas the remaining taxation under IRS (50%), was previously assessed and paid by the claimant, ["(…) as seen in the statement of account reconciliation (the amount of 235,721.25 euros, which includes IRS on 50% of the capital gain, was paid with the initial assessment)].

Being this the configuration of the claim, it is on the basis of it [regardless of its ground] that the value of the case should be fixed.

Therefore, the incident is dismissed, and the value of the case indicated by the claimant is maintained.

II. GROUNDS

FACTUAL MATTERS

Proved Facts:

1. The Claimants proceeded to sell, in the year 2010, all the shares of company C, with registered office in Cape Verde, for the price of € 2,992,892.00.

2. The said shares were acquired, in 2009, for the price of € 581,432.00.

3. In Annex J of the IRS declaration model 3 of IRS, the Claimants declared 50% of the capital gain, in the amount of €1,205,730.00 [(€ 2,992,892.00 - € 581,432.00 = 2,411,460.00) x 0.5].

4. From the assessment resulted the payment of tax at the special rate of 20%, in accordance with no. 4 of article 72 of the IRS Code in force at the time, in the amount € 241,460.00.

5. Through the Internal Service Order no. …, of 2012/07/02, of the Tax Inspection, the IRS declaration was officially corrected and the part of the capital gain not taxed (50%) in the amount of €1,205,730.00 was considered, from which a tax of € 240,916.92 resulted.

6. As a consequence, the claimants received on 8-3-2013 the additional assessment notice for payment of the mentioned IRS amount (€240,916.92) and compensatory interest accrued in the amount of € 15,291.86, having as the payment deadline 10-4-2013 [see doc 1, attached with the initial petition and administrative record];

7. The claimants made payment of these amounts [which totaled € 256,208.78] on 9-4-2013;

8. Company C, not listed on the stock exchange, presented, in 2010, an annual balance total of 568,652,031 Cape Verdean escudos (equivalent to € 5,157,140.00), nil volume of business and had no employee, besides its administrators.

Reasoning

The decision on the proved facts was based on the documents mentioned and those further attached and not challenged, and also on the administrative record attached to these proceedings by the Tax and Customs Authority.

In particular, the proof of the facts listed in 6. relied upon doc no. 3 attached by the claimants with their request for arbitral determination, a document that was not challenged by the respondent.

There are no unproved facts with relevance to the decision of the case.

II – GROUNDS (cont.)

THE LAW

1. The central legal question is what is the best interpretation of art. 43, no. 3, of the IRS Code.

The crux of the matter concerns the inclusion or non-inclusion in the scope of this norm of the benefit for micro and small enterprises whose registered office is located outside national territory.

On the other hand, in the case at hand the enterprise in question meets the requirements of the concept of micro and small enterprise, as it is legislatively construed.

Reducing the complexity of the legal question at issue, everything comes down to knowing whether any micro and small enterprises are relevant or whether only those whose registered office is in Portuguese territory are relevant for the application of this tax benefit.

1. From the literal point of view, the absence of distinction as to the origin of the capital gains from the perspective of the registered office of the enterprise to which they relate would not authorize the disregard of enterprises registered outside Portuguese territory.

And we know that already in Roman Law it was advised, as to the interpretive task, according to this maxim: ubi lex non distinguere, nec nos distinguere debemus…

If we could only attend to the literal element, the answer to be given as to the applicable law would lead to the acceptance of the claim.

1. The truth, however, is that it is necessary to also consider other available elements of legal interpretation, it being certain that this is an operation that goes far beyond the literality of legal provisions, the literalist conception of fiscal-legal interpretation being long since superseded.

The interpretation of tax norms today is an activity that is subject – although noting some exceptions, such as in fiscal-criminal matters – to the general canons of the Methodology of Interpretation of the Law.

This is precisely what is stated in art. 11, no. 1, of the General Tax Law: "In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed".

Now, one of these orientations is precisely to resort to other available elements of legal interpretation, such as the extra-literal elements: the historical, the systematic and the teleological, to which article 9 of the Civil Code points.

1. This means that the interpretation of the aspect of considering micro and small enterprises registered outside national territory must take into account the purpose intended by this tax benefit norm, which is directed at stimulating economic activity by those who most need that stimulus through the reduction of tax costs, which are micro and small enterprises.

If this is so, even though it may also benefit the national economy because it involves someone fiscally resident in Portugal, the fact remains that the transfer transaction occurs outside Portuguese territory, from which it follows the absence of economic impact that would benefit the Portuguese economy, at least with the intensity with which it would be desirable if this happened with enterprises registered within Portuguese territory.

And if in the case at hand the economic link between the Portuguese and Cape Verdean economies may even be appreciable, imagine what it would be – proceeding from the premise that the best interpretation would consider any registered office – to apply this norm to enterprises situated anywhere in the world, without the slightest connection to the Portuguese economy and thus making it impossible to fulfill the teleology that is believed to have been assigned to this tax benefit norm.

However, in our opinion, the question that is the subject of this proceeding is not essentially posed from the perspective of the enterprise or company but from that of whoever is the holder of parts of its share capital when they alienate them.

That is: everything comes down to knowing whether Portuguese taxpayers when taxed under IRS can be differentiated in the taxation of capital gains obtained from the sale of these interests according to whether the registered offices of the respective enterprises are located abroad or in Portugal.

Let us look more closely at the question, first analyzing the scope of article 43-3 of the IRS Code and, thereafter, what requirements are required for the legal fulfillment of the status of micro, small and medium enterprise for purposes of the matter at hand.

1. The Scope of Article 43-3 of the IRS Code

Article 43, nos. 3 and 4, of the IRS Code provides:

"3. The balance referred to in no. 1, relating to the transfers provided for in paragraph b) of no. 1 of article 10, concerning micro and small enterprises not listed on a regulated market or unregulated stock exchange market, when positive, is likewise considered at 50% of its value.

1. For the purposes of the preceding number, micro and small enterprises are understood to be the entities defined, in accordance with the annex to Decree-Law no. 372/2007, of 6 November".

The cited article 10-1/b) provides:

1 - Capital gains are constituted by gains obtained that, not being considered business and professional income, capital or real property income, result from

a) (…)

b) Onerous alienation of equity interests, including their redemption and amortization with capital reduction, and other securities, as well as the value attributed to the associates as a result of a distribution that, in accordance with article 75 of the IRC Code, is considered as a capital gain.

And in article 2-1 of the annex to Decree-Law no. 372/2007, micro, small and medium enterprise is defined:

1 - The category of micro, small and medium enterprises (SME) is constituted by enterprises that employ fewer than 250 people and whose annual volume of business does not exceed 50 million euros or whose total annual balance does not exceed 43 million euros.

The aforementioned wording of no. 3 of article 43 of the IRS Code was introduced by Law no. 15/2010, of 26 July, which revoked the exemption of capital gains relating to the alienation of shares held by their holder for more than 12 months and created, in addition to the regime under analysis, an exemption regime for capital gains for small investors provided for in article 72 of the Tax Benefits Statute (later revoked by Law no. 66-B/2012, of 31 December).

With these provisions, the legislator established more favorable treatment, under IRS, for capital gains obtained from the alienation of equity interests relating to unlisted micro and small enterprises.

This is a norm of partial exclusion from taxation with the nature of a tax benefit.

Attending exclusively to the letter of the law, we conclude that the legislator did not establish any limitation as to the residence of the company whose shareholding or shareholdings generated the taxable capital gain.

In any case, it should always be noted that the violation of Community law [the claimants speak of the violation of the right of establishment] will be ruled out as it has no direct relationship with the situation.

But as a parallel place (if the alienations were of a Company of the EU not registered in Portugal) it seems to me that there would be no violation of either that right nor the right of competition between enterprises, as the field of application of the 50% reduction is the individual sphere of the shareholders and not that of the enterprise. What might or could occur was the affectation of competition between countries, as it would certainly be more rewarding to create the SME in Portugal than in another EU country. This is, however, a matter of equality at the level of tax competition and which is not ensured by the EU (See the different rates of IRC and VAT, etc., which apply in the countries that make up the EU).

On the other hand and as the Claimants point out, if the legislator wished to establish limitation of the benefit to equity interests in national enterprises, it would suffice to add "(...)concerning micro and small enterprises with registered office in Portuguese territory(...)".

Furthermore, the analysis of other provisions of the IRS Code allows us to conclude that, in similar situations, the legislator expressly established limits to norms that establish exclusions or more favorable tax treatment [see, e.g., no. 2 of the same article 43 of the IRS Code: the exclusion from taxation of capital gains relating to the alienation of real property benefits only residents].

That is, it does not appear, in a first analysis, that there are reasons to presume as wrong or deficient the manner in which the legislator expressed itself.

Even so, article 9 of the Civil Code, ex vi article 11 of the General Tax Law, determines that interpretation cannot be limited to the letter of the law but must reconstruct from the texts the legislative thought. It will therefore be necessary to know, in the concrete case, whether an interpretation in the sense of exclusive application to capital gains obtained from the alienation of equity interests of enterprises resident in national territory results from the spirit and thought of the legislator, always reserving that any sense or meaning must have a connection with the text of the norm.

Let us see.

First, it is important to note that the exclusion in question only indirectly constitutes a benefit for micro and small enterprises. In the first place, the benefit serves exclusively to the shareholder financing the share capital of the company. And, as for this person, there is no doubt that the benefit is granted to a resident in Portuguese territory who will here pay tax on the capital gain generated.

In a second plane, it appears evident that micro and small enterprises also benefit (as we have said, indirectly) from this exemption insofar as if the shareholder invests his capital in an enterprise, the enterprise strengthens its own capital and financial availability, thereby obtaining an advantage. We could, as a result, be tempted to conclude that it makes no sense for this benefit to be created to benefit micro and small enterprises not resident in Portuguese territory.

This reasoning - logical and, possibly, defensible from a fiscal policy perspective - encounters objections in the Community principles of freedom of establishment and non-discrimination that prevent a benefit of this nature from being applied exclusively to capital gains resulting from the alienation of equity interests of enterprises that have their registered office in Portugal.

Even if the legislator had explicitly determined the application of this benefit to national enterprises, it would be directly violating Community Law, as happened with the aforementioned no. 2 of article 43 of the IRS Code[ "(…)no. 2 of article 43 of the IRS Code, approved by Decree-Law no. 442-A/88, of 30 November, as amended by Law no. 109-B/2001, of 27 December, which limits the incidence of tax to 50% of capital gains realized only by residents in Portugal, violates the provision of art. 56 of the Treaty Establishing the European Community, by excluding from that limitation capital gains that were realized by a resident of another Member State of the European Union. (see the Decision of the Supreme Administrative Court of 16-1-2008, case no. 439/06, available at www.dgsi.pt)].

But here there was discrimination of natural persons, between residents and non-residents in Portugal with respect to identical income obtained in the same country.

In any case, viewing the question from the perspective of individual taxpayers and not of the enterprises from which the income derives - which is how it should be seen in the context of IRS - it would constitute a direct violation of the constitutional principle of tax equality to distinguish, for purposes of taxation, the origin of their equal income: that obtained from the alienation of equity interests in national enterprises subject to the aforementioned tax benefit, as opposed to that obtained from the alienation of equal equity interests in a micro or small enterprise with registered office abroad.

That is: the same income of two nationals would be taxed in two different ways.

Viewing things from various perspectives and also taking into account the unity of the legal system (no. 1 of article 9 of the Civil Code, ex vi article 11 of the General Tax Law), it does not appear that such benefit can be interpreted in a restrictive manner.

Seen from the perspective of the enterprise – which is not, as we have seen, the relevant one for the conclusion on the taxation of capital gains - given the absence of an express criterion in the law, concluding that it applies only to micro or small enterprises with registered office in Portuguese territory appears to constitute a deductive leap that has no connection in the letter of the law.

The criterion that would bring greatest proximity to our country and its development would be a material criterion applicable to all enterprises that exercise activity here, regardless of residence. It seems to us, however, that this type of judgments have clearly speculative nature, going against the rules of interpretation defined in no. 2 of article 9.

Still focusing on the enterprise, it would also be concluded that it does not result from the letter nor from the spirit of nos. 3 and 4 of article 43 of the IRS Code any limitation to the partial exclusion of capital gains generated from the alienation of interests, as a result of the residence of the company.

However, it is insisted, given that we are here dealing with taxation under IRS, what is essentially relevant for this purpose is the location of the passive subjects and the income obtained by them, regardless of whether it derives or does not derive from abroad, provided there are no applicable international or community norms, naturally.

1. Fulfillment of the Requirements of Micro or Small Enterprise

In this respect and in the first place, it should be verified whether from the application of the criteria defined in law relating to the condition of micro or small enterprise, it will follow that the aforementioned tax benefit under IRS taxation (capital gains) can only be applied to entities resident in Portuguese territory certified as such by IAPMEI, in accordance with Decree-Law no. 372/2007, of 6 November, by express referral from no. 4 of article 43.

It is decidedly understood that it does not.

In fact, no. 4 of article 43 does not refer to Decree-Law no. 372/2007, of 6 November, but, expressly, to its annex.

"What the tax legislator intended in no. 4 of article 43 of the IRS Code was only to import, for purposes of application of no. 3, the concepts of micro and small enterprise and not to import a means of proof of the condition of SME. The legislator's aim is that the referral be made specifically to the Annex, because it is in the annex that the definitions of micro enterprise and small enterprise are contained.

Contrary to what the Respondent claims, the law does not require any formal requirement consisting of the presentation of electronic certification. First of all, it would be strange, as the claimants note, if it were required of a certain passive subject a document that is not within his availability to obtain, with nothing being relevant for this purpose, as is evident, whether the person in question was or was not a managing partner of the enterprise in question (…).

That is, the Claimants do not need, for the reasons set out above, to present the certification provided for in Decree-Law no. 372/2007. They may prove the condition of SME by any other appropriate means for this purpose, but are not dispensed from such proof…" [See the Arbitral Decision - CAAD - Case no. 40/2013-T]

The obligation of certification is limited to or restricted to the purposes [which are not those at issue here] indicated in no. 3 of article 3 of Decree-Law no. 372/2007, and the referral made by article 43 of the IRS Code is limited to the annex of this decree-law.

From this follows the first obvious conclusion: that it is not necessary or required for the verification of this legal requirement that the entity obtain certification but solely and only the fulfillment of the requirements provided for in the Annex to the cited Decree-Law no. 372/2007, that is, to prove that the enterprise in question employs fewer than 250 people, its annual volume of business does not exceed 50 million euros or its total annual balance does not exceed 43 million euros.

In the case at hand, the claimants sold, in 2010, with capital gain, interests in the commercial company, not listed, C, with registered office in Cape Verde, which presented, in that year:

• a total annual balance of 568,652,031 Cape Verdean escudos [€5,157,140.00];

• nil volume of business and

• did not employ any workers, beyond its administrators.

In conclusion: the aforementioned company meets (or met at the time of the facts), in addition, naturally, to the criterion of enterprise, the other requirements provided for in the annex to the cited Decree-Law no. 372/2007, to be qualified as a micro/small enterprise.

This leads to the complete acceptance of the request for annulment of the assessments challenged.

1. The Request for Payment of Indemnificatory Interest

Along with the declaration of illegality of the assessment, the Claimants further petition that they be recognized the right to indemnificatory interest, a matter that falls within the scope of the competencies of this Tribunal, as expressly provided for in no. 5 of article 24 of the RJAT.

Given the illegality of the assessment and its consequent annulment and finding that the undue tax debt has been paid, the right to indemnificatory interest subsists whenever this results from error attributable to the Tax Authority services, as provided for in no. 1 of article 43 of the General Tax Law (General Tax Law).

In the present case, there is an assessment determined by the Tax Authority that proved to be legally unjustified.

That is: it occurred not by any act or procedure, be it excusable or involuntary on the part of the passive subjects, but by an erroneous understanding about the presuppositions of the assessment.

This much suffices for it to be considered verified the error attributable to the services with the consequent obligation to pay indemnificatory interest on the amount undeservedly assessed and paid, counted from the day following the day of undue payment until the date of issue of the respective credit note – arts 43-1 and 2 of the General Tax Law and 61, of the CPPT.

Thus, based on the provisions of nos. 1 and 2 of article 43 of the General Tax Law and article 61 of the Code of Procedure and Tax Procedure (CPPT), indemnificatory interest is due, at the legal rate, on the amount undeservedly assessed and paid, counted from the day following the day of undue payment until the date of issue of the respective credit note.

1. Decision

In accordance with the foregoing, the Arbitral Tribunal agrees on:

a) To declare the requests, which are the subject of these proceedings, for annulment of the IRS assessment relating to the year 2010 (€240,916.92) and compensatory interest (€15,291.86), all totaling the amount of € 256,208.78, as well-founded;

b) To declare the request for indemnificatory interest filed, well-founded, condemning, as a consequence, the Tax and Customs Authority to restitution of the aforementioned amounts, accrued with interest counted from 9-4-2013, at the legal rate, until full and effective reimbursement.

1. Value of the Case

In accordance with the provision of art. 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at the already fixed value of € 256,208.78.

1. Costs

In accordance with art. 22, no. 4, of the RJAT, the amount of costs is fixed at € 4,896.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 27 January 2014

The Arbitrators

(José Poças Falcão)

(Jorge Bacelar Gouveia)

(Amândio Amadeu Fernandes Silva)

[1] The 2013 State Budget eliminated the exemption for capital gains up to 500 euros, namely with the purchase and sale of shares. Thus, regardless of the value, all capital gains became subject to tax.