Process: 155/2014-T

Date: October 17, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 155/2014-T concerned a dispute over IRS capital gains taxation from the 2012 sale of shares in company C, Lda. The claimants, a married couple, sold their share in C for €150,930.00 (acquired for €15,000.00) and argued the company qualified as a small enterprise under Decree-Law 372/2007, entitling them to the 50% capital gains exclusion under Article 43(3) of the CIRS. The Tax Authority assessed tax on 100% of the gain at the special rate of 26.5% under Article 72(4) CIRS, totaling €35,888.95. The claimants contended that C's 2011 data—annual balance of €1.25 million, turnover of €2.78 million, and 28 employees—met small enterprise criteria. They cited CAAD precedent (case 40/2013-T) holding that formal IAPMEI certification was not mandatory for proving SME status. The Tax Authority countered that C held IAPMEI certification as a medium-sized enterprise based on aggregated 2011 data. Critically, Article 6 of the Annex to Decree-Law 372/2007 requires aggregating financial data from associated companies. Beyond two subsidiaries acknowledged by claimants (D and E), C had three additional associated enterprises (F SGPS, G SGPS SA, and H SA). When all entities' data were aggregated per Article 6(2), C exceeded small enterprise thresholds. The arbitration proceedings included witness examination and oral arguments. The core legal issue was whether C's classification should consider only its direct data and acknowledged subsidiaries, or apply the broader associated enterprise aggregation mandated by Decree-Law 372/2007 for Article 43 CIRS purposes. The dispute centered on the €17,944.48 tax difference between classification approaches, with significant implications for capital gains taxation of SME share transfers in Portugal.

Full Decision

ARBITRAL DECISION

I – Report

  1. On 19.02.2014, the Claimants, A, taxpayer no. … and B, taxpayer …, married, residing at …, …, filed with CAAD a request for the constitution of an arbitral tribunal, under the terms of art. 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as LRAT), in which the Tax and Customs Authority is the Respondent, with a view to the partial annulment of the assessment of Personal Income Tax no. ..., relating to the year 2012, with the Claimants as taxpayers and further concerning the express refusal to consider the gracious complaint presented against that tax act.

The Claimants request the annulment of the aforementioned tax act in the amount of half of 35,888.95 €, resulting from the taxation at the special rate provided for in art. 72, no. 4 of the Personal Income Tax Code (hereinafter "PITC"), and also the payment of indemnificatory interest on the amount they consider was unduly assessed.

  1. The request for constitution of the arbitral tribunal was accepted by the Distinguished President of CAAD and notified to the Tax and Customs Authority.

Under the terms and for the purposes of art. 6, no. 1 of the LRAT, by decision of the President of the Deontological Council, duly communicated to the parties, within the legally applicable deadlines, the undersigned was appointed arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration his acceptance of the office within the regularly applicable deadline.

The Arbitral Tribunal was constituted on 24.04.2014.

  1. The meeting provided for in article 18 of the LRAT took place on 18.06.2014, at 11 o'clock.

  2. The grounds presented by the Claimants, in support of their claim, were, briefly, as follows:

The assessment at issue concerns the determination of the assessment in the part in which it considered 100% of the capital gains, whereas it should have only considered 50% given that the share alienated represents the ownership of the share capital of a small enterprise, C, Lda. (C).

The grounds for the gracious complaint included the circumstance that the claimants had not attached to the file proof of both the sale at the value of € 150,930.00 and the acquisition of the share at the value of € 15,000.00.

The alienation of the shares concerns a company qualified as a small enterprise under the annex to Decree-Law no. 372/2007, of 6 November for the purposes of applying the regime provided for in no. 3 of art. 43 of the PITC, since, as follows from no. 4 of the same article, its application depends only on the fulfilment of the requirements provided for in the annex to the Decree-Law and not on compliance with the Decree-Law as a whole.

To this effect, the decision of the Arbitral Tribunal, of 10.10.2013, handed down in case no. 40/2013-T decided that "(…) in order to benefit from the regime provided for in nos. 3 and 4 of article 43 of the Personal Income Tax Code, it is not necessary to 'Present the certification provided for in Decree-Law no. 372/2007, being possible to prove 'the status of SME by any other appropriate means for that purpose' ".

C met all the requirements provided for in the Annex to Decree-Law no. 372/2007, of 6 November, for the purposes of its qualification as a small or micro enterprise ("SME") in accordance with the last fiscal year closed (2011) prior to the alienation (February 2012). Indeed, C carried out, in 2011, the activity of medical practice and specialized clinical activity.

In 2011, C's annual balance sheet was 1,245,435.79 €, the turnover was 2,777,321.06 € and the number of employees was 28.

D, Lda was held at 65% by C, and had an annual balance of 201,431 €, turnover of 205,153.54 € and 3 employees.

E, Lda was held at 90% by C, and had an annual balance of 97,387.14 €, turnover of 82,519.91 € and 3 employees.

  1. The ATA – Tax and Customs Administration, called upon to express itself, contested the Claimants' claim, defending itself by means of a counterclaim.

The Respondent alleged, also in summary, the following:

The gracious complaint was refused on the grounds that the company in question was a medium-sized enterprise.

The Claimants, in the exercise of their right to prior hearing, in the context of the gracious complaint proceedings, presented a certificate issued by IAPMEI, according to which C was qualified as a "Medium-sized Enterprise".

This certification results, obviously, from the application of the concepts and criteria contained in the annex to Decree-Law no. 372/2007, of 6 November.

And it should not be said that the IAPMEI certification presented refers to data from 2012, because, in accordance with no. 1 of art. 4 of the aforementioned Annex, the certification made to C in 2012 was based on the data from the last accounting year, calculated on an annual basis, that is, the data from 2011.

Moreover, IAPMEI made an evaluation of C's historical size, qualifying the latter, in previous years, 2010 and 2011, also as a medium-sized enterprise.

As results from the administrative file, the tax administration, upon consultation of the IAPMEI certification and the grounds that supported it, verified that C had, at the date of the relevant facts, associated companies and partners, whose data, under the terms considered in no. 2 of art. 6, are accounted for in the evaluation of the company category.

In fact, C had as associated enterprises:

F, SGPS.

G SGPS SA.

H, SA.

Now, the result of the aggregation of C's data with those of such enterprises, as demonstrated in the file, does not allow it to be classified as a small enterprise, under the terms of art. 2 of the annex to Decree-Law no. 372/2007.

  1. On 24.09.2014, at 15:30 hours, the arbitral hearing took place for the examination of witnesses listed by the Claimants.

At the same hearing, after the examination of witnesses, the parties presented oral arguments.

  1. The tribunal is materially competent and is regularly constituted under the terms of the LRAT.

The parties have legal standing and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate them.

II – Relevant Facts

  1. The tribunal considers the following facts as proven:

  2. On 20.07.2013, the Respondent carried out the assessment of Personal Income Tax no. ..., relating to the year 2012, with the Claimants as taxpayers.

  3. This assessment includes the autonomous taxation, at the special rate of 26.5%, of 100% of the capital gains realized by the claimants in the onerous alienation, at the price of 150,930.00 € of a share with a par value of 15,000 € in the company C, from which resulted a specific taxation at this rate in the amount of 35,888.95 €.

  4. The Claimants paid the assessed tax in full.

  5. When completing annex G of the PIT declaration relating to the year 2012, the Claimants had declared in box 8, Field 801, the alienation in question which occurred on 8 February of that year, having completed box 8-A concerning the onerous alienation of shares in micro and small enterprises, where they declared that the shares alienated concerned a micro or small enterprise company.

  6. Because they did not agree with the assessment act identified in 1), the Claimants filed on 19.08.2013 a gracious complaint against that tax act.

  7. The reason for the disagreement invoked by the Claimants lies in the understanding that the company C was, at the date of the tax fact, a small enterprise and that, consequently, the balance of the capital gains should have been considered in only 50% of its value, under the terms of art. 43, no. 3, of the PITC.

  8. In the context of the gracious complaint proceedings, the Respondent notified the Claimants, for the purposes of exercising their right to prior hearing, of its intention to refuse the gracious complaint, having alleged, for that purpose, that "to justify the claim, the complainant should have attached to the file the proof of both the sale at the value of € 150,930.00 and the acquisition at the value of € 15,000.00, as well as the original certificate issued by IAPMEI and which certifies that the company C S.A. – NIPC. … meets the requirement of 'micro or small enterprise'".

  9. In the exercise of the right to prior hearing presented on 30.10.2013, the Claimants alleged that the TA can by direct consultation immediately verify in IAPMEI the certification process of the company in question, being sufficient for that purpose to enter the taxpayer identification number of the entity.

  10. Nevertheless, the Respondent attached to the file of the gracious complaint the certificate issued by IAPMEI regarding C, alleging at the same time that the entity had been "classified, by error of IAPMEI, as a MEDIUM enterprise, which is also not true, as can be seen from the IES 2012 of the aforementioned entity, which is attached as Doc. 2".

  11. With the exercise of the right to prior hearing, the Claimants further attached as doc. no. 3 the contract for the purchase and sale of the shares from which the capital gains in question resulted.

  12. The gracious complaint was refused, the decision stating:

"The taxpayer presents a photocopy of the certificate – fl. 36 of the file, where IAPMEI, I.P. (Institute for the Support of Small and Medium Enterprises and Innovation) states that the company 'C – NIPC ...' meets the requirements of 'Medium-sized Enterprise' and, contrary to what is stated by the complainant, this is not an error on the part of IAPMEI, I.P. (Institute for the Support of Small and Medium Enterprises and Innovation).

In the direct consultation carried out in the Administrative Justice Division – fls. 132 to 136 of the file, it appears that the complainant has relations with associated companies, under the terms of no. 2 (last paragraph) of art. 6 (Determination of Company Data) of the Annex to Decree-Law no. 372/2007 of 6 November, which states that 'the data referred to in no. 1 and 2 paragraphs must be added 100% of the data of any associated enterprises directly or indirectly associated with the company considered, which have not been resumed by consolidation in the accounts', whereby the company cannot be considered 'Small or Micro enterprise'.

  1. In the Certification Report issued by IAPMEI regarding C, this company appears with turnover of 2,777,321.06 € and Balance Sheet of 1,245,435.79 € and as associated enterprises F, SGPS, SA (100%) with turnover of 0.00 € and a Balance Sheet of 2,153,789.00 €; the company G SGPS SA (100%) with turnover of 0.00 € and a Balance Sheet of 3,633,260.00 €; the company H, S.A. (100%) with turnover of 2,845,265.248,00 € and a Balance Sheet of 23,785,455.00 €, and also listed as a partner (29.09%) the company I SGPS with 0.00 € of turnover and 290.90 € of Balance Sheet, resulting in a total turnover of 2,848,042,569.06 € and a total Balance Sheet of 30,818,230.69 €.

  2. In this report it appears as date of submission 31.12.2012 and date of effect 31.12.2012, also mentioning in the "historical dimension" regarding both 2010 and 2011 "medium".

  3. In the certificate also issued by IAPMEI it is mentioned as "date of decision" 31.12.2012 and as "date of effect" 31.12.2012.

  4. From the extract of the Commercial Register of company C, it appears that F, SGPS, SA appears in the register as holder registered in the share capital thereof on 05.03.2012, the date on which the company's transformation into a joint-stock company was registered, it being apparent from the tenor of such extract that until that date it had never been registered as a shareholder thereof.

  5. On 8 February 2012, F, SGPS, SA acquired from the claimants and the other shareholders of company C all the shares corresponding to one hundred percent of the share capital of the company (Cfr. Contract of fls. 93 to 122 of the administrative file).

  6. From consideration A) of this contract it appears that the Group C. ("C") is composed of the following companies, in addition to "C" itself:

  • D, Lda ("D"), legal entity no. ...;

  • E, Lda, ("E"), legal entity no. ....

  1. From point 1.1.13 of the same contract it appears that "Group C" "means the set of companies referred to in consideration A".

  2. From point 1.1.14 of the same contract it appears that "Group H" is "The set of companies that currently the buyer, as well as the reports … and …, which are dedicated to the production and commercialization of …".

  3. From the simplified business information of "C", relating to the year 2011, the following are listed as investee companies of "C":

  • D, Lda ("D"), legal entity no. ...;

  • E, Lda, ("E"), legal entity;

  1. Until 8 February 2012, the date on which the company F, SGPS, SA acquired the shares representing its share capital, the company C ("C") was not an associated or partner enterprise of that company nor of the companies G SGPS SA; H, S.A. and I SGPS, nor had it had any type of legal relationship with these.

  2. C carried out, in 2011, the activity of medical practice and specialized clinical activity.

  3. In 2011, C's annual balance sheet was 1,245,435.79 €, the turnover was 2,777,321.06 € and the number of employees was 28.

  4. D, Lda was held at 65% by C and had an annual balance of 201,431 €, turnover of 205,153.54 € and 3 employees.

  5. E, Lda was held at 90% by C and had an annual balance of 97,387.14 €, turnover of 82,519.91 € and 3 employees.

The proof of the facts given as proven results from the documents attached to the file by the Claimants, from the documents contained in the administrative file and from the positions of the parties expressed in the pleadings.

Specifically with respect to the fact given as proven under number 21, the proof thereof resulted from several documents, among which it is appropriate to highlight the contract for the purchase and sale of shares of 8.02.2012 by which F, SGPS acquired all the shares of "C" and from which it clearly follows that the "Group C" and the "Group H" were distinct groups and had, until that date, no relationship with each other and that, instead, it was only with such transaction that they began to be part of the same group, which was confirmed by other documents, namely the "IES" statement of "C" regarding the fiscal year 2011, the commercial register extract of this company and also an email authored by J, an IAPMEI employee, dated 12.09.2014, addressed to the representative of the Claimants.

The tenor of the documents was further confirmed by the testimony of several witnesses, who proved to be coherent, impartial and grounded in solid grounds of knowledge.

K was manager and representative of C until the date of the sale of the shares by the claimants and other former shareholders, which occurred on 8.02.2012.

He stated that the only companies in which C held shares until that date were E, Lda and D, Lda, having clarified that, until that date, there was no type of connection between C and the companies F, SGPS; G SGPS, SA; H SA and I SGPS.

L, currently Financial Director and executive of H, S.A., and financial director at the date of the sale, stated that C was never a shareholder of the companies F, SGPS; G SGPS, SA; H SA and I SGPS, nor did it ever have any connection with these before 8.02.2012.

He further stated that the SME certification requested from IAPMEI was carried out in late 2012, on 31.12.2012 or another day in December 2012 and that the request was made by another team member.

M started duties at H on 18.06.2012 as responsible for the treasury of the entire group, including C, SA. He was responsible for requesting the SME certification from this company, and it was the first certification, remembering that there would be a pending process but he is not certain of this fact.

He stated that company C in 2011 was not part of the group and that there may have been an oversight in completing a field of the form because when he referred to the relationship of this company with the companies F, SGPS; G SGPS, SA; H SA and I SGPS, he was referring to the present situation.

He added that he was incredulous when he learned of this situation.

All of these testimonies and the documents mentioned above are intrinsically coherent and corroborate each other.

For the purposes of deciding the case, there are no unproven facts.

III – Applicable Law

  1. Article 10, no. 1 of the Personal Income Tax Code provides that:

"Capital gains are constituted by gains obtained which, not being considered entrepreneurial and professional income, capital or real estate income, result from:

(…)

b) Onerous alienation of shares (…)".

On the other hand, no. 4 of the same article provides that:

"The gain subject to PIT is constituted:

a) By the difference between the value of realization and the value of acquisition (…)".

Article 43 of the same code further provides that:

"1 - The value of income qualified as capital gains is the corresponding to the balance calculated between the capital gains and capital losses realized in the same year (…).

(…)

3 - The balance referred to in no. 1, concerning the transmissions provided for in letter b) of no. 1 of art. 10, relating to micro and small enterprises not listed on the regulated or unregulated stock exchange markets, when positive, is also considered at 50% of its value.

4 - For the purposes of the preceding number, micro and small enterprises shall be understood as the activities defined, under the terms of the annex to Decree-Law no. 372/2007, of 6 November".

Article 72, no. 4 of the PITC, as worded on 31.12.2012, provided for the tax fact in question the special rate of 26.5 percent with the taxpayer having the option for aggregation, under the terms of no. 7 of the same article (which was not exercised in the case at hand).

  1. Article 1 of Decree-Law no. 372/2007, of 6 November, establishes that:

"1 - Electronic certification of micro, small and medium enterprises, hereinafter referred to as SMEs, is hereby created.

2 - The certification referred to in the preceding number allows the status of SME of any company interested in obtaining such status to be ascertained.

(…)".

In turn, article 2 of the same decree-law provides that "For the purposes of this Decree-Law, the definition of SMEs, as well as the concepts and criteria to be used to ascertain its status, are contained in its annex, which is an integral part thereof (…)".

The objectives of certification are provided for in article 5 of the Decree-Law in question, with article 6 providing for the procedure by which "the interested parties" must formulate their request.

Of the objectives of certification, provided for in article 5, none has application to the tax benefit provided for in art. 43, no. 3, of the PITC. On the other hand, article 3 of the Decree-Law in question makes reference to its applicability to companies that need to present and prove the status of SME in the context of administrative proceedings for whose instruction or final decision it is legally or regulatorily required.

It follows, thus, from the legal regime, that the same is applicable to companies and that it is these companies that are interested in the certification in question, also holding, as a consequence, the legitimacy for the respective procedure. The holders of shares, as such, do not therefore hold the legitimacy for the respective certification request which, even for companies, is only necessary in the context of administrative proceedings for whose instruction or final decision it is legally or regulatorily required.

In the case at hand, article 43, no. 3, of the PITC does not show that certification is legally required. Instead, no. 4, of art. 43 of this code expressly refers to the annex to Decree-Law no. 372/2007 and not to the Decree-Law as a whole.

Accordingly, it cannot but be concluded that for the application of no. 3 of art. 43 of the PITC it is sufficient that the alienator of the share in question proves that, in light of the annex, the company in question was effectively a micro or small enterprise, it not being necessary that such entity hold the certification issued by the Institute for the Support of Small and Medium Enterprises.

It was also in this sense the understanding of the arbitral tribunal, in case 40/2013-T[1], which is endorsed and where it may be read:

"The reference in no. 4 of art. 43 of the PITC must be considered only to the Annex to Decree-Law no. 372/2007, as the Claimants allege, or to the decree-law as a whole, as the respondent alleges.

First of all, it is important to bear in mind that art. 9, no. 3, of the Civil Code, applicable ex vi of article 29, no. 1, letter e), of the LRAT, provides that 'in determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express its thought in adequate terms.'

Now, the truth is that no. 4 of art. 43 of the PITC expressly refers to the Annex to Decree-Law no. 372/2007 and not to the legal instrument as a whole. If the legislator had wanted the reference in question to be to the text of the legal instrument, it would certainly have expressed itself accordingly.

(…).

What the tax legislator wanted in no. 4 of art. 43 of the PITC was only to import, for the purpose of applying 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 goal is that the reference be made specifically to the Annex, because it is in the annex that the definitions of microenterprise and small enterprise are contained.

Contrary to what the Respondent intends, the law does not require any formal requirement consisting of the presentation of electronic certification. First and foremost, it would be strange, as the Claimants note, if it were required of a certain taxpayer a document that is not available to him to obtain, with nothing relevant to the effect, as is obvious, the person in question having been or not a shareholder-manager of the company in question".

The Respondent itself came to embrace this interpretation in the recent circular no. 7/2014, of the Director General of Taxes, of 29.07.2014, where it may be read:

"(…) the qualification of micro or small enterprise for the purposes of applying nos. 3 and 4 of article 43 of the PITC must be based on the material reality of the entities whose shares were subject to onerous transmission, based on the verification of the material requirements contained in the annex to Decree-Law 372/2007, of 6 November, at the date of alienation, with the burden of proof resting on the taxpayers, under the terms of no. 1 of art. 74 of the General Tax Law.

  1. Accordingly:

a) The existence of Certification issued by IAPMEI, valid on the date of alienation of the shares, creates a presumption of the verification of the material requirements contained in the annex to Decree-Law no. 372/2007, of 6 November, so it is relevant as sufficient proof of the status of micro or small enterprise for the purposes of the regime provided for in nos. 3 and 4 of article 43 of the PITC.

b) If the company does not hold Certification as a micro or small enterprise, under the terms referred to above, it is nevertheless necessary to assess whether the entity, on the date of the alienation of the shares, met the material requirements contained in the annex to Decree-Law no. 372/2007, of 6 November, with the consequent and eventual qualification of the entity as micro or small enterprise for the purposes of no. 3 of art. 43 of the PITC"

  1. It is thus necessary to verify whether, in light of the facts proven, the company C, Lda, was at the date of the relevant facts a small enterprise as claimed by the Claimants, or rather a medium-sized enterprise as claimed by the Respondent.

  2. Under article 1 of the Annex to Decree-Law 372/2007 "An enterprise is understood to be any entity which, regardless of its legal form, carries out an economic activity (…)". As to this aspect, it should be noted that it follows from the facts proven that "C" carried out an economic activity.

In turn, article 2, no. 2 of the same decree-law provides that "In the SME category, a small enterprise is defined as an enterprise that employs fewer than 50 people and whose annual turnover or total annual balance sheet does not exceed 10 million euros".

Article 3, no. 3 further provides that:

"'Associated enterprises' are understood to be enterprises that maintain between themselves one of the following relationships:

a) One enterprise holds the majority of the voting rights of the shareholders or partners of another enterprise;

(…)

On the other hand, under article 4, no. 1 of the annex in question "The data considered for the calculation of the headcount and financial amounts are those of the last accounting year closed, calculated on an annual basis. The data are taken into account as from the date of closure of the accounts (…)".

From this it follows that company C, had at the date of the relevant facts for its qualification as a small enterprise, as associated enterprises, D, Lda, of which it held 65% of the share capital and E, Lda, of which it held 90% of the share capital and that, on that date, did not have partner enterprises.

  1. Under article 6 of the aforementioned annex:

"(…).

2 - The data, including the headcount, of an enterprise that has partner or associated enterprises are determined on the basis of the accounts and other data of the enterprise, or – if they exist – of the consolidated accounts in which the enterprise is resumed by consolidation.

(…)

100% of the data of any enterprises directly or indirectly associated with the enterprise considered, which have not been resumed by consolidation in the accounts, must be added to the data referred to in the first and second paragraph.

3 - (…)

For the purposes of applying no. 2, the data of the enterprises associated with the enterprise considered result from their respective accounts and other data, consolidated, if they exist. (…)"

  1. Accordingly, the data of companies D and E must be added to the data of company C.

Now, as results from the evidence, in the year 2011, C's annual balance sheet was 1,245,435.79 €, the turnover was 2,777,321.06 € and the number of employees was 28.

On the other hand, D, Lda had an annual balance of 201,431 €, turnover of 205,153.54 € and 3 employees.

In turn, E, Lda had an annual balance of 97,387.14 €, turnover of 82,519.91 € and 3 employees.

Therefore, considering the data of the three companies, the annual turnover was 3,064,994.51 €, the Balance Sheet was 1,544,253.93 € and the number of employees was 34, whereby company C, on the date of the relevant facts, was a small enterprise under article 2, no. 2 of the Annex to Decree-Law no. 372/2007, of 6 November.

Accordingly, under article 43, no. 3, of the PITC, the balance of capital gains calculated could only be considered at half its value, so it cannot but proceed to the annulment claim of the appellants.

  1. The appellants further petitioned for the payment of indemnificatory interest since they paid the full amount of the assessment.

Under article 43, no. 1, of the General Tax Law "Indemnificatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was an error attributable to the services from which resulted payment of the tax debt in an amount greater than legally due".

In the case at hand, it is verified that the Claimants filed their PIT declaration in accordance with the law and in accordance with the material truth ascertained in the file. The Respondent, essentially because it made an interpretation of art. 43, nos. 3 and 4 of the PITC, which does not appear to be correct and which the Respondent itself has since abandoned, as results from circular no. 7/2014, proceeded to tax the capital gains in question considering the entirety of their value and not only fifty percent, as results from art. 43, no. 3, of the PITC.

Accordingly, there is an error attributable to the services, and it is therefore necessary to also accept this claim of the Claimants.

IV - Decision

Thus, the Arbitral Tribunal decides:

To judge the arbitral claim wholly well-founded, partially annulling the assessment act, in the amount requested of 17,944.47 € (seventeen thousand nine hundred and forty-four euros and forty-seven cents) and to condemn the Respondent to pay indemnificatory interest to the Claimants on the amount in question from the date of payment of the undue tax.

Value of the action: 17,944.47 € (seventeen thousand nine hundred and forty-four euros and forty-seven cents) under the terms provided for in art. 315, no. 2, of the CPC and 97-A, no. 1, letter a), of the CPPT and 3, no. 2, of the Regulation of Costs in Arbitration Proceedings.

Costs by the Respondent, in the amount of 1,224 €, under the terms of no. 4 of art. 22 of the LRAT.

Lisbon, CAAD, 17 October 2014

The Arbitrator

(Marcolino Pisão Pedreiro)

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of shares in micro and small enterprises taxed under Portuguese IRS?
Capital gains from the sale of shares in micro and small enterprises receive favorable tax treatment under Article 43(3) of the CIRS. Only 50% of the capital gain is subject to taxation at the special rate provided in Article 72(4) CIRS, with the remaining 50% excluded from taxation. To qualify for this benefit, the company must meet the criteria established in the Annex to Decree-Law 372/2007, including specific thresholds for annual balance sheet, turnover, and number of employees. The classification is based on data from the last closed fiscal year prior to the share alienation. Importantly, Article 6 of the Annex requires aggregating data from associated companies and partner enterprises when determining size classification, which can affect whether a company qualifies for the favorable treatment.
What is the 50% exclusion rule under Article 43(3) of the CIRS for capital gains on SME share transfers?
The 50% exclusion rule under Article 43(3) of the CIRS provides that only half of capital gains realized from the onerous alienation of shares in micro and small enterprises is included in taxable income for IRS purposes. This means the other 50% is completely excluded from taxation, effectively reducing the tax burden by half. The benefit is designed to encourage investment in smaller enterprises and promote entrepreneurship. To qualify, the enterprise must meet the size criteria in Decree-Law 372/2007, assessed based on the last fiscal year closed before the share transfer. The excluded portion does not enter the tax base at all, while the included 50% is taxed at the special rate under Article 72(4) CIRS. This represents a significant tax advantage compared to capital gains from shares in medium or large enterprises, where 100% of the gain is taxable.
Does the small enterprise qualification under Decree-Law 372/2007 apply automatically for Article 43 CIRS purposes?
The small enterprise qualification under Decree-Law 372/2007 does not apply automatically for Article 43 CIRS purposes. While CAAD precedent (case 40/2013-T) established that formal IAPMEI certification is not strictly required and taxpayers can prove SME status by any appropriate means, the company must substantively meet all criteria in the Annex to Decree-Law 372/2007. A critical requirement under Article 6 of the Annex is the aggregation of financial data from associated companies and partner enterprises when determining size classification. In Process 155/2014-T, this proved decisive: while the claimants argued that company C met small enterprise thresholds based on its direct data, the Tax Authority demonstrated that when C's data was properly aggregated with all associated enterprises (including F SGPS, G SGPS SA, and H SA), the company exceeded small enterprise limits and qualified as a medium-sized enterprise, thus disqualifying it from the 50% exclusion benefit.
Can taxpayers challenge IRS assessments on capital gains taxation through CAAD tax arbitration proceedings?
Yes, taxpayers can challenge IRS assessments on capital gains taxation through CAAD (Centro de Arbitragem Administrativa) tax arbitration proceedings under the Legal Regime of Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). In Process 155/2014-T, the claimants successfully initiated arbitration to contest their 2012 IRS assessment concerning capital gains from share alienation. The process involves filing a request for constitution of an arbitral tribunal, which is accepted by the CAAD President who appoints an arbitrator. The tribunal has competence to review both the substantive tax assessment and administrative decisions such as the refusal of gracious complaints. Proceedings include preliminary meetings, witness examinations, hearings, and oral arguments. CAAD arbitration provides an efficient alternative to judicial courts for resolving tax disputes, with binding decisions that can annul assessments and order payment of indemnificatory interest on amounts deemed unduly assessed.
What was the CAAD ruling in Process 155/2014-T regarding the special tax rate under Article 72(4) CIRS?
The provided document excerpt does not include the final decision of the CAAD tribunal in Process 155/2014-T, as it cuts off after the factual findings section. The case centered on whether the special rate under Article 72(4) CIRS should apply to 100% of capital gains (as the Tax Authority assessed) or only 50% (as the claimants argued) from the sale of shares in company C. The dispute hinged on whether C qualified as a small enterprise under Decree-Law 372/2007, which would entitle claimants to the 50% exclusion under Article 43(3) CIRS. The contested amount was €35,888.95 in tax on 100% of gains, with the claimants seeking reduction by approximately half. The Tax Authority's position was that C constituted a medium-sized enterprise when properly aggregating data from all associated companies, thus disqualifying it from the favorable 50% exclusion treatment and requiring full taxation of capital gains.