Process: 161/2014-T

Date: November 7, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision (Process 161/2014-T) addresses a dispute over IRS capital gains taxation from the sale of company quotas. The taxpayers sold their shareholdings in company C for €4,500,000 (acquired for €74,820) and claimed the 50% capital gains exclusion under Article 43(3) of the Portuguese IRS Code (CIRS), which applies to transfers of shares in micro and small enterprises. The Tax Authority rejected this treatment and assessed autonomous taxation of €1,172,540.20 at the 26.5% rate under Article 72(4) CIRS on the full gain, rather than the €586,270.10 the taxpayers calculated based on 50% exclusion. The core legal issue centered on whether IAPMEI certification is mandatory to qualify for the reduced taxation. The Tax Authority argued that certification by IAPMEI (the Portuguese agency for competitiveness and innovation) was required, citing instructions for completing Annex G of the IRS declaration and noting that company C was certified as a medium enterprise on 31.12.2012. The taxpayers countered that Decree-Law 372/2007 only requires meeting objective criteria—fewer than 50 employees and annual turnover under €10 million for small enterprises—without mandating formal certification. They provided evidence through the 2011 IES declaration, trial balance, and Social Security payroll records showing approximately 37 employees and turnover below €2 million. The taxpayers argued that certification is only necessary for administrative procedures, not for tax purposes, and that requiring it would be unconstitutional as instructions lack normative force. After the Tax Authority rejected their hierarchical review, the taxpayers sought arbitration under the RJAT framework to annul the excess taxation amount, asserting their right to the 50% exclusion based on objective compliance with small enterprise criteria.

Full Decision

ARBITRAL DECISION

I – THE REQUEST

A, taxpayer no. ... and his wife B, taxpayer no. ..., resident at …, requested on 24.4.2014 the establishment of an ARBITRAL TRIBUNAL, pursuant to articles 10, nos. 1 and 2 of the Legal Framework for Tax Arbitration (RJAT) and articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, with a view to the partial annulment of the Personal Income Tax (IRS) assessment no. 2013 ..., for the year 2012, on the ground that the autonomous taxation relating to capital gains arising from the onerous transfer of quotas should not be € 1,172,540.00, but only 50% in the amount of € 586,270.10, as this concerns the transfer of shareholdings held in a micro/small enterprise.

The assessment issued by the Tax Authority (AT) in the total amount of € 1,180,175.35 was the subject of an official review request filed within the period for administrative complaint, which was rejected and whose order was communicated to the Claimant on 25.11.2013 by Official Notice no. ..., of 20.11.2013, from the Finance Directorate of ....

The capital gains in question resulted from the transfer of quotas held by the Claimant in company C, Ltd., hereinafter C, legal entity no. ..., with headquarters at ....

The quotas transferred on 31-10.2012 for the price of € 4,500,000.00 had been acquired for € 74,820.00.

At the date of transfer of the quotas, the Claimant alleges that C employed approximately 37 persons and recorded an annual turnover and provision of services of less than € 2,000,000.00.

As proof of the alleged facts, he refers to the annual declaration of accounting and tax information (IES) for the year 2011, the last financial year ended before the transfer, and also to the trial balance and payroll sheet submitted to Social Security, relating to 2011 and which he attaches to the proceedings.

The Claimants allege that in light of the evidence they submitted, they declared the onerous transfer of the quotas in question in Annex G to the IRS declaration form 3 for the year 2012, completing Table 8-A of that Annex, considering that these were quotas held by the Claimant in a small enterprise, further stating that they did not wish to opt for the aggregation of capital gains obtained.

The Tax Authority – Autoridade Tributária e Aduaneira (AT) disregarded these declarations and proceeded to the assessment of IRS no. 2013 ..., in which tax relating to autonomous taxation was calculated in the amount of € 1,172,540.20, applying the rate of 26.5% then provided in article 72, no. 4 of the IRS Code, to the total capital gain obtained, not applying the provision of article 43, no. 3, which would have resulted in the taxation of only 50% of the gain, from which the IRS payable would be € 586,270.10.

Following notification of the 2012 IRS assessment already referred to above, issued on 15.6.2013, the Claimants requested on 1.7.2013, within the period for administrative complaint, an official review of the assessment, on the ground of the non-application of article 43, no. 3 of the IRS Code, which would have granted the reduction in capital gains taxation by 50%.

The Tax Authority rejected the review request on the ground that C "was not classified by IAPMEI as a micro or small enterprise on the date of transfer of the shareholdings on 31.10.2013" and that, accordingly, the capital gain is taxed in full.

And in support of the grounds for rejection, the Tax Authority refers to the Instructions for completing Annex G which state "It is intended to identify the fields of the Table where values relating to the onerous transfer of equity interests of micro or small enterprises as defined in the annex to Decree-Law no. 372/2007, of 6/11, and certified as such by IAPMEI...".

The Tax Authority further states that in the aforementioned information, which supports the decision to reject the official review request, it is stated that the company in question, C, was certified by IAPMEI as a medium enterprise on 31.12.2012.

To this rejection decision the Claimants reacted by requesting the Arbitral Tribunal to annul the said IRS assessment, in the part involving autonomous taxation in the amount exceeding € 586,270.10, which the Claimants consider to be the tax due.

The Claimants base their request for an arbitral decision on the provision of article 43, no. 3 of the IRS Code, when it refers to the Annex to Decree-Law no. 372/2007, of 6/11, which defines the criteria that qualify enterprises as micro and small enterprises, which does not require any certification by IAPMEI.

The criteria are therefore those defined in the Annex to Decree-Law no. 372/2007, in article 2, nos. 2 and 3 thereof, which qualify as a small enterprise one that employs fewer than 50 persons and whose annual business turnover or annual balance sheet does not exceed 10 million euros.

A micro enterprise is defined therein as one that employs fewer than 10 persons and whose annual business turnover or total annual balance sheet does not exceed 2 million euros.

The Claimants further state that electronic certification by IAPMEI is applicable to enterprises that need to prove their SME status in the context of legally required administrative procedures.

But it is not required of shareholders, who after the transfer of the shareholdings do not even have standing to request such certification, and therefore the position defended by the Tax Authority to the effect that 50% taxation of capital gains is obtained is neither legal nor legitimate.

Nor can the Instructions for completing Annex G be considered as a valid ground, since they do not have the nature of normative acts nor do they respect the legislative competence reserved in article 165 of the Constitution.

What the Claimants need, as they acknowledge, is to demonstrate that C is a micro or small enterprise, as defined in the Annex to Decree-Law no. 372/2007.

And that is what the Claimants did based on the information collected from the 2011 IES and the Trial Balance relating to 31.10.2012 (date of sale) and also from the payroll sheet submitted to Social Security, as attached to the proceedings.

From these elements the Claimants concluded that C is a small enterprise, since it employed more than 10 and fewer than 50 persons and had an annual business turnover or total balance sheet of less than 10 million euros, according to data from the last accounting period ended, calculated on an annual basis – the year 2011.

In these terms, the Claimants conclude that the application of article 43, no. 3 of the IRS Code to the present case cannot legitimately be refused.

And, consequently, the IRS assessment must be annulled in the part in question here, that is, in the part that does not provide for autonomous taxation on 50% of the gain obtained from the onerous transfer of small enterprise equity interests, calculated at € 586,270.10, which the Claimants have already paid on account of the total amount of the assessment.

Accordingly, the Claimants request that their request for an arbitral decision be judged to be well-founded, in the terms and on the grounds set out, declaring the annulment of the IRS assessment in question, in the part involving autonomous taxation in an amount exceeding € 586,270.10, as well as of the decision which rejected the review request for that assessment, condemning the Tax Authority to pay the costs of the proceedings.

II – THE RESPONDENT'S ANSWER

The Respondent answers that the present arbitral decision proceedings have been brought against the order of 20.11.2013 from the Head of the Income and Expenditure Assessment Division of the Finance Directorate of ..., issued in the official review request no. …/13/…, which denied it relief, with a view to the partial annulment of the 2012 IRS assessment, with number 2013 ..., in the part in which the same disregarded the regime provided in article 45, no. 3 of the IRS Code.

The Tax Authority states that the Claimants are therefore requesting the annulment of that assessment, in the part involving autonomous taxation in an amount exceeding € 586,270.10, alleging a defect consisting of violation of law, for non-compliance with article 43, no. 3 of the IRS Code, as well as of the decision that rejected the review request filed in relation to the assessment in question, as a second-instance act that examined the legality of the decision in question.

What is at issue is the application or non-application of the 50% tax exemption on capital gains enshrined in article 43, no. 3 of the IRS Code, relating to gains resulting from the transfer of shareholdings obtained in micro or small enterprises and the proof of such status.

With regard to the facts, the Tax Authority limits itself to stating that those declared by the Claimants in their IRS declaration form 3 for the year 2012, in Annex G, Table 8-A, relating to the qualification of C as a micro or small enterprise, were not accepted by the Tax Authority due to lack of certification by IAPMEI.

And that, consequently, they were disregarded in the IRS assessment made to the Claimants with number 2013 ..., of 15.6.2013, not reflecting, therefore, the tax exemption.

The Tax Authority emphasizes that the Claimants, dissatisfied, reacted with the filing of an official review request at the Local Finance Service of ... on 1.7.2013, within, therefore, the period for administrative complaint.

And the Tax Authority confirms the rejection of the review request, whose draft was notified to the Claimants by Official Notice no. ..., of 20.9.2013, for the exercise of the right to prior hearing which was exercised on 10.10.2013.

The final decision maintaining the rejection was issued by order of 20.11.2013 and was notified to the Claimants by Official Notice no. ..., of 20.11.2013, by registered letter with acknowledgement of receipt, received on 25.11.2013.

Regarding the alleged defect in law nos. 3 and 4 of article 43 of the IRS Code, by the Tax Authority, it reaffirms that the controversial question consists of determining whether the certificate issued by IAPMEI attesting the SME status of C constitutes an essential requirement for the taxpayer to be able to benefit from the 50% tax exemption of the balance between capital gains and capital losses, determined as a result of the transfer of shareholdings in micro and small enterprises, provided in the aforementioned provision of nos. 1, 3 and 4 of article 43 of the IRS Code.

And the Tax Authority revisits the entire legal framework, citing and transcribing article 9, no. 1(a), article 10, no. 1(b) and nos. 1, 3 and 4 of article 43, all of the IRS Code.

The Tax Authority then also refers to the preamble of Decree-Law no. 372/2007, of 6.11, which creates SME certification and which under article 1, no. 2 thereof permits assessment of this status.

It also cites article 3, no. 3 of the same decree-law which refers to the use of SME certification as mandatory for all entities involved in procedures requiring SME status, adding that under article 5(d) thereof, certification is provided for, specifically to ensure that measures and support intended for SMEs apply only to enterprises that prove such status.

The Tax Authority emphasizes that this is not the understanding of the Claimants who allege as grounds the fact that article 43, no. 4 of the IRS Code does not invoke the entire regime of Decree-Law no. 372/2007, but simply a concept contained in the annex to the same, "in question", the concept of small enterprise.

And that, for this reason, the Claimants argue that what is relevant is that the entity whose transferred shareholdings generate a capital gain be a micro or small enterprise, as thus defined under the annex to Decree-Law no. 372/2007, of 6.11, that is, one which employs fewer than 50 persons and whose annual business turnover or total annual balance sheet does not exceed 10 million euros.

The Tax Authority, however, disagrees with this interpretation by the Claimants as one must consider the systematic element and "ratio" of the regime enshrined both in the IRS Code and in Decree-Law no. 372/2007, of 6.11, and therefore the true interpretation cannot be the strictly literal interpretation of the law made by the Claimants.

And the Tax Authority develops its argument on the basis of a systematic interpretation, supported by what is established in article 11, no. 1 of the General Tax Code (LGT) and article 9, no. 1 of the Civil Code.

And it reinforces its position in the interconnection and assessment that accompanies the literal presentation, in which logical elements intervene, as doctrine points to elements of a systematic, historical or teleological nature, whose content it develops.

This to conclude that from the provisions on interpretation cited it results unequivocally that, for purposes of applying the regime contained in article 43, no. 3 of the IRS Code, the tax legislator requires the verification of two cumulative requirements, one of a material nature and another formal.

The Tax Authority explains that the requirement of a material nature consists of capital gains arising from the transfer of shareholdings of companies that are micro or small enterprises that employ fewer than 50 persons and whose business turnover or annual balance sheet does not exceed 10 million euros and that of a formal nature consists in the enjoyment of such status by the entities in question, certified by IAPMEI, as provided in Decree-Law no. 372/2007.

And that this understanding is based on the requirement of the tax legislator to surround the exemption in question (or tax exclusion) with particular safeguards, subordinating it to the verification of the respective requirements to ensure safe control of compliance therewith.

And in support of this interpretation, the Tax Authority refers to the Instructions for completing field 8-A of Annex G to Declaration Form 3, where it is stated that the micro or small enterprises in question are those defined under the annex to Decree-Law no. 372/2007, of 6.11 and certified as such by IAPMEI, IP, not listed on regulated or non-regulated markets of the stock exchange.

And that being the aforementioned instructions approved by Ordinance of the Minister of Finance and published in the Official Journal, the Claimants cannot allege that the position of the Tax Authority is not legal or legitimate.

Furthermore, the Tax Authority states that having the Claimants chosen not to have presented the certificate issued by IAPMEI, despite being prompted to do so, C could not be considered a micro or small enterprise and, consequently, the Claimants benefit from the regime provided in article 43, no. 3 of the IRS Code, due to the lack of certification of that company, as legally required.

The Tax Authority further emphasizes that even if the Tribunal were to understand that the law does not require any formal requirement of SME certification by IAPMEI, even so the Tax Authority considers that the burden of demonstrating that the company in question is a micro or small enterprise as defined in the annex to the aforementioned Decree-Law no. 372/2007, lies with the Claimants.

The Tax Authority strengthens its understanding given the nature of the norm contained in article 43, no. 3 of the IRS Code, as it is a tax exemption rule, which does not dispense with the indispensable proof, legally required and which the Tax Authority considers to be the certificate issued by IAPMEI – which was not provided by the Claimants.

And it concludes by stating that due to the lack of proof of the legal requirements on which the claimed "benefit" is based, the Tax Authority considers that the request for an arbitral decision should be judged to be unfounded, maintaining in the legal system the tax assessment act of IRS in question.

III – PROCEDURAL REVIEW

The Tribunal is materially competent and is regularly constituted in accordance with articles 2, 5 and 6 of the RJAT.

The parties are legitimate and have standing and legal capacity in accordance with articles 4 and 10 of the RJAT and articles 1 and 3, nos. 1 and 2(b) of Ordinance no. 112-A/2011 of 22 March.

The proceedings are proper, the initial petition is timely and there are no preliminary exceptions to be addressed.

The Meeting provided for in article 18 of the RJAT and the production of submissions were dispensed with, by agreement between the parties.

IV – PROVEN FACTS

The Tribunal considers the following facts proven as relevant to the decision:

  1. Claimant A, taxpayer no. ..., was a partner in company C, Ltd., until the date of 31-10-2012, when he transferred his quota to company D.

  2. The quota had been acquired for € 74,820.00 and was transferred for the amount of € 4,500,000.00, as per the deed attached to the proceedings.

  3. The declarant and his spouse B, taxpayer no. ..., filed their respective IRS declaration form 3 for the year 2012, as well as Annex G, in which they declared the transfer of their quota and the respective values and dates of acquisition and transfer.

  4. They also included in that same Annex G, in Table 8-A that company C, whose quota they held and transferred on the date of 31.10.2012, was a micro or small enterprise.

  5. The Claimants were notified of the IRS assessment note no. 2013 ..., of 15.6.2013, which does not reflect the claimed 50% tax exemption of capital gains realized, as would result from completing the respective Annex G.

  6. The Claimants, in disagreement with the Tax Authority's position, filed an official review request for the said assessment on 1.7.2013, within, therefore, the period for administrative complaint.

  7. This request was finally rejected by the Tax Authority on 20.10.2013, after prior hearing of the Claimants, that decision having been communicated by the Tax Authority on 20.11.2013, by registered letter with acknowledgement of receipt received on 25.11.2013.

  8. The Claimants submitted, when notified of the prior hearing on the review request decision, a trial balance as of 31.10.2012 and a payroll sheet submitted to Social Security relating to the same month, from which it appeared that company C employed more than 10 persons and fewer than 50 and that it had an annual business turnover or annual balance sheet of less than 2 million euros.

  9. When submitting the initial petition the Claimants also attached the annual declaration of statistical and tax information (IES) for the year 2011, the last financial year ended before the date of transfer of the shareholding in question and, also, the Trial Balance and Payroll Sheet submitted to Social Security relating to the same date, from which it appears that the volume of sales and services provided was € 1,930,071.59 (03-A, line A50001), that the total annual balance sheet was € 1,874,563.85 (04-A, line A5127) and the average number of persons employed was 34 – See article 5 of the Initial Petition and footnote.

  10. The Tax Authority inserted in the Information provided on the review request the certification issued by IAPMEI, by which it is found that entity C was considered a medium enterprise on 31.12.2012.

V – LEGAL QUESTIONS TO BE DECIDED

The question to be decided regarding the merits of the case is whether the certification issued by IAPMEI, under Decree-Law no. 372/2007, of 6 November, certifying the status of micro and small enterprise is a necessary requirement for the application of the 50% tax exclusion on the positive balance between capital gains and capital losses determined in relation to the transfer of shareholdings in micro and small enterprises not listed on regulated markets, under article 43, nos. 1, 3 and 4 of the IRS Code?

VI – ON THE LAW

Under article 10, no. 1(b) of the Personal Income Tax Code, gains obtained in the onerous transfer of shareholdings, which are not considered business and professional income, capital or real property income, are treated as capital gains. For this purpose, the gain subject to IRS is constituted by the difference between the value of realization and the value of acquisition (subsection (d) of no. 4).

Article 43 then determines (as amended by article 1 of Law no. 15/2010, of 26 July) that:

"1. The value of income qualified as capital gains is the corresponding balance determined between capital gains and capital losses realized in the same year, determined in accordance with the following articles:

(...)

  1. The balance referred to in no. 1, relating to the transfers provided in subsection (b) of no. 1 of article 10, relating to micro and small enterprises not listed on the regulated or non-regulated markets of the stock exchange, when positive, is likewise considered as 50% of its value.

  2. For purposes of the previous number, micro and small enterprises are understood to be the entities defined under the annex to Decree-Law no. 372/2007, of 6 November."

The rate of tax to be applied to the positive balance was, at the date of the facts, 26.5%, under article 72, no. 4 of the IRS Code.

With regard to the reference to the annex of Decree-Law no. 372/2007, of 6 November, it should be noted that this decree-law established a system of electronic certification of micro, small and medium enterprises, administered by the Institute for Support of Small and Medium Enterprises and Innovation, I.P. (IAPMEI) for purposes of presenting and proving their SME status to public entities that require it.

In this sense, article 2 establishes that "For purposes of this decree-law, the definition of SME, as well as the concepts and criteria to be used for assessing their status, are contained in its annex, which forms an integral part thereof, and correspond to those provided in Recommendation no. 2003/361/EC, of the European Commission, of 6 May."

In this annex, no. 1 states that "An enterprise is understood to be any entity which, regardless of its legal form, carries on an economic activity. These include, in particular, entities which carry on craft or other activities on an individual or family basis, partnerships or associations which regularly carry on an economic activity."

Subsequently, no. 2 defines the various categories of SMEs:

"1 — The category of micro, small and medium enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and whose annual turnover does not exceed 50 million euros or whose total annual balance sheet does not exceed 43 million euros.

2 — In the category of SMEs, a small enterprise is defined as an enterprise which employs fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros.

3 — In the category of SMEs, a micro enterprise is defined as an enterprise which employs fewer than 10 persons and whose annual turnover or total annual balance sheet does not exceed 2 million euros."

Article 4 of the Annex also clarifies that the data considered for the calculation of workforce and financial amounts are those of the last financial year ended, calculated on an annual basis.

Having set out the legal framework, it now falls to be decided whether article 43, no. 3 requires certification as an SME or merely compliance with the requirements established in the Annex to Decree-Law no. 372/2007, of 6 November, for qualification as such.

Considering the letter of the law, article 43, no. 4 does not require any certification but only qualification as a micro or small enterprise, as defined in the said Annex.

As is stated in the Judgment of the CAAD, of 21 April 2014, Case no. 270/2013, "what is at issue in article 43, no. 4 of the IRS Code is evidently a reference, therefore, the classic legislative technical device used by the legislator to avoid, in the manner exemplified above, the repetition of norms. In fact, as is known, referential (or indirect) norms are 'those in which the legislator, instead of directly regulating the legal question in question, orders the application of other norms of its legal system, contained in the same or another legal instrument (intrasystemic reference)'"

More specifically, this concerns the normative provision in question contained in article 43, no. 4 of the IRS Code of a reference for purposes of defining the legal hypothesis.

Now, this reference, in its own terms and by its own nature, refers only to the definitional elements contained in the annex and not to the procedure for certification of micro, small and medium enterprises (SMEs) which is the object of Decree-Law no. 372/2007 itself (see its article 1). In fact, the main content of Decree-Law no. 372/2007 does not directly define which entities constitute SMEs, but rather consists of regulating the procedure for electronic certification, its scope, competence, objectives and terms – for this reason, article 2 of this Decree-Law no. 372/2007 – also by means of an internal reference – establishes that: "For purposes of this decree-law, the definition of SME, as well as the concepts and criteria to be used for assessing their status, are contained in its annex, which forms an integral part thereof (...)".

It is therefore understandable that in article 43, no. 4 of the IRS Code, the legislator, which sought to define, for purposes of establishing the factual situation to which the 50% tax exclusion contained in article 43, no. 3 of the same IRS Code could be applied, made a reference – and made a reference only – to the annex to Decree-Law no. 372/2007: it is because only in this annex, as results from article 2 itself of the same Decree-Law, are the definitional elements relevant to micro and small enterprises provided (the definition of SME and the concepts and criteria to be used for assessing their status)."

This interpretation follows, moreover, the understanding already embodied in the decision of Case no. 40/2013-T, of the CAAD:

"What the tax legislator intended in article 43, no. 4 of the IRS Code was merely to import, for purposes 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 objective is that the reference be made specifically to the Annex, because it is in the annex that the definitions of micro enterprise and small enterprise are contained.

(…), the law does not require any formal requirement consisting of the presentation of electronic certification. In the first place, it would be strange, as the claimants note, if a certain taxpayer were required to produce a document which is not within his reach to obtain, it being immaterial, as is evident, whether the person in question was or was not a managing partner of the company in question (…)."

More recently, the Tax Authority, in Circular no. 7/2014, of 29 July 2014, accepted and bound itself to this interpretation by stating that "…Should the enterprise not be a holder of Certification as a micro or small enterprise (…) it remains necessary, nonetheless, to assess whether the entity, on the date of transfer of the equity interests, met the material requirements contained in the annex to Decree-Law no. 372/2007, of 6 November, with the consequent and possible qualification of the entity as a micro or small enterprise for purposes of article 43, no. 3 of the IRS Code."

Based on the foregoing, it is concluded that the letter and ratio of nos. 3 and 4 of article 43 of the IRS Code do not require the obtaining of the electronic SME certificate but only the fulfilment of the requirements of the annex.

It is therefore necessary to verify whether in the case at hand company C, Ltd. fulfilled the requirements set out in articles 1 and 2 of the annex to Decree-Law no. 372/2007.

Now, in light of the facts found to be proven in points 8 and 9 of the evidence, company C, Ltd. constitutes a small enterprise (article 2, no. 2) which carries on an economic activity (article 1).

Consequently, the capital gain in the amount of € 4,425,180.00 (realization value of € 4,500,000.00 – acquisition value of € 74,820.00), obtained by the Claimants from the transfer of the shareholdings in the aforementioned company, should have been taxed, under article 43, no. 3 of the Personal Income Tax Code, considering only 50% of the capital gain, that is, € 2,212,590.00, value subject to the autonomous taxation rate of 26.5% provided in article 72, no. 4 of the IRS Code, the tax due in this regard being € 586,336.35 (€ 2,212,590.00 × 26.5%).

Given that in the impugned assessment the entire capital gain realized was considered, with the tax assessed in the amount of € 1,172,540.20, the said assessment must be annulled for violation of article 43, nos. 3 and 4 of the Personal Income Tax Code.

VII – DECISION

On these grounds, it is decided in this Arbitral Tribunal:

a) To judge the request for a declaration of illegality of the IRS assessment no. 2013 ..., for the year 2012, in the part that resulted in excess tax in the amount of € 586,203.85, relating to the full taxation of the capital gain obtained from the onerous transfer of shareholdings held in company C, Ltd., to be well-founded.

b) To condemn the Respondent to payment of the costs of the proceedings, in the amount of € 8,874.00.

VIII – VALUE OF THE CASE

The case is assigned a value of € 586,203.85, under article 97-A, no. 1(a) of the Code of Tax Procedure and Process, applicable by force of subsections (a) and (b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

IX – COSTS

The arbitration fee is € 8,874.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, under articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Let notice be given.

Lisbon, 7 November 2014

The collective tribunal,

(Jorge Lopes de Sousa,
in substitution of Jorge Lino Alves de Sousa)

(José Rodrigo de Castro)

(Amândio Silva)

Frequently Asked Questions

Automatically Created

What is the 50% capital gains tax exclusion for small and micro enterprise share sales under Article 43(3) of the CIRS?
Article 43(3) of the Portuguese IRS Code (CIRS) provides a 50% capital gains tax exclusion for the onerous transfer of shares or quotas in micro and small enterprises. This means that only 50% of the capital gain is subject to taxation when shareholders sell their equity interests in qualifying companies. The provision references the definitions in Decree-Law 372/2007, which classifies small enterprises as those employing fewer than 50 persons with annual turnover or balance sheet under €10 million, and micro enterprises as those with fewer than 10 employees and turnover under €2 million. The exclusion is calculated on the total gain before applying the autonomous taxation rate, effectively halving the taxable base and resulting in significantly reduced IRS liability for qualifying transactions.
What requirements must be met to qualify for reduced IRS taxation on the sale of quotas in a small company in Portugal?
To qualify for the reduced IRS taxation on quota sales under Article 43(3) CIRS, the company whose shares are being transferred must meet the objective criteria established in Decree-Law 372/2007. For small enterprise status: the company must employ fewer than 50 persons and have annual business turnover or total balance sheet not exceeding €10 million. For micro enterprise status: fewer than 10 employees and turnover/balance sheet under €2 million. These thresholds are calculated based on the last complete financial year before the transfer date. The central legal dispute involves whether IAPMEI certification is mandatory—the Tax Authority maintains it is required based on Annex G instructions, while taxpayers argue that meeting the objective criteria is sufficient, supported by documentation such as IES declarations, trial balances, and Social Security payroll records demonstrating employee count and financial metrics.
How does the Portuguese Tax Authority (AT) apply the autonomous taxation rate under Article 72(4) CIRS to capital gains from share disposals?
Under Article 72(4) of the CIRS, the Portuguese Tax Authority applies an autonomous taxation rate to capital gains from share disposals when taxpayers opt not to aggregate these gains with other income. In the case at hand, the applicable rate was 26.5% (the rate in force for 2012). The Tax Authority applied this rate to the entire capital gain of €4,425,180 (sale price of €4,500,000 minus acquisition cost of €74,820), resulting in tax of €1,172,540.20. However, if Article 43(3) applies for small/micro enterprise shares, only 50% of the gain would be taxable, reducing the tax to €586,270.10. The autonomous taxation is calculated separately from other income categories and is definitive, meaning it's not subject to progressive rates. This taxation method is optional—taxpayers can choose aggregation with general income, but autonomous taxation is often preferred for substantial capital gains to avoid higher progressive rates.
Can taxpayers challenge an IRS assessment through arbitration (CAAD) when the 50% exclusion on capital gains is denied?
Yes, taxpayers can challenge IRS assessments through tax arbitration (CAAD - Centro de Arbitragem Administrativa) when the 50% capital gains exclusion is denied. The case demonstrates this process: after the Tax Authority rejected their hierarchical review request, the taxpayers invoked Articles 10(1) and (2) of the Legal Framework for Tax Arbitration (RJAT) and Ordinance 112-A/2011 to establish an arbitral tribunal. Tax arbitration provides an alternative to judicial courts for resolving disputes over tax assessments, offering a faster and specialized forum. To access arbitration, taxpayers must first exhaust the administrative review process (as the claimants did by filing a hierarchical review within the complaint period). The arbitration request was filed on 24.4.2014, seeking partial annulment of the 2012 IRS assessment in the amount exceeding €586,270.10, with the tribunal empowered to annul illegal assessments and order refunds plus interest.
What evidence is required to prove small enterprise status (employees and turnover) for the IRS capital gains tax reduction in Portugal?
To prove small enterprise status for the IRS capital gains tax reduction under Article 43(3) CIRS, taxpayers must provide documentary evidence demonstrating compliance with the criteria in Decree-Law 372/2007. Essential evidence includes: (1) Employee count documentation—Social Security payroll sheets (folhas de remunerações) showing the number of workers employed during the relevant period; the company in question showed approximately 37 employees, falling within the small enterprise threshold of fewer than 50. (2) Financial metrics—the annual IES declaration (Informação Empresarial Simplificada) for the last complete financial year before the transfer, showing annual turnover and balance sheet figures; company C's 2011 IES showed turnover under €2 million, well below the €10 million threshold. (3) Trial balance (balancete) as of the transfer date confirming financial position. This evidence must demonstrate that both the employee headcount and at least one financial threshold (turnover OR balance sheet) are met for the relevant classification period.