Process: 177/2017-T

Date: March 29, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 177/2017-T) examines the Tax Authority's application of the general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) to an IRS assessment for 2012. The taxpayer received 13,750 shares of B… SGPS from her mother through donation, valued at €2,133,175, then sold them to the company itself for €598,125, resulting in a capital loss of €1,535,050. The Tax Authority argued this structure was abusive, claiming the actual intention was for the mother to distribute income by selling shares to the company, using the daughter as an intermediary to avoid taxation. The Authority attempted to recharacterize the transactions under the anti-abuse clause, requiring proof of five cumulative elements: means, result, intellectual (intent), normative, and sanctioning elements. However, the Tax Authority failed to submit a timely response or administrative file, requested suspension for re-examination, then failed to appear at scheduled hearings. The claimant contested each element, arguing the donation genuinely transferred ownership, proceeds went to her (not her mother), and the Authority presented contradictory interpretations of intent. The procedural irregularities, including the Authority's absence and failure to meet evidentiary burdens, significantly weakened its position. This case illustrates the strict requirements for applying Portugal's anti-abuse provisions and the consequences when tax authorities fail to properly substantiate their claims in CAAD proceedings, particularly regarding the burden of proof for demonstrating artificial arrangements lack economic substance.

Full Decision

ARBITRAL DECISION

Report

A - General

A…, taxpayer…, with tax domicile at Avenue …, …, …-… … (hereinafter referred to as the "Claimant"), filed, on 17.03.2017, a request for the constitution of a singular arbitral tribunal in tax matters, which was accepted, seeking the annulment of the additional assessment No. 2016 … of Personal Income Tax (hereinafter "PIT"), for the year 2012, and the subsequent account adjustment with the number 2016….

Pursuant to the provisions of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December (the Legal Regime for Arbitration in Tax Matters, hereinafter "LRAT"), the Deontological Council of the Administrative Arbitration Centre (CAAD) appointed the signatory as arbitrator, with the Parties, after being duly notified, not having raised any objection to such appointment.

By order of 29.03.2017, the Tax and Customs Authority (hereinafter referred to as the "Respondent") proceeded to appoint Dr. D… and Dr. E… to intervene in the present arbitral proceeding, in the name and representation of the Respondent.

In accordance with the provisions of paragraph c) of section 1 of article 11 of Decree-Law No. 10/2011, of 20 January, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 29.05.2017.

On 30.05.2017, the head of the Respondent's service was notified to, if it so wished, within a period of 30 days, submit a response and request the production of additional evidence, but the Respondent did not submit a Response nor did it attach the respective administrative file within that period.

On 19.10.2017, the Arbitral Tribunal decided to schedule the meeting referred to in article 18 of the LRAT for 30.10.2017, at 11h45.

On 26.10.2017, the Respondent submitted a request seeking the provisional suspension of the present proceedings and that the scheduled meeting be rendered without effect, taking into account that the application of the general anti-abuse clause provided for in article 38, section 2 of the General Tax Law (hereinafter "GTL") to the case in question was under re-examination, which was promptly granted by the Arbitral Tribunal.

In the absence of any communications from the Respondent, the Arbitral Tribunal, on 09.11.2017, requested information about the announced re-examination, but did not obtain such information.

On 05.12.2017, in view of the vicissitudes of the proceedings, the Arbitral Tribunal found itself obliged to issue an order extending the deadline for pronouncing the decision by a further two months.

On 19.01.2018, the meeting referred to in article 18 of the LRAT was scheduled, which took place on 29.01.2018, without the distinguished representatives of the Respondent having appeared. The deadline for pronouncing the decision was extended by a further two months and 15.02.2018 was set for the examination of witnesses, which occurred with respect to three of them, with the Claimant having waived the examination of the other two witnesses called.

The Respondent, at the request of the Arbitral Tribunal, on 21.02.2018 attached to the file the administrative proceedings.

B – Position of the Claimant

B… SGPS (hereinafter "B… SGPS"), taxpayer …, is a family joint-stock company incorporated on 01.07.1998 with a share capital of €6,000,000.00 (six million euros), represented by 1,200,000 (one million two hundred thousand shares) with a nominal value of €5.00 (five euros) each.

B… SGPS, on 02.11.2012, had a share capital of €480,000.00 (four hundred eighty thousand euros), represented by 1,200,000 (one million two hundred thousand shares) with a nominal value of €0.40 (forty cents of euro) each.

C…, mother of the Claimant, on 02.11.2012, was the holder of 275,000 (two hundred seventy-five thousand) shares representing the share capital of B… SGPS, and on that same date concluded with the Claimant a donation contract whereby she donated to the Claimant 13,750 (thirteen thousand seven hundred fifty) shares of B… SGPS.

Since B… SGPS was not listed on the stock exchange, the value of such gratuitous transfer was calculated in accordance with the rules of article 15, section 3, paragraph a) of the Stamp Duty Code.

The value attributed to the gratuitously transferred shares was €2,133,175.00 (two million one hundred thirty-three thousand one hundred seventy-five euros), which corresponded to the value considered as the acquisition value for the Claimant for PIT purposes.

The donation of the aforementioned shares from C… to the Claimant was exempt from Stamp Duty, in accordance with article 6, paragraph e) of the respective Code.

On 20.12.2012, the Claimant sold the 13,750 (thirteen thousand seven hundred fifty) shares to B… SGPS, which acquired them as treasury shares, at the value established between the parties: €598,125.00 (five hundred ninety-eight thousand one hundred twenty-five euros), which resulted, for PIT purposes, in a loss of €1,535,050.00 (one million five hundred thirty-five thousand and fifty euros).

The Claimant was subject to an internal tax inspection, with service order number OI2015…, which began on 01.10.2015 and ended on 04.02.2016.

After exercising her right to be heard, the Claimant was notified of the Inspection Report, through Official Letter No. 2016 … of 31.10.2016, in which the Respondent considers that the tax acts in question were abusive, applying to them the general anti-abuse clause provided for in article 38, section 2 of the GTL.

The Respondent understands that the business actually intended consisted of the alienation of shares of B… SGPS to the company itself by C…, as a way of distributing to the shareholder the income obtained from the sale of a shareholding, considering that the five application requirements, referred to as elements: means, result, intellectual, normative and sanctioning, have been met, when it failed to demonstrate the verification of any of them.

The element "means" translates to the route used to obtain a tax advantage. Now, on one hand, the donation in favour of the Claimant of the shares of B… SGPS resulted in the full transfer to the Claimant of the right of ownership over said shares and, on the other hand, the subsequent alienation of such shares to B… SGPS itself allowed her to appropriate, without any limitations, the proceeds of such alienation, which is why it is not understood how the acts actually practised would have been aimed at the distribution of income in favour of C….

As for the element "result", it corresponds to the tax advantage and economic equivalence obtained, with the Respondent arguing that the intended result would be to obtain liquidity for C… from the sale of the shares that were alienated by her daughter and now Claimant to B… SGPS. Now, it is evident that the proceeds from the alienation were not obtained by C…, as the Respondent claims, but by the Claimant.

With regard to the element "intellectual", corresponding to the motivation of the taxpayer, the Respondent does not appear to have a single reading of the facts, fluctuating between two interpretations that are contradictory to each other, the one that understands that the operation was aimed at transferring liquidity to C… and the one that sees in the succession of acts practised the intention of the mother to donate money to the daughter, the money that C… would obtain from the sale of the shares of B… SGPS made directly by her to the company itself.

The Respondent also failed to prove the fulfilment of the normative element, which "has to do with the normative-systemic disapproval of the structure put in place and the advantage obtained", that is, with the conclusion that the taxpayer acts with manifest abuse of legal forms, as can be read in the Inspection Report, since it merely considered that "through the scheme described above, C… obtained income from capital gains resulting from the sale of shares, of which she disposed in advance through her donation to her children, removing such income from taxation through the stipulation in section 6 of article 12 of the PIRC, combined with paragraph e) of article 6 of the CIS". As is evident, the mere invocation of fiscal norms is not sufficient to demonstrate that the normative element is fulfilled, and it was certainly the Respondent's responsibility to provide such demonstration, in accordance with the provisions of section 1 of article 74 of the GTL.

The Claimant acknowledges that the norms that governed the determination of the value of gratuitous acquisition of the shares were inadequate. However, the effects arising from their application can only be attributed to the legislator, since from at least 1999 there have been several voices that drew attention to this inadequacy, and it is to be presumed that the legislator's inertia was conscious and motivated by purely financial interests, which is why the Respondent cannot go beyond the legislator's assumed options, on pain of violating the constitutional principles of fiscal legality and separation of powers, provided for, respectively, in articles 165, section 1, paragraph i) and 111, section 1 of the Constitution of the Portuguese Republic (hereinafter "CPR").

Finally, with respect to the sanctioning element, there is a glaring inconsistency between the reasons invoked for deciding and the sanction applied. If accepting the line of reasoning of the Respondent, the only alternatives would be two: to feign a supposed distribution of results by B… SGPS to C… or an onerous transfer of shares by the latter to the former.

The claim to see in the factuality object of the proceedings a simulative nature also fails, since at no moment is there the necessary divergence between the real will and the declared will of the parties involved in the operation.

For all the reasons set forth above, the Claimant understands that the Additional Assessment and the Account Adjustment now challenged are illegal because the prerequisites on which the application of the general anti-abuse clause provided for in article 38, section 2 of the GTL depend are not met, and there is thus a defect in reasoning and violation of law, and the acts now impugned are unconstitutional due to violation of the principles of tax capacity (article 104, section 1 of the CPR), equality (article 13 of the CPR), fiscal legality (article 165, section 1, paragraph i of the CPR), separation of powers (article 111, section 1 of the CPR) and protection of private property (article 62, section 1 of the CPR).

C – Conclusion of the Report and Clarification

At the meeting of 15.02.2018, in which the examination of witnesses took place, the Arbitral Tribunal set the deadline for the presentation of written and successive submissions.

The Claimant presented her submissions on 23.02.2018. In it, she reaffirms what was already conveyed in the request for arbitral pronouncement and underscores the interest in acting on the part of the Claimant, in that the Additional Assessment and the Account Adjustment now challenged are tax acts that cause harm, susceptible to contentious challenge, also within the framework of tax arbitration.

The Respondent presented her submissions on 09.03.2018, in which she argues that the Claimant has no interest in acting, since the result of the present action will not alter her tax situation, whether in future or past terms.

The Respondent further understands that all witnesses without exception demonstrated a direct or indirect interest in the present case, which is why their testimony cannot have the intended probative effects.

Furthermore, she supports the soundness and coherence of what is contained in the Inspection Report, reiterating the verification of the prerequisites for the application of the general anti-abuse clause provided for in section 2 of article 38 of the GTL.

The Arbitral Tribunal is materially competent, pursuant to the provisions of articles 2, section 1, paragraph a) of the LRAT.

The Parties possess legal personality and capacity and, in the opinion of this Arbitral Tribunal, have standing in accordance with article 4 and section 2 of article 10 of the LRAT, and article 1 of Order No. 112-A/2011, of 22 March, the exception of lack of interest in acting invoked by the Respondent not being upheld, since it raises no doubts that the act of tax assessment now challenged is harmful and susceptible to contentious challenge, this Arbitral Tribunal being, as already mentioned, materially competent, pursuant to the provisions of articles 2, section 1, paragraph a) of the LRAT. In fact, even though no tax resulted from the Additional Assessment, such tax act is subject to challenge, with the Claimant having the right to react against it, namely in arbitral forum. Thus, this Tribunal judges that there is interest in acting on the part of the Claimant, being her therefore a legitimate party in this proceeding.

The proceeding does not suffer from any nullity.

Factual Matters

2.1 Proven Facts

B… SGPS, taxpayer …, is a family joint-stock company incorporated on 01.07.1998 with a share capital of €6,000,000.00 (six million euros), represented by 1,200,000 (one million two hundred thousand shares) with a nominal value of €5.00 (five euros) each (document No. 4 attached with the request for arbitral pronouncement).

B… SGPS, on 02.11.2012, had a share capital of €480,000.00 (four hundred eighty thousand euros), represented by 1,200,000 (one million two hundred thousand shares) with a nominal value of €0.40 (forty cents of euro) each (document No. 4 attached with the request for arbitral pronouncement).

C…, taxpayer …, mother of the Claimant, on 02.11.2012 was the holder of 275,000 (two hundred seventy-five thousand) shares representing the share capital of B… SGPS, and on that same date concluded, as donor, with the Claimant, as donee, a donation contract whereby she donated to the Claimant 13,750 (thirteen thousand seven hundred fifty) shares of B… SGPS (document No. 7 attached with the request for arbitral pronouncement).

B… SGPS was not a company listed on the stock exchange (consensus of the Parties).

The value of the gratuitous transfer of the shares to the Claimant was calculated in accordance with the rules of article 15, section 3, paragraph a) of the Stamp Duty Code, with the wording then in force (consensus of the Parties).

Upon filing the ISTG (Stamp Duty – Gratuitous Transfers) return with No. … and demonstrating the valuation value of the shares of B… SGPS that was used in the assessment of stamp duty, the respective duty was assessed with the indication that it concerned a gratuitous transfer, a taxable value of €170,637.50 (one hundred seventy thousand six hundred thirty-seven euros and fifty cents) being determined (p. 10v of the Administrative File).

The Claimant, on 04.07.2013, requested from the Respondent's services the reasoning underlying the determination of the taxable value indicated in the assessment mentioned in 2.1.6. (p. 10v of the Administrative File).

Following the Claimant's request, an error was detected and the said taxable value was corrected, with the value of €2,133,175.00 (two million one hundred thirty-three thousand one hundred seventy-five euros) being attributed to the transferred shares, a value that corresponded to the value considered as the acquisition value for the Claimant for PIT purposes (p. 10v of the Administrative File).

The donation of the aforementioned shares by C… to the Claimant was exempt from Stamp Duty, in accordance with article 6, paragraph e) of the respective Code (consensus of the Parties).

On 20.12.2012, the Claimant sold the 13,750 (thirteen thousand seven hundred fifty) shares of B… SGPS that she had acquired gratuitously from her mother to B… SGPS itself at the value of €598,125.00 (five hundred ninety-eight thousand one hundred twenty-five euros), the price that the Claimant received (document No. 8 attached with the request for arbitral pronouncement and p. 10 of the Administrative File).

The Claimant, by virtue of the acquisition and subsequent alienation of the 13,750 (thirteen thousand seven hundred fifty) shares of B… SGPS, determined for PIT purposes, in the year 2012, a loss of €1,535,050.00 (one million five hundred thirty-five thousand and fifty euros) (consensus of the Parties).

2.2 Unproven Facts

There are no facts relevant to the assessment of the merits of the case that have been determined as unproven.

2.3 Reasoning for the Determination of the Factual Matters

The Respondent's failure to submit a Response did not imply admission of the facts alleged in the request for arbitral pronouncement, having been freely evaluated by the Arbitral Tribunal in accordance with articles 110, sections 6 and 7 of the Code of Tax Procedure and Process (hereinafter "CTPP"), applicable by virtue of article 29 of the LRAT.

The facts were determined as proven on the basis of documents submitted to the file by the Parties and on the positions assumed by them in the pleadings they chose to submit. The testimony of the witnesses did not bring to the proceedings relevant elements that were not already present in the documents submitted to the file.

Legal Matters

3.1 Issues to be Decided

From what has been stated above, it results that the issue to be examined is, fundamentally, whether, in the case we have to analyse, the prerequisites on which the application of the general anti-abuse clause provided for in article 38, section 2 of the GTL depends are met, which formed the basis of the Additional Assessment and Account Adjustment now challenged.

3.2 The General Anti-Abuse Clause

The Respondent states in the Inspection Report that "the operations carried out, consisting of the donation of 13,750 shares to A… by the mother, shareholder and manager of B… SGPS and the subsequent alienation of those same shares by the donee to the company itself did not give rise to any tax burden", having considered that the prerequisites on which the application of the general anti-abuse clause provided for in article 38, section 2 of the GTL depends are met.

This provision states as follows:

"2 - Acts or legal transactions that are essentially or primarily directed, through artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal postponement of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or in part, without the use of such means, shall be ineffective for tax purposes, and taxation shall then be carried out in accordance with the applicable norms in their absence, and the aforementioned tax advantages shall not be produced."

From a procedural standpoint, the assessment of taxes on the basis of the aforementioned general anti-abuse clause must comply with the provisions of article 63 of the CTPP, which imposes, for what is relevant to us, the following:

"1 - The assessment of taxes on the basis of the anti-abuse provision contained in section 2 of article 38 of the general tax law follows the terms provided for in this article.

2 – (repealed)

3 - The reasoning of the draft and the decision on the application of the anti-abuse provision referred to in section 1 necessarily contains:

a) A description of the legal transaction concluded or the legal act performed and of the transactions or acts with an identical economic purpose, as well as an indication of the tax rules applicable to them;

b) A demonstration that the conclusion of the legal transaction or the performance of the legal act was essentially or primarily directed to the reduction, elimination or temporal postponement of taxes that would be due in case of a transaction or act with an identical economic purpose, or to the obtaining of tax advantages"

The general anti-abuse clause, among us, emerges as a weapon to combat so-called aggressive tax planning, all the more necessary as it is certain that other tools have failed, even if of more modest or less ambitious scope, presenting itself, in that measure, as "a dynamic and constantly current response to the eternally innovative contours of abusive tax planning"[1].

As is stated in the arbitral decision issued in case No. 162/2017-T that proceeded before the CAAD, "the anti-abuse norms find their 'raison d´être' in the evasive and fraudulent behaviour of taxpayers in tax matters and in the necessity to establish appropriate means of reaction in order to guarantee the fulfilment of the principle of equality in the distribution of the tax burden and the pursuit of the satisfaction of the financial needs of the State and other public entities". In this sense, the GACs [general anti-abuse clauses] express the harmonising and proportional weighing of the principle of legal certainty and protection of confidence – with their requirements of typicality and legality – with other constitutionally protected goods, such as the preservation of the tax base, tax equity and the realisation of fundamental rights and social justice".

Tax avoidance, in its deepest etymological sense, means to deceive, through the astute creation of conditions so that others, in this case the tax authority, at first glance, may see something different from what they would perceive if they had more attention (or information). What is at stake is thus avoiding the application of the tax rule, preventing the birth of the tax legal relationship, with the objective of obtaining a patrimonial advantage, regardless of its modality, which would not be obtained if acts were not practised or legal transactions were not concluded with the objective of circumventing the legislator's will. A patrimonial advantage that, for this reason, must be deemed undeserved. Through the judicious management, and formally lawful, of the available legal means, the most informed may escape the tax rules, thus exempting themselves from the taxable event.

In this sense, tax avoidance, with the contours we have been describing, is in no way to be confused with "tax economy", that is, with the adoption of the fiscally less onerous behaviour, an indispensable task of any minimally diligent manager. The evasive conduct does not find in itself any justification other than allowing it to achieve the effects provided for by the tax rule, circumventing paths that depart from it, and for good reason.

Traditional doctrine, contrasting this figure with that of tax evasion, has underscored that the exercise of the prerogatives inherent to the autonomy of will cannot merit censure, since the acts practised or the legal transactions concluded do not collide with any legal prohibition, at least specifically directed to them, whereby the effects thereof should benefit from adequate protection. Thus, from the essence of tax avoidance seems to be the formal lawfulness of the means chosen to circumvent the tax rule, making the conduct not, at least in terms of validity, attackable.

However, doors have been opened that are making it progressively possible to consider ineffective, in tax terms, the acts practised. Even though not questioning the constitutive perfection of the acts, it is not permitted to achieve the tax effects sought by certain types of behaviour. This judgment, rejecting the ideas of illegality and invalidity, or the need for their demonstration, associated with evasion, nonetheless permits a redress of the patrimony of the tax creditor, impoverished by conduct primarily directed, not in its consequences, but in its determining motives, to tax economy. Thus, it is being argued that the tax creditor should be given, as tax, the sums that failed to enter his coffers by virtue of the evasive conduct, with such redress operating, as far as we can see, through a device based on the institute of unjust enrichment, since, in light of the economics of tax relationships, no justifying title is perceived for the obtaining of the intended patrimonial advantage or public interest that would authorize it[2].

There are those who see clearly, and correctly in our view, the necessity to be opening "finalistic" or "economic" breaches in the hitherto sacred edifice of security, in the sense of protector of all initiatives of taxpayers, of the literal textual provision in Tax Law. Not only because investment has been made, in a progressive movement, toward equipping the tax authority with a structure technically prepared and knowing of its duties and limits, but above all because awareness is growing that there are courts in Portugal, with private parties therefore not being in a situation of pure subjugation before administrative power. However, there are those who are fiercely opposed to a general clause of this nature, as is the case of ALBERTO XAVIER, who appealed to all jurists to unite their efforts so that the provisions (...), of totalitarian and autocratic inspiration, and incompatible with the core of a Rule-of-Law State, would be eradicated by the Legislative Power and the Judicial Power from the legal order, where they ill-advisedly attempted to infiltrate through the spurious and abusive way of patently unconstitutional measures[3].

What precedes is merely intended to emphasize that the existence of an anti-abuse clause such as that consecrated in section 2 of article 38 of the GTL is not only understandable as a fundamental instrument in the pursuit of the Social State, supported financially by the Fiscal State, which must rest on the observance of the elementary principles of tax equality and tax capacity. However, the acceptance of such a mechanism does not dispense with, rather demands, its judicious application and the full demonstration, by the tax authority, of the verification of its respective prerequisites.

3.3 The Prerequisites on which the Application of the General Anti-Abuse Clause Provided for in Article 38, Section 2 of the GTL Depends

It is commonly accepted that there are four requirements on which the application of the general anti-abuse clause to which we have been referring depends[4]. They are:

a) The form used – means element;

b) The tax advantage and economic equivalence obtained – result element;

c) The motivation of the taxpayer – intellectual element; and

d) The normative-systemic disapproval of the advantage obtained – normative element.

Let us therefore examine more closely each of these requirements, it being clear that in the Inspection Report the Respondent understands that all are met, a conclusion that is rejected by the Claimant.

The Means Element

The means element corresponds to the route chosen by the taxpayer to obtain the desired fiscal gain or advantage, i.e., the act(s) or legal transaction(s) whose structure is determined in function of a given fiscal result. The legal transaction(s), in addition to being directed to obtaining the aforementioned fiscal advantage, will simultaneously be endowed with an anomalous, unusual, artificial, complex or even contradictory form[5].

It is therefore important to clarify whether, in the case sub judice, the parties involved in the operations in question used anomalous, unusual, artificial, complex or contradictory forms, with a view to achieving the (non-fiscal) end intended.

In the case before us, the Respondent understands that "the business intended by the taxpayers consisted of the alienation of shares of B… SGPS to the company itself by C…, as a way of distributing to the shareholder the income obtained from the sale" of a shareholding held by B… SGPS[6], which would have been achieved through the donation to the Claimant (without any associated taxation) of 13,750 (thirteen thousand seven hundred fifty) shares of B… SGPS and the subsequent alienation of those shares by the donee to the company itself.

In truth, it is not understood how the Respondent can see in the transactions actually practised – donation of shares made by C… to the Claimant and subsequent sale, with collection of the respective price, of those same shares by the Claimant to B… SGPS – a way for the donor to perceive the income obtained from the sale of a shareholding of B… SGPS.

As is clear, from the complex operation carried out there is no income or patrimonial attribution that can be imputed to C…. From the elements on file, nothing demonstrates or even suggests that the donation of the shares to the Claimant was not a true and genuine donation, that is, that it was not concluded with donative intent, in final terms, unconditional, genuinely gratuitous and without any burdens. That is, by means of the donation carried out to the Claimant, the donor received no benefit. On the contrary, she only saw her patrimony amputated, without any counterpart. It was the Claimant who benefited from the transaction, who acquired in absolutely gratuitous terms the shares which she then alienated for consideration to B… SGPS, making the price paid by it her own.

Moreover, it is necessary to recognize that the alleged abusive fiscal planning against which the Respondent sought to react rests on circumstances that at no moment showed themselves dependent on the will of the parties in the transactions that have occupied us: (i) B… SGPS being a joint-stock company whose share capital is represented by shares that were neither listed nor ever admitted to trading in a regulated market and (ii) the rules of article 15, section 3, paragraph a) of the Stamp Duty Code being those which, for PIT purposes, serve to determine the acquisition value of shares acquired gratuitously. There was therefore no behaviour on the part of any of the parties involved that permits the conclusion that there was an intention to place themselves in a position to benefit from a regime which, it appears, proved favourable to them, since, well before the date to which the facts refer, the circumstances were already those which allowed them to carry out the transaction in the terms drawn. There is, in that sense, no artificialness that can taint the production of effects of the legal transactions concluded[7].

Thus, the Arbitral Tribunal cannot accept the conclusion that the transactions practised were in terms "artificial or fraudulent and with abuse of legal forms", as required by the means element of section 2 of article 38 of the GTL.

The Result Element

In the result element, it is only necessary to demonstrate that the subject achieved, through his acts, the verification of a certain tax advantage and the equivalence of the economic effects with those of the normal taxed act[8]. In sum, the result element consists of the tax advantage achieved through the means element used by the taxpayer[9].

For the Respondent, "the economic effect intended lay in the financial proceeds that the transfer of the shares to the company could provide to C…". An effect that "could be obtained through the direct sale of the shares by C… to B… SGPS"[10].

As can be seen, the donation to the Claimant of the 13,750 shares of B… SGPS and the subsequent alienation of those shares by the donee to the company itself do not produce effects, either directly or indirectly, equivalent to those that would be produced if the donor had directly alienated said shares to B… SGPS. In the first case, the proceeds of the sale of the shares remained in the possession of the donee, in the second case they would have belonged to the donor.

Paragraph a) of section 3 of article 63 of the CTPP imposes on the Respondent the burden of describing the legal transaction concluded or the legal act performed and the transactions or acts with an identical economic purpose, which the Respondent failed to accomplish, as it is clear that the economic purposes of the two situations just examined are not identical. The diversity of economic purpose is demonstrated immediately by the absence of identity of those who appropriate the proceeds of the sale of the shares to B… SGPS.

The Intellectual Element

Section 2 of article 38 of the GTL expressly refers to "acts or legal transactions essentially or primarily directed, through artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal postponement of taxes" (emphasis ours). "It is not enough that the analysis of the acts or legal transactions in question result in the obtaining of a fiscally advantageous result and an equivalent non-fiscal result. It is required, equally, that the choices and forms adopted by the taxpayer be fiscally directed (tax driven) and that the former (fiscal result) prevail over the latter (non-fiscal result)"[11].

The Respondent does not deny the possibility of taxpayers choosing, from among the various legally admissible options, the fiscally least onerous option, provided that the tax savings is not the sole or principal purpose of the legal transaction to be concluded. In the case before us, the Respondent understands that the motivation of the parties involved in this operation was based on the fact that the transactions practised had no associated taxation, there being no economic or other motivation that justifies the donation of shares with which C… intended to benefit the Claimant[12].

A donation, by definition, imports, at the same time, an enrichment without counterpart in the patrimonial sphere of the donee and a symmetric final patrimonial ablation in the sphere of the donor. As is clear, one cannot view the donative intent through the lens of a strict economic analysis.

For the Respondent, there was at no moment the intention of C… to donate shares to the Claimant. This conclusion, with due respect, seems to be of an axiomatic nature. If there was not the intention of C… to donate the shares to the Claimant, as she manifestly did, what then was her intention? Not to donate, while donating? Recall that it was the liberality of the donor that permitted the Claimant to alienate and make her own the proceeds of the sale of those shares to B… SGPS. There is no doubt that by the complex transaction carried out there was a patrimonial transmission by C… in favour of the Claimant, her daughter, there being no reasons to doubt that the intention of the donor was to benefit the Claimant, at the expense of her own patrimony. Indeed, the Respondent concludes, at one point, that "what was truly intended to be donated would be the money resulting from the sale of the shares and not these."[13]

As the Respondent itself recognized, taxpayers may choose, from among the various legally admissible options, the fiscally least onerous option, provided that the tax savings is not the sole or principal purpose of the legal transaction to be concluded. However, there must be adequate weighting of this requirement, since it is not to be excluded, rather it is to be presumed, that the taxpayer, choosing the fiscally less onerous option, does so precisely because of that lesser onerousness. In the limit, the choice for the less onerous option in fiscal terms is always fiscally motivated. As is evident, this requirement cannot have such breadth that it encompasses all behaviour tending toward the choice of the less onerous alternative. The key to this problem lies, in our view, in the rational justification of the operation implemented. In this sense, and in connection with the other requirements on which the application of the general anti-abuse clause depends, one should ask whether the donation of shares by C… to the Claimant is justified in light of the intention to benefit her. The answer cannot but be affirmative.

As is evident, C… could donate to her daughter the money corresponding to the sale of the shares she donated that the latter ended up making to B… SGPS, without having to donate them and without the latter having to sell them after the donation. C… could have sold those shares to B… SGPS and donated the proceeds of the sale to the Claimant. She could even, in the limit, donate that amount to her daughter without need to sell the shares that ended up being purchased by the company itself. The problem, in our view, is not this. The problem is to know, from the tax standpoint, evaluating the matter not in terms of validity but of effectiveness, whether it would be forbidden to C… the possibility of benefiting her daughter by donating the shares to her. Moreover, as was demonstrated, in legal terms, once the donation was made and the ownership of the shares transmitted to the Claimant, the latter had no duty to give them a previously agreed destination, to sell them, or to sell them to the company itself. Once entered into her patrimony, the Claimant could enjoy and dispose of the gratuitously acquired shares as she best saw fit. The parties involved chose the fiscally least onerous option, this Tribunal not seeing in that choice a tax preponderance not consented to by the legal order in light of the ultimate purpose which was for the donor to benefit the Claimant, her daughter.

This Tribunal therefore judges that the intellectual element of section 2 of article 38 of the GTL is also not fulfilled.

The Normative Element

The normative element already contains a question of law: the conclusion that the tax result obtained is anti-juridical. It is the analysis of this requirement that permits one to draw the frontier between legitimate tax saving and tax avoidance. Invoking the spirit of the law, the legislative thought, the interpreter should be capable of detecting abusive behaviours, not authorized by the rule, even if apparently consented to by its letter. In the reading we make, this element is umbilically linked to the interpretation of the legal rule, even though the essential hermeneutical exercise cannot be divorced from the evaluation made of the other requirements on which the application of the general anti-abuse clause depends[14]. The conclusion that the legal order rejects the advantage obtained must pass through the demonstration that the impositive intention of a norm was frustrated, which could only be achieved through an abuse of legal forms.

Indeed, the Respondent failed to demonstrate, as was incumbent upon it, the verification of the normative element of said general anti-abuse clause.

The Sanctioning or Statutory Element

Given that none of the preceding requirements on which the application of the general anti-abuse clause provided for in section 2 of article 38 of the GTL depends is shown to be met, it is difficult to understand that the tax result obtained offends the legal order and escapes an imperative tax norm.

Thus, all things considered and weighed, with the elements that integrate the normative provision of section 2 of article 38 of the GTL not being fulfilled, its statutory provision cannot be applied.

3.4 Prejudiced Matters

The analysis of the other arguments used by the Claimant to sustain the illegality of the acts of additional assessment of PIT and Account Adjustment challenged is rendered unnecessary and is accordingly prejudiced.

Decision

On the grounds and for the reasons set forth, the Arbitral Tribunal decides to fully allow the request for arbitral pronouncement, accordingly annulling the additional assessment of PIT No. 2016 … for the year 2012 and the account adjustment with the number 2016 …, with all legal consequences.

Value of the Case

When a tax assessment act is challenged, the value of the case is that of the amount whose annulment is sought, which corresponds to the economic utility of the claim.

In the present case, the annulment of the tax acts challenged does not imply additional tax to be paid nor any higher amount to be reimbursed, in light of the PIT assessment initially carried out for the year 2012. However, we are still dealing with a PIT assessment act, and not a mere act of fixing the assessable amount, whereby, in accordance with the provisions of section 2 of article 306 of the Code of Civil Procedure, article 97-A of the CTPP and also section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case shall be that of the amount whose annulment is sought. The case is therefore valued at €128.38 (one hundred twenty-eight euros and thirty-eight cents), the amount corresponding to the value to be reimbursed in the additional assessment now annulled.

Costs

For the purposes of the provisions in section 2 of article 12 and section 4 of article 22 of the LRAT and section 5 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at €306.00 (three hundred six euros), in accordance with Table I annexed to said Regulation, to be borne entirely by the Respondent.

Lisbon, 29 March 2018

The Arbitrator

(Nuno Pombo)

Text prepared by computer, in accordance with section 5 of article 131 of the Code of Civil Procedure, applicable by remission of paragraph e) of section 1 of article 29 of Decree-Law No. 10/2011, of 20 January and with the spelling prior to said Orthographic Agreement of 1990.

[1] See GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, 2004, p. 13.

[2] See our Fiscal Fraud – the Incriminating Norm, Simulation and Other Reflections, Almedina, 2007, pp. 26 et seq.

[3] ALBERTO XAVIER, "The general anti-evasion norm of MP No. 66/02 and taxation by analogy: a brutal assault on the principle of legality", in Tax and Public Finance Journal, vol. 47, Nov/Dec 2002, pp. 39 – 42.

[4] See GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, 2004, pp. 165 et seq.

[5] Ibid., p. 166.

[6] See point 3.1.3.1., on pp. 13/49 et seq. of the Inspection Report, at p. 43 et seq. of the Administrative File.

[7] See Opinion of Prof. Dr. Gustavo Lopes Courinha attached to the file, p. 10.

[8] GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, 2004, p. 176.

[9] See arbitral decision issued in case No. 363/2016-T.

[10] See point 3.1.3.2., on p. 14/49 of the Inspection Report, at p. 43v of the Administrative File.

[11] GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, 2004, p. 179.

[12] See point 3.1.3.3., on pp. 14/49 et seq. of the Inspection Report, at pp. 43v et seq. of the Administrative File.

[13] Ibid., p. 45 of the Administrative File.

[14] See in a somewhat different sense GUSTAVO LOPES COURINHA, The General Anti-Abuse Clause in Tax Law – Contributions to its Understanding, Almedina, 2004, p. 189, note 423. The reading we make of this element of the general anti-abuse clause does not lead to the concern expressed by this distinguished Author. It merely seeks to emphasize the necessity of concluding that the non-fiscal result fits within the scope of the norm, a weighing that cannot fail to invoke the other requirements on which the application of said general anti-abuse clause depends.

Frequently Asked Questions

Automatically Created

What is the general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT)?
The general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) allows the Tax Authority to disregard legal acts or business arrangements that constitute abuse of legal forms for tax purposes. To apply this clause, the Authority must prove five cumulative elements: (1) means - the mechanism used to obtain tax advantage; (2) result - the tax advantage and economic equivalence obtained; (3) intellectual element - the taxpayer's improper tax motivation; (4) normative element - that the structure contradicts the tax system's purpose and constitutes manifest abuse of legal forms; and (5) sanctioning element - the legal consequences of recharacterization. The burden of proof rests entirely on the Tax Authority, which must demonstrate all elements are satisfied to successfully invoke the anti-abuse clause.
Can the Portuguese Tax Authority (AT) apply the anti-abuse clause to additional IRS income tax assessments?
Yes, the Portuguese Tax Authority can apply the anti-abuse clause to additional IRS (Personal Income Tax) assessments, as demonstrated in this case involving capital gains/losses from share transactions. However, the Authority must rigorously prove all five required elements and cannot merely assert abuse exists. The application requires demonstrating that the taxpayer's legal arrangements were artificial, lacked economic substance beyond tax avoidance, and contravened tax law principles. In CAAD arbitration proceedings, the Tax Authority faces strict procedural requirements and evidentiary burdens. Failure to substantiate claims with concrete evidence, as occurred in this case where the Authority presented contradictory interpretations and failed to prove proceeds went to the alleged beneficiary, will result in rejection of the anti-abuse assessment.
What happens when the Tax Authority fails to respond or present evidence in CAAD arbitration proceedings?
When the Tax Authority fails to respond or present evidence in CAAD arbitration proceedings, it faces serious procedural consequences that typically favor the taxpayer. In this case, the Authority failed to submit a timely response within the 30-day deadline, did not attach the administrative file initially, requested suspension without proper follow-up, and failed to appear at scheduled hearings. These failures significantly undermine the Authority's position, as it bears the burden of proof when invoking the anti-abuse clause. The arbitral tribunal may proceed with hearings in the Authority's absence, rely on the taxpayer's evidence and witness testimony, and ultimately rule against the Authority due to insufficient proof. The tribunal extended deadlines to accommodate the Authority's re-examination request, but the continued absence and failure to provide substantiation severely prejudiced the tax assessment's validity.
How does the CAAD arbitral tribunal handle requests for process suspension during anti-abuse clause review?
CAAD arbitral tribunals have discretion to grant suspension requests during anti-abuse clause reviews, balancing procedural efficiency against the Authority's legitimate need to re-examine complex cases. In this proceeding, when the Tax Authority requested provisional suspension on October 26, 2017, citing ongoing re-examination of the anti-abuse clause application, the tribunal initially granted the request and cancelled the scheduled hearing. However, tribunals expect timely updates and good faith engagement. When the Authority failed to communicate progress despite the tribunal's November 9, 2017 information request, the tribunal resumed proceedings, scheduled new hearings for January and February 2018, and extended decision deadlines. This approach reflects tribunals' willingness to accommodate legitimate administrative needs while preventing indefinite delays that prejudice taxpayers' rights to timely dispute resolution under the RJAT framework.
What are the grounds for annulment of an additional IRS tax assessment based on the general anti-abuse clause in Portugal?
Grounds for annulment of an additional IRS assessment based on the general anti-abuse clause in Portugal include: (1) failure by the Tax Authority to prove all five cumulative required elements (means, result, intellectual, normative, and sanctioning); (2) contradictory or inconsistent reasoning by the Authority regarding the taxpayer's intentions or the actual beneficiaries; (3) absence of evidence that proceeds or benefits actually went to the alleged beneficiary rather than the taxpayer; (4) failure to demonstrate the legal structure was artificial or lacked economic substance beyond tax considerations; (5) procedural defects, including the Authority's failure to respond, present administrative files, or appear at hearings; and (6) inability to prove manifest abuse of legal forms or that the arrangements contravened tax system principles. The burden rests entirely on the Tax Authority, and any gap in proof of the required elements mandates annulment of the assessment.