Process: 180/2015-T

Date: November 17, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitration case (Process 180/2015-T) before the Administrative Arbitration Centre (CAAD) addresses the critical issue of determining taxable profit under Portuguese IRC (Corporate Income Tax) for real estate buy-and-sell transactions. The applicant company challenged additional IRC assessments for fiscal years 2010, 2012, and 2013, totaling approximately €163,311.41 including compensatory interest. The dispute centers on whether acquisition values of properties purchased in insolvency proceedings should be calculated using the actual contract price or the Tax Patrimonial Value (VPT). The company had systematically used VPT as the acquisition cost basis, deducting differences between VPT and lower purchase prices from taxable profit (Form 22, field 772). For disposal values below VPT, the company correctly increased taxable profit using VPT amounts (field 745). The Tax Authority's inspection report accepted the disposal value treatment but rejected the acquisition value methodology, insisting that actual declared contract values must be used instead of VPT, resulting in significant taxable profit increases. The case was filed under Decree-Law 10/2011 establishing the Legal Regime for Arbitration in Tax Matters (RJAT). The arbitral tribunal, composed of three arbitrators appointed by CAAD's Deontological Council, had jurisdiction over both the legality of the additional assessments and the associated compensatory interest charges. Key procedural aspects include the 10-day deadline for filing after notification, automatic notification to Tax Authority, constitution of the tribunal within statutory timeframes, and submission of written arguments. This decision provides important guidance on IRC profit determination methodologies for real estate transactions, valuation criteria when VPT differs from transaction prices, and the scope of challenges available through tax arbitration including interest assessments.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Vasco Valdez and Ana Duarte, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal:

AGREE AS FOLLOWS:

I – REPORT

· On 16 March 2015, A..., S.A., with registration number and collective person number... , share capital of € 50,000.00, and registered office at ..., n.ºs ..., ... and ..., ...-... Guimarães, filed a request for the constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the following acts:

· Additional IRC assessment for 2010 no. 2014 ... of 2014-11-03 and Assessments of compensatory interest with numbers 2014 ... and 2014 ..., which set the IRC payable (including compensatory interest) in the amount of € 4,584.79;

· Additional IRC assessment for 2012 no. 2014 ... of 2014-11-03 and Assessment of compensatory interest with number 2014 ..., which set the IRC payable (including compensatory interest) in the amount of € 5,958.95;

· Additional IRC assessment for 2013 no. 2014 ... of 2014-11-20 and Assessment of compensatory interest with number 2014 ..., which set the IRC payable (including compensatory interest) in the amount of € 152,767.67.

· To support its request, the Applicant alleges, in summary, that those acts suffer from illegality due to violation of law, erroneous application of factual and legal assumptions, as well as incorrect accounting of the acquisition and disposal values of article ... (fiscal year 2013), which resulted in an increase to taxable profit in the amount of €137,780.91.

· On 18-03-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to AT.

· The Applicant did not proceed with the appointment of an arbitrator, and therefore, under the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of RJAT, the President of the Deontological Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

· On 08-05-2015, the parties were notified of these appointments, having shown no intention to refuse any of them.

· In accordance with the provisions of paragraph c) of no. 1 of article 11 of RJAT, the collective Arbitral Tribunal was constituted on 27-05-2015.

· On 29-06-2015, the Respondent, duly notified for this purpose, filed its reply defending itself solely by exception and by impugnation, and the Applicant, on 13-07-2015, following notification for this purpose, exercised the right to reply on the matter of exception.

· Given that procedural principles of procedural economy and prohibition of useless acts apply in arbitral proceedings, under the provisions of paragraphs c) and e) of article 16 of RJAT, the holding of the meeting referred to in article 18 of RJAT was dispensed with.

· Having been granted a period for the submission of written arguments, these were submitted, in summary form, by the Applicant.

· On 30-09-2015, a period of 30 days was set for the rendering of final decision, which period was extended by a further 30 days.

· The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the provisions of articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

Everything considered, it must now be decided:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

a) The assessments which are the subject of the present proceedings have their origin and basis in the Tax Inspection Report (RIT) notified to the Applicant by Office Letter no. ... of 2014-10-17, prepared under the Orders of Service for inspection action ...2014..., ...2014... and ...2014... .

b) As a consequence of the aforementioned inspection action, AT notified the Applicant of the aforementioned additional IRC assessments, with a voluntary payment deadline until 02/01/2015 (the one relating to 2010), 05/01/2015 (the one relating to 2012) and 21/01/2015 (the one relating to 2013).

c) The assessments result from corrections to the taxable base for each of the years due to the correction of the criterion followed by the Applicant regarding the acquisition value to be considered in the determination of taxable profit obtained with the purchase and sale of a set of real properties, occurring in each of these three fiscal years.

d) In each of the years 2010, 2012 and 2013 the Applicant carried out the following real property purchase and sale operations:

[Details of specific properties and transactions]

e) The acquisition of the aforementioned properties by the Applicant took place in the context of insolvency proceedings:

f) The property acquired in 2010 was purchased in the context of the liquidation in insolvency proceedings no. .../07... TBGDM;

g) The property acquired in 2012 was purchased in the context of the liquidation in insolvency proceedings no. .../11... TYVNG;

h) The three properties (articles ..., ... and...) acquired in 2013 were purchased in the context of insolvency proceedings no. .../11... TYVNG.

i) No IMT was assessed in relation to any of the acquisitions referred to in the preceding point.

j) The Applicant also made a transaction in 2013 of another property, which it had acquired in 2009, under the following circumstances:

[Details of the 2009 property transaction]

k) This property had, on 20/03/2009, its Tax Patrimonial Value (VPT) corrected, by valuation, to €171,880.00, since its acquisition was the first transfer under the Real Estate Tax (IMI) Code.

l) As the acquisition values of all properties were lower than the VPT, the Applicant understood that the acquisition value to be considered for the purposes of determining taxable profit should be the VPT, which is why the Applicant entered in Field 772 of Table 07 of the Form Mod. 22 the difference between the acquisition value and the VPT, thus deducting it from taxable profit.

m) In cases where the sale values were lower than the VPT (which occurred in all situations except in the case of article ... – sold in 2010), the Applicant understood that it should consider the VPT as the sale value, and therefore increased taxable profit by the difference between these two values in field 745 of Table 07 of Form Mod. 22.

n) The RIT considered that all sales whose price was lower than the VPT, for the purposes of determining taxable profit, should be considered, not at the declared sale value, but rather at the VPT, and therefore understood that the increases to taxable profit entered in field 745 were correct.

o) With regard to the acquisition values, the RIT considered that the Applicant had incorrectly accounted for, for the purposes of determining taxable profit, the VPT, understanding that account should have been taken of the value declared at the time of acquisition, in the respective contracts.

p) With respect to the property relating to cadastral article ..., acquired by the Applicant in 2009 and sold in 2013, the Applicant had proceeded with the deduction from taxable profit in field 772 of Table 07 of its Form Mod. 22, of the amount of €206,953.55 (resulting from the difference between the original VPT: €309,705.91; and the acquisition value: €102,752.36).

q) The Applicant further proceeded, with respect to the property corresponding to the same cadastral article, to increase taxable profit in field 745 of Table 07 of its Form Mod. 22, of the amount of €204,705.91 (resulting from the difference between the original VPT: €309,705.91; and the sale value: €105,000.00).

r) The understanding set forth in the RIT was to the effect that only a deduction could be entered in Field 772 corresponding to the difference between the VPT resulting from the revaluation of the property: €171,880.00; and the acquisition value: €102,752.36 (that is, the deduction accepted by the RIT could only be in the amount of €69,127.64).

s) The RIT did not proceed, with respect to the property in question, to any correction to the VPT used by the Applicant in field 745, and therefore for these purposes, the final assessment took into account the original VPT (€309,705.91).

t) The Applicant paid the assessments which are the subject of the present proceedings (including interest and costs of enforcement proceedings) relating to the years 2010 and 2012 on 29/01/2015, in the total amount of € 10,703.31.

u) With respect to the assessment relating to the year 2013, the Applicant proceeded with the provision of a guarantee for suspension of the tax enforcement proceedings.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Basis for the proven and not proven factual matters

With respect to the factual matters the Tribunal does not need to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven from the not proven matters (see article 123, no. 2, of CPPT and article 607, no. 3 of CPC, applicable pursuant to article 29, no. 1, paragraphs a) and e), of RJAT).

In this way, the pertinent facts for the judgment of the case are chosen and delineated according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former article 511, no. 1, of CPC, corresponding to current article 596, applicable pursuant to article 29, no. 1, paragraph e), of RJAT).

Thus, taking into account the positions assumed by the parties, in light of articles 110/7 of CPPT and 557/1 of CPC, the documentary evidence and the procedural file joined to the records, the above-listed facts were considered proven, with relevance to the decision.

B. ON THE LAW

i. on the matter of exception

The Respondent begins by arguing that "there is a lack of subject matter of the present proceedings in the part in which it seeks that the arbitral tribunal examine the issue related to the possible correction that the tax inspection services should have made with a view to the neutrality of the operation and on which the Respondent entity never pronounced itself since no administrative appeal was filed, which constitutes a peremptory exception, which is invoked for all legal purposes, in accordance with the provisions of no. 3 of Article 577 of CPC, as amended by Law 41/2013, of 26 June, applicable pursuant to Article 1 of CPTA, which gives rise to the dismissal of the Respondent from the claim, in accordance with the provisions of no. 3 of Art. 576 of CPC.".

The AT further understands that "As a consequence of the lack of subject matter of the present request for arbitral pronouncement and as regards the part referred to, it is the understanding of the Respondent entity that the Arbitral Tribunal also lacks competence to examine the request in question.", since "having the Applicant not filed an administrative appeal the Respondent entity did not pronounce itself on this request.", and therefore, in the opinion of the Respondent, "the claim formulated is not concerned with the assessment acts resulting from the corrections undertaken, in accordance with the established in paragraph a) of no. 1 of Article 2 of RJAT, the Arbitral Tribunal is materially incompetent to examine a possible correction that should have been promoted by the tax inspection services.".

However, the Respondent is not correct, on these matters.

In fact, and first of all, the subject matter of the present arbitral proceedings is well defined, consisting of the additional IRC assessments of the Applicant, for the years 2010, 2012 and 2013 (and not, as the Respondent seems to believe, in the corrections carried out by it), for the examination of whose legality the arbitral tribunal is unquestionably competent, and it is necessary to distinguish, naturally, the subject matter of the action, from the vices attributed to it, which may or may not proceed.

On the other hand, as was written in the Decision of the Plenary of STA of 03-06-2015, handed down in case 0793/14[1], "In the judicial challenge subsequent to a decision of AT that falls on an administrative appeal or request for official revision of the tax act, the judicial bodies may, and must, have knowledge of all illegalities of substance that affect the tax act in crisis, whether or not such illegalities have been raised in the administrative phase of the dispute, and they are obliged to do so when it comes to matters of official knowledge.", there being, thus, no preclusion to the raising of vices of the tax act[2] in the context of impugnation, by reason of the fact that such vices were not previously raised in the context of administrative appeal.

In this way, and by the foregoing, the exceptions raised by AT must fail.

ii. on the merits of the case

The first issue raised by the Applicant to the Tribunal, for resolution, is whether the assessment relating to the year 2013, suffers from error in the quantification of the tax fact.

In this respect, it is noted that the Applicant does not indicate any rule that it considers violated in the quantification of the tax fact. This circumstance will not, however, prevent knowledge of the alleged vice, insofar as it is sufficiently determined, so as to be able to qualify as a question raised to the Tribunal, and this is obliged to, ex officio, apply the law to the facts, as follows from article 5/3 of the current Civil Procedure Code, and is confirmed by STA[3].

The Respondent, for its part, does not contest the allegations of the Applicant on this matter, limiting itself, in this respect, to defending itself by exception, as already resolved. As already mentioned, we are here examining the legality of the assessment resulting from the corrections promoted by AT, and not, simply, the legality of those corrections. In other words, what is at issue is not judging the (il)legality of corrections not made, but rather ascertaining the (il)legality of the assessment act in question, as it was carried out by AT.

Such legality must, in the first place, be determined in light of the provisions of article 64 of the applicable CIRC, which provides, for what is relevant here, that:

"1 — Sellers and buyers of real rights over real estate must adopt, for the purposes of the determination of taxable profit under the terms of this Code, normal market values that cannot be lower than the final tax patrimonial values that served as the basis for the assessment of the municipal tax on paid transfers of real estate (IMT) or that would serve in the event that there is no assessment of this tax.

2 — Whenever, in the paid transfers provided for in the preceding number, the value stated in the contract is lower than the final tax patrimonial value of the real property, this is the value to be considered by the seller and buyer, for the determination of taxable profit.

3 — For the application of the provisions of the preceding number:

a) The selling taxpayer must make a correction, in the income statement of the taxation period to which the income obtained from the transfer operation is attributable, corresponding to the positive difference between the final tax patrimonial value of the real property and the value stated in the contract;

b) The acquiring taxpayer adopts the final tax patrimonial value for the determination of any taxable result in IRC with respect to the real property."

With respect to this matter, it is established, in summary, that:

a) The Applicant acquired the property corresponding to cadastral article ... on 16/01/2009, having declared as value, in the corresponding contract, the amount €102,752.36;

b) At the time of acquisition the VPT of the property in question was €309,705.91;

c) On 20/03/2009, the VPT was changed to € 171,880.00;

d) The Applicant sold the same property on 12/12/2013, having declared as value, in the corresponding contract, the amount of €105,000.00;

e) The Applicant entered in Field 772 of Table 07 of the corresponding Form Mod. 22, as a value to be deducted, the difference between the declared acquisition value (€102,752.36) and the original VPT (€309,705.91).

f) The Applicant entered in Field 745 of Table 07 of the corresponding Form Mod. 22, as a value to be increased, the difference between the declared sale value (€105,000.00) and the original VPT (€309,705.91).

g) AT made the correction to the value entered in field 772, considering, in place of the value of the original VPT, the value resulting from the change, while leaving field 745 unchanged.

With respect to this matter, the instructions given by AT itself for the completion of Table 7 of Form 22 of IRC[4], refer to the following:

"Field 745 – Positive difference between the final tax patrimonial value of the real property and the value stated in the contract [art. 64, no. 3, paragraph a)]

Sellers and buyers of real rights over real estate must adopt, for the purposes of the determination of taxable profit, normal market values that cannot be lower than the final tax patrimonial values that served as the basis for the assessment of the municipal tax on paid transfers of real estate (IMT) or that would serve in the event that there is no assessment of this tax.

The selling taxpayer must make a correction in field 745 of the income statement of the taxation period to which the income obtained from the transfer operation is attributable, corresponding to the positive difference between the final tax patrimonial value of the real property and the value stated in the contract. (...)

Field 772 – Correction by the acquirer of the real property when it adopts the final tax patrimonial value for the determination of the taxable result in its respective transfer [art. 64, no. 3, paragraph b)]

Contrary to what happened under the former article 58-A, the acquirer of real rights over real estate can no longer account for real properties at the final tax patrimonial value (VPT) when higher than the acquisition value, and must respect the concept of acquisition cost referred to in the accounting regulations and in D.R. no. 25/2009, of 14 September.

Therefore, since the real property can no longer be accounted for at the VPT, the increase in depreciation that resulted from such accounting can no longer be accepted.

However, for tax purposes, this value (VPT) is taken into account in the determination of any taxable result in IRC that is to be determined with respect to the real property.

Consequently, when the taxpayer transfers the real property, the tax result is determined by considering as the acquisition value the VPT and not the acquisition cost that it recognized in its assets, when that value is higher than the acquisition cost.

Example:

A given taxpayer acquired, in 2013, a real property, for € 650,000.00, which it recognized in its inventories at the respective acquisition cost.

In 2014, it was notified of the VPT of this real property (€ 700,000.00), having included the respective document in the tax file provided for in art. 130 (art. 64, no. 5).

Assuming it transferred it in 2014 and:

a) That the sale price was € 720,000.00 (higher, therefore, than the VPT):

Accounting result: 720,000.00 – 650,000.00 = 70,000.00 Tax result: 720,000.00 – 700,000.00 = 20,000.00

(sale price) (VPT set at acquisition) Correction in Table 07:

Field 772 – Deduction of € 50,000.00

b) That the sale price was € 680,000.00 (lower, therefore, than the VPT):

Accounting result: 680,000.00 – 650,000.00 = 30,000.00 Tax result: 700,000.00 – 700,000.00 = 0

(VPT set for the real property) Correction in Table 07:

Field 745 – Increase of € 20,000.00 (€ 700,000.00 – € 680,000.00) Field 772 – Deduction of € 50,000.00 (€ 700,000.00 – € 650,000.00)

In this case, the taxpayer must increase, as a seller, in field 745, the positive difference between the VPT and the value stated in the sales contract (€ 20,000.00) and, as an acquirer, must deduct, in this field 772, the amount of € 50,000.00, corresponding to the difference between the VPT and the acquisition value stated in the contract. Consequently, the tax result of the sale of the real property is € 0.00."

As can be seen, and follows from AT's own instructions, the VPT to be considered for field 745 and for field 772, is the one in effect at the moment correspondingly relevant (acquisition, in the case of field 772, and sale, in the case of field 745), it being certain that there are no doubts that the VPT in effect at the time of sale was the changed value, of € 171,880.00.

By not considering the correct VPT value for the purposes of calculating the deduction in field 745 of Table 07 of Form 22 of IRC, the impugned assessment suffers from the alleged error in the quantification of the tax fact, by violation of article 64/3/a) of the applicable CIRC, insofar as it is not in conformity with what is established there.

In fact, the tax demanded in the assessment in crisis arises, as results from the established facts, not only from the (correct and legal) consideration of the updated VPT for the purposes of calculating the deduction from taxable profit, but also, from the (incorrect and illegal) consideration of the original VPT for the purposes of calculating the increase to the aforementioned profit.

It will not prevent the conclusion just reached, evidently, the circumstance that the Applicant itself has incurred in the same error, in the IRC statement presented by it.

Such circumstance, first of all, does not validate the illegality detected, nor does it exempt AT from its duties of objectivity and legality. On the other hand, the assessment act is an autonomous tax act, which – obviously – must be carried out in conformity with the applicable regulatory framework, and the illegalities from which it suffers, insofar as they are alleged or of official knowledge, are susceptible to declaration.

Thus, and in light of the foregoing, the arbitral claim should, in this respect, proceed, annulling the tax acts in question (2013 IRC assessment no. 2014 ... of 2014-11-20 and Assessment of compensatory interest with no. 2014 ...), insofar as they reflect the erroneous application of the original VPT, for the purposes of calculating the increase to taxable profit, in violation of the provisions of article 64/3/a) of CIRC.

The Applicant further contests the remaining corrections made in the tax acts which are the subject of the present proceedings, resulting from the consideration by AT of the value stated in the contracts for the acquisition of the real properties that the Applicant sold, in place of the VPT thereof.

At issue here is the circumstance that the real properties in question were acquired by the Applicant through private negotiation in the context of insolvency proceedings, the latter understanding that this form of acquisition is not subsumed under the concept of "judicial sale", used in article 12/4/16th of CIMT, and therefore, in the opinion of the same, the tax acts which it now attacks suffer from violation of no. 1 of article 64 of CIRC.

In this matter, however, it will not be correct.

Let us see: article 64/1 CIRC provides that the "normal market values (...) cannot be lower than the final tax patrimonial values that served as the basis for the assessment of the municipal tax on paid transfers of real estate (IMT) or that would serve in the event that there is no assessment of this tax".

This will thus be the starting point of the hermeneutical course to be followed; it will be necessary to ascertain whether IMT was assessed or, if not, what value would serve as the basis for that assessment, if it had occurred.

In the case, as there was no IMT assessment, the value that would serve as the basis for that assessment must be ascertained, which, in this case, results from article 12 of CIMT, which provides that:

"1 - IMT shall be assessed on the value stated in the act or contract or on the tax patrimonial value of the real properties, whichever is greater.

2 - In the case of real properties omitted from the property matrix or entered therein without tax patrimonial value, as well as goods or rights not subject to cadastral registration, the tax patrimonial value is determined in accordance with CIMI.

3 - To the tax patrimonial value is added the declared value of the component parts, when the same is not included in the aforementioned value. (...)

4 - The provisions of the preceding numbers are understood, however, without prejudice to the following rules:

16th The value of goods acquired from the State, the Autonomous Regions or local authorities, as well as those acquired by judicial or administrative sale, is the price stated in the act or contract";

In the case, as AT rightly considered, we are faced with a situation that can be brought within the concept of "judicial sale", used in the rule that has just been transcribed.

In fact, and as was written in the Decision of the STA of 05-11-2014, handed down in case 01508/12:

"II - The ratio legis of the rule contained in rule 16th, of no. 4, of art. 12 of CIMT relates to the greater assurance of the correspondence and conformity of the declared value to the actual value of the transaction in situations where the act of sale is carried out through the intervention of judicial and administrative authorities, it being admitted that there will always be control by those authorities over the value of the alienation, even though the sale is carried out after negotiation between a negotiator appointed by that body and the buyer.

III - The sale of real property carried out by the administrator in judicial insolvency proceedings and under judicial control (arts. 158 and 161 of CIRE) integrates the concept of judicial sale for the purposes of rule 16th, of no. 4 of art. 12 of CIMT.".

In this way, if there had been IMT assessment, the value that would serve as its basis would be the value declared in the contracts by means of which the Applicant acquired the real properties in question, and therefore this is the "final tax patrimonial value" for reference for the purposes of article 64/1 of CIRC.

Having said this, it is judged that no. 2 of the same article, although it contains the interpretation – now upheld by the Applicant – according to which whenever "the value stated in the contract is lower than the final tax patrimonial value of the real property, this is the value to be considered by the seller and buyer, for the determination of taxable profit.", should be read in conjunction with no. 1 that precedes it, which follows, first of all, from the expression "Whenever, in the paid transfers provided for in the preceding number".

Indeed, the ratio legis of no. 1 of article 64 is to ensure the "correspondence and conformity of the declared value to the actual value of the transaction", for the purposes of the taxation of enterprises, through the application of the rules of CIMT, and such ratio is pursued in no. 2, which must operate, by force, precisely, of its ratio legis, only in situations where the "market value" referred to in no. 1 is lower than the value that served as the basis for IMT assessment, or that would serve, if it had occurred.

Read, with proper attention, the rule of no. 1 in question, it is verified that it imposes that the "normal market values" cannot be lower than the "final tax patrimonial values that served as the basis for the assessment of the municipal tax on paid transfers of real estate (IMT) or that would serve in the event that there is no assessment of this tax". That is: this rule includes in the concept of "final tax patrimonial values" the values that "would serve in the event that there is no assessment of this tax", and therefore it must be concluded that this expression does not refer to the VPT, strictly speaking, but to the value that served or would serve as the basis for IMT assessment, regardless of whether that value is, or is not, the VPT.

When the expression "final tax patrimonial value" is reproduced in no. 2, it should be read – coherently – in the same way as in no. 1, that is, as not referring to the VPT, strictly speaking, but to the value that served or would serve as the basis for IMT assessment, regardless of whether that value is, or is not, the VPT.

Understood, in this way, the applicable regulatory framework, it must then be concluded by the conformity with the same of the impugned assessments, and in that respect, therefore, the arbitral claim must fail.

The Applicant combines with the request for annulment of the tax act which is the subject of the present proceedings, the request to condemn AT to payment of compensatory interest on the amount paid by it as a consequence of the tax acts now annulled.

However, examining the factual matters, it is verified that the Applicant only proceeded with payment of the assessments relating to the years 2010 and 2012, which remain, and not the one relating to the year 2013, which is the one covered by the partial success of the arbitral claim.

Thus, this request must also be judged to fail.

C. DECISION

In light of which, this Arbitral Tribunal decides:

a) To judge the arbitral claim partially successful and, consequently, to annul the tax acts in question (2013 IRC assessment no. 2014 ... of 2014-11-20 and Assessment of compensatory interest with no. 2014 ...), insofar as they reflect the erroneous application of the original VPT, for the purposes of calculating the increase to taxable profit;

b) To judge the remaining arbitral claims to fail;

c) To condemn the parties to the costs of the proceedings, in proportion to their respective defeats, fixing at €2,754.00, the amount charged to the Applicant, and at €918.00, the amount charged to the Respondent.

D. Value of the proceedings

The value of the proceedings is set at €163,311.41, in accordance with article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is set at €3,672.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective defeats, as set out above, since the claim was partially successful, in accordance with articles 12, no. 2, and 22, no. 4, both of RJAT, and article 4, no. 4, of the cited Regulation.

Let notice be given.

Lisbon

17 November 2015

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Vasco Valdez)

The Arbitrator Member

(Ana Duarte)

[1] Available for consultation at www.dgsi.pt, as well as the remaining jurisprudence cited without mention of origin.

[2] Although the same is not divisible, and to that extent, which is not the case. On this matter, see the Decision of the TCA-Sul, of 30-04-2014, handed down in case 05376/12.

[3] In this sense, see the Decision of 05-06-2013, handed down in case 0433/15, which reads: "In matters of law, the tribunal is not subject to the allegations of the parties, nor even with respect to the legal qualification of the facts carried out by them, and enjoys freedom in the investigation, interpretation and application of the Law (art. 664 of CPC)."

[4] Available at http://info.portaldasfinancas.gov.pt/NR/rdonlyres/FB6CB26B-D8B3-44AB-AF99-157215322F09/0/Manual_Q_07_Mod22.pdf.

Frequently Asked Questions

Automatically Created

How is taxable profit determined for real estate buy-and-sell transactions under Portuguese IRC?
Under Portuguese IRC law, taxable profit from real estate buy-and-sell transactions is determined by calculating the difference between disposal value and acquisition value of properties. According to this arbitration decision, the Tax Authority maintained that acquisition values must be the actual amounts declared in purchase contracts, not the Tax Patrimonial Value (VPT), even when properties are acquired in insolvency proceedings at prices below VPT. For disposal values, when sale prices are lower than VPT, the VPT amount should be used for taxable profit calculations, resulting in increases to taxable income (reported in field 745 of Table 07, Form 22). The proper accounting treatment requires companies to carefully distinguish between actual transaction values and fiscal reference values.
What grounds can be used to challenge additional IRC tax assessments before the CAAD arbitral tribunal?
Additional IRC tax assessments can be challenged before the CAAD arbitral tribunal on several grounds under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). Valid grounds include: violation of law (illegality), erroneous application of factual assumptions, incorrect application of legal provisions, and accounting errors in determining taxable profit. In this case, the applicant alleged all these grounds, specifically challenging the Tax Authority's methodology for calculating acquisition and disposal values of real estate. The challenge must be filed within 10 days after notification of the assessment acts through a formal arbitration request. The tribunal has jurisdiction to review both substantive tax law issues and procedural irregularities. Parties can contest the technical and legal basis of corrections made during tax inspections.
How are acquisition and disposal values of properties calculated for IRC taxable income purposes?
Acquisition and disposal values of properties for IRC taxable income purposes are calculated based on the values declared in the respective transaction contracts. According to the Tax Authority's position in this decision, the acquisition value must be the actual purchase price stated in the acquisition contract, regardless of whether it differs from the Tax Patrimonial Value (VPT). However, for disposal values, when the sale price is lower than the VPT, the VPT should be used instead of the actual sale price, requiring an increase to taxable profit. Companies must report these adjustments in Form 22: field 772 (Table 07) for deductions related to acquisition values, and field 745 (Table 07) for increases related to disposal values. The controversy in this case centered on whether VPT could substitute actual acquisition costs when properties were purchased below fiscal valuations.
What is the procedure for filing an arbitration request against illegal IRC tax assessments in Portugal?
The procedure for filing an arbitration request against illegal IRC tax assessments in Portugal follows the RJAT (Decree-Law 10/2011). Step 1: Within 10 days of notification of the contested assessment, file a written request for constitution of an arbitral tribunal with CAAD, identifying the contested acts and grounds for illegality. Step 2: The request is automatically notified to the Tax Authority (AT). Step 3: Parties may appoint arbitrators, or the CAAD Deontological Council appoints them. Step 4: The tribunal is constituted once arbitrators accept and parties don't refuse appointments. Step 5: AT files a reply (defense), typically within 30 days. Step 6: The applicant may respond to exceptions raised. Step 7: Written arguments are submitted. Step 8: The tribunal issues a decision within 30-60 days. No mandatory preliminary hearing is required if procedural economy principles apply. Legal representation and payment of arbitration fees are required.
Can compensatory interest charges on additional IRC assessments be contested in tax arbitration?
Yes, compensatory interest charges on additional IRC assessments can be contested in tax arbitration proceedings before CAAD. In this case, the applicant specifically challenged not only the principal IRC assessment amounts but also the separate assessments of compensatory interest (juros compensatórios) issued alongside the main tax debts. The arbitral tribunal has jurisdiction under RJAT to review the legality of both the underlying tax assessment and the consequential interest charges. For 2010, compensatory interest was assessed under number 2014...; for 2012 under number 2014...; and for 2013 under number 2014.... These interest charges represent a significant portion of the total amounts due and are automatically calculated when additional taxes result from inspection corrections. Grounds for contesting interest include: illegality of the underlying assessment (if the principal tax is annulled, interest falls), incorrect calculation methodology, or procedural errors in the assessment notification.