CAAD Process 188/2017-T: IRS Ratification Under Article 13 RJAT

Process: 188/2017-T

Date: February 1, 2018

Tax Type: IRS

Summary

This arbitral decision addresses critical procedural issues regarding late ratification of tax administrative acts in CAAD arbitration proceedings. Taxpayers A and B challenged an IRS assessment of €356,588.32 for the 2012 tax year, seeking annulment, reimbursement, and compensatory interest. A pivotal issue arose when the Tax Authority submitted a ratification order dated 04-05-2017 only on 08-11-2017, months after filing its response. The claimants objected on multiple grounds: failure to notify interested parties under Article 77(6) LGT and Article 66(1) CIRS; violation of the concentration of defense principle per Article 83(4) CPTA and Article 573(2) CPC via Article 29 RJAT; untimeliness under Article 168(3) CPA's ratification deadlines; and non-compliance with Article 13(1) RJAT's requirement to notify CAAD's President within prescribed time limits. This case exemplifies the intersection of RJAT, CPA, and CPTA in governing tax arbitration procedures. It demonstrates that while Article 164(5) CPA permits ratification to cure procedural defects in administrative acts, such ratification in arbitration contexts must comply with strict temporal and notification requirements. The claimants expanded their claim under Article 64(6) CPTA to seek judicial recognition of the ratification act's illegality regarding effects already produced. The decision clarifies that taxpayers can challenge both substantive tax assessments and the procedural validity of subsequent administrative acts submitted during arbitration. It reinforces procedural fairness principles, preventing tax authorities from introducing belated ratifications that circumvent defense concentration rules and established deadlines, thereby protecting taxpayer rights in administrative arbitration proceedings.

Full Decision

ARBITRAL DECISION

The arbitrators José Baeta de Queiroz (presiding arbitrator), Rui Ferreira Rodrigues and José Rodrigo de Castro (co-arbitrators), appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the arbitral tribunal, hereby agree as follows:

1. Report

1.1

A... and B... (hereinafter referred to as "Claimants"), married, respectively holding taxpayer numbers ... and ..., with tax domicile at Rua ..., No. ..., ..., in the city of Porto, requested the constitution of a collective arbitral tribunal, under the combined provisions of Article 2, No. 1, paragraph a) and Article 10, both of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as "RJAT") and Articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, in which the Tax and Customs Authority (AT) is the Respondent.

1.2

The request for arbitral pronouncement, submitted on 21 March 2017, together with 27 documents and a legal opinion authored by Professor Doctor C..., seeks the annulment or declaration of nullity of the Personal Income Tax (IRS) assessment No. 2016... relating to the tax year 2012; the annulment or consequent invalidation of the compensatory interest assessment No. 2016...; the condemnation of the AT to refund to the Claimants the sum of 356,588.32 € corresponding to the amount paid by them as tax and compensatory interest pursuant to and because of the assessments that are the subject of the present proceedings; the condemnation of the AT to payment of indemnificatory interest calculated at the legal rate in force on the said sum from the date of payment (20-12-2016) until the date of full and effective reimbursement to the Claimants of that same sum; and also the condemnation of the AT to payment of the costs of the arbitral proceedings, ordering the reimbursement of the arbitration fees paid by them in the present proceedings.

1.3

The Claimants chose not to appoint an arbitrator.

1.4

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the AT on 23 March 2017.

1.5

The signatories were appointed by the President of the Ethics Council of CAAD as arbitrators of the collective arbitral tribunal, pursuant to the provisions of Article 6 of the RJAT, and their acceptance of the appointment was communicated within the applicable period.

1.6

On 17 May 2017, the parties were notified of these appointments and did not object to them, in accordance with the combined provisions of Article 11, No. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the CAAD Code of Ethics.

1.7

Thus, in compliance with the provisions of Article 11, No. 1, paragraph c) of the RJAT, the collective arbitral tribunal was constituted on 01 June 2017.

1.8

The AT was notified, by arbitral order of 02 June 2017, pursuant to Article 17, No. 1 of the RJAT, to submit a response within 30 days, attach a copy of the administrative file (PA) and, if desired, request the production of additional evidence.

1.9

On 28 June 2017, given the extent of the pleadings and complexity of the matter at issue, the AT requested an extension, for an equal period, of the deadline to respond.

1.10

This was granted by order of 29 June 2017.

1.11

On 21 September 2017, the AT submitted its response, defending itself by exception (lack of merit of the initial petition due to unintelligibility of the cause of action) and by objection, requesting, respectively, the dismissal of the instance or, subsidiarily, the rejection of the request for arbitral pronouncement.

1.11

By order of 02 October 2017, the arbitral tribunal ruled that the exception raised was not established.

1.12

By the same order, the meeting provided for in Article 18 of the RJAT was dispensed with and the Parties were invited to submit written arguments, within a successive period of ten days, with the AT's period to be counted from notification of the Claimants' arguments.

1.13

Considering that the AT did not attach the PA, despite having stated in its response that it would do so, the Claimants, on 03 October 2017, requested that the AT be notified with a view to attaching such document, since it was an essential means of evidence in demonstrating several facts alleged in the request for arbitral pronouncement.

1.14

On the same date they responded to the exception raised by the AT, requesting its rejection, and also requesting the condemnation of the AT as a litigant in bad faith to an appropriate fine and payment to the Claimants of compensation to be determined at the tribunal's discretion in an amount corresponding to 5% of the value of the condemnatory claim.

1.15

Also on the same date (03-10-2017) the tribunal ordered the AT to be notified to attach the said PA within five days.

1.16

The Claimants, on 03-10-2017, having learned of the issuance of the order that ruled the said exception inadmissible, requested the disregard of the pleadings concerning the response to it.

1.17

On 13 October 2017, the Claimants submitted arguments and formulated the consequent conclusions, requesting the admissibility of the request for arbitral pronouncement, as set out in the respective petition, and also requesting the condemnation of the AT as a litigant in bad faith to a fine and compensation to be determined by the arbitral tribunal.

1.18

On 19 October 2017, the AT attached the respective PA to the proceedings.

1.19

On 30 October 2017, the AT submitted arguments, requesting once again the admissibility of the exception invoked or, subsidiarily, the rejection of the request for arbitral pronouncement and, responding to the request for condemnation as a litigant in bad faith, it states the absence of any fault regarding the alleged exception of lack of merit of the initial petition, given its verbosity.

1.20

On 08-11-2017, the AT requested the attachment of a document (order ratifying the order, undated, provided for in Article 65, Nos. 4 and 5 of the CIRS), dated 04-05-2017, which, it states, it inadvertently failed to attach to the PA.

1.21

On the same date the Arbitral Tribunal admitted the attachment of the said document and set 30 November 2017 as the date for issuance of the arbitral decision.

1.22

Upon notification of the attachment of this document, the Claimants, on 20-11-2017, request that the arbitral tribunal disregard and disattend it, because:

It is legally ineffective, by virtue of not having been notified to the directly interested parties, see Article 77, No. 6, of the General Tax Law (LGT); Article 36, No. 1, of the Code of Tax Procedure and Process (CPPT); and Article 66, No. 1, of the Personal Income Tax Code (CIRS);
Its late presentation and invocation in the present proceedings violates the principle of concentration of defence, in particular in its dimension of prohibition of invocation of new means of defence after the submission of the AT's response, except in the case of subsequent means, see Articles 83, No. 4, of the Code of Procedure in Administrative Courts (CPTA) and 573, No. 2, of the Code of Civil Procedure (CPC), by virtue of Article 29 of the RJAT;
It is illegal, as untimely, by virtue of having only taken place after the expiration of the time limit set in Article 168, No. 3, of the Code of Administrative Procedure (CPA), applicable by virtue of Article 164, No. 1, of the same code; and
It is illegal, as untimely, by virtue of not having been notified to the President of CAAD within the time limit set in Article 13, No. 1, of the RJAT.

1.23

Consequently they proceed to the expansion of the claim and the cause of action, so that the arbitral tribunal recognizes the illegality of that act, with respect to effects already produced, under the provisions of Article 64, No. 6 of the CPTA, applicable by virtue of Article 29, No. 1 paragraph c) of the RJAT. And that the validation of the act shall be valid only for the future, pursuant to Article 164, No. 4 of the CPA, since the remedial act was issued while the present proceedings were pending.

1.24

Altering the petition as follows:

"a. This learned Arbitral Tribunal should declare the original invalidity of the Alteration Act issued by the Head of the Tax Inspection Division V on an unknown date (because omitted from the text of the act itself and from its notification), arising from a defect of relative incompetence;

b. This learned Arbitral Tribunal should annul the harmful effects produced in the interim by the Alteration Act in the period that preceded the issuance of the Ratification Order, pursuant to Article 164, No. 5, at the end, of the CPA; and consequently,

c. To proceed to the annulment of the Challenged Assessment (i) either because it is in itself one of the harmful effects produced in the interim by the Alteration Act that must be annulled by virtue of Article 164, No. 5, at the end, of the CPA; and (ii) either because as a consequence of the annulment of the harmful effects produced in the interim by the Alteration Act, the Challenged Assessment is affected by a defect of violation of law arising from error in the factual presuppositions, in that it was based on a circumstance that, in reality, did not occur, because at the date on which the Challenged Assessment was issued there was no legally valid title by means of which could be considered established (by alteration or correction of income declared by the Claimants) the taxable base on which the Challenged Assessment was levied.

In all other respects the claim and cause of action regarding the grounds of illegality attributed to the Challenged Assessment and the Compensatory Interest Assessment in the request for arbitral pronouncement and reiterated in the Claimants' arguments are maintained".

They also request the condemnation of the AT for contumacious bad faith litigation to appropriate compensation to the Claimants to be determined at the discretion of this arbitral tribunal.

1.25

By order of 21-12-2017 the objective amendment of the instance was admitted.

1.26

The Respondent being notified to, within ten days, submit, if desired, complementary arguments restricted to the matter contained in the admitted amendment.

2. Position of the Parties

The cause of action is as follows, that is, the facts that serve as the basis for the condemnatory claims made by the Claimants:

On the illegality of the additional Personal Income Tax assessment:

2.1 Illegality arising from a defect of relative incompetence;

2.2 Illegality arising from expiry of the right to assess;

2.3 Illegality arising from expiry of the tax procedure;

2.4 Illegality arising from a procedural defect by omission of notification of the decision to initiate the tax procedure;

2.5 Illegality arising from violation of the principle of procedural participation;

2.6 Illegality arising from a formal defect by omission of notification of the authorizing order of the head of the service;

2.7 Illegality arising from nullity of notification of the income alteration act;

2.8 Illegality arising from a defect of lack of reasoning;

2.9 Illegality arising from a defect of incongruence of the reasoning;

2.10 Illegality arising from error in the factual presuppositions in the application of the anti-abuse provision;

2.11 Illegality arising from error in the legal presuppositions in the application of the anti-abuse provision;

2.12 Illegality arising from violation of the principles of proportionality and reasonableness;

2.13 Illegality arising from violation of the principle of tax capacity and procedural illegitimacy;

On the illegality of the compensatory interest assessment:

2.14 Illegality consequent to the illegality of the additional Personal Income Tax assessment;

2.15 Illegality arising from violation of the right of procedural participation;

2.16 Illegality arising from a defect of lack of reasoning;

2.17 Illegality arising from errors in the factual and legal presuppositions; and

2.18 On liability in case of bad faith.

2.1 Illegality arising from a defect of incompetence

From the Claimants (Articles 487 to 592 of the request for arbitral pronouncement (r.p.a.), 29 to 34 of the arguments and complementary arguments submitted on 20-11-2017):

That, pursuant to No. 5 of Article 65 of the CIRS, the competence to perform the acts of determination, fixing or alteration referred to in this article is exercised by the director of finance in whose area the tax domicile of the taxpayers is located, that is, in the case of the present proceedings, the director of finance of Porto.

However, the alteration act was performed by the tax official Dr. D..., who holds the position of Head of Division of the Tax Inspection Division ... of the Finance Directorate of Porto.

That the director of finance of Porto delegated such competence to the assistant director of finance Dr. E..., who in turn sub-delegated it to the said head of division, but only up to the limit of 1,000,000.00, per tax year.

Therefore, considering that the altered amount is 1,500,371.24 €, the said competence, in the present case, was neither delegated nor sub-delegated, and must be exercised by the competent entity, that is, by the director of finance of Porto.

Thus the act altering the net income, performed pursuant to Article 65, No. 4, of the CIRS, is affected by a defect of incompetence, in that it was performed by an organ or agent who did not have its own, delegated or sub-delegated competence for its issuance, generating the voidability of the act affected by it, see Article 163, No. 1, of the CPA.

The defect of incompetence pointed out in the alteration act generates its voidability and, by extension, by virtue of the principle of unitary objection provided for in Article 54 of the CPPT, generates the consequent voidability of the assessment itself that is being objected to.

In the complementary arguments submitted on 20-11-2017, the Claimants state:

That the ratification order is legally ineffective, by virtue of not having been notified to the directly interested parties, see Article 77, No. 6, of the LGT; Article 36, No. 1, of the CPPT; and Article 66, No. 1, of the CIRS;

Its late presentation and invocation in the present proceedings violates the principle of concentration of defence, in particular in its dimension of prohibition of invocation of new means of defence after the submission of the AT's response, except in the case of subsequent means, see Articles 83, No. 4, of the CPTA and 573, No. 2, of the CPC, by virtue of Article 29 of the RJAT;

That the said order is illegal, as untimely, by virtue of having only taken place after the expiration of the time limit set in Article 168, No. 3, of the CPA, applicable by virtue of Article 164, No. 1, of the same code; and

As well as by not having been notified to the President of CAAD within the time limit set in Article 13, No. 1, of the RJAT.

From the Respondent (Articles 50 to 52 of the arguments):

It states that, analyzing pages 75, 117, 203, 208 and 251 of the PA, it is easily apparent that all acts contain the signature and the date on which they were performed.

Therefore, the lack of the formality invoked by the Respondent is not understood.

2.2 Illegality arising from expiry of the right to assess

From the Claimants (Articles 45 to 141 of the r.p.a. and 5 to 9 of the arguments):

That, according to Article 45, No. 1 of the General Tax Law (LGT), "(...) the right to assess taxes expires if the assessment is not validly notified to the taxpayer within four years, when the law does not set another".

And that, in the case of periodic taxes, according to No. 4 of the same provision "(...) the initial term of the said limitation period occurs with the end of the year in which the tax event took place".

Since the additional Personal Income Tax assessment relating to the year 2012 is at issue in the present proceedings (periodic tax), the initial term of the limitation period took place on 31-12-2012, with the final term occurring on 31-12-2016, since there was no suspensive or interruptive event of the said limitation period.

That the assessment should have been validly notified to the Claimants by this date, under penalty of the AT's right to assess having expired.

As it is not an intrinsic element of the assessment act, and therefore does not constitute a requirement for its validity, its notification functions as a condition of effectiveness and of its ability to produce legal effects, particularly vis-à-vis the taxpayer to whom it is addressed.

However, the challenged assessment was not validly notified to the Claimants until the expiry of the limitation period, which ended on 31-12-2016.

That, on 11-3-2016 the Objectors granted power of attorney to an Attorney to represent them in the context of the tax procedure that led to the issuance of the challenged assessment (see Document No. 7), granting her "(...) the broadest general powers allowed under law, including the power to substitute, to act in their name and representation in the context of the tax procedure currently pending at the Finance Directorate of Porto - Tax Inspection Services - Division ... under No. OI 2016..., as well as in all its incidents and annexes and in all gracious, judicial or arbitral proceedings that have as their object the decisions that may be issued in that procedure and in its incidents and annexes".

The said power of attorney was attached to the petition signed by the respective representative (see Document No. 8), in the context of the right to hearing exercised by the Objectors regarding the draft report of the inspection action, having been submitted on 14-03-2016.

Therefore, pursuant to Article 40, No. 1, of the Code of Tax Procedure and Process (CPPT), notifications to interested parties who have appointed an attorney shall be made to the person of the attorney and at their office.

With No. 3 of the same article providing that notifications shall be made by registered mail or notice, addressed to the domicile or office of the notified parties, who may be notified by the competent official when found in the service or court building.

This means that "(...) having the Objectors appointed an attorney, all acts of the tax procedure - and by an even stronger reason, its final and horizontally definitive act, which moreover is the only one that can legally be subject to objection (Article 54 of the CPPT) - should be notified to the Objectors in the person of the respective attorney and at their office".

In this sense the Central Administrative Court South (TCAS) ruled in the judgment of 10-04-2014 (Case No. 07443/14): "(...) In the case at hand, what matters, therefore, is to ascertain whether notification was made to the objector and in the legal form, within the limitation period for assessment. (...) Article 40, No. 1, of the C.P.P.T. establishes the obligation for notification of interested parties who have appointed an attorney to be made to the person of their attorney, and such rule applies to notifications to attorneys both in tax procedures and in tax court proceedings. "(...) From the exegesis of the regime just mentioned it should be concluded that having appointed a judicial attorney in the tax procedure it is mandatory to notify them of the assessment act that terminated the same gracious procedure, this notification being not replaceable by notification of the taxpayer themselves. (...) it must be concluded that notification made only to the person of the taxpayer is ineffective, in particular to make the final term of the limitation period for the right to assess take effect (see judgment S.T.A.-2nd Section, 4/5/2011, case 927/10; Jorge Lopes de Sousa, C.P.P.Tributário annotated and commented, Volume I, Áreas Editora, 6th edition, 2011, page 394 et seq.). (...) Concluding, the assessment acts in question cannot produce effects with respect to the taxpayer, being, for that reason, ineffective acts, which is declared".

All the more so as "the final report of the inspection action and the subsequent act altering the taxable income of the Objectors were, and rightly so, notified to the Objectors in the person of the appointed representative through official correspondence sent by post to their office (see Document No. 9)", and in the same notification it was stated that, "In the near future, the AT Services will proceed to notify the respective assessment, which will contain the means of defence, as well as the payment period, if applicable".

However, "In the communication addressed to the Objectors (see Document No. 12, through which it was reported that "...on this date we notify your representative [...] of the result of the inspection action...") no reference was made to a future notification of the assessment, nor to the terms in which it would be carried out".

Resulting, thus, in the inescapable conclusion that "the objected assessment act was not validly notified to the Objectors within the limitation period provided for in Article 45, No. 1, of the LGT", at least until the date of filing of the initial petition, not constituting a personal act for the purposes of No. 2 of Article 40 of the CPPT.

"Nor can it be opposed to what is said above a certain construction that has been gaining acceptance in some doctrine, pointing to the fact that the assessment procedure is a procedure distinct from the preceding 'procedures' that chronologically preceded it - and by an even stronger reason, from the inspection action - and that therefore the appointment of an attorney in the inspection action would no longer be valid for the subsequent assessment procedure".

Indeed, "Tax procedure is a sequential unit of procedural acts ordered for the purpose of performing an assessment act", this being understood, in the broad sense, as "the set of acts, legally framed, that have as their object the determination and quantification of the tax obligation, encompassing both the actions of the tax administration (application of indirect or circumstantial methods, application of tax rates, calculation of deductions owed, etc.), and the actions of taxpayers or third parties (declarations, for example) to that end".

"Because by virtue of the principle of unitary objection (see Article 54 of the CPPT) all procedural action prior to the issuance of the assessment act (that is, the assessment in the strict sense) forms part of a single tax procedure".

It being unsustainable to assert that "(...) the preceding (sub)procedure inspection and the subsequent (sub)procedure assessment are completely separate and sealed off from each other, so that one could draw the conclusion that the attorney appointed to intervene on behalf of the taxpayer in the first of those (sub)procedures already lacks the power to appear in the second of them".

Thus, "The appointment of an attorney at any stage or (sub)procedure of the tax procedure is valid for the entire tax procedure, including for the (sub)procedure of assessment in the strict sense that puts an end to it".

"Therefore, "The attorney appointed by the taxpayer at any stage or (sub)procedure of the tax procedure remains in the fullness of their powers of representation until the end of the tax procedure - that is, until the issuance of the assessment act".

Accordingly, "(...) having the taxpayer appointed an attorney at any moment, stage or (sub)procedure of the tax procedure, subsequent notifications that must be made to them must be carried out in the person of the appointed attorney", including also notification of the assessment, which is moreover the final and sole act of the procedure that can be subject to objection (Article 54 of the CPPT).

It is also important to note that "(...) the case at hand does not concern a normal and typical assessment procedure, with respect to which some doctrine has pronounced that a distinction and separation should be made between the inspection phase and the assessment phase", but rather a procedure for assessment of taxes on the basis of the application of the anti-abuse provision, provided for and regulated by Article 63 of the CPPT, initiated ex officio by the AT, and directed to the assessment of taxes on the basis of the provisions of Article 38, No. 2, of the LGT.

That procedure is expressly regulated in the section relating to "proper procedures [of assessment]" (Section IV) of the chapter relating to "assessment procedure" (Chapter III) of the CPPT and which "(...) comprises a procedure that extends from the decision to initiate until the assessment decision, passing through the preparation of a draft decision, the hearing of the taxpayer and the authorization decision of the head of the service".

From the foregoing it concludes that the AT's right to proceed with the challenged assessment has expired, since it was not validly notified to the Objectors within the limitation period.

From the Respondent (Articles 7 to 17 of the arguments):

The Claimants appointed an attorney in the proceedings and participated in the tax inspection procedure that underlies the application of the General Anti-Abuse Clause (CGAA), having been notified to exercise the right of hearing, and to participate in the decision/procedure, so it is manifestly abusive and in a clear situation of venire contra factum proprium to argue that after all they were never notified of the assessment, as stated in Article 79 of the r.p.a.

It states that the Claimants were validly notified not only of OI2016... as came to exercise, on 04 March 2016, the right of hearing (see p.a.) having been notified through their representative and additionally in their persons of the conclusion of the procedure and the Claimants of the tax assessment, all before 31-12-2016.

Therefore, the alleged expiry of the assessment invoked is manifestly inadmissible.

2.3 Illegality arising from expiry of the tax procedure

From the Claimants (Articles 142 to 300 of the r.p.a. and 10 to 18 of the arguments):

That the assessment of taxes on the basis of the anti-abuse provision contained in No. 2 of Article 38 of the LGT, follows the terms of the proper procedure provided for and regulated in Article 63 of the CPPT, which is of first instance, initiated ex officio by the AT services and typically culminates, at the end of its procedure, with the issuance of an act assessing a tax.

As no tax procedure can be prolonged indefinitely and the legislator has not set a maximum period for its duration, recourse must be made to the provisions of Article 57, No. 1, of the LGT, pursuant to which the tax procedure, including that regulated in Article 63 of the CPPT, must be concluded within four months and which is computed in accordance with the terms provided for in Article 279 of the Civil Code (see Article 20, No. 1, of the CPPT; Article 57, No. 2, of the LGT). However, the tax legislator does not indicate what the consequence of non-compliance or failure to observe this period is.

That there is no provision in the CPPT or in the LGT that disciplines or determines the consequence that should occur when the AT exceeds the maximum period for the duration of a tax procedure, initiated on its own initiative, so recourse must be had to the application of subsidiary law, in accordance with the provisions of Article 2 of the CPPT, invoking for this purpose Article 128, No. 6, of the Code of Administrative Procedure (CPA) which states: "[o]ffice-initiated procedures, capable of leading to the issuance of a decision with unfavorable effects for the interested parties, expire, in the absence of a decision, within 180 days."

For this consequence - the expiry of the administrative procedure - to occur, the following requirements must be met:

being an office-initiated procedure;
the procedure being capable of leading to the issuance of a decision with unfavorable effects for the interested party;
absence of issuance of a decision in the procedure within 180 days.

For the Claimants this rule has full application to the case of the tax assessment procedure by application of the anti-abuse rule, provided for and regulated in Article 63 of the CPPT, with respect to the consequences of non-compliance with the maximum period for the duration of that type of procedure and not as to the fixing of the maximum duration period for office-initiated procedures of the Administration.

Although the decision to initiate the tax procedure was not notified to the Objectors, from the final report of the inspection action it follows that it was initiated on or before 26-01-2016 (see page 1 of Document No. 9), so the maximum period for its decision - four months - would end on 27-05-2016 (since 26-05-2016 was a national holiday) or on 01-07-2016, if the holding of the hearing of the interested parties had the effect of suspending the running of the period, by virtue of the provisions of Article 121, No. 3, of the CPA.

Thus, on 01-07-2016, the expiry of the procedure occurred and the consequent extinction of the procedural legal relationship, so all acts issued after this date, in particular the order of the Director-General of the AT, of 18-10-2016, which was apparently to authorize taxation by application of the anti-abuse provision, in accordance with and for the purposes provided for in Article 63, No. 7, of the CPPT; the order that altered the income declared by the Objectors, whose date is unknown; and the Assessment No. 2016..., corresponding to the Additional Personal Income Tax Assessment relating to the tax year 2012 (which corresponds to the Challenged Assessment) issued on 10-11-2016, were issued after the tax procedure had expired, which means they were performed with total omission of the legally required procedure, to which corresponds the sanction of nullity, see Article 161, No. 2, paragraph l), of the CPA.

For internal inspection actions - precisely the type of inspections at issue in the tax procedure that is the subject of the present proceedings - no consequence is provided for in the tax laws for non-compliance by the AT of the maximum period (six months) set for its duration, so making the regime set out in Article 128, No. 6, of the CPA work, in a subsidiary capacity, and considering that the said inspection action was initiated on or before 26-01-2016, the end of the period would occur on 26-07-2016 or on 29-08-2016, if the holding of the hearing of the interested parties had the effect of suspending the running of the period, by virtue of the provisions of Article 121, No. 3, of the CPA.

Thus, from one of these two dates onwards the internal inspection action procedure expired, and the acts subsequently issued by the AT are null, in particular the final report of the internal inspection action (dated 21-10-2016), as well as the sanction order that fell upon it (dated 31-10-2016), with such nullity extending to the concomitant invalidity of the Challenged Assessment itself, which is thus equally null.

But, even if it were understood that Article 161, No. 2, paragraph l), of the CPA would not apply to the present case, it would still have to be concluded, nonetheless, to the voidability of the Additional Assessment arising from the already pointed out expiry of the tax procedure, in that there is a procedural defect generating illegality, pursuant to Article 163, No. 1, of the CPA.

From the Respondent (Articles 18 to 33 of the arguments):

It states that "the legislator does not determine any period for the initiation and conclusion of the procedure, and doctrine and case law itself make the application of the CGAA depend only on the expiry of the beginning of the 'last step' of the set of acts of the abusive scheme".

Therefore, "it would be difficult for a period for the procedure to be shorter than that of the inspection action not only because we are dealing with complex schemes, but also sometimes they are multi-located, which cannot be reconciled with the normal general periods of inspection action".

It understands that the period is merely organizational, implying only that the procedure be initiated and concluded, and the consequent assessment occur within the time window of the 4 years of expiry.

That "It would be rash, implying the very unexecutability of Article 38, No. 2 of the LGT, to impose a period of 4 months for the inspection services to dismantle complex, artful schemes of abusive tax planning, which are often not easily perceptible or dismantleable, as is indeed what happens in the present proceedings".

That "(...) having the procedure been concluded and the Respondent notified of the assessment before 31 December 2016, the period of the inspection action is irrelevant, which in this case being internal does not suspend the limitation period".

Thus, the four-month period provided for in Article 57, No. 1, of the LGT, because referred to the general period for administrative procedure, is inapplicable to the case.

Therefore, given the various reasons mentioned above, the expiry of the procedure now invoked does not occur, nor do the consequent nullities also invoked.

2.4 Illegality arising from a procedural defect by omission of notification of the decision to initiate the tax procedure

From the Claimants (Articles 301 to 327 of the r.p.a. and 19 to 20 of the arguments):

That from the draft report notified to the Objectors (see Document No. 5) and the final report (see Document No. 9), in the context of the procedure to which the present proceedings relate, an internal inspection action was initiated against the female Objector, commencing on 26-01-2016 and ending on 04-02-2016, pursuant to and by reason of an alleged service order No. OI 2016..., which would have had as its scope the Personal Income Tax relating to the tax year 2012.

However, at no time is it stated who issued the said service order, what the motivation underlying it was, its respective reasoning and, likewise, its scope and purposes.

On the other hand, the Objectors were not notified at any time of the service order mentioned above and allegedly issued, thus not knowing its content and scope, being prevented from participating in the investigative phase of the tax procedure that led to the issuance of the Challenged Assessment, as well as knowing all the elements that were being brought to the proceedings by the AT.

That it is a general principle of tax law that the initiation of any and all tax procedure must be notified to the interested parties, as follows from Article 69, No. 2, of the LGT, and the omission thereof is a procedural defect capable of generating the annulment of the decision made on the basis of it.

It also states that an interpretation of Article 51, No. 2, of the RCPITA, according to which this rule would exclude the application of Article 69, No. 2, of the LGT to internal inspection actions, would be organically unconstitutional, since the RCPITA was approved by the Government under its concurrent legislative power, while the LGT is a law adopted under authorized legislative power.

Hence, as a consequence of the alleged procedural defect arising from failure to comply with the principle of procedural participation, the Tribunal should declare the annulment of the Challenged Assessment, with all legal consequences.

From the Respondent (Articles 34 to 38 of the arguments):

It states that, as per the judgment of TCASul of 07-10-2012 (Case 05292/12) "the internal inspection procedure has as its object the formal analysis and coherence of the documents of the taxpayer's accounts, as well as their cross-checking with other elements collected", with no place for the credentialing of officials for this purpose nor the issuance of a service order for the purpose of notifying the taxpayer at the beginning of the procedure, which also follows from Article 49, No. 1, of the RCPIT (a contrario).

Therefore, the alleged defect is without merit.

2.5 Illegality arising from a formal defect by violation of the principle of procedural participation

From the Claimants (Articles 328 to 412 of the r.p.a. and 21 to 24 of the arguments):

The witnesses enrolled by the Claimants were heard at the premises of the District Finance Directorate of Porto on 31-03-2016 (three) and on 06-04-2016 (the remaining two), behind closed doors, only in the presence of tax inspectors without the representative or the Claimants being present.

After the exercise by the Objectors of their right to prior hearing, the AT proceeded ex officio and on its own initiative to collect new means of documentary evidence, in particular:

It obtained from the official website of corporate publications of the Ministry of Justice a draft merger relating to a company named F..., LDA (Tax ID...), whose content is expressly cited and invoked in the final report of the inspection action (see pages 61-62 of Document No. 9).
It obtained the Annual Declarations of Accounting and Tax Information/IES submitted by the company G... SGPS, S.A. during a period of 16 years (from 1999 to 2014), having reproduced (moreover with errors and inaccuracies) some of the accounting information contained therein in a table that appears on page 63 of the final inspection report and commenting on these data several considerations and conclusions, also incorrect and unfounded, on pages 60 and 62-64.
It obtained the Annual Declarations of Accounting and Tax Information/IES submitted by a company called H... LDA (Tax ID...) relating to the tax years 2012 to 2014, having reproduced (it is unknown whether correctly or incorrectly) some of the accounting information contained therein in a table that appears on page 64 of the final inspection report and commenting there on these data several considerations and conclusions.
It obtained a news report published in the Jornal Público of 15-07-2012, the full text of which it reproduced on pages 66 and 67, attempting to extract from such report the alleged proof of instrumental facts for filling the factual basis of the norm of Article 38, No. 2, of the LGT.

Also the testimony of some of the witnesses enrolled were expressly invoked in the final inspection report (see pages 27 to 29; and page 65).

As a consequence, after the exercise by the Objectors of their right to prior hearing, the AT carried out complementary investigative steps that were not made known when notified to exercise the said right, nor were they confronted with these means of evidence nor with the use (moreover erroneous and incorrect) made of them by the AT in the final RIT, thus being deprived of making any pronouncement.

The omission of the promotion of this new hearing of the Objectors proves, in the concrete case, to be a violation of the principle of procedural participation, established in Article 60 of the LGT, and which constitutes the failure to comply with an essential legal formality, generating a procedural defect that extends to the voidability of the Challenged Assessment, not subject to the benefit of the act as concerns the taxation by application of the general anti-abuse provision, provided for in Article 38, No. 2, of the LGT, whose application involves a special "degree of uncertainty" arising from the fact that it involves a certain degree of subjectivity on the part of the organs of the Tax Administration.

Thus it cannot be sustained that, even if the Objectors had the opportunity to exercise their right of hearing after the completion of the complementary investigative steps, the administrative decision would necessarily have the same content.

That is, even so, by virtue of the provisions of Article 103, No. 3, of the CRP, all formalities established in the tax procedure are essential formalities and their failure always has an invalidating effect, from which follows the inapplicability in the field of tax law of the principle of benefit of the act, provided for in Article 163, No. 5, of the CPA. Any different interpretation would be materially unconstitutional.

From the Respondent (Articles 39 to 41 of the arguments):

It states that "In the context of the inspection procedure and before the formation of the act of authorization of the CGAA, the Respondent participated in the procedure, exercising the right of hearing, there even being testimony of witnesses, exposing facts and law the reasons why she does not agree with the application of the CGAA procedure".

Therefore, such allegation is manifestly inadmissible.

2.6 Illegality arising from a formal defect by omission of notification of the authorizing order of the head of the service

From the Claimants (Articles 413 to 486 of the r.p.a. and 25 to 28 of the arguments):

That the authorizing act provided for in No. 7 of Article 63 of the CPPT does not have external effects, but purely internal ones. However, although not bearing a harmful or definitive character, it is a procedural act that conditions and serves as a necessary presupposition of the final decision-making act of the procedure, configuring itself as constitutive of legitimation.

The fact that inter-organ authorizations constitutive of legitimation do not have external effectiveness nor are immediately harmful does not remove from them the nature of true administrative acts, internal and procedural, that shape the object of the procedural legal relationship, functioning as a procedural presupposition (and not material) of the subsequent act of assessment of a tax by application of the general anti-abuse provision.

From which it follows that the authorization of the head of the service referred to in No. 7 of Article 63 of the CPPT is not immediately harmful to taxpayers, because it does not itself operate any deprivation of the legal sphere of the interested parties, but is capable of affecting the rights and legitimate interests of taxpayers, thus having constitutive effectiveness and innovative effects that reflect in their status as subjects of the procedural legal relationship.

Therefore, as it is not an act with external effectiveness in the plane of the substantive relationship of tax law, the authorizing act is an act modifying the procedural legal relationship, reconfiguring its object so as to legitimize the AT to issue a harmful and external tax act that, otherwise, would not have procedural legitimacy to issue.

Thus, given this nature of a procedural administrative act, shaping the object of the procedural legal relationship and serving as a presupposition of the assessment act, the authorization of the head of the service must be notified to the interested parties in the procedure, also by virtue of the provisions of Article 77, No. 6, of the LGT and Article 36, No. 1, of the CPPT, under penalty of generating the ineffectiveness of that decision and preventing it from being able to serve as a presupposition and condition for the practice of the authorized act, that is, of the act of assessment of the tax by application of the general anti-abuse provision.

Thus, the failure to notify the Objectors of the order to authorize taxation by application of the general anti-abuse provision, apparently issued by the Director-General of the AT, on 18-10-2016, generates its legal ineffectiveness, since they do not know not only whether the order was actually issued, but have no knowledge whatsoever of its content and grounds, determining the voidability of the consequent assessment, that is, of the Challenged Assessment, by reason of violation of law due to error in the factual presuppositions, as well as due to a defect of illegitimacy.

Consequently, in the admissibility of the invoked defects arising from the legal ineffectiveness of the alleged authorizing order allegedly issued by the Director-General of the AT, the Challenged Assessment is voidable and, as such, the Tribunal should determine its annulment.

From the Respondent (Articles 42 to 49 of the arguments):

It states that, pursuant to Article 63, No. 7, of the CPPT, the application of the anti-abuse provision referred to in No. 1 is prior and mandatorily authorized, after the prior hearing of the taxpayer, provided for in No. 5, by the head of the service or by the official in whom he has delegated that competence.

That the draft application of the CGAA was validly notified to the Claimants, having them exercised the right of hearing and participated in the decision of the authorization order, knowing the factual and legal grounds underlying the authorization order of the CGAA, being consequently notified of the final report and the authorization order, which thus integrates it, in view of the principle of unitary objection contained in Article 54 of the CPPT.

Therefore, the alleged defect is manifestly without merit, and it is also not apparent how Article 103, No. 3 of the CRP is being violated, which in any case does not specify the alleged unconstitutionality.

2.7 Illegality arising from nullity of notification of the income alteration act

From the Claimants (Articles 593 to 667 of the r.p.a. and 35 to 38 of the arguments):

That the notification of the Alteration Act suffers from the insanable nullity referred to in Article 39, No. 12, of the CPPT, since nowhere in the notification letter is any reference made to the date of issuance of the notified act, that is, the notification does not contain the date on which the Alteration Act was issued nor in the fixing/alteration note itself.

That the table 3 of the said note, intended for the indication of the tax domicile of the taxpayers, is incorrect, since the objectors never had a domicile at the address mentioned there, which they don't even know where it is located.

Thus, the notification of the Alteration Act being null due to a defect of violation of law arising from error in the factual presuppositions, the same act is legally ineffective, see Article 36, No. 1, of the CPPT and Article 77, No. 6, of the LGT, determining the voidability of the consequent assessment, that is, of the challenged assessment, with the Tribunal being required to determine its annulment.

From the Respondent (Articles 50 to 52 of the arguments):

It states that, analyzing pages 75, 117, 203, 208 and 251 of the PA, it is easily apparent that all acts contain the signature and the date on which they were performed.

Therefore, the lack of the formality invoked by the Respondent is not understood.

2.8 Illegality arising from a defect of lack of reasoning

From the Claimants (Articles 668 to 743 of the r.p.a. and 39 to 41 of the arguments):

That, pursuant to Article 77, No. 1, of the LGT, the decision of procedure is always reasoned by means of a brief exposition of the facts and legal reasons that motivated it, and the tax act that does not contain the reasoning is ineffective and, consequently, voidable.

However, the law allows the reasoning of the tax act to be done by reference, provided that the grounds that motivated it are contained in previous opinions, information or proposals produced in the course of the procedure to which the act relates and to which the act itself refers expressly and specifically, under penalty of verifying violation of the duty to reason and, as a consequence, by the verification of a defect generating the voidability of the act.

Upon examination of the Challenged Assessment, it is found that it does not contain any reasoning that justifies or motivates the decision of taxation taken in it and, in particular, the apparent decision to disregard for tax purposes certain transactions and operations and consequent taxation of other transactions or operations in place of those.

Thus, not a single line of motivation, a single argumentative path, is put forth that would allow understanding the manner in which the taxable base was determined, which, after a standalone tax rate was applied, generated the assessment of that quantitative amount of tax, nor is it indicated which tax rate was applied in such taxation.

Nothing is stated in the Challenged Assessment that could justify or motivate - that could lead any reasonable person placed in the position of recipient to understand - the result reached in it, and it is certain that, as established in Article 77, No. 2, of the LGT, the reasoning of the tax act must "always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for the determination of the taxable matter and the tax."

From which it must also be concluded that the Challenged Assessment is completely lacking in reasoning: even if an implicit reasoning per relationem were accepted, the Challenged Assessment would still be affected by a defect of lack of reasoning. Also for this reason, in the admissibility of the invoked defect of lack of reasoning, the Challenged Assessment should be annulled.

From the Respondent (Articles 53 to 68 of the arguments):

It states that "Regarding the alleged lack of reasoning, the inspection report and the information forming part of the authorization order for application of the CGAA notified to the Respondent is reasoned in fact and in law, making reference to the applicable legal norms, having even throughout the inspection action and the procedure the participation of the Respondent".

The tax act was perfectly clear and congruent, allowing the Respondent to know the cognitive and evaluative itinerary pursued by the Administration for the determination of the act, so it is apparent that the rights of defence of the latter are not diminished.

But even if there was an eventual lack of reasoning, the Respondent could nonetheless invoke the means provided for in Article 37, No. 1, of the CPPT and request notification of the requirements on which the act depends.

Therefore, "it is incomprehensible that at this procedural stage the Respondent continues to allege the lack of reasoning, for convenience, with the presupposition of by the formal or procedural route obtaining a result that contradicts material truth in the present proceedings, whose testimony evidence brought in the procedure corroborated the legality of the correction made by the Administration".

In this way the alleged claim by the Respondent is completely without merit.

2.9 Illegality arising from a defect of incongruence of the reasoning

From the Claimants (Articles 744 to 796 of the r.p.a. and 42 to 44 of the arguments):

They refer to the existence of two incongruences and inconsistency at the level of the reasoning that undermine the logical-deductive path in the decision to which the RIT leads and, as a consequence, strike down the Challenged Assessment with a defect generating its invalidity.

Indeed, in the inspection report it is proposed that the net income of category G be corrected, upwards, by the amount of 1,185,250.00€ and it would be on this amount of income, thus corrected, that taxation in the seat of Personal Income Tax should have been incurred as effected by the Challenged Assessment.

However, in the text of this assessment, the amount of 326,148.75€ is mentioned as "tax relating to autonomous taxation", when neither in the inspection report of 21-10-2016, nor in any other piece of the tax procedure, was a single argument, a single motivation, put forward that would justify the circumstance of having been assessed Personal Income Tax relating to autonomous taxation.

Thus, there is a clear and evident contradiction between the discourse of the inspection report and the assessment of tax for autonomous taxation that is carried out in the Challenged Assessment.

Moreover, in the process of legal reconfiguration that constitutes the establishment of the general anti-abuse provision, there is likewise a notable non-conformity between the grounds advanced in the inspection report for the application of that legal instrument and the concrete requalification that, in that same report, it is proposed be given to the operation as a result of application of that provision. That is, if on the one hand it is established in the inspection report that there will be "taxation of the transaction intended by the taxpayer, that is, the transmission, directly, by [the female Claimant] to G..., SGPS of those same shares" (page 20), on the other hand, the same report maintains that the entire legal structure contested configured a "way of distributing to shareholders the income obtained by G..., SGPS from the sale of J..." (page 13), which "allows concluding that there was the intention to distribute to the shareholders of G..., SGPS part of the proceeds from the sale of the entirety of its interest in J..., BV" (page 18).

If the logical path proposed by the AT in the RIT were to be followed, the operation contested by the AT should not be requalified to mean a capital gain, framed in category "G" of income, as it was, but rather as capital income, translated precisely in the alleged distribution to shareholders (the female Claimant and her brothers) of profits and accumulated reserves by the Company, framed in category "E".

This deficiency of reasoning vitiates, by itself and in an insuperable manner, the challenged Assessment, in terms necessarily conducive to its respective voidability and, as petitioned finally, to its annulment.

From the Respondent (Articles 53 to 68 of the arguments):

Also as in the defect invoked previously (2.8), for the Respondent the tax act was perfectly clear and congruent, allowing the Claimants to know the cognitive and evaluative itinerary pursued by the Administration for the determination of the act, reason why the defect now invoked is manifestly without merit.

2.10 Illegality arising from violation of law due to error in the factual presuppositions as to the application of the general anti-abuse provision

From the Claimants (Articles 797 to 1,081 of the r.p.a. and 45 to 57 of the arguments):

That following the doctrine that currently appears as the dominant one, the analysis of the application of Article 38, No. 2, of the LGT is decomposed into five elements, the first four of which correspond to the normative provision (result; means; normative; and intellectual) and the last to the statutory (sanctioning).

The element result, as a presupposition or essential condition for being able to trigger the application of the general anti-abuse provision "concerns the obtaining of a tax advantage, by virtue of the choice of that means, when compared with the tax burden that would result from the practice of 'normal' acts or legal transactions of equivalent economic effect".

Viewed in the light of each of the taxpayers involved here, it is manifest that in the acts performed by each one, in particular those carried out by the female Claimant, it is not possible to discern that a fiscally advantageous result has been produced capable of triggering the application of the general anti-abuse provision provided for in Article 38, No. 2, of the LGT: in the legal sphere of the female Claimant, the gift of shares or money to her son - the only transactions that possibly can be equivalent and between which she had the possibility of choosing - constitute two legal transactions with equal tax impact, that is, none.

That on page 13 of the final report of the inspection action it is identified, in a clear manner, that "the transaction intended by the taxpayers consisted in the sale of shares of G... SGPS to the company itself, on the part of [the female Claimant], as a way of distributing to the shareholder the income obtained from the sale of the interest in J..." and that to avoid the taxation that would result therefrom, initially the gift of the shares to her son was made, who, in a second moment, sold them to the Company.

However, as the female Claimant was not the one who decided to sell the shares to the Company, and she did not for the same reason instruct, or even advise, her son to do so, the sale of the shares to the Company corresponded to an exclusive decision of the female Claimant's son, and the same were donated by the female Claimant to her son without the imposition of any encumbrance or burden by virtue of which the donee was constituted in the obligation to sell to the Company those shares.

The sale was effected by her son to whom the price of the shares - 1,196,250.00€ - was paid, on 21-12-2012, by bank transfer. The price of the sale of the shares was, therefore, paid by the acquiring Company directly to the seller-donee, son of the Claimant - a fact that is expressly accepted and recognized by the AT. After having entered into the patrimony of the female Claimant's son, the price of sale of the shares was by him managed, used and enjoyed with full autonomy and in accordance with his free and exclusive judgment, as if he were its owner - as he effectively was and is, and never ceased to be. Therefore, the female Claimant's son received and made his own the value for which he sold the shares to the Company.

Therefore, it cannot fail to conclude that the element result is not verified.

The requirement of means - translated into the demonstration of abuse of legal forms - requires that the applicator of the anti-abuse provision demonstrates that the set of acts or legal transactions carried out by the taxpayer were carried out using unusual, improbable and/or indirect legal solutions.

Thus, it must be ascertained whether the gift of the shares by the Claimant to her son, followed by the sale by the donee to the Company, constitutes a situation of abuse of legal forms.

No conduct can be identified that could lead to a conclusion in the sense of abuse of legal forms. The Company met, and always met, the requirements for the evaluation of its shares, in cases of gratuitous transfer, to be made by application of the formula provided for in Article 15, No. 3, paragraph a) of the Stamp Tax Code (CIS). There is no artificious conduct that could be pointed out to the female Claimant, or to any of the other participants, as to what is the most important presupposition of this operation allegedly fiscally advantageous and which resides precisely in the nature of unquoted shares with which the social interests donated are clothed.

Nor is it possible to discern any abuse of legal forms with respect to what is the transaction that the AT seeks to have fiscally disregarded: the gift of the shares made by the female Claimant to her son. It is evident that the gift contract celebrated between the female Claimant and her son fulfilled its own social function and had not been dysfunctionalized.

That according to uniform teaching of doctrine, structurally the gift contract contains three elements: i) the gratuitous disposition of goods or rights; ii) the diminishment of the patrimony of the donor; iii) the spirit of liberality.

As to the first of these elements - gratuitous disposition of certain goods or rights - it is evident that the same is present in the gift contract executed between Claimant and her son: no obligation or consideration was stipulated between them on the part of the donee, whose legal declaration is limited to the simple acceptance of the gift, nor were any encumbrances or reservation of availability of the shares donated by the donor attached to the gift, as allowed in Articles 959 and 963 of the Civil Code. The donee is not obliged to divide, return or, in any way, remunerate the donor for the gift of the shares: the donated property indisputably became part of the donee's patrimony.

As to the second characteristic - diminishment of the patrimony of the donor - its verification is equally evident: not only does the exit of the shares donated correspond to any consideration in favor of the donor Claimant, but the loss of ownership of the shares is real and definitive. This finding is reinforced by the absence of any circularity in the circuit of the shares or the money corresponding to the price for which they were sold to the Company. The absence of any circular nature in this operation is amply demonstrated by the loss of legal ownership of those goods in favor of the donee, without substitution by any others or, even, by equivalent rights. The donee was not subject to any legal duty towards the Claimant her mother that passes through the attribution to her of shares, of the fruit thereof or of the monetary values for which the same were substituted.

As to the last characteristic - spirit of liberality - this too is present. In fact, it is manifest that the cause of the gift contract is not distorted - its social function is not annulled or perverted - by the gift in the concrete case of the good to a donee of whom the donor was mother: that good does not return, in any way, to the legal sphere of the donor mother, nor are its fruits or the values obtained from its subsequent sale to the Company divided with the donor. There are no rules, whether legal or from contractual source, that permit contesting this evidence.

Thus, given that no contract dysfunctionalization is discernible, nor the diminishment or practical annulment of the effects of liberality, it is not correct to speak of abuse of legal forms: the form used in the case to which the present proceedings relate fully respects the function attributed to it by the Civil Code in Articles 940 et seq.

Therefore, it cannot fail to conclude that the element means is not verified.

As to the normative element, translated into the normative-systemic disapproval of the advantage obtained, it is the effects of the statutory provision resulting from Article 15, No. 3, paragraph a) of the CIS that trigger all the fiscal consequences that, according to the AT, justify the decision of taxation by application of the general anti-abuse provision.

Now, in the face of exempt operations, the reference made by Article 45, No. 1, paragraph b) of the CIRS to the evaluation criterion set out in Article 15, No. 3, paragraph a) of the CIS implies the assumption of precisely the opposite effects to those aimed at by the legislator: instead of increasing tax revenue, the inaction of the legislator came to produce a decrease in said revenue in cases where the good that is the subject of the exempt gift is subsequently sold. Considering that the majority of operations of gratuitous transfers of goods occur between close relatives - precisely those covered by the subjective exemption (in this case, descendants) - it would be more than foreseeable to consider the possibility of production of this effect. The legislator therefore had the strict obligation to foresee that the catalyzing effect artificially caused by a capitalization factor indexed to the main ECB interest rate would have implications for a subsequent onerous transfer of the good that is the subject of a gratuitous transfer: if an operation subject and not exempt led to much greater tax revenue, an operation subject but exempt would lead to the production of the diametrically opposite effect.

The non-verification in the concrete case of the normative-systemic element is further evident from another argument: that of the comparative example of the subjectively exempt gift of immovable property.

In fact, looking at the legislative action in that segment of incidence very close to that dealt with in the present proceedings - that of the subjectively exempt gift of immovable property - it appears that the legislator became aware of the effect produced by tax evaluation in exempt gifts of movable property, having deliberately chosen not to intervene. That is, when it becomes apparent that the legislator expressly foresaw that similar effects could be produced as to immovables, it is almost impossible to sustain that a similar reasoning was not weighed by the legislator as to movables. Seeing manifest the impact created with the reference made by the Personal Income Tax Code to the Stamp Tax Code with respect to the fixing of an acquisition value for goods received by exempt gift, the law came to provide (Article 45, No. 3, of the CIRS): "In the case of real rights over immovable property acquired by exempt gift, in accordance with paragraph e) of Article 6 of the Stamp Tax Code, the acquisition value is considered to be the patrimonial value tributary shown in the matrix up to the two years prior to the gift."

That is: the legislator became aware that, precisely in the case of subjectively exempt gifts by reason of proximity of family relationship, important hypotheses of tax planning arising from the immediate consideration of the Stamp Tax value as the acquisition value for purposes of determining capital gains in Personal Income Tax emerged. And, for that reason, it acted.

Now, the choice not to draw identical conclusions for gratuitous transfers of unquoted shares, thus extending to these a solution of analogous effects, cannot fail to be valued. It is an intense signal that the legislator deliberately accommodated the risk of such effects.

It is not possible to discern any manifestation of fraud against the law - of verification of the normative requirement of the general anti-abuse provision - in light of such great legislative passivity and indifference.

It becomes evident that, for the AT, the application of the general anti-abuse provision was intended to extend analogically the normative-tax sanction that flows for gifts of immovable property in Article 45, No. 3, of the CIRS to situations of gifts of exempt shares of Stamp Tax. Now, analogy rests on the idea of "equal treatment of similar cases", considering that there is analogy between two cases "when in them there is verified a parallel, isomorphic or similar conflict of interests - so that the evaluative criterion adopted by the legislator to settle that conflict of interests in one of the cases is by equal or greater reason applicable to the other".

It happens, however, that the integration by analogy of the lacunae of tax norms included within the scope of the legislative reservation of the Parliament is expressly prohibited by Article 11, No. 4, of the LGT. This is a prohibition that is associated with and flows from the "interests underlying the principle of equality: certainty and security".

To admit the integration of lacunae of tax norms via analogy would be handing over on a silver platter to the administrative interpreter broad jurisgenic powers in tax matters that the Constitution expressly wished to reserve to the parliamentary legislator: "[a]s tax law determines the essential elements of taxes, analogy in this field would permit eluding the legislator's will". Moreover, following the teaching of CASALTA NABAIS (see Tax Law, 3rd ed., Almedina, 2005, p. 221), the prohibition of analogic integration of lacunae of tax norms extends, for the same reasons of protection of the constitutional legal interests of certainty and legal security, to any other means of integration of lacunae, a position that has the adhesion of consolidated case law, according to which "the norms of incidence of taxes, as well as those that grant exemptions or exclusions from taxation, should be interpreted in their exact terms, without recourse to analogy, making the certainty and security in its application prevail".

Therefore, it cannot fail to conclude that the normative element is not verified.

As to the intellectual element, that is the fiscal motivation of the taxpayer, it is necessary to keep in mind that "the proof of the motivation must be carried out using facts or elements that permit the interpreter to extract, with reasonable assurance and according to criteria of reasonableness and normality, the conclusion that the taxpayer attributed to the legal forms adopted a preponderant fiscal purpose". Indeed, "[n]ot proving what were the concrete motivations that, in the case, determined the carrying out of the act whose ineffectiveness the AT claims, naturally it cannot be understood that it was carried out by motivations exclusively or mainly linked to a fiscal gain that, subsequently, was verified, since such demonstration was a burden that such authority, as claimant to the application of Article 38, No. 2 of the LGT, should fulfill". In this way, "[i]t is, therefore, on the Tax Administration that falls the burden of proof of the constitutive fact of its right, incumbent on it, thus, the burden of proof that the transformation carried out had as its main or essential purpose the elimination of the tax".

Now, it appears manifest that this burden of proof was not fulfilled by the AT in the case that is the subject of the present proceedings. Indeed, in respect of evidentiary matters all that permeates through the final report are mere confabulations, processes of intent and speculative exercises.

Therefore, also with respect to this last element of the normative provision contained in Article 38, No. 2, of the LGT, it must necessarily be concluded that it is not verified in the case of the present proceedings.

The Claimants further state that taxation by application of the general anti-abuse provision rests on the verification of certain presuppositions, normatively fixed, and the failure to verify these presuppositions prevents the triggering of the rule and opposes its being able to be invoked to produce the effects to which it is directed.

That the facts that the AT erected as presuppositions of its action do not accord with reality and, as a consequence, prevent the triggering of the general anti-abuse provision.

Therefore, the challenged assessment is affected by a defect of violation of law, arising from error in the factual presuppositions, generating its respective voidability, as a consequence of which, and as petitioned finally, the same should be annulled.

From the Respondent (Articles 69 to 99 of the arguments):

Given the facts determined in inspection, the transaction intended by the taxpayers consisted of the sale of shares of "G... SGPS" to the company itself, on the part of B..., as a way of distributing to the shareholder the income obtained from the sale of the interest in "J...", having, to avoid the taxation that would result therefrom, the following succession of acts been adopted:

On 2/11/2012, shareholder B... makes a gift to her son L... of 10% of the shares she held in G... SGPS", exempt from Stamp Tax;
On 20/12/2012, the donee transfers the shares to the company itself, determining a loss, only possible because of benefiting from the acquisition value of the shares, corresponding to the taxable value that would serve as the basis for the assessment of Stamp Tax, should it be due.

This taking into account, equally, that the donor is a member of the board of directors in "G... SGPS", which enabled her to take part in the deliberations, in particular as regards the decision of the company to acquire its own shares.

Thus, what was truly intended to be gifted would be the money resulting from the sale of the shares and not the shares themselves.

Through the scheme described above, B... obtained capital gain income resulting from the sale of shares, from which she disposed in advance through her gift to her son, keeping such income from taxation through that provided in No. 6 of Article 12 of the CIRS, combined with paragraph e) of Article 6 of the CIS.

Thus, it was considered as proven the cumulative existence of the presuppositions that justify the application of the anti-abuse clause provided for in No. 2 of Article 38 of the LGT, determining the ineffectiveness of the legal transactions at issue, that is, the disregard of the gift of shares by B... to her son L... and the subsequent sale by him to "G... SGPS".

In normal conditions, that is, without the motivation to avoid taxation, the taxpayer B... would sell 27,500 shares of "G... SGPS" to the company itself and the capital gain obtained on the sale of these shares, in the value set forth below, would be taxed as income of category G of Personal Income Tax:

Holder	No. shares	Unit acquisition value	Acquisition value	Unit sale value	Sale value	Capital gain
B...	27,500	0.40 €	11,000.00 €	43.50 €	1,196,250.00 €	1,185,250.00 €

Thus, the facts collected throughout the inspection procedure and mentioned in the RIT are sufficient to consider verified the presuppositions for the application of the anti-abuse clause, provided for in No. 2 of Article 38 of the LGT.

In this way there is no defect to point out to the tax inspection procedure, and it is to be maintained that the "normal" transaction (equivalent) involved is the direct sale of shares to the company G... SGPS, SA, by the taxpayer B..., reflecting in such act in the legal sphere of the latter, and that, contrary to what she maintains, the tax impact of the transaction carried out and the "normal" (equivalent) transaction are quite distinct, and the performance of the transaction in the manner in which it was effected aimed essentially at avoiding the taxation of capital gains in the seat of Personal Income Tax.

2.11 Illegality arising from violation of law due to error in the legal presuppositions as to the application of the general anti-abuse provision

From the Claimants (Articles 1,082 to 1,139 of the r.p.a. and 58 to 59 of the arguments):

That to prevent tax avoidance the legislator established, inter alia, a general anti-abuse provision contained in Article 38, No. 2, of the LGT, through which the legislator aimed to "lead to the taxation of certain realities that, by virtue of the distortion introduced by taxpayers, produced a reduction, elimination or temporal deferment of taxes to be paid to the State, if compared with those that would normally be practiced".

Thus, the scope of application of the general anti-abuse provision is circumscribed to those hypotheses where there exists an "improper use of the precarious normative body, from which the revenue-gathering objectives of the legislator are frustrated" since the general anti-abuse provision respects "the attitude of the tax subject taxpayer relating to the abusive use of lacunae of the legal-fiscal order", encompassing the actions of the tax subject which are situated in the field of the so-called tax avoidance, which rests on the existence of transactions that the parties intended validly to carry out (and did carry out) and which are only ineffective from a fiscal perspective because they contravene the purposes underlying the fiscal rules in question.

Examining the final report of the inspection action, from it the AT's claim to make the anti-abuse provision provided for in Article 38, No. 2, of the LGT take effect is withdrawn, by considering that the female Claimant, intending to sell to the Company part of the shares held by her in that same company, sought to exempt herself from the taxation of capital gains that would result from that transfer, having, for that purpose, made a gift of those shares to her son, who subsequently sold them to the Company.

Thus it is stated in that report (RIT):

— that the transaction that was intended to be carried out consisted of the sale to the Company of the shares held by the Claimant, as a way of distributing to her the income obtained from the sale of the interest in J... BV (page 13 of the final report);

— that the economic effect intended was translated into the financial proceeds that the transfer of the shares to G... could provide to the Claimant (page 14 of the report);

— that the Claimant never had, at any moment, the intention to gift those shares to her son L... (page 15 of the final report); and

— that what the Claimant intended to gift to her son L... was the money resulting from the sale of the shares and not the shares themselves (page 17 of the final report).

On page 18 of the RIT it is concluded that "the choice for the gift of shares to the detriment of the gift of money, aimed only at avoiding taxation, in the seat of Personal Income Tax, of the capital gain that would arise from the direct sale of the shares to G... SGPS", adding further, on page 19, that what is at issue is "the fact of the donor intending to avoid taxation to occur in her sphere, by means of mere alteration of the chronological order of the operations carried out, anticipating the performance of the gift", and that "through the scheme described above, [the Claimant] obtained capital gain income resulting from the sale of shares, from which she disposed in advance through her gift to her son".

The simple fact that the AT considers that the female Claimant never had the intention to gift the shares to her son - and maintains it in a vehement manner - is sufficient, more than sufficient, to render impossible the application of the general anti-abuse provision provided for in Article 38, No. 2, of the LGT, causing the situation sub juditio to fall under the scope of Article 39 of the LGT which respects the simulation of legal transactions. That is: in the light of the very argumentation upheld by the AT in the RIT, there must be concluded the inadmissibility of recourse to the application of the general anti-abuse provision.

Indeed, "[o]ur legislator excluded (...) from the scope of Article 38, No. 2, of the LGT the hypotheses of tax simulation. We cannot forget that simulation is in itself an illicit act (Article 240 of the Civil Code), which means that in this case we are in a situation of tax evasion and not in a situation of tax avoidance as happens with the situations encompassed by the rule now under analysis [Article 38, No. 2, of the LGT]".

From which: the factuality that the AT understands (erroneously) as proven does not permit the framing that the AT gives to it; the legal rule applied by the AT - Article 38, No. 2, of the LGT - has no application to the factual situation to which it was applied.

However, it is not sufficient, they state, "that the practice integrated in a set of acts or legal transactions results in a given tax advantage, being necessary to prove that the same is achieved because of a pre-determination that is found in the genesis of such acts or legal transactions".

Thus, by erroneously applying the anti-abuse provision contained in Article 38, No. 2, of the LGT to a situation that does not fall within the scope of the provision of this rule, the Challenged Assessment suffers from illegality arising from a defect of violation of law and, as such, is voidable, and should finally be annulled by this learned Tribunal.

From the Respondent (Articles 69 to 99 of the arguments):

That No. 2 of Article 38 of the LGT, in the wording introduced by Article 13, No. 1, of Law No. 30-G/2000, of 29 December, in force at the time of the facts (2012), contains within itself a general anti-abuse clause, when it states: "Acts or legal transactions are ineffective in the tax sphere when they are essentially or mainly directed, by artificious or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, wholly or partially, without use of such means, taxation then being carried out in accordance with the norms applicable in their absence and the said tax advantages not being produced".

Determining No. 1 of Article 63 of the Code of Tax Procedure and Process (CPPT), that: "The assessment of taxes on the basis of the anti-abuse provision contained in No. 2 of Article 38 of the general tax law follows the terms provided for in this article".

In turn, No. 3 of that provision states "The reasoning of the draft and the decision to apply the anti-abuse provision must necessarily contain:

a) The description of the legal transaction celebrated or legal act carried out and of the transactions or acts of identical economic purpose, as well as the indication of the norms of incidence applicable to them;

b) The demonstration that the celebration of the legal transaction or the practice of the legal act was essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due in case of transaction or act with identical economic purpose, or to the obtaining of tax advantages".

Thus, as follows from the law, the general anti-abuse clause has as a requirement the practice used by the taxpayer of an artificious legal transaction or with abuse of legal form that has as its sole or determining purpose avoiding the taxation that would be due should an equivalent economic substance transaction or act have been used.

Such a provision enshrines five conditions or requirements for application, called elements, which must be proven, four of them corresponding to the requirements for application and one to its respective application rationale/sanction.

Frequently Asked Questions

Automatically Created

What is the ratification of an administrative act under Article 13(1) of the RJAT in Portuguese tax arbitration?

Article 13(1) of the RJAT establishes notification requirements and deadlines for ratification of administrative acts in tax arbitration proceedings. When the Tax Authority seeks to ratify an administrative act during pending arbitration at CAAD, it must notify the President of CAAD within specific time limits. Ratification under Article 164(5) of the CPA allows correction of procedural defects in administrative acts, but in arbitration this is subject to RJAT's special procedural rules. The ratification must be timely under Article 168(3) CPA and properly notified to both the tribunal and affected taxpayers under Article 77(6) LGT. Failure to comply with these requirements renders the ratification legally ineffective and subject to challenge as an independent ground for illegality in arbitral proceedings.

Can taxpayers request annulment of an IRS tax assessment through CAAD arbitration proceedings?

Yes, taxpayers can request annulment or declaration of nullity of IRS assessments through CAAD arbitration proceedings under Article 2(1)(a) and Article 10 of the RJAT in conjunction with Ordinance 112-A/2011. The jurisdiction covers substantive challenges to tax assessments, associated compensatory interest assessments, and requests for reimbursement of amounts paid. Taxpayers constitute a collective arbitral tribunal by filing a detailed request with CAAD identifying the contested acts and grounds for annulment. The arbitration can address both the legality of the original assessment and any subsequent administrative acts, including ratifications. Claimants may also seek indemnificatory interest on refunded amounts calculated at the legal rate from payment until reimbursement, plus recovery of arbitration costs and fees.

How do Articles 164(5) and 168(3) of the CPA apply to the ratification of tax administrative acts?

Article 164(5) of the CPA establishes the framework for ratification of administrative acts with procedural defects, allowing competent authorities to cure invalidity by confirming the act. Article 168(3) CPA imposes strict time limits, requiring ratification within the timeframe for issuing the original act. In tax arbitration, these provisions apply through general incorporation of administrative procedure rules but are modified by RJAT's special requirements, including Article 13(1)'s notification obligations. A ratification violating Article 168(3)'s timeliness requirements is itself illegal and cannot cure the original defect. The ratification must be properly notified to interested parties under Article 77(6) LGT and Article 66(1) CIRS to become effective. Late submission during arbitration also violates the concentration of defense principle under Article 83(4) CPTA.

What are the grounds for claiming compensatory interest and reimbursement in IRS arbitration cases?

In IRS arbitration cases, taxpayers can claim reimbursement of all amounts paid pursuant to illegal tax assessments, including both principal tax and compensatory interest charges. When an assessment is annulled, the Tax Authority must refund all collected amounts. Beyond reimbursement, taxpayers are entitled to indemnificatory interest at the legal rate, calculated from the payment date until complete reimbursement, compensating for the State's use of taxpayer funds during illegal collection. Claims can include recovery of arbitration costs and fees paid to CAAD. These claims are consequent to the principal annulment claim—if the assessment is found illegal, reimbursement and interest follow automatically based on the principle against unjust enrichment from amounts collected through illegal administrative acts.

What is the procedure for constituting a collective arbitral tribunal at CAAD for IRS disputes?

The procedure begins with filing a request for arbitral pronouncement under Articles 2(1)(a) and 10 of RJAT and Ordinance 112-A/2011, identifying parties, contested acts, annulment grounds, and supporting documents. Claimants may appoint an arbitrator or defer to CAAD selection. The CAAD President accepts the request and notifies the Tax Authority. The Ethics Council of CAAD appoints three arbitrators (one presiding, two co-arbitrators) under Article 6 RJAT. Parties are notified and may object under Article 11(1) RJAT and the CAAD Code of Ethics. The tribunal constitutes once arbitrators accept and the objection period expires. The Tax Authority then has 30 days to respond and submit the administrative file under Article 17(1) RJAT, with possible extensions, before the tribunal proceeds to written arguments and decision.

IRS Tax Assessment Annulment: Administrative Act Ratification Under RJAT – CAAD Process 188/2017-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

1. Report

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

1.10

1.11

1.11

1.12

1.13

1.14

1.15

1.16

1.17

1.18

1.19

1.20

1.21

1.22

1.23

1.24

1.25

1.26

2. Position of the Parties

On the illegality of the additional Personal Income Tax assessment:

On the illegality of the compensatory interest assessment:

2.1 Illegality arising from a defect of incompetence

2.2 Illegality arising from expiry of the right to assess

2.3 Illegality arising from expiry of the tax procedure

2.4 Illegality arising from a procedural defect by omission of notification of the decision to initiate the tax procedure

2.5 Illegality arising from a formal defect by violation of the principle of procedural participation

2.6 Illegality arising from a formal defect by omission of notification of the authorizing order of the head of the service

2.7 Illegality arising from nullity of notification of the income alteration act

2.8 Illegality arising from a defect of lack of reasoning

2.9 Illegality arising from a defect of incongruence of the reasoning

2.10 Illegality arising from violation of law due to error in the factual presuppositions as to the application of the general anti-abuse provision

2.11 Illegality arising from violation of law due to error in the legal presuppositions as to the application of the general anti-abuse provision

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