IRS Capital Gains and Transitional Regime Under Decree-Law 442-A/88: Official Review and Limitation Period

ARBITRAL DECISION [1]

The arbiter, Dr. Sílvia Oliveira, designated by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Sole Arbitral Tribunal, constituted on 20 June 2016, with respect to the case identified above, decided as follows:

1. REPORT

1.1

A… and B…, married, holders of tax identification numbers … and …, respectively, residing at Rua…, nº …, …, …, in ..., (hereinafter referred to as "Claimants"), submitted a request for an arbitral ruling and constitution of a Sole Arbitral Tribunal, on 7 April 2016, under the provisions of Article 4 and no. 2 of Article 10 of Decree-Law no. 10/2011, of 20 January [Legal Regime of Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

1.2

The Claimants seek to obtain "(…) judgment on (…) the request for constitution of an arbitral tribunal and arbitral ruling concerning the assessment of Personal Income Tax (IRS) for the year 2010 (…)" and, consequently, to declare "(…) the illegality of the act of rejection contested in the application for official review, correcting, accordingly, the said assessment", having also presented, as evidence, three witnesses.

1.3

The request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD on 8 April 2016 and notified to the Claimants on the same date.

1.4

The Claimants did not proceed to appoint an arbiter, whereby, under the provisions of Article 6, no. 2, paragraph a) of RJAT, the signatory was designated as arbiter by the President of the Ethics Council of CAAD, on 2 June 2016, the appointment having been accepted within the legally prescribed timeframe and terms.

1.5

On the same date, the Parties were duly notified of this designation, and neither manifested any intention to refuse the appointment of the arbiter, in accordance with the provisions of Article 11, no. 1, paragraphs a) and b) of RJAT, combined with Articles 6 and 7 of the Code of Ethics.

1.6

Thus, in accordance with the provisions of paragraph c), no. 1, of Article 11 of RJAT, the Arbitral Tribunal was constituted on 20 June 2016, and an arbitral order was issued on 21 June 2016, directing the Respondent to, "(…) within 30 days, respond, submit a copy of the administrative proceedings and request, if so desired, the production of additional evidence"

1.7

On 9 September 2016, the Respondent submitted its Response, defending itself by exception and by opposition, and concluded that "(…) a) The dilatory exceptions raised should be entirely upheld and, accordingly, the Respondent should be absolved from the arbitral proceedings; b) The present request for arbitral ruling should be dismissed as unproven, and, consequently, the Respondent absolved of all claims, with all appropriate legal consequences; c) The peremptory exception raised should be entirely upheld, the Respondent being absolved of the claim; d) Furthermore, as submitted above, in the event that the production of witness evidence is not waived, the Claimants should be notified to indicate which facts they wish to have proven by the witnesses".

1.8

Additionally, the Respondent protested to join the instructional administrative proceedings, which were submitted to the record on 4 October 2016.

1.9

By arbitral order of 9 September 2016, the Claimants were notified to, within a period of ten days, if they so wished, pronounce themselves on the matter of exception raised by the Respondent in the Response submitted on the same date.

1.10

By arbitral order of 3 October 2016, "taking into account the fact that the Claimants did not pronounce themselves, within the period of 10 days (granted by the arbitral order of 9 September 2016), regarding the matter of exception raised by the Respondent in the response presented on that date and with the objective of guaranteeing the principle of adversarial proceedings and equality of the parties (…)", the Arbitral Tribunal ordered notification to:

1.10.1

"Both Parties to pronounce themselves, within a period of 5 days, on the possibility of waiving the holding of the meeting referred to in Article 18 of RJAT and on the possibility of waiving the submission of arguments";

1.10.2

"The Claimants to, within the said period of 5 days, pronounce themselves on the possibility of waiving the examination of the witnesses listed" and, should they not dispense with the examination of the witnesses indicated in the Claim, they would be forthwith "(…) notified to, within the said period (…), indicate the facts regarding which (…)" they would wish the witness evidence to relate.

1.11

On 4 October 2016, the Respondent submitted a request stating that the respondent entity had "(…) no objection to the draft waiver of the meeting referred to in Article 18 of RJAT, equally dispensing with the holding of written arguments (…)", but "should the Claimant deem it advisable to submit arguments, the same should be successive (…)".

1.12

On 11 October 2016, the Claimants submitted a request stating that they "maintain an interest in the examination of the witnesses listed by them", indicating for that purpose the facts regarding which the witnesses presented should be examined, and also stating that they maintain "the interest in the submission of written arguments".

1.13

By arbitral order of 17 October 2016, taking into account the aforementioned orders and the requests submitted by the Parties, the Arbitral Tribunal decided "in accordance with the procedural principles set forth in Article 16 RJAT, of the autonomy of the arbitral tribunal in the conduct of proceedings and in the determination of the rules to be observed [paragraph c)] and of the free conduct of proceedings set forth in Articles 19 and 29, no. 2 of RJAT", "(…) to schedule a meeting for (…) 28 October 2016, at 14:00, to be held at the CAAD premises, in Lisbon, for the purpose of examining the witnesses listed by the Claimants, regarding the facts indicated by them in their request (…), response to the exceptions raised by the Respondent (to be submitted orally or in writing) and to decide on the possibility of waiving the submission of arguments".

1.14

The Claimants, by a request submitted on 18 October 2016, requested the joining of a document to the record, regarding which, the Arbitral Tribunal, by order of 21 October 2016, directed the Respondent to be notified "to, if so desired, pronounce themselves at the meeting scheduled for (…) 28 October, on the (…) attached document".

1.15

The Claimants, by a request submitted on 24 October 2016, requested the alteration of the date scheduled for the holding of the meeting referred to in Article 18 of RJAT (see point 1.13., above), due to the impossibility of attendance of their representative, having by arbitral order of 25 October 2016, the said meeting been rescheduled to 11 November 2016, at 11:00, at the CAAD premises, in Lisbon.

1.16

On 11 November 2016, the first arbitral hearing was held, at CAAD, at which two of the three witnesses listed by the Claimants were examined, with sound reproduction of the statements given and of which the corresponding minutes were drawn, which are hereby fully reproduced.

1.17

Within the scope of the said meeting, the Tribunal also notified the Claimants and the Respondent to, in this order and in succession, submit written arguments within a period of 10 days, with the period for the Respondent beginning to run from the date of notification of the joining of the Claimants' arguments or from the end of the period allowed therefor (in the event that the latter do not submit arguments).

1.18

On the other hand, in compliance with the provisions of Article 18, no. 2 of RJAT, the Tribunal designated 15 January 2017 for the purpose of delivering the arbitral decision, this date having been corrected (by arbitral order dated 12 December 2016), to 16 January 2017, given that the first date fell on a Sunday.

1.19

Finally, the Tribunal also warned the Claimants that, until the date of delivery of the arbitral decision they should proceed with payment of the subsequent arbitration fee, in accordance with the provisions of no. 3 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and notify CAAD of this payment (which they did on 22 November 2016).

1.20

On 29 November 2016, the Claimants submitted their written arguments, reiterating the reasoning used in the claim, having also submitted a defense to the exceptions raised by the Respondent in the Response (and already summarily discussed at the meeting held on 11 November 2016), in the sense of:

1.20.1

That the exception regarding the lack of material jurisdiction of this Arbitral Tribunal, raised by the Respondent, under the guise of procedural error, should be dismissed as unfounded;

1.20.2

That the peremptory exception relating to the alleged expiration of the right of action should be dismissed as unfounded, inasmuch as "(…) the application for official review (…) which is now being challenged appears as the appropriate procedural means to satisfy the Claimants' claim, having been timely and legitimately submitted (…)".

1.21

On 19 December 2016, the Respondent submitted its written arguments, in the sense of reiterating "(…) everything requested in response to the request for arbitral ruling", inasmuch as "reading the provisions (…) it is immediately clear that they fit perfectly the factuality present here, given that the … was located (and is located) in an urbanized area and this without the necessity of this area being located in an area with a previously approved urban development plan and that, three years after the date of death, the Claimants promoted the licensing of the property, in order to, after it was subdivided and allocated to commercial/professional activity, sell it to third parties for new urban buildings to be erected there", whereby "(…) there being no alleged error imputable to the AT, the contested tax acts do not merit censure and should be maintained in the legal order and the present request for arbitral ruling should be dismissed as entirely unfounded".

2. CAUSE OF ACTION

The Claimants support their claim, in summary, as follows:

2.1

They begin by clarifying that "the (…) claim aims to obtain an arbitral ruling regarding the declaration of illegality, and consequent annulment, of the tax act rejecting the official review (…) mentioned, as well as of the Personal Income Tax assessment for the year 2010".

2.2

In this context, they clarified that "with a view to the revision of the Personal Income Tax assessment for 2010, the Claimants submitted the request for Revision of the Tax Act from which they now appeal (…)", inasmuch as they understand that "(…) the request to initiate the procedure may, in any circumstance, be made at the initiative of the taxpayer", "whereby, the procedural remedy from which they now appeal was (…) the most appropriate to satisfy the claims of the Claimants here", "(…) having been timely and legitimately submitted (…)".[2]

2.3

Thus, according to the Claimants, in the wake of what is understood by the jurisprudence of the Supreme Administrative Court (STA), "where there is an error of law in an assessment made by the Tax Authority services, such error is imputable to the services", "(…) reason for which any illegality not resulting from an action of the taxpayer will be imputable to the Administration itself", "and being an error imputable to the services, it is unequivocal that the period for submission of this instrument is four years from the date of the tax act" (our emphasis).

2.4

Thus, "the Claimants cannot agree with the decision rejecting their application (…) nor, consequently, with the Personal Income Tax assessment underlying it (…)", primarily because they understand that "the same resulted in a substantive ruling denying the Claimants' request for a declaration of the illegality of the taxation raised (…)".

2.5

In these terms, and as to the factual circumstances underlying the request for constitution of the Arbitral Tribunal submitted, the Claimants clarified that "in the year 1987, the male Claimant and his brother (…) acquired, by succession caused by the death of the mother of both (…) a rural property called "…", in…, parish of …, ... (…)", and that "they acquired ownership of the property in accordance with the regime of joint ownership (…)".

2.6

However, "during the year 1990, the nature of rural property (…) was changed to urban property (land for construction) (…)" and already "(…) after the entry into force of the Personal Income Tax Code, the male Claimant allocated the (…) property to his business and professional activity (…)", and "(…) in the year 2007, the said property (…) was subject to a subdivision process consisting of 23 lots (…)", having "in the year 2010, the male Claimant and his brother (…)" sold three of those lots.

2.7

As a consequence, "on 1 July 2011, the now Claimants (…) proceeded to submit their Personal Income Tax Return Form 3, for the year 2010, indicating, in the annex relating to capital gains, the onerous sale of three urban lots (…)".

2.8

However, the Claimants state that "(…) gains that were not subject to capital gains tax, created by the code approved by Decree-Law no. 46373, of 9 June 1965, as well as those derived from the onerous sale of rural properties allocated to the exercise of an agricultural activity or from the allocation of these to a commercial or industrial activity, exercised by their respective owner, are only subject to Personal Income Tax if the acquisition of the goods or rights to which they relate was made after the entry into force of this Code" (emphasis of the Claimants), a circumstance which, in the opinion of the Claimants, is verified in the case under analysis, inasmuch as it being "unequivocal that the rural property was acquired in the year 1987, by succession (…)", and "not being (…) land for construction, on the date of 1987, (…) as such, it was not covered by the scope of Decree-Law no. 46373, of 6 June (Capital Gains Tax Code)".[3]

2.9

That is, according to the Claimants, "it is manifest that the requirements on which non-subjection to taxation depends are materially met" and, having the land in question been acquired with the nature of rural property and "having been allocated to the male Claimant's economic and professional activity (…) after the entry into force of the CIRS", "the Claimants do not understand how the Tax Authority could base the rejection decision on the (…) understanding (…)" that "once the Claimant allocated the property (…) to his business activity, it comes within the transitional regime contained in Article 5 of Decree-Law 442-A/88, of 30 November, since gains subject to capital gains tax are excluded from it" (our emphasis).[4]

2.10

In these terms, for the Claimants "such conclusion is not in keeping with a thorough and legalistic interpretation of the legislator's provision".

Duty of the Tax Authority to Correct Assessment Errors

2.11

According to the Claimants, "the Tax Administration has a duty to officially correct all errors in returns that could lead to greater taxation than that due in accordance with the law".

2.12

Thus, "(…) under pain of unconstitutionality, the provisions providing for official review on the grounds of error imputable to the services should be interpreted as not excluding the duty of review in all cases where it is ascertained, within the period in which review is possible, that tax has been assessed in excess" (emphasis and bold of the Claimants).

2.13

However, "the Claimants (…) found that the Tax Authority did not correct the above-mentioned errors, disregarding, in its favor, the existence of the essential requirements for non-taxation of the said capital gains" (emphasis of the Claimants), whereby, to this extent, "the understanding of the Tax Authority incurs a defect regarding the legal premises, which should be remedied (…)" for, otherwise "(…) the Tax Authority proceeds to the retroactive application of a tax law, which the Constitution of the Portuguese Republic expressly prohibits (…)".

2.14

Thus, the Claimants understand that "(…) global income could never have been EUR 72,039.45, but rather EUR 55,224.44", whereby "(…) the amount to be paid for Personal Income Tax for the year 2010 would not be EUR 12,331.15 but about EUR 6,466.06 (…)", and it is thus "possible to conclude that (…) they improperly paid EUR 5,865.09, as tax".

2.15

In conclusion, the Claimants understand that the "(…) Personal Income Tax assessment is affected by illegality and unconstitutionality, and the amount of tax improperly paid should be corrected (…) and reimbursed (…)".

3. RESPONSE OF THE RESPONDENT

3.1

The Respondent responded, defending itself by exception and by opposition, concluding that:

3.1.1

"(…) the dilatory exceptions raised should be entirely upheld and, accordingly, the Respondent should be absolved from the arbitral proceedings";

3.1.2

"The present request for arbitral ruling should be dismissed as unproven and, consequently, the Respondent absolved of all claims, with all appropriate legal consequences";

3.1.3

"The peremptory exception raised should be entirely upheld, the Respondent being absolved of the claim (…)".

By Exception

Lack of Material Jurisdiction of the Tribunal

3.2

The Respondent begins by alleging that "the request for arbitral ruling sub judice is formulated following the rejection of a request for official review of a self-assessment act for corporate income tax (IRC) for the year 2010, formulated in circumstances when the period for informal objection referred to in Article 131 of CPPT had already expired" and, "(…) taking into account the provisions of Articles 2, no. 1, paragraph a) and 4, no. 1, both of RJAT, and Articles 1 and 2, paragraph a), both of Order no. 112-A/2011, of 22 March, there is the exception of lack of material jurisdiction of this Arbitral Tribunal to appreciate and decide the above claim, a circumstance which requires the determination of the absolution of the Respondent from the Proceedings (…)" (our emphasis).

3.3

As a matter of fact, according to the Respondent, "(…) it is concluded that by virtue of the provision in Article 2, paragraph a) of Order no. 112-A/2011, disputes whose object is the declaration of illegality of acts of withholding at source, as is the case in the situation sub judice, are excluded from the material jurisdiction of arbitral tribunals, if they are not preceded by informal objection in accordance with Article 132 of CPPT, regardless of whether this is mandatory under the provision cited or whether the taxpayer has opted (…) for official review" (our emphasis).

3.4

Thus, according to the Respondent, "(…) it is concluded that the Arbitral Tribunal constituted is materially incompetent to appreciate and decide the claim being the object of the dispute sub judice (…), which constitutes a dilatory exception preventing the tribunal from hearing the merits of the case (…)" "under pain of, if this understanding is not adopted, such interpretation being not only illegal, but manifestly unconstitutional, by violation of the constitutional principles of the rule of law and separation of powers (…), as well as legality (…), as a corollary of the principle of unavailability of tax credits inherent in Article 30, no. 2 of LGT, which bind the legislator and all activity of the Tax Authority".

Error in Procedural Form

3.5

In this context, according to what the Respondent alleges "(…) taking into account that the request for official review was summarily rejected because the Services understood the same to be untimely, that is, submitted beyond the four years counted from the tax fact, it will always be said that this arbitral means is not the appropriate means to discuss the question of untimeliness", inasmuch as "(…) the reason which led to the rejection of the official review request was situated, exclusively, in the question of the timeliness of the said informal procedure", "which is equivalent to saying that the Tax Authority did not rule on the merits of the question".

3.6

And, "consequently, it is unequivocal that we are faced with a tax administrative act which, by not appreciating or discussing the legality of the assessment act, cannot be subject to judicial review, in accordance with the provisions of paragraph a) of no. 1 of Article 97 of CPPT".[5]

3.7

Now, the Respondent alleges that "the tax arbitral process is established by reference and with an object in all respects similar to the judicial review process, in relation to which it should constitute an alternative procedural means", whereby, where "(…) the identity of the fields of application of the judicial review process and the arbitral process (…) is verified, it means that the possibility of using the arbitral process is excluded when, in the judicial tax process, judicial review cannot be used".

3.8

Thus, the Respondent understands that "(…) given the above, it is ascertained that the review of the act in question is outside the scope of matters susceptible to appreciation in arbitral proceedings (…) and as (…) the arbitral jurisprudence has decided in similar circumstances", whereby there is verified "(…) in the concrete case, a dilatory exception of procedural error, which, if it proceeds (…) requires the absolution of the Respondent from the Proceedings".[6]

By Opposition

3.9

In this matter, the Respondent alleges that "(…) there is no doubt that we are in the presence of genuine land for construction, whose transmission would be subject to taxation under the rules of the Capital Gains Tax Code, and that, for that reason, the exclusion provided for in the transitional regime will not apply to it".

3.10

On the other hand, the Respondent alleges that "the burden of proof that the goods (…) were acquired before the entry into force of the Personal Income Tax Code (…) falls on the claimant", whereby it concludes that "(…) if there was an error, it would always be imputable to the Claimants, since the contested assessment did not result from any official correction".

3.11

In these terms, understanding the Respondent "(…) that there is no alleged error imputable to the Tax Authority (…)", it should "(…) the present request for arbitral ruling be dismissed as unfounded".

By Peremptory Exception

3.12

Finally, the Respondent also alleges that "(…) the request for official review, at the moment it was submitted, was untimely (…)", inasmuch as having been "(…) the tax act (…) notified to the Claimants in the year 2011 (…)" and "the request for official review having been made in June 2015 (…)" it was "(…) submitted untimely".

3.13

Now, in this context, the Respondent concludes that being "the expiration of the informal procedure (…) a peremptory exception (…) it extinguishes the legal effect of the facts alleged by the Claimants".

4. PRELIMINARY ISSUES

4.1

The Respondent, in the Response submitted, raised the following exceptions in its defense:

4.1.1

The exception of lack of material jurisdiction of the Arbitral Tribunal to appreciate and decide the claim presented by the Claimants on the basis that their claim was not preceded by recourse to the administrative procedure, in accordance with the provisions of Articles 131 to 133 of the Code of Tax Procedure and Process (CPPT), an argument which, if upheld, would determine the absolution of the Respondent from the Proceedings;

4.1.2

The exception of procedural error inasmuch as the arbitral claim was, according to the Respondent, untimely submitted, whereby the Respondent understands that the "(…) arbitral means is not the appropriate means to discuss the question of untimeliness", given that "(…) the reason which led to the rejection of the official review request was situated, exclusively, in the question of the timeliness of the said informal procedure";

4.1.3

The exception of expiration of the informal procedure, inasmuch as the Respondent alleges that "(…) the request for official review, at the moment it was submitted, was untimely (…)", inasmuch as "(…) the tax act was notified to the Claimants in the year 2011, the request for official review having been made in June 2015, that is, submitted untimely", a peremptory exception which, if upheld, determines the absolution of the Respondent of the claim.

4.2

In this context, taking into account that questions of jurisdiction are of priority knowledge, as results from the provisions of Article 13 of the Code of Procedure in the Administrative Courts (subsidiarily applicable, by force of the provisions of Article 29, no. 1, paragraph c), of RJAT), the exception of lack of material jurisdiction placed will be appreciated here, in the first place, it being certain that if this question is upheld, the knowledge of the remaining exceptions raised will become prejudicial, as it will become useless.

Exception of Lack of Material Jurisdiction of the Arbitral Tribunal

4.3

The Claimants submitted to the appreciation of this Arbitral Tribunal the following claims:

4.3.1

Declaration of illegality of the act rejecting the official review relating to Personal Income Tax (IRS) for the year 2010, with the consequent annulment thereof, and

4.3.2

Declaration of illegality of the act assessing Personal Income Tax for the year 2010, with its consequent annulment.

4.4

In general terms, the jurisdiction of arbitral tribunals functioning in CAAD is, first, limited to the matters indicated in Article 2, no. 1, of RJAT, and, under the terms of this provision, the jurisdiction of arbitral tribunals comprises "the declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and payment on account", as well as "the declaration of illegality of acts of determination of taxable matter when it does not give rise to the assessment of any tax, of acts of determination of taxable base and of acts of determination of property values" (our emphasis).

4.5

Beyond the direct appreciation of the legality of the type of acts described in the preceding point, the jurisdiction of arbitral tribunals functioning in CAAD also includes jurisdiction to appreciate acts of second or third degree which have as their object the appreciation of the legality of acts of that nature, namely acts that decide informal objections and hierarchical appeals, as can be inferred from the express references made in Article 10, no. 1, paragraph a), of RJAT to no. 2 of Article 102 of CPPT (which refers to the judicial review of decisions of informal objections) and to the decision of the hierarchical appeal.

4.6

On the other hand, it has also been understood, in line with the jurisprudence of the STA, that, following the declaration of illegality of assessment acts, rendered in judicial review proceedings, decisions of condemnation in the payment of indemnity interest can be rendered as well as, by force of Article 171, no. 1, of CPPT, of condemnation in the payment of indemnities for undue guarantee.

4.7

Now, beyond the situations enumerated above, it has been understood that there is no legal basis for permitting that other types of condemnations be rendered, by arbitral tribunals, even if they are a consequence of the declaration of illegality of assessment acts.

4.8

With respect to the case under analysis, following the exception raised by the Respondent, regarding the alleged lack of jurisdiction of the Arbitral Tribunal to appreciate claims for declaration of illegality of assessment acts following claims for official review, it will be necessary to determine, in greater detail, the jurisdiction of arbitral tribunals functioning in CAAD, already generically enumerated above.

4.9

Thus, and in the first place, this jurisdiction is limited (as we have seen in points 4.4. to 4.6.) to the matters indicated in Article 2, no. 1, of RJAT and, in a second line, the said jurisdiction (of arbitral tribunals functioning in CAAD) is also limited by the terms in which the Tax Administration is bound by that jurisdiction, in accordance with the provisions of Order no. 112-A/2011, of 22 March.

4.10

Indeed, Article 4 of RJAT establishes that "the binding of the tax administration to the jurisdiction of tribunals constituted under the terms of this law depends on an order of the members of the Government responsible for the areas of finance and justice, (…)".

4.11

Thus, faced with this second limitation of the jurisdiction of arbitral tribunals functioning in CAAD, the resolution of the question of jurisdiction depends, essentially, on the terms of this binding, inasmuch as, even if one is faced with a situation falling within the aforementioned Article 2 of RJAT, if it is not covered by the binding identified above, the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be precluded.

4.12

Now, in accordance with the provisions of paragraph a), Article 2 of the above-mentioned Order, there are expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of arbitral tribunals functioning in CAAD the "claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to the administrative procedure in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process", whereby this express reference to the preceding "recourse to the administrative procedure" should be interpreted as referring to cases where such recourse is mandatory, through informal objection (which is the administrative means indicated in Articles 131 to 133 of CPPT), to whose terms it refers.

4.13

In the concrete case, it having been requested the declaration of illegality and annulment of the act rejecting the request for official review relating to the assessment of Personal Income Tax for the year 2010 (and not of an act of self-assessment of corporate income tax or withholding at source as, by lapse, the Respondent refers to in its Response), it is important, first of all, to clarify whether the declaration of illegality of acts rejecting requests for review of the tax act, provided for in Article 78 of the General Tax Law (LGT), is included in the jurisdiction attributed to arbitral tribunals functioning in CAAD, in accordance with the provisions of Article 2 of RJAT.

4.14

In fact, in this Article 2 of RJAT no express reference is made to these acts, unlike what happens with the legislative authorization on which the Government relied in approving RJAT, when it refers to "requests for review of tax acts" and "administrative acts which constitute the appreciation of the legality of assessment acts".

4.15

However, the formula "declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and payment on account", used in paragraph a), no. 1 of Article 2 of RJAT does not restrict (in a mere declarative interpretation), the scope of arbitral jurisdiction to cases where a direct claim is made against an act of that nature.

4.16

Indeed, the illegality of assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-degree act, which confirms an assessment act, incorporating its illegality.

4.17

The inclusion in the jurisdiction of arbitral tribunals functioning in CAAD of cases in which the declaration of illegality of the acts indicated there is effected through the declaration of illegality of second-degree acts, which are the immediate object of the contestatory claim, results with certainty from the reference which is made in that provision to the assessment acts, self-assessments, withholding at source and payment on account, which are expressly referred to as included among the jurisdiction of arbitral tribunals.

4.18

Now, regarding acts of self-assessment, withholding at source and payment on account, informal objection is imposed, as a rule (as provided for in Articles 131 to 133 of CPPT), whereby, in these cases, the immediate object of the contestatory process is, as a rule, the second-degree act which appreciates the legality of those acts, which, if it confirms them, must be annulled to obtain the declaration of illegality of the first-degree act.[7]

4.19

Having reached the conclusion that the formula used in paragraph a) of no. 1 of Article 2 of RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-degree act, it will also encompass cases in which the second-degree act is the rejection of a request for review of the tax act, since there is no reason for any restriction, all the more so that, in cases in which the review request is made within the period of informal objection, it should be equated to an informal objection.

4.20

Thus, the express reference to Article 131 of CPPT which is made in Article 2 of the Order mentioned above cannot have the decisive scope of precluding the possibility of appreciation of claims for illegality of acts rejecting requests for official review of assessment acts.[8]

4.21

In these terms, it is manifest that the scope of the requirement of prior informal objection, in the cases enumerated (that is, necessary to open the contentious avenue of contestation of acts of self-assessment, withholding at source and payment on account) has as its sole justification the fact that, regarding that type of acts, there does not exist a pronouncement by the Tax Administration on the legality of the legal situation created with the act, a position which could even turn out to be favorable to the taxpayer, avoiding the need for recourse to the contentious avenue.

4.22

Another unequivocal confirmation that this is the reason for the requirement of necessary informal objection is found in no. 3, of Article 131 of CPPT, in establishing that "without prejudice to the provisions of the above numbers, when its sole ground is a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration, the period for contestation does not depend on prior objection, the contestation being submitted within the period of no. 1 of Article 102".

4.23

Now, in the case under analysis, the underlying tax act to the claim being a Personal Income Tax assessment made by the Respondent itself, the latter had knowledge of the rules it applied, making a prior pronouncement (via informal objection) on the legality of the legal situation created with the assessment act in question unnecessary.

4.24

And having a request for official review of a Personal Income Tax assessment act been formulated (in the case relating to the year 2010), the Tax Administration was afforded (with this request) an opportunity to pronounce on the merits of the taxpayer's claim before the latter resorts to the contentious avenue, whereby, coherently, it cannot be required here that, cumulatively with the possibility of administrative appreciation, within the scope of that official review procedure, a new administrative appreciation be required through an informal objection.

4.25

Thus, being unequivocal that the law expressly provides taxpayers with the possibility of opting for informal objection or official review of assessment acts and being the request for official review formulated within the period of informal objection perfectly equatable to an informal objection, as was mentioned, there cannot be any reason which could explain that a taxpayer cannot access the arbitral avenue when having opted, in the case of an assessment act for a tax, for the submission of a request for review of the tax act rather than submitting an informal objection.

4.26

Moreover, it should be noted that the interpretation produced above, not limiting itself to the literal wording, is even particularly justified in the case of the provision in paragraph a), Article 2 of Order no. 112-A/2011, because of the obvious imperfections thereof, inasmuch as one thing is to associate the comprehensive formula "recourse to the administrative procedure" (which encompasses, in addition to informal objection, hierarchical appeal and review of the tax act) to the "expression in accordance with the terms of Articles 131 to 133 of the Code of Tax Procedure and Process", which has a potentially restrictive scope to informal objection, and another is to use the expression "preceded" by recourse to the administrative procedure, referring to the "claims relating to the declaration of illegality of acts" which would obviously cohere much better with the word "preceded".

4.27

In these terms, ensuring with the review of the tax act the possibility of appreciation of the taxpayer's claim before access to the contentious avenue (which is intended to be achieved with the contestation), the most correct solution, because it is the most coherent with the legislative purpose of "reinforcing effective and efficient protection of the rights and legally protected interests of taxpayers" (manifested in no. 2 of Article 124 of Law no. 3-B/2010, of 28 April), is the admissibility of the arbitral avenue to appreciate the legality of assessment acts previously appreciated in review procedure without the need for prior submission of informal objection.

4.28

And, because it is the most correct solution, it must be presumed to have been normatively adopted (Article 9, no. 3 of the Civil Code).

4.29

Thus, it is to be concluded that Article 2, paragraph a) of Order no. 112-A/2011 (duly interpreted on the basis of the criteria for interpretation of law provided for in Article 9 of the Civil Code) and being applicable the substantive tax rules to procedural ones (by force of the provision in Article 11, no. 1, of LGT), enables the submission of claims for arbitral ruling regarding assessment acts which have been preceded by a request for official review (without the limitation mentioned above in point 4.12. being applicable to them), the exception of lack of material jurisdiction of the Arbitral Tribunal raised by the Respondent not proceeding, consequently.

Exception of Lack of Jurisdiction of the Arbitral Tribunal due to Procedural Error

4.30

As we have seen above (see point 4.3.), the Claimants submitted to the appreciation of this Arbitral Tribunal a claim for "declaration of illegality of the act rejecting the official review relating to Personal Income Tax for the year 2010, annulling it in consequence" and a claim for "declaration of illegality of the assessment act for Personal Income Tax for the year 2010, with its consequent annulment".

4.31

Within the scope of the Response submitted, the Respondent came to defend that "taking into account that the request for official review was summarily rejected because the Services understood the same to be untimely (…), it will always be said that the arbitral means is not suitable to discuss the question of untimeliness".

4.32

Indeed, according to the Respondent, "the reason which led to the rejection of the request for official review was situated, exclusively, in the question of the timeliness of the (…) informal procedure", "which is equivalent to saying that the Tax Authority did not rule on the merits of the question".

4.33

And, therefore, the Respondent concludes that "it is unequivocal that we are faced with a tax administrative act which, by not appreciating or discussing the legality of the assessment act, cannot be subject to judicial review, in accordance with the provisions of paragraph a) of no. 1 of Article 97 of CPPT".

4.34

Thus, the Respondent understands that, "given the above, it is ascertained that the review of the act in question is outside the scope of matters susceptible to appreciation in arbitral proceedings (…)", whereby there is verified "a dilatory exception of procedural error, which, if it proceeds, requires the absolution of the Respondent from the Proceedings".

4.35

Now, in this matter, it is important to return to the question of lack of material jurisdiction of this Arbitral Tribunal (already analyzed above), in the case, to appreciate the legality of assessment acts preceded by a request for official review whose decision, allegedly, does not comprise the appreciation of the legality of those acts.

4.36

As has already been referred to above (see point 4.4.), Article 2 of RJAT defines "the jurisdiction of arbitral tribunals", but does not expressly include the appreciation of claims for declaration of illegality of acts rejecting requests for official review of tax acts.

4.37

However, the fact that paragraph a), no. 1, of Article 10 of RJAT makes reference to nos. 1 and 2 of Article 102 of CPPT (in which the various types of acts giving rise to the period for judicial review are indicated, including informal objection), makes clear that all types of acts capable of being contested through the process of judicial review, covered by those nos. 1 and 2, will be encompassed within the scope of the jurisdiction of arbitral tribunals functioning in CAAD, provided that they have as their object an act of one of the types indicated in that Article 2 of RJAT.[9]

4.38

However, the same argument extracted from the legislative authorization also leads to the conclusion that the possibility of using the arbitral process will be precluded when, in the judicial tax process, judicial review or an action for recognition of a right or legitimate interest is not usable.

4.39

In fact, being this the sense of the said legislative authorization law and inserting itself in the relative reservation of the Assembly of the Republic's legislative competence to legislate on the "tax system" (including, with respect to the guarantees of taxpayers) and on the "organization and jurisdiction of the courts", Article 2 of RJAT cannot be interpreted as conferring on arbitral tribunals functioning in CAAD jurisdiction to appreciate the legality of other types of acts (for whose contestation the process of judicial review and the action for recognition of a right or legitimate interest are not appropriate), under pain of unconstitutionality, due to lack of coverage in the legislative authorization law which limits the power of the Government.

4.40

In this context, although in Article 165, no. 1, paragraph i), of the Constitution of the Portuguese Republic (CRP), in which the relative reservation of the Assembly of the Republic's legislative competence is defined, reference is made to the creation of taxes and the tax system, this provision must be integrated with the content of no. 2 of Article 103 of the same, in which it is referred that the law determines the incidence, the rate, tax benefits and the guarantees of taxpayers, which constitutes an clarification of the scope of the matters included in that reservation, as has been uniformly understood by the Constitutional Court.[10]

4.41

Thus, to resolve the question of the jurisdiction of this Arbitral Tribunal it becomes necessary to ascertain in what terms the legality of an act rejecting a review request can be appreciated, in a tax tribunal, through the process of judicial review or whether an action for recognition of a right or legitimate interest will have to be used.

4.42

In general terms, the act rejecting a request for review of a tax act constitutes an administrative act, in the face of the definition provided by Article 120 of the Administrative Procedure Code [subsidiarily applicable, in tax matters, by force of the provision in Article 2, paragraph d), of LGT, Article 2, paragraph d), of CPPT, and Article 2, no. 1, paragraph d), of RJAT], since it constitutes a decision of a body of the Administration that, under the authority of rules of public law, aimed to produce legal effects in an individual and concrete situation.

4.43

On the other hand, it is also unquestionable that it is an act in tax matters since the application of rules of tax law is made in it, that is, an act rejecting a review request constitutes a "tax administrative act".

4.44

From the provisions in paragraphs d) and p), no. 1 and no. 2, of Article 97 of CPPT there is inferred the rule that the contestation of tax administrative acts should be effected, in the tax judicial process, through judicial review or special administrative action (which succeeded contentious review, under the terms of Article 191 of the Code of Procedure in the Administrative Courts) according to whether those acts do or do not comprise the appreciation of the legality of administrative assessment acts.

4.45

In these terms, faced with this criterion of division of the fields of application of the process of judicial review and of special administrative action, acts rendered in official review procedures of assessment acts can only be contested through the process of judicial review when they comprise the appreciation of the legality of these assessment acts, and if the act rejecting the request for official review of an assessment act does not comprise the appreciation of the legality of this, the special administrative action shall be applicable.[11]

4.46

Now, adopting the understanding that the process of judicial review is the appropriate procedural means to contest acts rejecting requests for official review of an assessment act, it will be possible to conclude that one is not faced with a situation in which the action for recognition of a right or legitimate interest could be used in the tax judicial process, since its application in tax litigation has residual nature, inasmuch as such actions "can only be proposed whenever such procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest" (see Article 145, no. 3, of CPPT).[12]

4.47

Indeed, the legislative concern to preclude, from the jurisdiction of arbitral tribunals functioning in CAAD, the appreciation of the legality of administrative acts which do not comprise the appreciation of the legality of assessment acts, in addition to resulting, from the outset, from the generic directive of creation of an alternative means to the process of judicial review and the action for recognition of a right or legitimate interest, results with clarity from paragraph a), no. 4, of Article 124 of Law no. 3-B/2010, of 28 April, in which among the possible objects of the tax arbitration process are indicated "the administrative acts which comprise the appreciation of the legality of assessment acts", since this specification can only be justified by a legislative intention to exclude from the possible objects of the arbitral process the appreciation of the legality of acts which do not comprise the appreciation of the legality of assessment acts.

4.48

Therefore, the solution of the question of the jurisdiction of this Arbitral Tribunal connected with the content of the act rejecting the review request of the Personal Income Tax assessment depends on the analysis of this act.

4.49

In the case under analysis, the reason invoked for the rejection of the request for official review was the untimeliness of the request which, by itself, does not imply appreciation of the legality of the Personal Income Tax assessment act underlying the said review request.

4.50

However, faced with the criterion of division of the fields of the process of judicial review and of special administrative action (delineated by paragraphs d) and p) of no. 1 of Article 97 of CPPT), it is not necessary that the appreciation of the legality of an assessment act be the foundation of the procedural decision or that the claim formulated request the appreciation of the legality of an assessment act, it being sufficient that this act comprises it (which, in this context, means that the contested act includes a judgment on the legality of an assessment act), even if the legality or illegality thereof is not the foundation of the decision.[13]

4.51

Now, in the case at hand, it can be understood that the decision on the review request includes the appreciation of the legality of the Personal Income Tax assessment act/2010 which underlies it, since, as can be seen from the text of the information on which the rejection decision was based (a copy of which was annexed to the record, both by the Claimants and by the Respondent), in various points thereof there is manifest the disagreement with the corrections which the Claimants wanted to see made.

4.52

Indeed, in the said Information (which constitutes the substantiation of the act rejecting the review request) there are various references regarding the legality of the underlying Personal Income Tax assessment act, even though the reason invoked for its rejection is the alleged untimeliness thereof:

4.52.1

The Respondent in point II of the Information identified above, begins by making a transcription of the framing of the review request submitted, which is based "(…) on incorrect completion of Annex G for the year 2010, by lapse of the requestor, and on the injustice arising from this situation, given that the income declared, in its view would be excluded from taxation, and on violation of law, by error in the legal premises imputable to the Tax Authority, for having disregarded in its favor the existence of the essential requirements for non-taxation of the said capital gains", subsequently transcribing the content of Article 78 of LGT (bold present in the original text);

4.52.2

Next, the Respondent states that "despite the period of administrative objection having elapsed (…) the review of tax acts by the entity that made them can also be effected at the initiative of the tax administration, within a period of four years after the assessment (…), on the grounds of error imputable to the services (…)" "and, being, in this context, the request timely (…)", the Respondent makes considerations on the applicability, to the case, of the transitional regime provided for in Article 5 of Decree-Law no. 442-A/88, of 30 November, concluding that having the male Claimant stated "(…) to have allocated the property acquired by succession to his business activity is the basis for his appeal to the transitional regime (…)" referred to above (bold present in the original text);

4.52.3

The Respondent further states that "the burden of proof that the goods or values were acquired before the entry into force of the Personal Income Tax Code (…) falls on the requestor", concluding that "if there was an error, it would always be imputable to the taxpayer", concluding that "the alleged error imputable to the Tax Authority does not proceed";

4.52.4

Additionally, the Respondent understands that "the exceptional circumstances that justify the authorization of review of the taxable base are not considered to be met, under the provisions of no. 4 of the same article", "first of all, given the untimeliness of the request (…)", considering that the possibility of the senior director of the service authorizing the competent entity to review the act made by him could only happen "(…) within the period of three years after the date of the tax act (…)" and not within the period of four years as the Claimants contend (bold present in the original text).

4.53

In these terms, it is unequivocal that when the Respondent concludes that "the request should, on the basis of the reasoning adduced above, be rejected (…)", the act rejecting the request for official review comprises the appreciation of the legality of the assessment acts, since, as demonstrated in the preceding point, the Respondent affirms that the corrections which the Claimants wanted to be made do not have support in substantive law, not limiting itself to rejecting the request on the grounds of untimeliness.

4.54

Thus, taking into account what has already been referred to above regarding the jurisdiction of arbitral tribunals functioning in CAAD, as well as regarding their limitations, this Arbitral Tribunal concludes that it is competent to appreciate the legality of the act rejecting the request for official review relating to the assessment act for Personal Income Tax/2010 (inasmuch as the legality of the underlying assessment act was appreciated therein), whereby the exception of procedural error based on alleged lack of material jurisdiction of the Arbitral Tribunal to appreciate the merits of the case does not proceed.

Exception of Expiration of the Informal Procedure

4.55

The Respondent, in the Response submitted, also raised, as a form of defense, untimeliness, inasmuch as, having the tax act been "(…) notified to the Claimants in the year 2011 (…)" and having "(…) the request for official review been made in June 2015 (…)" it was, according to the Respondent, submitted untimely.

4.56

Now, according to what the Respondent alleges, "the request for official review, at the moment it was submitted, was untimely (…), in accordance with the provisions of no. 4 of Article 78 of LGT (…)" given that the applicable period for submission of the said request was "(…) within the three years following the date of the tax act (…)", concluding that "the expiration of the informal procedure constitutes a peremptory exception which extinguishes the legal effect of the facts alleged by the Claimants".

4.57

Thus, it will be necessary to analyze, in light of the applicable legislation, whether or not the Respondent is correct regarding the alleged untimeliness (expiration) of the request.

4.58

Article 78 of LGT provides for the review of the tax act "at the initiative of the taxpayer" or at the initiative "of the tax administration", the former "within the period of administrative objection and on the grounds of any illegality", and the latter "within a period of four years after the assessment or at any time if the tax has not yet been paid, on the grounds of error imputable to the services".

4.59

However, this does not mean that the taxpayer cannot, within the period for official review, request this same review, as results not only from the principles of legality, justice, equality and impartiality (Article 266, no. 2 of CRP), but also from the written law itself, that is, from Article 78, no. 7 of LGT.[14]

4.60

As for "error imputable to the services" set forth in Article 78, no. 1 in fine of LGT (…)", it has been understood by the STA jurisprudence, notably, in the already cited Judgment no. 01009/10, of 22/03/2011, that "(…) this comprises the legal error committed by the same not only simple lapse, material error or fact error, as is moreover clarified in no. 3 of Article 78 of LGT, in the wording introduced by Law no. 55-B/04, of 30 December".[15]

4.61

Moreover, as is referred to in the STA Judgment of 12/12/2001 (rec. 26,233), cited in the Judgment identified in the preceding point, "where there is an error of law in the assessment (…) and it is made by the services, it is to the tax administration that this error is imputable (…)", being "(…) this imputability to the services (…) independent of the fault of any of its officials in making the assessment affected by error, given that the tax administration is generally obliged to act in accordance with the law (arts. 266, no. 1 of CRP and 55 of LGT), whereby, independent of proof of fault of any of the persons or entities that comprise it, any illegality not resulting from an action of the taxpayer will be imputable to the fault of the services themselves" (our emphasis).[16]

4.62

In these terms, it was legally permissible, because timely, for the Claimants to submit, on 1 June 2015, the request for review of the assessment act relating to Personal Income Tax/2010.

4.63

Now, given that the claim for arbitral ruling is included the claim to review the decision rejecting the request for review, submitted on 1 June 2015, against the assessment act relating to Personal Income Tax for the year 2010 (as a way to be able to declare, in final instance, the illegality of the Personal Income Tax assessment being the object of the claim), which was notified to the Claimants on 4 January 2016 [and comprises, as analyzed above (points 4.30. to 4.54.), the appreciation of the legality of Personal Income Tax assessment act], the claim is covered by the provision of paragraph e) of no. 1 of Article 102 of CPPT.

4.64

Thus, taking into account the provision in no. 1 of Article 102 of CPPT (in the wording in force since 1 January 2013), the period for submission of judicial review is three months counted from the facts enumerated in that article, namely, "the notification of the other acts which can be the object of autonomous contestation in accordance with this Code", as well as that provided for in Article 10, no. 1, paragraph a) of RJAT which establishes that the request for constitution of an arbitral tribunal should be submitted "within a period of 90 days, counted from the facts provided for in nos. 1 and 2 of Article 102 of CPPT, with respect to acts susceptible to autonomous contestation (...)", whereby, taking into account the date of submission of the request for arbitral ruling (7 April 2016), the request is timely.

4.65

Having here considered timely the request for arbitral ruling submitted by the Claimants, the respective peremptory exception raised by the Respondent does not proceed.

5. SANATION

5.1

The request for arbitral ruling is timely since it was submitted within the period provided for in paragraph a) of no. 1 of Article 10 of RJAT.

5.2

The parties have legal personality and capacity, are legitimate regarding the request for arbitral ruling and are duly represented, in accordance with the provisions of Articles 4 and 10 of RJAT and Article 1 of Order no. 112-A/2011, of 22 March.

5.3

The joinder of claims here effected by the Claimants is legal and valid, in accordance with the provisions of Article 3, no. 1 of RJAT, given that the admissibility of the claims depends, essentially, on the appreciation of the same circumstances of fact and on the interpretation and application of the same principles or rules of law.

5.4

The Tribunal is competent regarding the appreciation of the request for arbitral ruling formulated by the Claimants.

5.5

Beyond the exceptions raised by the Respondent and already analyzed in Chapter 4 of this Decision, there are no other exceptions as to which it is necessary to know.

5.6

No nullities are verified, so it is necessary, now, to proceed to the merits of the claim.

6. FACTUAL MATTER

Facts Proven

6.1

The following facts are considered as proven (based on the documents identified below, annexed by the Claimants, as well as based on the documents that form part of the administrative proceedings, annexed by the Respondent):

6.1.1

In the year 1987, the male Claimant and his brother (C…), acquired, in the regime of joint ownership, by succession caused by the death of the mother of both (Lady D… the ownership of a rural property called "…", located in…, in the parish of …, in ..., registered in the rural matrix under no.…, as per documents no. 4 and 5, annexed by the Claimants.

6.1.2

The nature of the rural property identified was changed to urban property (land for construction), in accordance with Statement Form 129 submitted on 19 July 1990, giving rise to the article … of the parish of…, as per document no. 6, annexed by the Claimants.

6.1.3

After the entry into force of the Personal Income Tax Code, the male Claimant allocated the said property to his business and professional activity of "acquisition and sale of real estate" (fact submitted by the Claimant and accepted by the Respondent).

6.1.4

In the year 2007, the said rural property (described in the Land Registry of ..., under no. …/…), was subject to a subdivision process consisting of 23 lots, in accordance with License no. …/07, of … September (and amended on … July 2008), issued in the name of the male Claimant and his brother C…, through which the licensing of the subdivision and the respective urbanization works was made, as per documents no. 7 and no. 5, annexed by the Claimants.

6.1.5

The said lots were considered, for the purposes of Municipal Property Tax (IMI), as urban property (land for construction) in … September 2007, as is apparent from the copies of the first assessment certificates for IMI purposes, contained in the administrative proceedings, annexed by the Respondent.

6.1.6

In the year 2010, the male Claimant and his brother sold three of those lots (no. 18 which corresponds to property article no.…, no. … which corresponds to property article no. … and no. … which corresponds to property article no.…), all with an area of 290.00 square meters, intended for the construction of a single-family building with basement, ground floor and upper floor, as per document no. 7, annexed by the Claimants.

6.1.7

In 2011, the Claimants proceeded to submit their Personal Income Tax Return Form 3, for the year 2010, having indicated in the respective Annex G (capital gains), the values associated with the onerous sale of the three urban properties identified in the preceding point, as per documents no. 8 to 11, annexed by the Claimants (values expressed in Euros):

6.1.8

The Respondent made on 5 July 2011, the assessment of Personal Income Tax no. 2011…, which resulted in the collection note no. 2011…, in the amount of EUR 12,331.15, as per documents contained in the administrative proceedings, annexed by the Respondent.

6.1.9

The Claimants voluntarily paid the assessed Personal Income Tax on 27 September 2011, as per documents contained in the administrative proceedings, annexed by the Respondent.

6.1.10

The Claimants submitted, on 1 June 2015, a request for review of the Personal Income Tax assessment for the year 2010 (identified above in point 6.1.8.), as per document no. 2, annexed by the Claimants.

6.1.11

The Claimants were notified of Memorandum no.…, dated 3 November 2015 (and sent by registered mail on 4 November 2015), by means of which they were informed of the draft rejection of the request for review of the Personal Income Tax assessment/2010, and its respective substantiation, contained in Information no. …/15, of 26 October 2015, as well as to exercise, if they so wished, their right to prior hearing, as per documents contained in the administrative proceedings, annexed by the Respondent.

6.1.12

The Claimants exercised, through registered letter of 23 November 2015, their respective right to hearing to the effect that "(…) the request submitted is the appropriate procedural means to satisfy the claimant's claim, having been timely and legitimately submitted" and maintaining "(…) the relevance of all arguments made in the context of the request for review of the tax act (…)", as per documents contained in the administrative proceedings, annexed by the Respondent;

6.1.13

The Claimants were notified, on 7 January 2016, of Memorandum no. …/…, of 4 January 2016, relating to the decision rejecting the request for review of Personal Income Tax for the year 2010, as per document no. 1, annexed by the Claimants and documents contained in the administrative proceedings, annexed by the Respondent.

6.2

No other facts capable of affecting the decision on the merits of the claim were proven.

Facts Not Proven

6.3

No facts were verified as not proven with relevance to the arbitral decision.

7. LEGAL GROUNDS

7.1

In the present case, the claims formulated by the Claimants were in the sense of obtaining:

7.1.1

Declaration of illegality of the act rejecting the official review relating to Personal Income Tax for the year 2010, annulling it in consequence;

7.1.2

Declaration of illegality of the assessment act for Personal Income Tax for the year 2010, with its consequent annulment and reimbursement of the amount of tax allegedly paid in excess, in order to enable the Respondent to issue a new corrected tax assessment.

7.2

And, in order to allow or disallow the claims formulated it will be necessary to analyze the legal framework applicable to the factual situation described and given as proven (see points 6.1.1. to 6.1.7., above), as well as to answer the disputed question of whether the gains resulting from the transmission, in 2010, of three lots of land were or were not subject to taxation, under Personal Income Tax, as capital gains or whether, on the contrary, were exempt from taxation, taking into account the fact that the land then subdivided was acquired before the entry into force of the Personal Income Tax Code (that is, before 1 January 1989) and, to that extent, is covered by the transitional regime of category G, provided for in Article 5, no. 1 of Decree-Law no. 442-A/88, of 30 November.

7.3

In order to assert their claims, the Claimants alleged, both in the request for review of the Personal Income Tax assessment for the year 2010 and in the arbitral claim, that:

7.3.1

"(…) it is unequivocal that the rural property was acquired in the year 1987 by succession (…)" and "not being, therefore, land (…) for construction, on the date of 1987 (…) it was not covered by the scope of incidence of the (…) (Capital Gains Tax Code)", "whereby, it is manifest that the requirements on which non-subjection to taxation depends are materially met";

7.3.2

"The land here in question was acquired with the nature of rural property (…) and only after the entry into force of the CIRS (…) acquired the nature of urban property (land for construction) (…)", "having been allocated to the male Claimant's economic and professional activity (…) after the entry into force of the CIRS", "whereby, the Claimants do not understand how the Tax Authority could base the rejection decision on the (…) understanding (…)" that, having the male Claimant allocated "the property acquired by succession to his business activity, it comes within the transitional regime contained in Article 5 of Decree-Law 442-A/88, of 30 November, since gains subject to capital gains tax are excluded from it", "for such conclusion is not in keeping with a thorough and legalistic interpretation of the legislator's provision" (our emphasis).

7.4

The Respondent came to contradict the position of the Claimants, having presented arguments in the sense that:

7.4.1

"Article 1 of the Capital Gains Tax Code determined that that tax was subject to gains resulting from the onerous transmission of land for construction, provided that the transferor had acquired it, whether by gift or for consideration, after 9 June 1965";

7.4.2

It was established "in its § 2 that those in urbanized zones or comprised in already approved urban development plans and those thus declared in the acquisition title are deemed to be for construction";

7.4.3

"According to the prevailing jurisprudence of the Superior Courts, land for construction, for the purposes of article 1, no. 1, of the Capital Gains Tax Code would be those actually intended for that purpose, it being presumed that those referred to in § 2 of the same provision are so";

7.4.4

"It should also be noted that § 2 of Article 1 of the Capital Gains Tax Code establishes a mere presumption rebuttable by evidence to the contrary, which, while on one hand admitting proof in rebuttal, on the other does not prevent the demonstration of the verification of the objective requirements of incidence based on elements demonstrating that the transmitted lands were actually intended for construction" (emphasis of the Respondent).

7.5

Thus, according to the Respondent, "(…) there is no doubt that we are in the presence of genuine land for construction, whose transmission would be subject to taxation under the rules of the Capital Gains Tax Code, and that, for that reason, the exclusion provided for in the transitional regime will not apply to it", and "on the other hand, the burden of proof that the goods or values were acquired before the entry into force of the Personal Income Tax Code (…) falls on the claimant", whereby the Respondent concludes that "if there was an error, it would always be imputable to the Claimants, since the contested assessment did not result from any official correction".

7.6

In the case under analysis, and as per the factual matter given as proven:

7.6.1

The male Claimant and his brother (C…), acquired, in the regime of joint ownership, in 1987, by succession, the ownership of a rural property called "…" (see point 6.1.2., above);

7.6.2

The nature of the rural property identified above was changed to urban property (land for construction), in accordance with Statement Form 129 submitted on 19 July 1990 (see point 6.1.2., above);

7.6.3

The male Claimant allocated, after the entry into force of the Personal Income Tax Code, the said property to his business and professional activity of "acquisition and sale of real estate" (see point 6.1.3., above).

7.6.4

In the year 2007, the said rural property was subject to a subdivision process consisting of 23 lots, in accordance with License no. …/07, of … September (and amended on 15 July 2008), issued in the name of the male Claimant and his brother C…, through which the licensing of the subdivision and the respective urbanization works was made (see point 6.1.4., above);

7.6.5

In the year 2010, the male Claimant and his brother sold three of those lots (no. 18, no. 22 and no. 23) (see point 6.1.5., above).

7.7

In general terms, Decree-Law no. 442-A/88, of 30 November (statute which approved the Personal Income Tax Code, which entered into force on 1 January 1989), states that, on that date, were "(…) abolished, with respect to the taxpayers of this tax, the professional tax, the capital tax, the industrial contribution, the property contribution, the agricultural industry tax, the complementary tax, the capital gains tax and the stamp tax contained in the 134 item of the General Table of the Stamp Tax (…)".

7.8

Nevertheless, and to safeguard taxpayers, various transitional regimes were created, notably, the one provided for in Article 5 of the Preamble of the Law which approved the said Personal Income Tax Code, in the sense of applying a transitional regime to income of Category G, under the terms of which "gains that were not subject to capital gains tax, created by the code approved by Decree-Law no. 46,373, of 9 June 1965, as well as those derived from the onerous sale of rural properties allocated to the exercise of an agricultural activity or from the allocation of these to a commercial or industrial activity, exercised by their respective owner, are only subject to Personal Income Tax if the acquisition of the goods or rights to which they relate was made after the entry into force of this Code", it being incumbent "on the taxpayer to prove that the goods (…) were acquired before the entry into force of this Code, and the same should be effected (…) through any means of proof legally accepted in the remaining cases" (our emphasis).

7.9

Now, in accordance with the provision in the Capital Gains Tax Code referred to above (which was in force on the national territory until 31 December 1988), the said tax was charged "(…) on gains realized through the acts (…)" enumerated in the statute identified above, namely, those resulting from the onerous transmission of land for construction, whatever the title by which it operates, when it results in gains not subject to the charges of capital gains provided for in Article 17 of Law 2030, of 22 June 1948, or in Article 4 of Decree-Law 41,616, of 10 May 1958, and which do not have the nature of income taxable in industrial contribution" (our emphasis).

7.10

Additionally, it was stated that "income taxable in industrial contribution" were deemed to be "gains from the onerous sale of land for construction up to the expiry of two years from the date of acquisition, when this operated for equal title" and that they were "deemed land for construction those located in urbanized zones or comprised in already approved urban development plans and those thus declared in the acquisition title" (our emphasis).

7.11

Thus, to decide on the law it is necessary to establish whether, in light of the above, at the date of entry into force of the Personal Income Tax Code, the land in question was or was not integrated in an urbanized zone or comprised in an urban development plan and whether in the acquisition title the same was intended for land for construction.

7.12

In this context, it should be noted from the outset that the Capital Gains Tax Code "offered a threefold criterion for classification of a land as urban property (given that even then properties would be classified as rural or urban in accordance with their allocation or destination – cfr. Article 5 of the Code of Property Contribution then in force)", that is:[17]

7.12.1

Having "structural constructive potential (criterion of structural or objective suitability)";

7.12.2

Having "been allocated to construction by an act of the administration (criterion of administrative allocation)";

7.12.3

"Being intended for that purpose by the contracting parties themselves (criterion of particular destination)".

7.13

For the purposes of what is described in the preceding point, "the land would have constructive potential if it was located in an urban agglomeration, considering as such (in accordance with Article 62 of Decree-Law no. 794/76, of 5.11) those which, located in the surrounding area of a nucleus of authorized buildings, were in contact with paved public roads and were served by a network of domestic supply of electricity, water and drainage of sewage" (our emphasis).[18]

7.14

Nevertheless, confronting this normative with provisions inserted in later statutes (namely, with Article 6, no. 3, of the Code of Autonomic Contribution, "we immediately see that neither the criteria of structural suitability nor administrative allocation were adhered to there, given that neither the location in an urban agglomeration nor the existence of an urban development plan is relevant", inasmuch as "the legislator of this latter Code limited itself to being relevant particular destination indices such as that of having requested and been granted a subdivision license, requested and approved a construction project, having requested and been granted a construction license, or such purpose having been declared by the acquirers themselves in the acquisition title".[19]

7.15

In the case under analysis, the land called "…" was only registered as "urban property (land for construction)" following the submission, on 19 July 1990, of form 129 (see point 6.1.2., above), thus making it clear that, on the date when the Capital Gains Tax Code ceased to apply, the land in question was not yet land for construction for the purposes of this Code.

7.16

And, as that land (whilst rural property) was acquired, by the Claimants, before the entry into force of the Personal Income Tax Code, the assessment in question is illegal by being excluded from the incidence of the tax by Article 5 of Decree-Law no. 442-A/88.

7.17

Indeed, in accordance with the consolidated and firm and reiterated jurisprudence of the STA, notably, in Judgment no. 0872/09, of 4 February 2009, "by force of the provision in Article 5, no. 1 of Decree-Law 442-A/88, of 30 November, gains obtained with the transmission of agricultural land acquired before the validity of the CIRS are not taxed under Personal Income Tax and maintained that nature at the moment of its entry into force" (our emphasis).[20]

7.18

And, not being proven that a given land "was integrated in an urbanized zone or comprised in an urban development plan, so that the qualification as land for construction, for the purpose of Capital Gains Tax, could only arise from declaration as such in the acquisition title".[21]

7.19

Now, in the case under analysis, in the document relating to the statement of goods by death of the mother of the male Claimant, it is stated that the "rural property (…) called … (…), registered in the rural matrix under article…" "is located in an urban zone but reserved for rural lease", but from the examination of the witnesses (in particular from the statement of witness E…) it resulted in the conviction that, on the date to which the transmission of ownership of the property to the Claimants refers (1987), the said rural property was nothing more than a "(…) walled farm (…) with house (…) of the farm workers (…)", being constituted by "(…) pinewood, agricultural land, uncultivated land (…)", in an area of other rural properties ("it was an area of fields" according to the said witness) (our emphasis).

7.20

Indeed, it also results from the document itself referred to in the preceding point that "the rural property (…) called … (…)" bordered "(…) to the north, south and east with paths and to the west with (…) Av. … (…)", whereby this Tribunal understands that that land, in 1987, did not meet the potential referred to in point 7.13., above.

7.21

As referred to in the STA Judgment no. 0872/08, already mentioned, "it is true that there is an appreciation of agricultural lands when they are transformed into land for construction and allocated to the commercial or industrial activity of their owners, a situation which came to be taxed under Personal Income Tax, in the category of capital gains, with the wording given to paragraph a) of no. 1 of Article 10 of the CIRS by Decree-Law no. 141/92, of 17 July. However, this situation was not taxed under Capital Gains Tax and, upon coming to be taxed under Personal Income Tax, as capital gains, the scope of incidence was also limited to cases in which the acquisition of the goods or rights to which they relate was made after the entry into force of this Code, as was established in the new wording given to Article 5 of Decree-Law no. 442-A/88 (…)" (our emphasis).

7.22

Thus, in order for the transmission of the land referred to in the case (in 2010) to be taxed under Personal Income Tax it was necessary that, before the date of entry into force of the Personal Income Tax Code (which occurred on 1 January 1989), the land in question be qualified as land for construction, since only the appreciation of lands with this qualification was taxed under Capital Gains Tax.

7.23

Indeed, according to the same Judgment, which we adopt here, "considerations relating to the economic substantiality of situations of appreciation of agricultural lands, derived from their transformation into land for construction and their alleged identity with situations of appreciation of lands acquired and transmitted as land for construction, do not avail, in this context of taxation as capital gains", since "(…) it is clear from Article 1 of the Capital Gains Tax Code that it did not have the vocation to tax the generality of situations of appreciation of goods which the CIRS has".[22]

7.24

On the other hand, and in the wake of the said Judgment, "the exclusion by Article 5 of Decree-Law no. 442-A/88 of taxation under Personal Income Tax, as capital gains, of gains obtained with the transmission of lands which, on the date of entry into force of the CIRS, were qualified as agricultural lands (and, therefore, were outside the scope of incidence of the Capital Gains Tax Code) is understood by the fact that, having opted for the calculation of gains taxable as capital gains on the basis of the difference between the acquisition value and the transmission value

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