IRS Withholding Tax Dispute: Factual Error and Quantification Error in Assessment (CAAD 259/2015-T)

ARBITRATION DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Rui Ferreira Rodrigues, and Ana Duarte, appointed by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 16 April 2015, A..., SA, legal entity number ..., with registered office at Avenue of the ..., no. ..., ...-... ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2º and 10º of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228º of Law no. 66-B/2012, of 31 December (hereinafter, briefly designated RJAT), seeking a declaration of illegality of the act of assessment of Personal Income Tax (IRS) no. 2014..., for the year 2010, in the amount of €111,404.44 (one hundred and eleven thousand, four hundred and four euros and forty-four cents).

To substantiate its request, the Applicant alleges, in summary, that the following are verified:

i. Expiry of the right of assessment;

ii. Failure to deliver a copy of the Service Order;

iii. Invalidity of the notification of the note of diligence relating to the completion of inspection acts;

iv. Lack of notification of the inspection report;

v. Lack of substantiation of the assessment;

vi. Error of fact, given that the acquisition of the capital stock of..., had as consideration the assumption, on an individual basis by the former shareholder, of debts of the applicant company;

vii. Error in the quantification of the tax obligation.

On 20-04-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT (Tax Authority).

The Applicant did not appoint an arbitrator, so pursuant to the provisions of subparagraph a) of paragraph 2 of article 6º and subparagraph a) of paragraph 1 of article 11º of the RJAT, the President of the Ethics Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 12-06-2015, the parties were notified of these appointments and did not manifest any intention to challenge any of them.

In accordance with the provisions of subparagraph c) of paragraph 1 of article 11º of the RJAT, the collective Arbitral Tribunal was constituted on 14-07-2015.

On 02-10-2015, the Respondent, duly notified for this purpose, presented its response, defending itself solely by way of challenge.

On 30-10-2015, the meeting referred to in article 18º of the RJAT was held, where the witnesses presented by the Applicant were examined.

Having been granted a period for the submission of written arguments, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the delivery of the final decision, after the submission of arguments by the AT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with the provisions of articles 2º, paragraph 1, subparagraph a), 5º, and 6º, paragraph 1, of the RJAT.

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

The process does not suffer from nullities.

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

Having considered all this, it is necessary to deliver a decision.

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proven

1. In compliance with Service Order no. OI2012..., an inspection action was carried out at the company "A..., LDA.", of general scope - concerning the fiscal year 2010.

2. Service order no. OI2012... was signed on 2014-06-05, by ..., NIF... , Official Accounting Technician.

3. In the course of the inspection procedure, the Tax Inspection Services (SIT) concluded that the de facto managers of the company were:

i. B... (NIF ... in the period: 2010-12-31 to 2014;

ii. C... (NIF...), in the period of 2010-12-31 to 2014;

iii. D... (NIF: ...), in the period of 1991-03-06 to 2010-01-29;

iv. E... (NIF: ...), in the period of 2010-02-14 to 2011-01-12.

1. The inspection action resulted in corrections to Personal Income Tax/withholdings at the liberatory rate, by advance on account of profits.

2. Such corrections resulted in corrections to the taxable matter of €96,503.28.

3. The now Applicant exercised the right to a hearing regarding the draft inspection report, in accordance with chapter VIII of that Report.

4. The arguments then presented were not accepted and the proposed corrections were maintained, with the RIT (Tax Inspection Report) stating in this regard:

"(...) 2. As regards the documents which are attached as an annex, intended to prove that the debts were assumed and paid by the former shareholders, these documents were recorded in the accounting of company A....;

1. In the case of Leasing rents, equally referred to as having been assumed by the shareholders, their accounting record constituted a debit of account 428 – Tangible Fixed Assets, as a counterpart to account ... – Deposits on demand, to credit;

2. That is, from this accounting entry it can only be concluded that company A... will have paid from its bank account the amount of the rents, with no evidence whatsoever that other persons made any payment;

3. If this were the case and as accounting reflects variations in the shareholders' capital assets, no other reason can be inferred than the one it shows, which is that amounts that were in the bank were used to pay the rents for the said equipment;

4. Regarding documents nos. 8 to 39 and because the accounting entry by company A ..., can only be understood as entry and exit of their own financial flows, since the money entered the bank through the exit from the same amount from the cash account. In other situations, money will have entered the bank as a counterpart to another bank account of A...;

5. There are still other entries of more difficult technical accounting understanding, in which entry into the bank is made as counterpart to a credit in the cash account and the remainder by account of a credit in an account of other debtors and creditors.

6. Regarding the above in points 7 and 8, see the accounting entry of document 16, which for a purported payment to the bank (of the debt in question), €10,000.00 is delivered in cash, with a debit to the banks account (deposit), and credit is given to the cash account (exit of money) of €9,000.00, and further credit is given to an account of other debtors and creditors for €1,000.00;

7. This creates a credit available in this Cash account, which may be received by the account holder at any time they see fit;

8. There finally exists for the same justification (payment by shareholders of the debt to the bank) the accounting entry of amounts in which the banks account is debited, as counterpart to an account 2113 (customers);

9. Notwithstanding the existence, aggregated to each document attached to the right to hearing, of cheques issued by the former shareholders, the fact is that this money was accounted for as if the debt in payment were of company A... itself, of which proof is given by the accounting records thereof;

10. It is in this way that it is concluded that these operations were carried out, that is, the flows and inflows generated with these operations (with rare exceptions) suffered direct and substantive impact on the company's assets and not on the shareholders;

11. The validation of these assertions is in fact supported by the balance recorded in the company's assets, in the cash account on 31 December 2010, in the amount of €440,248.36 credit;

12. A different balance would result if the shareholders had indeed made deposits of the amounts determined, with a view to the acquisition of both the property and the capital of the same company;

13. In the case in question, and extensively explained in the report, the profit obtained by the shareholders in this transaction will have reverted to their personal sphere, with property on one hand, and with the increase in capital on the other, without having spent their own financial resources on it;

14. All this scheme was possible through the formal accounting of entries and exits in the cash account and other values from personal accounts of the shareholders;

15. It should be recalled that the shareholders operated a deposit account in the same bank, whose account holders were Mr. D... and Mr. E... and not the company, although the same account was used to make deposits relating to amounts paid by customers (taxes, social security, among others). Extracts of the same were requested, but it was stated that there were no longer supporting documents;

16. Through the capital increase whose counterpart was the accounts mentioned above (cash, entries and exits merely bookkeeping), it resulted that, for all operations to be correctly accounted for, amounts of approximately €440,000.00 would have to actually enter the cash;

17. The amount determined as undue gain of the shareholders corresponds to €454,231.35 (€222,930.00 + €231,301.35), so that the net amount corresponding to the property and the increase in capital could be effectively paid;

18. This resulted in a balance, unlikely to occur, of payments exceeding the amounts it had in cash;

19. However, if we compare the shareholders' rights on one hand and the payments that did not exist on the other, we end up concluding that subtracted would result in a balance whose amount would be more acceptable, given the conditions and procedures recommended for accounting of the cash account, in accordance with the accounting standards required.

20. It should be recalled that accounting must provide a true and fair picture. According to the SNC, financial statements should appropriately present the financial position, financial performance and cash flows of an entity. Appropriate presentation requires faithful representation of the effects of transactions and conditions, in accordance with the definitions and recognition criteria for assets, liabilities, revenues and expenses;

21. The characteristics of financial information are the attributes that make the information mentioned in financial statements useful to its users;

22. The four main characteristics of financial information are comprehensibility, relevance, reliability and comparability;

23. In summary, it is on the basis of the financial statements that we evaluated here the impact that the operations of acquisition of the property and the increase in capital had on the company.

As for the calculation of the liberatory rate, which is also questioned here, it should be noted that the calculation assumes that the amount received/used by the shareholders is the net amount of tax, similar to what happens with any other category of tax. As we can see, when a liberal professional, accounting technician, lawyer, among others, issues a receipt to an entity with organized accounting, it mentions from the outset the amount relating to the provision of services, to which the respective rate is applied. The amount finally received is the difference between the amount of the provision of services (gross amount) and the tax assessed, which results in the net amount to be received.".

1. From the correction made by the Tax Inspection Services (SIT) resulted the additional assessment of Personal Income Tax no. 2014 ..., for the fiscal year 2010, as well as the corresponding compensatory interest, in the total amount of €111,404.44, which is the subject matter of the present dispute.

2. In accordance with the provisions of article 40º, paragraph 1 of the CPPT, the Tax Inspection Report (RIT), with the corrections in question, was notified to the representative of the now Applicant on 07-11-2014, through Official Letter no. ... of 2014-11-06, under postal registration RD...PT, by registered mail with acknowledgement of receipt, the signature of which occurred on 2014-11-07.

3. The assessment in question, dated 18-11-2014, was sent to the Applicant's electronic mail box (Via CTT) on 20-11-2014.

4. The Applicant accessed its electronic mail box on 21-11-2014.

5. The Applicant underwent a major transformation at the end of 2010.

6. The shareholders and managers who constituted it sought a business partner, interested in acquiring the company's shares, which was formalized on 4 January 2013.

7. In 2010, the shareholders and managers, manifesting the intention to effect the transfer of their shares, first proceeded with the cessation of functions as managers, and those who would become the holders of the company's capital in the future were appointed to the same position, B... and C... .

8. On 30 October 2012, shareholder D... of the Applicant transferred his share valued at €175,000.00 to B..., for the overall amount of €180,000.00.

9. On the same day, shareholder F... of the Applicant transferred her share with a nominal value of €175,000.00 to C..., for the overall price of €180,000.00.

10. The Applicant contracted 2 loans under the PME Invest program, in the amounts of €150,000.00, on 22-04-2009, and €25,000.00, on 19-08-2009.

11. For the movement of such financing, the Applicant had with the then ... a demand deposit account with number ..., exclusively for this purpose, with D... (transferor of the company's shares) and E... (husband of the transferor F...) as the only representatives and persons responsible for its movement.

12. As of 31/12/2010 the said demand deposit account also had a pledged account in the amount of €50,000.00 corresponding to contract no. ... .

13. As of 22/04/2013, such loans were completely settled.

14. A prerequisite for the performance of the share transfer contract to the current shareholders was that the fulfillment of the said financial responsibilities with the PME Invest program be assumed by Mr. D... (transferor of the company's shares) and by Mr. E... (husband of the former shareholder F...), and that the company be transferred without liabilities.

15. In compliance with such agreement, the former shareholder D... and the husband of the former shareholder F..., made deposits in the demand deposit account no. ..., of the ... bank, in the name of the company here Applicant, and used exclusively for the financing of PME Invest, bank deposits either through cash or through personal cheques.

16. From the analysis of the balance sheet of the company now Applicant, the SIT found that the item of tangible fixed assets decreased from €243,930.61 in 2009 to €74,278.85 in 2010, which was due to the sale of the company's property to its shareholders.

17. The Applicant acquired the property registered in the property register with no. ..., divided into three units, used for services, located at Av...., ... and Av. of the..., ... and... , in ..., which it allocated to the exercise of its activity.

18. The said property had the taxable property value of €169,982.05.

19. The said property, at the date of the inspection procedure, was registered in the name of D... and of the company "G..., S.A", with NIPC... .

20. The company G..., S.A., exercises the activity of Purchase and Sale of immovable property and had, at the same time, as a shareholder, "H... ", Lda.

21. In the accounting of the Applicant, the following entries were found, among others:

i. No. ... of the cash journal, on 23 November 2010, according to which the shareholders, F... and D..., in their capacity as sole shareholders and in representation of the Applicant, by means of public deed, sell to themselves, jointly, the building of which the Applicant is the owner, urban property of ground and first floor, inscribed in the property register with article... , previously mentioned, for the price of €175,000.00.

ii. No. ... of the cash journal, on 25 November 2010, relating to a capital increase of the company, from €124,699.48 to €350,000.00.

1. The movement no. 311001 above-mentioned did not occur in reality, that is, there was no cash entry into the Applicant's cash, in the amount indicated, as consideration for the sale of the property in question.

2. Part of that amount was subsequently withdrawn from the cash balance, through a fictitious withdrawal thereof, made through the internal movement no. ..., of 30 November 2010, in the overall amount of €159,935.77, as counterpart to Loans.

3. The increase to which movement no. ... refers was accounted for as having been made:

i. By incorporation of Supplementary Contributions;

ii. By accounting as cash entry, in the amount of €181,571.56, in the Cash account, in the proportion of the shares of shareholders F... and D... and to strengthen the capital of the same.

1. In reality, there was no cash entry into Cash.

2. To achieve the new value of the shares, the company's money was used, cash account – 111, with the shareholders not placing any value in the company.

3. The accounting of the capital increase was made through the integration of Supplementary Contributions into the capital of each of the shareholders, with the remainder to make up the €175,000.00 deducted from the Initial Capital, accounted for as if they were deliveries in cash by the shareholders.

A.2. Facts established as not proven

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

A.3. Substantiation of the factual matter proven and not proven

Regarding the factual matter, the Tribunal does not have to pronounce itself on everything that was alleged by the parties, but rather its duty is to select the facts that matter for the decision and distinguish the proven from the unproven matter (see article 123º, paragraph 2, of the CPPT and article 607º, paragraph 3 of the CPC, applicable under article 29º, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of Law (see former article 511º, paragraph 1, of the CPC, corresponding to the current article 596º, applicable under article 29º, paragraph 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in the light of article 110º/7 of the CPPT, the documentary evidence and the PA joined to the file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the TCA-South of 26-06-2014, delivered in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

In particular, the facts established as proven in points 10 and 11 result from the document attached by the AT in its response, whose genuineness or authenticity was not questioned by the Applicant.

The facts established as proven in points 17 to 21 result from documents 1, 2 and 3, presented by the Applicant on 16-10-2015, freely assessed by the Tribunal and combined with the testimonial evidence produced, which confirmed its contents, having also taken into account that genuineness or authenticity were not questioned.

The fact established as proven in point 22 is based, in addition to the documentary evidence provided, on the testimonial evidence produced, in particular the testimony of D... and E..., who presented themselves in a calm and coherent manner, relating the facts as they were established as proven.

The facts established as proven in points 29 and 32, in addition to corresponding to the normality of the common experience of things, where – already at that time – it was not normal for cash payments of the order of values in question to occur, was equally corroborated by the testimonial evidence presented to this Tribunal.

B. ON THE LAW

i.

The Applicant begins by arguing the expiry of the right of assessment in question in the present case, concerning Personal Income Tax for the year 2010.

In this matter, article 45º/1 of the LGT provides:

"The right to assess taxes expires if the assessment is not validly notified to the taxpayer within four years, when the law does not otherwise provide.".

In these terms, and as, according to paragraph 4 of the same article, "The expiry period is counted, for periodic taxes, from the end of the year in which the tax fact occurred", save cases of interruption or suspension of the period in question, the assessment in question should have been notified by 31 December 2014.

As results from the factual matter established as proven, the Applicant accessed its electronic mail box on 21-11-2014, to which the notification of the assessment in question had been sent on 20-11-2014.

On this matter, article 149º of the CIRS provides:

"1 - Notifications by postal means shall be made at the tax domicile of the notified party or of its representative.

2 - Notifications referred to in article 66º, when by postal means, shall be made by means of registered mail with acknowledgement of receipt.

3 - Other notifications shall be made by registered mail, with notification being deemed effected on the 3rd day following the date of registration or on the 1st working day following that date, if that day is not a working day.

4 - If the tax domicile of the notified party is not known, notifications may be made by notice posted in the tax office in the area of its last residence.

5 - In all other respects, the rules established in the Code of Tax Procedure and Process shall apply."

Also with relevance to what is discussed, article 19º of the LGT provides:

"2 - The tax domicile also includes the electronic mail box, in the terms provided for in the public electronic mail box service. (...)

10 - Legal entities subject to corporate income tax with registered office or effective management in Portuguese territory and permanent establishments of non-resident companies and other entities, as well as resident taxpayers covered by the normal regime of value added tax, are obliged to possess an electronic mail box, in the terms of paragraph 2, and to communicate it to the tax administration within 30 days from the date of the start of activity or the date of the start of the normal regime of value added tax, when the same occurs by alteration.".

Still in the same scope, article 38º of the CPPT provides:

"1 - Notifications are made compulsorily by registered mail with acknowledgement of receipt, whenever they concern acts or decisions capable of altering the tax situation of taxpayers or the summons for them to attend or participate in acts or diligences. (...)

3 - Notifications not covered by paragraph 1, as well as those relating to the assessments of taxes that result from declarations by taxpayers or corrections to the taxable matter that have been the subject of notification for the purposes of the right to a hearing, are made by registered mail. (...)

9 - The notifications referred to in this article, as well as those made in tax enforcement proceedings, may be made by electronic transmission of data, which are equivalent, as the case may be, to remittance by registered postal route or by registered postal route with acknowledgement of receipt.".

Finally, article 39º, also of the CPPT, provides:

"9 - Notifications made by electronic transmission of data are deemed made at the moment the recipient accesses the electronic mail box.

10 - Notification is deemed made on the 25th day following its dispatch, if the taxpayer does not access the electronic mail box on an earlier date.".

As results from the regulatory framework set out, "The tax domicile also includes the electronic mail box" (article 19º/2 of the LGT).

Furthermore, notifications "made by electronic transmission of data, (...) are equivalent, as the case may be, to remittance by registered postal route or by registered postal route with acknowledgement of receipt." (article 38º/9 of the CPPT), and "are deemed made at the moment the recipient accesses the electronic mail box.", or "on the 25th day following its dispatch, if the taxpayer does not access the electronic mail box on an earlier date." (article 39º, paragraphs 9 and 10 of the CPPT).

It is true that article 149º of the CIRS does not refer to notifications by electronic transmission of data, but it is no less true that it expressly mentions that "In all other respects" not provided therein "the rules established in the Code of Tax Procedure and Process shall apply.".

On the other hand, assessing the materiality of the question, no reason is apparent, nor does the Applicant offer any support in this direction, why the equivalence of notifications "made by electronic transmission of data (...) to remittance by registered postal route or by registered postal route with acknowledgement of receipt" should not operate in the context of Personal Income Tax, taking into account that, both in cases where the electronic mail box is mandatory, under paragraph 10 of article 19º of the LGT (as is the case with the Applicant), and in cases where the taxpayer voluntarily adhered to it, the obligation to regularly consult it would be justified, and to monitor its access.

Thus, and having regard to the facts established as proven and pointed out above, it should be considered that the Applicant was notified of the disputed assessment on 21-10-2014, still within the period enshrined in article 45º/1 of the LGT, so that the alleged expiry of the right of assessment does not occur.

ii.

The Applicant continues, protesting against the failure to deliver a copy of the Service Order, alleging that "it never received any copy of the service order or the order that determined the Inspection, as required by article 51º numbers 1 and 2 of the Supplementary Regime of Tax Inspection Procedure", from which it concludes that there is "a procedural invalidity, which determines the nullity of all acts practiced thereafter.".

In the same vein, the Applicant further alleges that there will have been invalidity of the notification of the note of diligence relating to the completion of the inspection acts, made to E..., on 03/10/2014, in his capacity as Manager, despite the fact that he no longer held such office since 19 January 2011, as indeed results from point 18 of the factual matter, considering that this results in "a formal defect that carries its nullity and of all the subsequent ones, which is requested here.".

With due respect, it is understood that the Applicant's argument does not merit acceptance.

As was already stated in arbitration case 164/2013-T, of the CAAD[2]:

"it is held that, as expressly stated in the preamble of the RCPIT, the regulation of the tax inspection procedure is aimed "essentially at the organization of the system, and consequently at the guarantee of proportionality to the objectives to be achieved, the security of taxpayers and other tax obligors and their own participation in the formation of decisions.".

That is, the regulation of the tax inspection procedure has, in the first place, an essentially organizational (ordering) purpose and, from the perspective of taxpayers, is aimed essentially at defining the conditions under which the legal effects proper to such procedure will be reflected effectively in their legal sphere, in addition to ensuring their participation in the decisions that may be taken.

Regarding this last aspect, it should be stated from the outset that, in accordance with the general principle of the participation of taxpayers in the formation of decisions concerning them, enshrined in article 60º of the LGT, the essential of their legally relevant interests would always be duly safeguarded in this matter, regardless of the concrete regulation of the tax inspection procedure. In addition, it should be noted in this regard that the tax inspection procedure does not have, primarily, a decision-making nature (hence, for example, its final act – the report – is not directly impugnable, in so far as it is not, in itself, injurious), but merely preparatory or accessory[3], so that the need to safeguard the participation of taxpayers "in the formation of decisions", within its scope, will be highly diminished.

Thus, the main purpose, still from the perspective of taxpayers, of the regulation of the tax inspection procedure, and of its observance by the Tax Administration, will reside in the fixing of the legal conditions necessary for the legal effects proper to the procedure in question to be reflected effectively in the sphere of taxpayers, especially the suspension of the expiry period of the right to assess taxes by the Administration, under article 46º/1 of the LGT, as well as the subjection of those targeted to the guarantees and prerogatives of tax inspection (articles 28º and 29º of the RCPIT), and to the application of precautionary measures (articles 30º and 31º of the RCPIT).

Thus, and following from what has been stated above, it is understood that the violation of rules regulating the tax inspection procedure will have, essentially, the consequence of preventing certain effects proper to that procedure from occurring, such as the suspension of the expiry period of the right to assess taxes, or the obligation to open the premises of those targeted to tax inspection.

In sum, it is understood that the tax inspection procedure does not aim to protect the taxpayer's participation in the process of gathering information and elements by the Tax Administration, nor much less oblige it to institute such procedure in order to gather information and elements that it is permitted to obtain, in the general terms of the legal system, outside such procedure. Equally, the tax inspection procedure will not aim, in the first place[4], at least, to ensure, by its observance, the reliability or suitability of the information or elements gathered.

This, moreover, has been the understanding of the STA, and in this regard reference may be made to the Decision delivered in case 0955/07, on 27-02-2008, in whose summary it states:

"The inspection and assessment procedures are distinct from one another, although the latter has merely preparatory or accessory character, which does not mean that the illegalities committed therein are fatally reflected in the assessment, invalidating it."."

It is thus understood that the failure to deliver a copy of the service order or the order that determined the Inspection, in violation of article 51º, numbers 1 and 2, of the Supplementary Regime of Tax Inspection Procedure, as well as the notification to a third party of the note of diligence relating to the completion of the inspection acts[5], does not "fatally project itself on the assessment, invalidating it", but rather will prevent the effects proper to the procedure from being produced, as an external inspection action, such as, for example, the suspension of the expiry period, under article 46º/1 of the LGT, the guarantees of the exercise of the inspection function, regulated in articles 28 et seq. of the RCPITA, which will be not only sufficient, but also appropriate, to the safeguard of the interests concretely at stake.

Hence, this argument of the Applicant cannot be accepted either.

iii.

The Applicant also alleges that there was a lack of notification of the inspection report, in so far as, recognizing that it was notified to her appointed representative, it was not notified to her in person.

The Applicant understands that "Being the Inspected Party the one directly affected and whose contents must, notwithstanding the notification to the Representative, be carried out also in its person, once this is a condition of the effectiveness of the act.", since the "literal argument itself, set out in article 61º of the RCIPT, what is ordered is the notification to the taxpayer, that is, to the taxpayer or tax obligor.".

It is understood, however, and once again, that the Applicant does not merit being upheld in this matter.

In fact, as the Applicant itself recognizes, "The RCIPT in chapter III on the heading "Notifications and Information" which includes articles 37º to 43º, refers to the CPPT and to the LGT, as regards the mode of processing and effects of notification".

Now, article 40º of the CPPT provides that "Notifications to interested parties who have appointed a representative shall be made to that person and at their office.", and only when "When the notification is intended to lead to the interested party carrying out a personal act, in addition to the notification to the representative, a letter shall be sent to the interested party itself, indicating the date, place and reason for appearance.".

Hence, as the notification in question is not manifestly intended for "the interested party carrying out a personal act", the AT was not obliged to, "in addition to the notification to the representative", send "a letter to the interested party itself".

In the light of the above, this argument of the Applicant should also be judged without merit.

iv.

The Applicant also contends that the assessment will be deficient in substantiation, in so far as "The assessment was confined to the document attached under doc. 1." and "Nothing else was informed or attached".

As is well known, and both parties recognize, substantiation is a requirement of tax acts in general, being a constitutional requirement (268º of the CRP) and legal requirement (article 77º of the LGT).

Briefly, it can be said that it is now settled in national doctrine and jurisprudence that the required substantiation must have the following characteristics:

1. Officiousness: it must always be initiated by the administration, with substantiations on request being inadmissible;

2. Contemporaneity: it must be coeval with the practice of the act, with no deferred substantiations being permitted;

3. Clarity: it must be comprehensible to an average recipient, avoiding polysemic or deeply technical concepts;

4. Completeness: it must contain all the essential elements and those that were determinative of the decision taken. This characteristic breaks down into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and motivation (domain of discretion or expediency, when an evaluation is required).

Now, if substantiation is, in the terms referred to, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the substantiation required of a concrete tax act should be that which is functionally necessary for it not to present itself to the taxpayer as a pure demonstration of arbitrariness. This will be – it is considered – the touchstone of compliance with the duty of substantiation: when, before an average recipient placed in the position of the actual recipient, the tax act presents itself, from a point of view of reasonableness, as a product of pure arbitrariness of the Administration, because the reasons of fact and/or law on which it rests are not discernible, the act will suffer from lack of substantiation.

Article 77º/1 of the LGT thus states: "The decision of a procedure is always substantiated by way of a concise exposition of the reasons of fact and law that motivated it, substantiation being able to consist in a mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those forming part of the tax inspection report.".

In parallel, article 66º/2 of the CIRS provides that "Substantiation must be expressed through an exposition, although concise, of the reasons of fact and law of the decision, the lack of substantiation being equivalent to the adoption of grounds which, by obscurity, contradiction or insufficiency, do not concretely clarify its motivation.".

Descending to the concrete case, it appears that the assessment act in question occurred in the sequence of an inspection act and in accordance with the tax inspection report endorsed by order, a report in which the grounds for the assessment in question are set out, grounds that the Applicant demonstrated understanding, taking, in a well-founded manner, the decision not to accept.

In fact, what is happening is that the Applicant wishes the remittance of the assessment to the inspection report to be explicit.

However, this understanding is immediately contradicted by the Decision of the STA of 19-05-2004, delivered in case 0228/03[6], where it states that "Substantiation presented after the practice of the act does not count as substantiation, nor that contained in previous instructional pieces for which no express or implicit reference was made.", thus accepting that the reference may be implicit, that is, arising from the very context of the tax act, or from which this emerges.

In this same sense, the jurisprudence of the STA is oriented, which considers that "Despite the non-explicit indication of the applicable legal provision, the required substantiation of law of the tax act will be sufficient with reference to the pertinent legal principles, the applicable legal regime or a specific regulatory framework, provided that, in any case, it can be concluded that these were known or knowable by a normal recipient placed in the concrete position of the actual recipient."[7].

Thus, it is understood that, considered the concrete context in which the assessment acts in question in the present proceedings were produced, it will be perceptible, to an average recipient placed in the position of the actual recipient, that the grounds of those acts are those contained in the inspection report that preceded them, and it is certain that it is further evident that the Applicant understood that very thing.

This, moreover, has been the judgment of our superior courts in similar cases, and in this regard reference may be made to the Decisions of the STA of 10-09-2014, delivered in case 01226/13[8], of the TCA-North of 13-09-2012, delivered in case 00334/05.8BEBRG[9], and of the TCA-South of 23-05-2006, delivered in case 01156/06[10] (cited by the AT).

Thus, and in this manner, there will be nothing to censure, in the perspective of the duty of substantiation, to the tax acts which are the subject matter of the present proceedings.

v.

Entering now into the merits of the case, the Applicant comes to question the factual grounds of the assessment which is the subject matter of the present arbitration, and consequently the applicable law.

The Personal Income Tax assessment which is the subject matter of the present arbitration results from the imputation to the former shareholders of the Applicant of "withdrawals on account of profits", stemming from two situations, which are:

• The acquisition – free of charge – of the property registered in the property register with no. ..., located at Av..., ... and Av. of the ..., ... and..., in ..., giving rise to the requirement of the amount of tax of €47,930.00, and respective interest;

• the capital increase of the company, from €124,699.48 to €350,000.00, with accounting as cash entry, in the amount of €181,571.56, without there having been any cash entry into Cash, giving rise to the requirement of the amount of tax of €48,573.28, and respective interest.

Of these two situations, the Applicant only questions, on the plane of materiality, the first, so only that will be the subject matter of assessment by this Tribunal.

As results from the RIT, and the AT itself exposes in its Response, the assessment in question in the present proceedings rests, as regards the first of the situations above listed, essentially, on the following understanding:

• the shareholders of the Applicant acquired a property valued at €175,000.00, which came into their possession without having any value for its purchase, so the patrimonial advantage corresponded to €87,500.00 for each of the shareholders;

• the shareholders enriched themselves by the amount of €87,500.00, respectively, corresponding to the alleged payment of the property, which becomes their private assets, through financial means of the company, without having declared any profit or gain in their favor;

• The obtaining of the title to the property by the shareholders, without them having made payment of that amount to the selling entity, which was held by them 100%, configures the discharge of a debt that was paid with money that belonged to the company itself, that is, for the acquisition of that right, they withdrew that same amount from the company.

• Such conduct constitutes the figure of "withdrawal on account of profits", subject to the liberatory rate of 21.5%, under the provisions of subparagraph c) of paragraph 1 of article 71º of the CIRS (as amended by Law no. 12-A/2010 of 30/6) of the value of the acquisition of the building of €175,000.00, to affect each of the beneficiaries, F... and D... .

As can be seen, the tax act in question in the present proceedings is based, in the part in question, on the assumption that the shareholders of the Applicant acquired a property valued at €175,000.00, which came into their possession without spending any amount for its purchase.

However, upon examination of the factual matter determined in the file, it appears that this does not correspond to reality.

In fact, what occurred was that the consideration for the acquisition by the shareholders of the Applicant (more correctly, by one of the shareholders and by the spouse of the other), was the assumption of debts of the Applicant in the amount of, precisely, €175,000.00.

It is thus demonstrated that the acquisition by the shareholders of the Applicant was not gratuitous, contrary to what the tax act under review has as its basis, but onerous, so that, in this part, that act will be deficient in error as to the factual assumptions, and consequent error in the application of law.

This conclusion is not hindered by the manner, pardon the expression, perfectly clumsy, in which the Applicant accounted for the operations in which it was involved.

In fact, demonstrated, as the AT demonstrated, that it suffers from omissions, errors and inaccuracies, which prevent knowledge of the real taxable matter of the taxpayer, it loses the same any probative value, whether in favor of the Applicant or in favor of the AT, so that the proof that the parties have the duty to make, in the matter affected, will have to be made with recourse to other elements of evidence.

On the other hand, although it may be legitimate for the AT to demand tax, the fact is that it is a question of a Personal Income Tax declaration, where the taxpaying capacity that legitimizes the tax imposition resides in the individual taxpayers, who in this case will be the shareholders of the Applicant. Now, what occurs is that – in reality – no patrimonial increase of those is demonstrated, so that the existence of the tax fact would always be lacking, a prerequisite of the tax, under article 1º of the CIRS, and that always, and at the limit, doubt about its verification would have to be resolved in the direction of the annulment of the tax act, by force of the provisions of article 100º of the CPPT.

This conclusion is not hindered, finally, by the allegation made by the AT in its Response, according to which it is unaware of "what destination was given to the amounts obtained through the same loans, since the shareholders refused to demonstrate it". In fact, and firstly, so far as can be determined – and the AT has demonstrated nothing to the contrary, the PME Invest loans constituted a debt of the Applicant. On the other hand, even if the proceeds of those loans were diverted to purposes unrelated to the Applicant, which also is not demonstrated, in order for Personal Income Tax could be assessed relating to the shareholders of the Applicant, it was necessary that it be demonstrated, affirmatively, that they were the concrete and real beneficiaries of such loans, it not being sufficient mere proof that the Applicant was not and, much less, the lack of demonstration that it was.

Finally, the Applicant questions the quantification of the tax demanded.

In fact, and as is expressly recognized by the AT and results from the RIT, "in the case in hand, it was considered that the amount attributed to 23.11.2010 is net of tax, and the calculation of the amount subject to the said rate was made".

Now, with due respect, it is considered that such "consideration" has, in this case, no foundation whatsoever.

In fact, given that the Personal Income Tax taxpayers received a certain income – in this case, a total of €181,571.56 - in order for it to be considered that the same is net of tax, it is necessary that it be demonstrated that this is so, that is, that, once the amount in question is received, the beneficiaries of the income are exonerated from the payment of any tax.

Now, in this case not only is this not demonstrated, but that is not what happens. In fact, the beneficiaries of the income being taxed, given that taxation is due, in no case are they exonerated from supporting it.

In fact, as the AT states, these are income referred to in subparagraph c) of paragraph 1 of article 71º of the CIRS applicable, we will be faced with a withholding at the source on account of the tax ultimately due, or by way of a liberatory withholding, depending on whether the taxpayer exercises, or not, the faculty conferred by paragraph 6 of the same article.

In the first case, it will be incumbent, even on the substitute – the taxpayer in Personal Income Tax – the original responsibility for the tax, as results from paragraph 2 of article 28º of the LGT, so that it would be, in the first place, from that person that the AT should have demanded the tax owed.

In the second case, the substitute will be subsidiary responsible for the tax owed.

Thus, and in this case, even if the AT manages to recoup from the Applicant the tax in default, nothing will prevent it from demanding from its former shareholders the tax owed by them, which it was forced to support, since in the scope of their relationship, nothing was able to be determined that places a charge on the Applicant of any amount that, by way of Personal Income Tax, has to be supported by the former shareholders.

If the AT does not manage to collect the tax from the Applicant, the subsidiary responsibility of the substitutes may, under the law, be activated.

As was stated in the Decision of the STA of 23-09-2015, delivered in case 0997/15[11]:

"Personal Income Tax is a tax that, as its name indicates, is owed by individuals, applying to the annual value of income earned by them over the year, article 1º of the Code of Personal Income Tax.

Withholding at the source is not a tax, but a collection mechanism, instituted by the Portuguese tax system with the objective of increasing the effectiveness of collecting tax (Personal Income Tax). Through the use of such a mechanism, the State receives, monthly, on account of the tax that will be owed at the end of each year by employees or workers providing services and not covered by the exemption regime, part of the personal income tax that these have to pay.

For the taxpayer in personal income tax it is an anticipated payment of the tax that is owed at the end of each year. For the entity which proceeds to its withholding it is a tax debt and not the payment of personal income tax. It simply proceeds to the deduction from the employee's salary of the amount that the state has to receive in the context of taxation of personal income tax of that employee, being incumbent on it the delivery of that amount to the state. The same occurs when the entity to which a service was provided withholds from the cost of the service that it should pay to the service provider, and for this would be taxable income in the context of personal income tax, the amount corresponding to personal income tax.

But the company that proceeds to withholding at the source does not thereby become subject to personal income tax. It collects the amounts of personal income tax that are owed by workers/service providers which it must deliver to the state coffers.".

Thus, it is demonstrated that the amount attributed by the Applicant to its former shareholders, in the part that remains of the assessment which is the subject matter of the present proceedings, is not, in fact, "net of tax", since, originally or subsidiarily, they are responsible for such tax, on one hand, and nothing permits concluding that, in the internal relations of the Applicant with its former shareholders, that has assumed the obligation to support the tax burdens that weigh on these, in particular those at stake in the present arbitration.

It is thus concluded that it is not demonstrated that the income placed at the disposal of the former shareholders of the Applicant, to which the part that remains of the assessment which is the subject matter of the present proceedings refers, are not "net of tax", so that, in this part, the arbitration request must also succeed, in so far as the tax owed on the income of €181,571.56 attributed by the Applicant to its shareholders, amounts to the existence of tax in the amount of €39,037.89, and not €48,573.28, as required in the assessment in question.

C. DECISION

In these terms, it is decided in this Arbitral Tribunal to judge the arbitration request partially upheld and, in consequence,

a) Partially annul the act of assessment of Personal Income Tax (IRS) no. 2014 ..., for the year 2010, in the part relating to the requirement of the amount of tax of €47,930.00, and respective interest;

b) Partially annul the same assessment act, in the part relating to the requirement of the amount of tax of €48,573.28, and respective interest, which should be reduced to the amount of tax of €39,037.89, and respective interest;

c) Judge improcedent the remaining part of the arbitration request;

d) Condemn the parties to the costs of the proceedings, in the proportion of their respective shortfalls, fixing at €1,439.00 the part to be borne by the Applicant, and at €1,621.00 the part to be borne by the Respondent.

D. Value of the Proceedings

The value of the proceedings is fixed at €111,404.44, in accordance with article 97º-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs a) and b) of paragraph 1 of article 29º of the RJAT and paragraph 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective shortfalls, as fixed above, since the request was partially upheld, in accordance with articles 12º, paragraph 2, and 22º, paragraph 4, both of the RJAT, and article 4º, paragraph 4, of the cited Regulation.

Let notification be made.

Lisbon

6 January 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Voting Arbitrator

(Rui Ferreira Rodrigues – With attached dissenting opinion)

The Voting Arbitrator

(Ana Duarte)

Dissenting Opinion

I dissent from the decision in the segment contained in the respective subparagraph a), that is, from the partial annulment of the Personal Income Tax assessment act no. 2014 ..., for the year 2010, in the part relating to the requirement of the amount of tax of €47,930.00 and respective interest.

In fact, as the burden of proof of the facts alleged by the Applicant rests on it, in accordance with paragraph 1 of article 74º of the General Tax Law, applicable by force of subparagraph a), paragraph 1, article 29º of Decree-Law no. 10/2011, of 20 January (RJAT), it failed to prove that the debts referred to in articles 17º and 19º of "Facts established as proven" (two loans under the PME Invest program, in the overall value of €175,000.00 and a pledged account in the amount of €50,000.00) were actually supported by the former shareholder D... and E..., spouse of also former shareholder F..., as consideration for payment of the price, in the amount of €175,000.00, for the purchase they made from the Applicant of the urban property registered in the register of the parish of ..., municipality of …, under article... .

It should be said, first and foremost, that the purchase and sale contract took place on 23-11-2010 and that from the same, executed by public deed, it is stated that the price was fully settled.

On the other hand, according to the accounting of the Applicant, on 31-12-2010, there was no liability, other than debts to suppliers and to the State and other public entities, and the said property no longer formed part of tangible fixed assets.

In view of documents nos. 11 to 42 (deposit slips and cheques), presented by the Applicant with the request for arbitration opinion, it is concluded that, in the period from 20-05-2011 to 01-08-2013, deposits were made in account no. ..., opened in the name of the Applicant, in the amount of €206,487.60.

And that such deposits were made in cash, with the exception of those relating to documents nos. 12, 38 (partly), 40 and 42, in which cheques were issued from accounts in the name of the said D... and E... .

The information from the ... contained in document no. 5 is not understood, which states "… We further inform you that all these loans (referring to the above-mentioned loans) were completely settled on 22/04/2013, having proceeded with the closure of the account (referring to account no. ...)" when there were deposits made on a date later than that. Thus, the deposit relating to document no. 12 was made on 26-07-2013, and the deposits relating to documents 35 and 36 were made on 16-07-2013 and 01-08-2013, respectively.

On the other hand, in the said deposit slips, there are accounting entries indicating that the deposited amounts would have passed through the Applicant.

In his testimony, the tax inspector ... said he could not relate those cheques to the deposit slips and bank statements of the Applicant and consequently guarantee that such deposits were actually supported by the said acquirers of the property.

Also the tax inspector ..., in her testimony, referred that there is no accounting element proving that the said deposits were made for payment of any debt.

For her part, the testimony of the accountant - ...-, is not clarifying on such facts, since, according to her, the accounting does not contain either copies of the cheques or the deposit slips, there being only bank statements, in which mention is made of the deposit of the cheque, and the entry notes.

In her testimony, E ... said she had assumed payment of the said debts of the Applicant and that when these were settled the account was closed.

However, she does not know why it was stated in the deed of purchase of the property that the price was fully settled.

Also D ..., the other acquirer of the property, said he had assumed payment of the said debts of the Applicant and that it was he himself who made the deposits at the bank counter. He also said that such assumption of the debt, in December 2010, was verbal, since the transfer of shares only took place on 30-10-2012.

Under subparagraph e) of article 16º of the RJAT, free assessment of facts in accordance with the rules of experience and free conviction of the arbitrators constitutes a principle of the arbitration process.

Also, article 396º of the Civil Code provides that the probative force of witness testimony is freely assessed by the court.

It should be noted that the acquirers of the property – E ... and D ...- despite being able to testify, since they are not parties to the present proceedings, see article 496º of the Code of Civil Procedure, applicable by force of subparagraph e), paragraph 1, article 29º of Decree-Law no. 10/2011, of 20 January, are interested, more correctly, the main interested parties, in the success of the arbitration request.

Thus, in view of the evidence produced, both documentary and testimonial, I was not convinced that the debts of the Applicant were supported by the said acquirers of the property.

Therefore, I would decide in the following terms:

"a) Partially annul the act of assessment of Personal Income Tax (IRS) no. 2014..., for the year 2010, in the part relating to the requirement of the amount of tax of €47,930.00, and respective interest, which should be reduced to the amount of tax of €37,625.00 and respective interest";

Lisbon, 24 December 2015.

Rui Ferreira Rodrigues