IRS Capital Gains on Share Sales: Tax Law Retroactivity and Official Review at CAAD (26/2016-T)

ARBITRAL DECISION

Claimant: A…

Respondent: Tax and Customs Authority

I – Report

1. The taxpayer A…, with tax identification number … (hereinafter "Claimant"), filed on 22 January 2016 a petition for the constitution of a Collective Arbitral Court, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is the respondent.

2. The Claimant requests an arbitral pronouncement, whether on the illegality of the additional individual income tax (IRS) assessment No. 2011…, issued by the Director-General of the Directorate-General for Taxes and relating to the year 2010, in the total amount due of €213,378.05, or on the illegality of the tacit dismissal of the petition for official review submitted against that assessment. It submits one witness.

3. The petition for constitution of the Arbitral Court was accepted by the President of CAAD and automatically notified to the TCA on 5 February 2016.

4. Pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of the LFATM, as amended by article 228 of Law No. 66-B/2012 of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Court, who communicated acceptance of the assignment within the applicable timeframe, and notified the parties of such appointment on 21 March 2016.

5. The Collective Arbitral Court was constituted on 6 April 2016; it was regularly constituted and is materially competent, in accordance with articles 2(1)(a), 5, 6(1), and 11(1) of the LFATM (as amended by article 228 of Law No. 66-B/2012 of 31 December).

6. Pursuant to articles 17(1) and (2) of the LFATM, the TCA was notified on 6 April 2016 to submit its answer.

7. Meanwhile, the TCA had submitted a Motion on 5 April 2016, noting the absence of document No. 14, which was supposed to be attached but was not attached to the petition for arbitral pronouncement – requesting that the Claimant be notified to attach the said document to the case file.

8. By Arbitral Order of 7 April 2016, the Claimant was notified to attach to the case file, if it so wished, the document in question, with number 14, to the petition for arbitral pronouncement.

9. In a Motion of 14 April 2016, the Claimant responded to the Arbitral Order of 7 April 2016 by attaching the Request for Issuance of Certificate corresponding to the said document No. 14, submitted to the Chief of the Tax Service of … on 13 April 2016.

10. By Arbitral Order of 14 April 2016, it was determined to await the presentation of the said document No. 14.

11. By Motion of 19 April 2016, the TCA requested the grant of a new deadline to submit its Answer, given the circumstance that the said document had not yet been attached, without which equality of parties and the principle of adversarial proceedings could not be ensured – requesting consequently the revocation of the Order of 6 April 2016 in which it was notified to submit its Answer, and the issuance of a new notification to respond only when all the missing elements were gathered in the case file.

12. In a Motion of 20 April 2016, the Claimant submitted a petition for extension of the scope of the proceedings, based on the fact that to the tacit dismissal of the petition for official review submitted against the additional individual income tax assessment No. 2011… there followed an express act of dismissal, by Order of 4 March 2016 communicated to the Claimant by official letter of 16 March 2016.

13. And thus, to the appreciation of the illegality of the additional individual income tax assessment No. 2011…, issued by the Director-General of the Directorate-General for Taxes and relating to the year 2010, in the total amount due of €213,378.05, and to the appreciation of the illegality of the tacit dismissal of the petition for official review submitted against that assessment, there would be added, pursuant to articles 63, 64, 65 and 70 of the Code of Tax and Customs Procedure, the appreciation of the illegality of the Order of 4 March 2016 of the Director of the Personal Income Tax Services determining the express dismissal of the said petition for official review – henceforth requesting cumulatively the annulment of the assessment and of the tacit and express dismissals of the corresponding petition for official review.

14. In Arbitral Order of 20 April 2016, a deadline was granted to the TCA to pronounce on the petition for extension of the scope of the proceedings submitted on the same date by the Claimant, determining at the same time that the deadline notified on 6 April 2016 to the TCA to submit its Answer would remain in progress.

15. By Motion of 26 April 2016, the Respondent submitted, for attachment to the case file, document No. 14 attached to the petition for arbitral pronouncement.

16. The Arbitral Order of 26 April 2016 admitted the attachment to the case file of the said document No. 14.

17. In a Motion of 26 April 2016, the TCA pronounced on the petition for extension of the scope of the proceedings submitted by the Claimant, sustaining its dismissal; and again requested a new deadline for its Answer, pursuant to article 17 of the LFATM.

18. By Order of 29 April 2016, the President of the Administrative Arbitration Centre (CAAD) clarified a question from the TCA regarding criteria for priority of submission, on the Computer Platform, of Motions presented by the parties.

19. Following this, the Arbitral Order of 3 May 2016 requested the TCA to identify which Motion was referred to in the Order of the President of CAAD – clarifying that the principle of adversarial proceedings would always be respected, whatever the moment of admission of that Motion.

20. In a Motion of 4 May 2016, in response to that Arbitral Order, the TCA clarified that it was the Motion entered on the Computer Platform on the same date, on 4 May 2016. It is verified, however, that the Motion of the TCA entered on the Computer Platform with the date of 4 May 2016 is the same already entered with the date of 19 April 2016, in which the grant of a new deadline to submit its Answer was requested, requesting consequently the revocation of the Order of 6 April 2016 in which it was notified to submit its Answer, and the issuance of a new notification to respond.

21. The TCA submitted its Answer on 6 May 2016.

22. In that answer, the TCA alleges, in summary, the complete groundlessness of the Claimant's petition, and also opposes the production of witness evidence, whether by considering it useless, or by understanding that the witness submitted does not offer guarantees of impartiality.

23. The Arbitral Order of 10 May 2016 designated, pursuant to article 18 of the LFATM, the date of 9 June 2016 for the holding of the hearing, requesting from the Claimant the definition of the facts to which the witness evidence requested by it relates.

24. In a Motion of 23 May 2016, the Claimant came, on the one hand, to request the substitution of the initially indicated witness by another; and, on the other hand, came to indicate that it intended to examine the witness submitted on the facts contained in article 55 of the Initial Petition.

25. The Arbitral Order of 23 May 2016 admitted the substitution of witnesses requested by the Respondent.

26. In a Motion of 27 May 2016, the Claimant came to pronounce on the exceptions invoked by the TCA in its Answer, sustaining the groundlessness of all of them.

27. On 9 June 2016, the hearing took place, notwithstanding the absence of the Representatives of the Respondent, which did not prevent the continuation of the proceedings, in accordance with article 19(1) of the LFATM.

28. At the hearing, an Arbitral Order was issued refusing the extension of the scope of proceedings requested on 20 April 2016 by the Claimant, by considering such extension useless. Thus was resolved, by the Court, both the question raised by the Claimant and the objections formulated by the Respondent in its Motion of 26 April 2016 and in its Answer of 6 May 2016.

29. In that same hearing, the examination of the witness submitted by the Claimant, B…, took place.

30. At the end of the hearing, the Claimant and the Respondent were notified to submit written submissions in successive periods of 15 days.

31. The Court set the date of 6 October 2016 as the limit for the issuance of the Arbitral Decision.

32. The Claimant submitted on 23 June 2016 its written submissions.

33. The Respondent submitted on 5 July 2016 its written counter-submissions.

34. The proceedings do not suffer from nullities and, once the exceptions raised are resolved, no further questions, whether preliminary or subsequent, prejudicial or exceptional, remain that would prevent the consideration of the merits of the case, with the conditions being met for a final decision to be issued.

35. The TCA proceeded to designate its representatives in the case file and the Claimant attached a power of attorney (and subsequently a substitution), with the Parties thus being properly represented.

36. The Parties have legal personality and capacity and have standing, pursuant to articles 4 and 10(2) of the LFATM and article 1 of Decree No. 112-A/2011 of 22 March.

II – On the Exceptions

II.A. Position of the Respondent

1. In its Answer, the Respondent invokes four exceptions:

2. Violation, by the Claimant, of the formality established in article 59 of the Personal Income Tax Code;

3. Untimeliness of the petition for official review;

4. Non-fulfillment of the requirements for consideration of the petition for official review;

5. The verification of a venire contra factum proprium.

6. As to the 1st of the exceptions invoked, the violation of the formality established in article 59 of the Personal Income Tax Code, the TCA sustains that, if the Claimant intended to exclude from taxation the onerous alienations of shares, it should have declared such fact in annex G1 of the income declaration model 3 of IRS, and not in annex G as it did when it filed such declaration on 29 May 2011. Not having done so, those income were subject to taxation in strict compliance with the declaration of the taxpayer, in accordance with what is stipulated in article 59 of the Personal Income Tax Code in the version in force at the time of the facts.

7. Still in accordance with that regime, the TCA recalls that the Claimant could have remedied that declarative lapse, if that were the case, by filing a substitute declaration, in accordance with the terms and deadlines established in article 59(3) of the Personal Income Tax Code.

8. But it could not and cannot do so through a petition for official review, under pain of fraud against the law (which is emphasized by article 59(6) of the Personal Income Tax Code).

9. As to the 2nd of the exceptions invoked, the untimeliness of the petition for official review, the TCA underlines the fact that, in its petition for arbitral pronouncement, the Claimant did not focus on the legal requirements of its petition for official review, rather seeming to start from the assumption that those requirements would be unequivocally fulfilled, or that the tacit dismissal would consolidate them.

10. But as that is not the case, the TCA understands that the Arbitral Court must analyze those procedural requirements of the petition for official review itself, to determine whether it was viable or not – which will condition the arbitral proceedings itself.

11. Now, the TCA understands that the petition for official review was untimely, by violation of the deadlines in article 78 of the General Tax Law. For, having the IRS assessment been made strictly in accordance with the elements provided by the Claimant (with the declaration in item 8 of annex G, and not in annex G1 as should have occurred if exclusion from taxation was truly intended), the error invoked is attributable to the taxpayer and not to the services, whereby the Claimant did not have the 4-year deadline that article 78 of the General Tax Law reserves exclusively for cases in which the error is attributable to the tax administration.

12. Now, there having been no error imputable to the services of the tax administration, and the error having been the sole responsibility of the Claimant, the latter did not have the 4-year deadline to submit its petition for official review, whereby that submission, when it occurred, was untimely. And it was, the TCA adds, even for purposes of the exceptional petition provided for in article 78(4) of the General Tax Law, for there the deadline is 3 years and that deadline was also exceeded.

13. As to the 3rd of the exceptions invoked, the non-fulfillment of the requirements for consideration of the petition for official review, the TCA recalls that no error – whether material, of fact or of law – attributable to the services occurred, but only an error manifestly attributable to the Claimant itself, whereby, even if it had been timely presented, the petition for official review would be unfounded, the procedural requirements on which the presentation and success of that petition depend not existing, and which are contained in article 78(1) of the General Tax Law.

14. As to the 4th of the exceptions invoked, the verification of a venire contra factum proprium, constituting abuse of right, the TCA sustains that the figure derives from the fact that the Claimant requested official review, and then arbitral pronouncement, in contradiction with the conduct previously assumed – namely the conduct revealed in the completion and filing of the income declaration in model 3 of IRS on 29 May 2011, for there it declared the alienation of the shares in item 8 of Annex G, to later attempt to challenge the legality of the act that it itself performed (using illegitimately, in material and temporal terms, the petition for official review, as a kind of substitute for the filing of the substitute declaration).

II.B. Position of the Claimant

1. In its Motion of 27 May 2016, the Claimant came to pronounce on the exceptions invoked by the TCA in its Answer, sustaining the groundlessness of all of them.

2. As to the 1st of the exceptions invoked, the violation of the formality established in article 59 of the Personal Income Tax Code, the Claimant denies any intention to reopen the deadlines provided for in article 59(3) of the Personal Income Tax Code through the mechanism of the petition for official review, thus circumventing, and defrauding, the prohibition contained in article 59(6) of the Personal Income Tax Code.

3. On the contrary, it argues that the TCA is based on an erroneous understanding, which is that the values of gains obtained in May 2010 were not communicated through the income declaration model 3 of IRS – when the truth is that they were, only a defect having arisen in the completion of that declaration that was due to strict compliance with incorrect instructions provided by the TCA itself (the official completion instructions, in keeping moreover with declarations made publicly by the Secretary of State for Tax Affairs of the 18th Constitutional Government).

4. In effect, the Claimant notes that the declaration model No. 3 and its respective annex G1 were modified by Decree No. 1303/2010 of 22 December, so as to reflect the legislative amendment resulting from Law No. 15/2010 of 26 July. With that modification, which took effect on 1 January 2011, Item 4 of the said annex G1 came to refer to "onerous alienation of shares held for more than 12 months (years 2009 and earlier)", not permitting, therefore, the insertion in that annex G1 of the declaration of alienation of shares held for more than 12 months, when that alienation had occurred in the year 2010 itself – as was the case.

5. That impossibility was confirmed in the completion instructions for the said annex G1.

6. This means that, even not agreeing with the understanding and instructions of the TCA, it was not even materially possible for the Claimant to declare in Annex G1 the securities gains that it had obtained in that year of 2010; and for that reason the TCA also informed the Claimant that it would have to declare those securities gains in item 8 of Annex G of the said income declaration – as came to happen.

7. In sum, the Claimant alleges that it limited itself to complying with the instructions that embodied the TCA's understanding, that understanding later called into question in the jurisprudence and in the doctrine.

8. Being thus, the Claimant expresses surprise at the fact that the Respondent centers its argument on an alleged option – between Annex G and Annex G1 – that never existed, that was never made available to the Claimant.

9. And the same surprise extends to the TCA's argument that the Claimant could have filed a substitute declaration, in accordance with the terms and deadlines established in article 59(3) of the Personal Income Tax Code – because quite simply there did not exist, nor does there exist, any substitute declaration that permits declaring in Annex G1 the securities gains obtained in the year 2010.

10. It being impossible to correct anything, there was no option by the Claimant for non-correction, and there was therefore no violation of a legal formality.

11. In the same manner, the Claimant refutes the 3rd of the exceptions invoked, the non-fulfillment of the requirements for consideration of the petition for official review, already that the petition for official review did not aim to alter the income declaration relating to 2010, rather aimed to question the terms that determined the assessment of tax in a manner different from that expected, as it was believed an exclusion of that tax would occur. It was a matter of reviewing the final decision of a procedure, not the declaration from which that procedure emerged – and whose alteration was never at issue, nor could be by this means, as the Claimant well knew.

12. On the other hand, the Claimant takes the opportunity to recall that, contrary to the Respondent's argument, a petition for official review for annulment of an act of assessment is not, nor could be, dependent on the filing of any substitute declaration – the verification of the requirements established in article 78 of the General Tax Law sufficing –. And sustains that this is precisely what results from the regime established in article 59(6) of the Personal Income Tax Code.

13. As to the 2nd of the exceptions invoked, the untimeliness of the petition for official review, the Claimant sustains that the TCA is mistaken if it intends that the declaration of the taxpayer would exhaust the procedure of assessment, exonerating the TCA of assuming its competencies in that matter; on the contrary, in IRS there does not occur a self-assessment, whereby the assessment is ultimately an initiative and responsibility of the TCA, which cannot and should not blindly confirm any declaration of a taxpayer (see article 78(2) of the General Tax Law).

14. It further adds that, in the case, by restricting the options available in the completion of the income declaration and by transmitting completion instructions that had the same restrictive scope, the TCA had provoked the situation that it itself qualifies as an error in that income declaration. The Claimant limited itself to declaring the securities gains in the only possible way, and in the way that was indicated to it as the only adequate and permitted way.

15. Therefore, if it were to be admitted that there could be an error in the assessment – the very object of the petition for official review, based on a jurisprudential and administrative understanding that came to reveal itself as dominant, as is recognized by the Personal Income Tax Services Directorate itself (in its Memorandum No. …/15) – that error is not that of the Claimant, it is an error of the services, an error induced by the services of the TCA.

16. In other words, if the error affecting the declaration or the assessment is the result of incorrect instructions from the tax administration, it cannot fail to be considered attributable to it, since the law imposes on it the provision of correct information and, by not providing it, there will be action on its part constituting breach of its duties, which can only be attributed to it.

17. The Claimant alleges that, at most, it will have been a victim of a violation of the principle of good faith, being constrained, against the protection of its trust, to adopt a declarative conduct as a result of which an assessment occurred to its flagrant and unjustified detriment – as it sought to demonstrate and repair through the petition for official review, and as it would be unjustly deprived of doing, if, against all evidence, untimeliness were alleged based on the erroneous attribution to the Claimant itself of a declarative error.

18. As to the moment in which it presented its petition for official review, the Claimant clarifies, especially in its Final Submissions, that it was only in 2015, when it became aware of the content of the Decision of the Supreme Administrative Court, issued in the scope of Process No. 013/15, on 20 May 2015, in accordance with which it was ruled illegal the taxation of gains resulting from operations of alienation of shares held for more than 12 months, occurring before the date of entry into force of Law No. 15/2010 of 26 July, as was the case, that the Claimant came to make use of the means of defense that article 78 of the General Tax Law and article 93 of the Individual Income Tax Code granted it to contest administratively the legality of the said individual income tax assessment of 2010.

19. As to the 3rd of the exceptions invoked, the non-fulfillment of the requirements for consideration of the petition for official review, the Claimant insists that the assessment is ultimately the responsibility of the TCA, in addition to which the "error" verified in the case in question is directly due to the constraints and instructions that accompanied the completion of the income declaration of IRS relating to the year 2010 – being a true error, given the uniform jurisprudence of the Supreme Administrative Court, to the effect that Law No. 15/2010 of 26 July does not apply to securities gains resulting from operations of alienation carried out before the date of entry into force of the said statute, that is, before 27 July 2010 (Decision of the Supreme Administrative Court, issued in Process No. 734/15, on 2 December 2015).

20. As it is now a matter of the fulfillment of requirements and not of untimeliness, the Claimant further recalls that even if it were understood that there is no case of error attributable to the services, the question of the unlawful act of assessment, based on an error as to the legal requirements and as a result of which an amount of tax superior to that which would be due in light of the law in force resulted, would always subsist, whereby the TCA could not fail to promote its respective revocation, out of respect for legality, the pursuit of the public interest, and the principles of justice and equality – within the general principle that the State cannot retain tax revenues to which it is not legally entitled, official review being one of the appropriate means for attaining that objective.

21. As to the 4th of the exceptions invoked, the verification of a venire contra factum proprium, the Claimant says it is surprised at that argument, which seems to configure a restriction of access to tax justice – since the Law nowhere establishes any restriction on challenging an act of tax assessment that injures rights or legally protected interests of the taxpayer, be it for whatever reason. Being thus, the Claimant's conduct could never create in the TCA the legitimate conviction that the latter refrained from (or would refrain from) exercising its right to challenge the legality of the act of assessment – it sufficing for this to have not verified the first of the requirements of the legal institute of venire contra factum proprium: the existence of conduct by the agent capable of basing an objective situation of trust.

22. As to the second of the requirements of the legal institute of venire contra factum proprium, the Claimant merely recalls that it was not by its option that it completed the income declaration model 3 of IRS relating to 2010 in the manner it did, but that that completion was determined by constraints and instructions authored by the TCA – whereby there was neither is there any conduct on the part of the Claimant that, revealing inconsistency of choices, would injure the trust of the TCA.

23. On the contrary, the Claimant insists that it is the TCA that violates the principle of good faith and fails to protect the trust of the individual, by attempting to impute to the Claimant conduct that is the result of its own action, in a circumstance that generated significant and unjust harm to the individual.

II.C. Decision on the Exceptions

1. Regarding the exceptions invoked by the Respondent, none of them are sustainable; and, although they have been presented in a fourfold classification, they all founder on the same and sole fundamental reason, which is the absence of an option that would have been made available to the Claimant, and to which an error attributable to it could be associated.

2. There was no conduct revealed by the Claimant in the completion and filing of the income declaration in model 3 of IRS on 29 May 2011 – because it was not granted, whether in the available forms or in the respective completion instructions, any alternative, having limited itself, therefore, to following the only path made possible. There being no such relevant conduct, "revealed" or "revealing", it ceases to be possible that there is on the part of the Claimant any incongruity in challenging the legality of the act it performed, ceasing to be possible to invoke the existence of a venire contra factum proprium and, with it, the existence of an abuse of right, whether in the petition for official review or in the petition for arbitral pronouncement.

3. Besides, it does not seem appropriate to invoke the figure of venire contra factum proprium to condition the exercise of a prerogative that the law recognizes unconditionally to individuals to guarantee them access to tax justice and to defend them from illegalities.

4. There is thus no basis for the 4th of the exceptions invoked (the verification of a venire contra factum proprium).

5. It not having been granted, whether in the available forms or in the respective completion instructions, any alternative to the Claimant beyond the conduct that it thus found itself forced to adopt, it was not possible for it subsequently to "remedy", "correct", the situation through any substitute declaration – whereby the Claimant did not violate, nor could have violated, the formality established in article 59 of the Personal Income Tax Code. For the same reason, the petition for official review was not, nor could be, a "substitute", more or less fraudulent, for that formality provided for in article 59 of the Personal Income Tax Code – it further being to be underlined that, on the contrary, the legal regime in no way conditions the right to present a petition for official review for annulment of an act of assessment on the prior filing of any substitute declaration.

6. There is thus no basis for the 1st of the exceptions invoked (violation, by the Claimant, of the formality established in article 59 of the Personal Income Tax Code).

7. As we shall better see hereafter, the application of Law No. 15/2010 of 26 July, carried out by the tax administration in violation of what is provided in article 12 of the General Tax Law, suffers from error as to the legal requirements. By embodying that error, whether in the available forms or in the respective completion instructions, inducing conduct and preventing the Claimant from adopting any alternative conduct that would allow it to face that error and remedy it at that moment, the TCA originated an error "attributable to the services", permitting the full fulfillment of the requirements for consideration and success of the petition for official review.

8. If the error affecting a declaration or an assessment is the result of constraints present in the available forms, or of defects or inaccuracies contained in the respective completion instructions, that error cannot fail to be considered attributable to the TCA, since the law imposes on it the rigor of forms in declarations and the correctness in the provision of information, whereby, in the absence of that, there will be action on its part constituting breach of its duties, which can only be attributed to it.

9. There is thus no basis for the 3rd of the exceptions invoked (non-fulfillment of the requirements for consideration of the petition for official review).

10. For the same reason that error as to the legal requirements that is "attributable to the services" – at least in the sense that such error is certainly not attributable to the Claimant, which limited itself to the observance and compliance with the limits evident in the available forms and in the respective completion instructions of the responsibility of the TCA – did occur, the Claimant had, in accordance with article 78 of the General Tax Law, the 4-year deadline to present the petition for official review, and that deadline was observed, whereby there was no, therefore, untimeliness.

11. There is thus also no basis for the 2nd of the exceptions invoked (untimeliness of the petition for official review).

12. There being no basis for any of the exceptions presented, the Court is enabled to consider the merits of the case.

III – Grounds: The Facts

III.A. Facts Considered Proven and Relevant to the Decision

1. By public deed of 28 June 1983, the limited liability company "G…, Lda." was established between C…, D…, E… and F…, having as its main social object the operation of the hotel industry and similar activities.

2. The share capital, fully subscribed and paid, was initially divided as 2/3 to D…, 1/6 to C… and 1/6 to E….

3. By subsequent division of D…'s share, 1/6 of the share capital would come to belong to the Claimant (of the remaining capital, the shares would be 1/3 for H…, 1/6 for D…, 1/6 for C… and 1/6 for E…).

4. By capital increase on 20 December 1988, 2 new partners were admitted, C… and E…, who came to hold 99.25% of the capital, divided by two shares of equal value (49.625% each).

5. Subsequently, on 29 May 1996, the Company G…, Lda. was transformed into a joint-stock company, coming to be named "G…, S.A.", having as partners the Claimant (0.125% of share capital), I… (49.625% of share capital) and E… (49.625% of share capital), H… (0.25% of share capital), D… (0.125% of share capital), C… (0.125% of share capital) and E… (0.125% of share capital).

6. By capital increase, a new partner was admitted, J…, S.A., with the shareholdings coming to be distributed as follows: the Claimant (0.069% of share capital), J…, S.A. (35.7% of share capital), I… (31.943% of share capital) and E… (31.943% of share capital), H… (0.138% of share capital), D… (0.069% of share capital), C… (0.069% of share capital) and E… (0.069% of share capital).

7. On 27 July 2000, I… and E… sold all of the shares they held in the company G…, S.A. to the Claimant and to other shareholders, including a new shareholder, K…, with the purpose of leveling their positions, resulting therefrom the following distribution of shareholdings: the Claimant (10.7165% of share capital), J…, S.A. (35.7% of share capital), H… (10.717% of share capital), D… (10.7165% of share capital), C… (10.717% of share capital), E… (10.7165% of share capital) and K… (10.7165% of share capital).

8. The same proportions were maintained with the redenomination of share capital and shares into euros.

9. On 13 May 2003, shareholder J…, S.A. sold to the company G…, S.A. its 71,400 shares, corresponding to 35.7% of share capital.

10. Subsequently, "G…, S.A." resolved a reduction of share capital (by extinction of own shares held by it), a cancellation of the discount on acquisition of extinct own shares and an increase of share capital by incorporation of free reserves and allocation of the new shares to the shareholders in proportion to their respective shareholdings, resulting therefrom the following distribution of shareholdings: the Claimant (16.6665% of share capital), H… (16.667% of share capital), C… (16.667% of share capital), D… (16.6665% of share capital), E… (16.6665% of share capital) and K… (16.6665% of share capital).

11. On 24 May 2010, the shareholders of "G…, S.A." alienated all of the shares they held in that company: 200,000 shares with the face value of €5.00 each, for the global price of €14,000,000.00.

12. The Claimant's shareholding in the share capital of "G…, S.A." was sold for a price of €2,333,310.00 (33,333 shares, with the face value of €166,665.00, being the price corresponding to 16.6665% of €14,000,000.00).

13. The gains resulting from that operation for the Claimant are €2,166,645.00, corresponding to the difference between the realization value (€2,333,310.00) and the acquisition value (€166,665.00) of the shares held by it for more than 12 months.

14. Those gains were considered in only 50% of their value (€1,083,322.50), because it was a matter of the transfer of shareholdings relating to a small unquoted company (article 43(3) of the Individual Income Tax Code).

15. On 8 July 2010, the Claimant filed Declaration Model 4 referred to in article 138 of the Individual Income Tax Code (a substitute declaration), indicating €8,334.00 as the value of the operation of alienation of securities, corresponding only to the portion in which there had been no gains (the lot of shares acquired in December 2008 and alienated for the same value on 24 May 2010).

16. On 29 May 2011, the Claimant filed Declaration Model 3 of IRS relating to the year 2010, and in Category G indicated that in the month of May 2010 it had obtained, by onerous alienation of shares, a realization value of €2,341,644.00 (= €2,333,310.00 + €8,334.00) offset against an acquisition value of €174,999.00 (= €166,665.00 + €8,334.00).

17. The Claimant opted for the non-aggregation of income.

18. Decree No. 1303/2010 of 22 December modified the declaration model No. 3 and its respective annex G1 so as to reflect, as from 1 January 2011, the legislative amendment resulting from Law No. 15/2010 of 26 July; with that modification, Item 4 of the said annex G1 came to refer to "onerous alienation of shares held for more than 12 months (years 2009 and earlier)", not permitting, therefore, the insertion in that annex G1 of the declaration of alienation of shares held for more than 12 months, when that alienation had occurred in the year 2010 itself.

19. The "Completion Instructions" for Annex G1 indicated on two occasions (generally and in relation to Item 4) that only the declaration of alienations carried out in the years 2009 and earlier was admitted in relation to shares held by taxable persons for more than 12 months (which was corroborated by witness evidence).

20. The Director-General of the Directorate-General for Taxes issued on 2 July 2011 an act of additional individual income tax assessment No. 2011…, with tax being assessed in the total amount due of €213,378.05.

21. The portion of tax corresponding to autonomous taxation (€216,664.50) results from the application of the special rate of 20% to the positive balance between gains and losses in securities obtained in the year in question (€216,664.50 = €1,083,322.50 × 20%).

22. The application of the rate of 20% results from the application of the regime established by Law No. 15/2010 of 26 July, which took effect on 27 July 2010 (revoking article 10(2)(a) and (b) of the Individual Income Tax Code which excluded from taxation gains from the alienation of shares held by their holder for more than 12 months, and raising to 20% the special rate of taxation provided for in article 72(4) of the Individual Income Tax Code – which previously had been 10%).

23. On 26 June 2011, the Claimant fully paid the tax owed, in the amount of €213,378.05.

24. The Claimant presented on 26 June 2015 a petition for official review of the additional individual income tax assessment No. 2011…, issued by the Director-General of the Directorate-General for Taxes and relating to the year 2010, on the grounds of error attributable to the services, and on 26 October 2015 occurred the tacit dismissal of that petition, in accordance with article 57 of the General Tax Law, by a final decision not having been notified to it until that date.

25. In the Order of 4 March 2016 dismissing the Petition for Official Review, express reference is made (on pp. 6/8 and 7/8) to Memorandum No. …/15 of the Personal Income Tax Services Directorate according to which it is "administratively settled that the amendment effected by Law No. 15/2010 of 26 July applies only to onerous alienations of shares held for a period exceeding twelve months when the same have occurred already during the validity of the new regime".

III.B. Facts Considered Not Proven

Based on the documentary elements available in the case file and consensually accepted by the parties, and based on the witness evidence presented at the hearing, it is verified that, to the extent relevant to the decision of the case, nothing remained to be proved.

IV – Grounds: The Law

IV.A. Position of the Claimant

a) The Claimant begins by alleging that the additional individual income tax assessment No. 2011…, issued on 2 July 2011 by the Director-General of the Directorate-General for Taxes and relating to the year 2010, violates article 77 of the General Tax Law due to lack of grounds, whether of fact or of law (also invoking articles 135 of the Code of Administrative Procedure, and 103(2) and 268(3) of the Constitution).

b) Additionally, the Claimant alleges that the right to prior hearing, an essential formality enshrined in article 60(1)(a) of the General Tax Law, was illegally violated (also invoking articles 45 of the Personal Income Tax Code and 267(5) of the Constitution).

c) As to the illegality of the act of assessment, the Claimant invokes the jurisprudence of the Supreme Administrative Court and the CAAD to sustain that the gains ascertained on 24 May 2010, because obtained on a date prior to the entry into force of Law No. 15/2010 of 26 July, are excluded from taxation, in accordance with the applicable terms of article 10(2)(a) of the Individual Income Tax Code, in the version given to it by Decree-Law No. 192/2005 of 7 November.

d) It reinforces its understanding by invoking article 10(1)(b) and (3) of the Individual Income Tax Code, in accordance with which gains are considered obtained at the moment of performance of the acts in question (notwithstanding the value depending on a balance calculated annually, in accordance with article 43(1) of the Individual Income Tax Code).

e) The gains obtained on 24 May 2010 would thus be excluded from taxation, by corresponding to the alienation of shares held by their holder for more than 12 months; if they had been held for less than 12 months, they would have been subjected to the rate of 10%, which was the one in force until the modification of article 72(4) of the Individual Income Tax Code by Law No. 15/2010 of 26 July.

f) The Claimant insists on the understanding that, having taken effect on 27 July 2010 (in accordance with its own article 5), Law No. 15/2010 of 26 July cannot apply to gains resulting from onerous alienations of securities that occurred before its entry into force, that is, between 1 January 2010 and 26 July 2010 – for otherwise it would correspond to a violation of the general rule contained in article 12 of the General Tax Law, which forbids the retroactivity of tax norms, and to a violation of the prohibition contained in article 103(3) of the Constitution (which constitutes a guarantee to the taxpayer and a protection of his trust).

g) As to the moment in which the taxable event occurs, the Claimant sustains that it is a simple tax fact, whose objective element refers to the very moment of its occurrence, the "moment of performance of the acts" to which article 10(1) and (3) of the Individual Income Tax Code refers.

h) That the relevant moment, the Claimant sustains, moment of completion of the tax fact; a moment that should not be confused with that of the determination of the taxable base, as that depends on the calculation of the annual balance, in accordance with article 43(1) of the Individual Income Tax Code. The determination of the taxable base should not be confused with the determination of the tax facts underlying that taxable base, as those are completed at the moment of their occurrence; in other words, the annual balance of gains does not coincide with the gains themselves, being these, and not that (which consists of a mere aggregation for purposes of collection), the tax facts to which article 10 of the Individual Income Tax Code refers. Tax is due from the moment the tax fact occurs, notwithstanding its respective assessment and collection may still depend on further considerations and calculations.

i) Having the alienation of shares that generated the gains occurred before the entry into force of Law No. 15/2010 of 26 July, there results, in the understanding of the Claimant, the illegality of the assessment to which the Respondent proceeded, to the extent that it applied its regime retroactively, without any legal authorization to do so and in violation of the principle established in article 12 of the General Tax Law, there should follow from that illegality the annulment of the act of assessment and the restitution of the tax unduly paid, increased by indemnificatory interest in accordance with article 43 of the General Tax Law.

j) The Claimant further adds that it was retroactivity in the proper sense, so-called "of the first degree", as it consisted in the application of new law to tax facts of instantaneous nature already completely formed, already stabilized, and prior to the entry into force of that new law. This, in its view, collides with the principle of legal certainty and protection of trust, which should be preserved to reinforce the express prohibition of retroactivity, so as to prevent the taxpayer from being confronted with breaks in continuity that are unjustified and frustrating of legitimate expectations.

k) In its Submissions, the Claimant summarizes its argument and refers to the corroborating testimony of the witness it submitted.

IV.B. Position of the Respondent

a) In its Answer, the Respondent maintains the understanding that the contested assessment constitutes a correct application of Law, not suffering from any defect.

b) The Respondent begins, as was referred to before, by invoking four exceptions.

c) Beyond the exceptions presented, the Respondent also defends itself by opposition, beginning by contesting the Claimant's argument regarding the alleged lack of grounds for the act of assessment – opposing not only that groundedness is a relative concept, instrumental as to the objective of comprehension by a normal recipient, but also, and above all, that, having the assessment resulted exclusively from the elements declared by the Claimant itself, reflecting that declaration, it makes no sense to say that such assessment is unfounded.

d) As to the alleged violation of an essential formality that would consist of the absence of prior hearing, the Respondent underlines that such argument of the Claimant has no support in the Law. On the contrary, as the assessment was made exclusively on the basis of the elements declared by the Claimant, the TCA was exempted from proceeding with prior hearing, in accordance with article 60(2)(b) of the General Tax Law.

e) As to the alleged illegality of the act of assessment due to violation of the principle of non-retroactivity and due to violation of the principle of trust, the TCA recalls that Law No. 15/2010 of 26 July was created in accordance with the principle of "income-increment" which has presided over the tax system since the 1989 Reform, drawing therefrom the conclusion that the absence of a transitional law provision in that Law can only mean that it was intended that all realization of gains occurring during the year 2010 would be subjected to the new regime established by the Law.

f) Besides, the TCA sustains that it was always clear, from a historical point of view, that the regime would be applicable at the proper moment of calculation of gains which is that of the end of the taxation period, and that, therefore, at the end of 2010 all gains generated in 2010 would be calculated and their balances subjected to the new taxation – it being clear that what would be subjected to the new taxation regime would be the balances of gains and losses, and that balance could only be calculated at the end of 2010. There would result, from the entry into force of the new Law in the middle of the year 2010, merely retrospectivity (or "weak, inauthentic or improper retroactivity"), not damaging any reasonable expectation (there not existing a "right to immutability of tax law"), not violating article 103(3) of the Constitution.

g) The TCA insists on the fact that the taxable event, in the case of IRS, always occurs on 31 December of each year, the only solution consonant with the unitary and global character of that taxation on income, which is an annual taxation, with brackets and rates that depend on the global consideration of income and of the taxable capacity it reflects. Thus, in the case of gains, the taxable event would be the calculation of the global balance between gains and losses, in accordance with article 43(1) of the Individual Income Tax Code, and not the gains or losses recorded in each concrete alienation (for these do not permit their unitary and annual consideration, and would lead to a need for apportionment "pro rata temporis" that would be incongruous, impracticable and exposed to speculative tax planning).

h) In the case, at the entry into force of Law No. 15/2010 of 26 July, the taxable balance was not yet formed, was not susceptible of assessment, whereby its occurrence took place squarely already in the validity of the new Law.

i) On the other hand, the Respondent rejects the application to the case of article 12 of the General Tax Law, as that norm yields to a special norm which is the Individual Income Tax Code itself, which establishes the principle of annuality of tax (article 143 of the Individual Income Tax Code), from which follows the aforesaid aggregation of all taxable events of income that occur from the first to the last day of the year.

j) As to the indemnificatory interest whose payment is claimed by the Claimant, the TCA sustains that, being the tax act valid and legal, there does not exist the error attributable to the services on which the right to indemnificatory interest would depend, in accordance with article 43 of the General Tax Law and article 61 of the Personal Income Tax Code.

k) In Counter-Submissions, the Respondent entirely maintained the arguments already adduced in its answer, understanding that there was nothing new in the submissions presented by the Claimant.

V. On the Merits of the Case

1. The gains ascertained on 24 May 2010, because obtained by the Claimant on a date prior to the entry into force of Law No. 15/2010 of 26 July, are excluded from taxation, in accordance with the applicable terms of article 10(2)(a) of the Individual Income Tax Code, in the version given to it by Decree-Law No. 192/2005 of 7 November.

2. This understanding, which could be given as merely dominant in the jurisprudence and in the doctrine until 2015, thus admitting some margin of controversy, is today settled and uncontroversial after the Decision for Uniformization of Jurisprudence issued by the Plenary of the Tax Litigation Section of the Supreme Administrative Court on 2 December 2015, in Process No. 734/15, and whose summary is reproduced:

"I - The Individual Income Tax Code establishes, clearly and expressly, that gains obtained with the onerous alienation of shares constitute gains, and that such gains are considered obtained at the moment of alienation - article 10, No. 1, lit. b), and Nos. 3 and 4. And being the gain ascertained at that precise moment – by the difference between the realization value and the acquisition value of the transmitted asset – gains cannot fail to be reported to each gain separately.

II - Which is why the tax fact is born and is exhausted at the autonomous and complete moment of alienation and realization of gains, being, therefore, an instantaneous tax fact and not a complex tax fact of successive formation over a year, notwithstanding the value to be considered for the determination of the tax base for purposes of IRS being the corresponding to the annual balance ascertained between the gains and losses realized in the same year.

III - Law No. 15/2010 of 26 July is silent on what concerns the establishment of specific rules as to its application in time, as it does not contain any provision that bears on its temporal application, limiting itself to prescribe that "This law takes effect on the day following its publication". Reason which imposes the application of the general rule that governs the application of substantive tax law in time, embodied in article 12 of the General Tax Law.

IV - The gains produced before 27/07/2010 with the alienation of shares held for more than 12 months continue to follow the regime of non-subjection determined by No. 2 of the Individual Income Tax Code prior to the amendments introduced by Law No. 15/2010 of 26 July, and, as such, do not contribute to the formation of the annual taxable balance of gains referred to in article 43 of the Individual Income Tax Code."

1. That decision of the Supreme Administrative Court, which annuls the arbitral decision of the CAAD which, in Process 771/2014-T, had followed the opposite understanding, comes to culminate a firm convergence of jurisprudential positions, whether in the scope of the Supreme Administrative Court (decisions issued in the scope of Processes 1078/12, 1582/13, 1292/14, 1504/14 and 013/15), or in the scope of the CAAD itself (decisions issued in Processes 25/2011-T, 135/2013-T, 223/2014-T, 338/2014-T, 402/2014-T, 509/2014-T and 770/2014-T), and which comes laconically embodied in the Decision issued by the Supreme Administrative Court, on 20 May 2015, in Process 013/15, whose summary we also transcribe:

"I - The amendments introduced to the tax regime of securities gains by Law No. 15/2010 of 26 July apply only to tax facts occurring on a date after that of its entry into force (27 July 2010 – article 5 of Law No. 15/2010).

II - In gains resulting from the onerous alienation of securities subject to IRS as patrimonial increments, the tax fact occurs at the moment of alienation (article 10(3) of the Individual Income Tax Code), being that the relevant moment for purposes of application in time of the new law, in the absence of express provision of the legislator to the contrary (articles 12 of the General Tax Law and of the Civil Code).

III - The application of Law 15/2010 of 26 July to gains resulting from the alienation of shares held by their holder for more than twelve months carried out in May 2010 configures error as to the legal requirements of the assessment, generating the duty of payment of indemnificatory interest, ex vi of No. 1 of article 43 of the General Tax Law, inasmuch as by error attributable to the services the assessment judicially annulled determined the payment of tax superior to that due."

1. We highlight this decision issued by the Supreme Administrative Court in the scope of Process No. 013/15, on 20 May 2015, because it is the Claimant itself that admits that it was the knowledge of its content that motivated it to make use of the means that Law granted it to contest administratively the legality of the said individual income tax assessment of 2010, presenting the petition for official review on 26 June 2015 – before even, therefore, the aforementioned uniformization of jurisprudence undertaken by the Supreme Administrative Court on 2 December 2015, in Process No. 734/15.

2. Until that moment, in mid-2015, the Claimant had remained in the conviction of the regularity of the assessment to which it had been subjected, by having been constrained and induced to comply with its declarative duties in accordance with formulary guidelines and completion instructions that were based on an erroneous interpretation of the legal framework – and, therefore, on an illegality.

3. From the combination of the relevant norms, it is today settled, with relevance to the case in hand, that:

a. The tax fact occurs at the moment of the onerous transmission of the shares;

b. The corresponding income is ascertained in accordance with the rules of each category, in particular when the taxpayer opts for non-aggregation – and hence the application of a special and proportional rate, when taxation is to occur;

c. The constitution of the tax fact does not coincide with the calculation of the annual balance of that category of income, which results especially clear in cases in which a single operation is carried out in a given year, and thus no longer need for any further calculation of balances;

d. The rule of incidence does not coincide with the rule of quantification of the tax obligation, with the rule governing the calculation of the taxable base;

e. When a new law is silent as to its transitional regime, as to its application in time, the prohibition of retroactivity imposed by article 12 of the General Tax Law is applied, which is the rule governing the application in time of tax norms;

f. The General Tax Law, notwithstanding not having the status of reinforced law, presents itself, by legislative will, as the document condensing and superordinating the structural principles of Tax Law, its rules not being able to be set aside by simple arguments of posteriority or specialty of other tax law norms;

g. Gains proceed from operations carried out individually in which each tax fact presents itself as autonomous and complete;

h. The tax fact must be located in time in accordance with its respective rule of incidence; and in accordance with its specific rule of incidence, gains resulting from the onerous alienation of securities are considered obtained at the moment of performance of the act of alienation of these securities;

i. Law No. 15/2010 of 26 July does not establish any transitional regime, but merely determines its entry into force on the day following its publication (article 5), whereby the amendments introduced by it to the tax regime in IRS of securities gains apply only to tax facts occurring on a date after its entry into force – under pain of, otherwise, a violation of express law, of article 12 of the General Tax Law (in addition to possible violation of the constitutional provision).

1. The application of the new law to facts occurring before its entry into force, without the legislator having provided for it, constitutes therefore a true and proper "error of the services", specifically a conceptual confusion in which the TCA fell as respects the requirements of the IRS assessment relating to the fiscal year 2010 – a confusion that it conveyed to taxpayers, either by obliging them to complete their declarations, or by instructing them to do so, in accordance with that error which it professed.

2. It should further be underlined that in the situation at issue the Claimant realized a single gain resulting from a single onerous transmission of capital shares, not only making it clear how it would be erroneous to confuse that moment of incidence with the moment of calculation of a balance (which, in the absence of other operations, would become redundant), but especially reinforcing the instantaneous nature of the taxable event, to the extent that it removed any meaning and relevance to the temporal domain of the new law, by there not subsisting any fact, reality or moment which, after the validity of the new law, would present itself as necessary to complete the taxable event occurring under the old law.

3. Applying the above considerations to the case in hand, it becomes in sum evident the illegality of the assessment resulting from the retroactive application of the tax regime approved by Law No. 15/2010 of 26 July. The onerous transmission of the capital shares occurred before the entry into force of that Law, and that transmission is the taxable event of the tax, whereby at the date of realization of the tax gain, which constitutes that taxable event, the regime of exclusion from taxation embodied in No. 2 of article 10 of the Individual Income Tax Code was in force.

4. Being thus, even if it were understood that there is no case of error attributable to the services, the question of the unlawful act of assessment would always subsist, from which there resulted an amount of tax superior to that which would be due in light of the law in force, whereby the TCA could not fail to promote its respective revocation, out of respect for legality, the pursuit of the public interest and the principles of justice and equality – within the general principle that the State cannot retain tax revenues to which it is not legally entitled, official review being an appropriate means for ensuring that principle.

5. "In the decisions it issues, the judge shall take into consideration all cases that merit analogous treatment, in order to obtain a uniform interpretation and application of law", such is the rule established in article 8(3) of the Civil Code. The tenor of the decision thus accompanies the jurisprudence of the Supreme Administrative Court identified above: it is a value in itself that an arbitral tribunal, as an alternative means of jurisdictional resolution of conflicts in tax matters, seek to accompany the jurisprudence of superior courts.

6. Finally, the verification of the illegality of the act of assessment, essentially due to violation of the principle of non-retroactivity, suffices for the petition for arbitral pronouncement to be ruled as well-founded, with the consideration of the other grounds presented, in the same sense, by the Claimant thus being rendered moot (namely, the alleged lack of grounds, violation of the right to prior hearing and violation of the principle of trust).

VI – On the Indemnificatory Interest

1. Beyond the declaration of the illegality of the assessment, the Claimant further petitions that it be recognized the right to indemnificatory interest, a matter that falls within the scope of the competencies of this Court, as expressly provided for in No. 5 of article 24 of the LFATM.

2. The illegality of the assessment having been determined and its consequent annulment, and with the tax debt unduly paid having been paid, the right to indemnificatory interest subsists, always when that results from error attributable to the services of the TCA, as provided for in No. 1 of article 43 of the General Tax Law.

3. In the present case, there is an assessment determined by the TCA and which came to reveal itself legally unjustified, not by any act or procedure of the Claimant, but by an erroneous understanding as to the requirements of the assessment – an understanding sustained, imposed and conveyed by the TCA itself.

4. It is thus considered verified an error attributable to the services, with the consequent obligation of payment of indemnificatory interest, in accordance with article 43(1) and (2) of the General Tax Law and article 61 of the Personal Income Tax Code.

5. Indemnificatory interest is thus due, at the legal rate, on the amount unduly assessed and paid, counted from the day following that of the unduly payment to the date of issuance of the respective credit note.

VII. Decision

In light of all the foregoing, it is decided:

a) To rule that the petition for arbitral pronouncement is well-founded, declaring illegal the additional individual income tax assessment No. 2011…, issued by the Director-General of the Directorate-General for Taxes and relating to the year 2010, annulling that act of assessment and condemning the Respondent to the reimbursement of the corresponding amount of €213,378.05.

b) To rule that the petition for declaration of illegality of the tacit dismissal of the petition for official review submitted against that act of assessment is well-founded.

c) To rule that the petition for payment of indemnificatory interest is well-founded, condemning the Respondent to the payment of the corresponding amount.

VIII. Value of the Proceedings

The value of the proceedings is fixed at €213,378.05, in accordance with what is provided for in article 97-A of the Personal Income Tax Code, applicable ex vi article 29(1)(a) of the LFATM and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

IX. Costs

Costs to the charge of the Tax and Customs Authority, given that the present petition was ruled well-founded, in the amount of €4,284.00, in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, and in compliance with what is provided for in articles 12(2) and 22(4), both of the LFATM.

Lisbon, 26 July 2016

The Arbitrators

José Baeta Queiroz
(President)

Fernando Araújo

Luís Menezes Leitão