Process: 276/2016-T

Date: January 14, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 276/2016-T addressed whether Article 44(2) of the Portuguese IRS Code created an unconstitutional irrebuttable presumption for capital gains taxation. The applicants challenged a €59,424.92 additional IRS assessment for 2011, arguing that the presumption requiring the realization value to equal the tax property value (VPT) for Municipal Property Transfer Tax purposes—when higher than the declared price—violated constitutional principles of equality and tax capacity. At the time of the transaction (2011), taxpayers with Category G income (capital gains) could not rebut this presumption, unlike Category B taxpayers (business income) who could challenge it under Article 31-A(5) or corporate taxpayers under IRC provisions. The applicants contended this differential treatment was discriminatory, as they actually received less than the VPT but were taxed on the higher presumed amount. The case highlighted a significant gap in the pre-2015 IRS Code that the Reform Commission acknowledged, leading to the 2015 amendments adding paragraphs 5 and 6 to Article 44, which established a juris tantum (rebuttable) presumption for Category G income. The arbitration proceedings examined whether taxation based on an irrebuttable presumption of unreceived amounts constituted material unconstitutionality under Articles 13(1) and 104(3) of the Portuguese Constitution.

Full Decision

ARBITRAL DECISION

1. Report

1.1 A… and B…, hereinafter referred to as the "Applicants", taxpayers no. … and …, respectively, residing at Street …, no. …, place of …, parish of …, municipality of Leiria, requested the constitution of a single arbitral tribunal, under the combined provisions of article 2, no. 1, subsection a) and article 10, both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as "LRATM") and articles 1 and 2 of Ministerial Order no. 112-A/2011, of 22 March, in which the Tax and Customs Authority (TCA) is the Respondent.

1.2 The request for arbitral decision, presented on 18 May 2016, has as its object the decision to dismiss the Chief of the Division of Tax Justice–Contentious of the Finance Office of …, of 12-02-2016, issued in the gracious complaint proceedings no. …2015… and the consequent annulment of the additional Personal Income Tax assessment for 2015 … and respective compensatory interest, in the amount of €59,424.92 (fifty-nine thousand, four hundred and twenty-four euros and ninety-two cents), relating to the year 2011.

1.3 The Applicants chose not to appoint an arbitrator.

1.4 The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TCA on 24 May 2016.

1.5 The signatory was appointed by the President of the Deontological Council of CAAD as arbitrator of the single arbitral tribunal, in accordance with the provisions of article 6 of the LRATM, and the acceptance of the assignment was communicated within the applicable period.

1.6 On 8 July 2016, the Parties were notified of this appointment, and neither opposed it, in accordance with the combined provisions of article 11, no. 1, subsections a) and b) of the LRATM and articles 6 and 7 of the Deontological Code of CAAD.

1.7 Thus, in compliance with the provisions of subsection c) of no. 1 of article 11 of the LRATM, the single arbitral tribunal was constituted on 25 July 2016.

1.8 The Respondent was notified, by arbitral order of 26 July 2016, to, in accordance with article 17, no. 1 of the LRATM and within a period of 30 days, present a reply and, if desired, request the production of additional evidence.

1.9 It was further notified to, within the same period, submit the administrative proceedings (AP) referred to in article 111 of the Code of Tax Procedure and Process (CTPP).

1.10 On 26 September 2016, the Respondent submitted its Reply, defending itself by way of objection, arguing for the dismissal of the request for arbitral decision, and on the same date attached the respective AP to the proceedings.

1.11 Considering that the Parties did not request the production of any evidence other than documentary evidence that the Applicant attached to the request for arbitral decision, the Arbitral Tribunal, in light of the principles of autonomy in the conduct of the proceedings, expedition, simplification and procedural informality, inherent in no. 2 of articles 19 and 29 of the LRATM, by order of 21 December 2016, dispensed with the holding of the meeting provided for in article 18 of the same instrument as well as the presentation of submissions by the Parties.

1.12 On 15 December 2016, statements were taken from the Applicants as well as the examination of the witnesses called by them.

1.13 On the same date, oral submissions were produced by the Parties.

1.14 The date of 23 January 2017 was set for the issuance of the respective final arbitral decision.

2. Sanitation

2.1 The Parties have legal standing and capacity, show themselves to be legitimized and are properly represented (articles 4 and 10, no. 2 of the LRATM and article 1 of Ministerial Order no. 112-A/2011, of 22 March).

2.2 The proceedings are not affected by any nullities.

2.3 The Arbitral Tribunal is properly constituted and is materially competent to know and decide the request, cf. article 2, no. 1, subsection a) of the LRATM.

2.4 There are no other circumstances that prevent the examination of the merits of the case.

3. Position of the Parties

3.1 Of the Applicants

They support their request for arbitral decision, in summary, as follows:

At the time to which the facts date (year 2011), the Personal Income Tax Code made the tax property value that served as the basis for the Municipal Property Transfer Tax assessment prevail over the declared price, when lower, without admitting evidence to the contrary, cf. article 44, no. 2 of the Personal Income Tax Code.

This rule constituted, however, an irrebuttable presumption of transfer of real estate by its respective tax property value, even though the value actually received by the taxpayer was lower, as was the case in the present matter.

The taxation of a sale of property, whose value the law presumes without admitting evidence to the contrary by the taxpayer, flagrantly violates the principle of equality enshrined in article 13, no. 1 of the Constitution of the Republic and the principle of contributory capacity, which constitutes the expression of the principle of equality in the field of taxes, enshrined in article 104, no. 3 of the Constitution of the Portuguese Republic (CPR).

The assessment act is illegal, as it is based on an irrebuttable presumption of the existence and value of amounts not received, and the said rule (article 44, no. 2 of the PIT Code) is materially unconstitutional.

Article 4 of Decree-Law no. 287/2003, of 12 November, added to the PIT Code article 31-A, whose no. 1 states that the value of realization, in the case of onerous transfer of real estate within the scope of business and professional activities carried out by individual taxpayers, corresponds to the value that served as the basis for the Municipal Property Transfer Tax assessment, whenever this is higher than the value declared in the contract. However, under no. 5 of the same article, the provisions of that rule do not apply if proof is made that the value of realization was lower than that provided for therein, such proof to be effected in accordance with the procedure provided for in article 129 (now 139) of the Corporate Income Tax Code.

An identical regime is now contained in the Corporate Income Tax Code, with the addition of articles 58-A (now 64) and article 129 (now 139), introduced by no. 6 of the same decree-law.

However, such a regime for rebutting the presumption does not apply to capital gains obtained under the "G" category of income, but only to gains obtained by individual businessmen in the scope of "B" category income in whose specific regime said rule is inserted (Section III of Chapter II of the PIT Code) as well as to legal entities.

With the 2015 reform of the PIT Code, the legislator began to admit that, also in the "G" category income, the taxpayer could rebut the presumption of transfer by the tax property value, adding to that article 44 its nos. 5 and 6.

Prior to evidence to the contrary to the provisions of no. 2 of article 44 of the Personal Income Tax Code, it was not admitted, as stated on page 44 of the final report of the Commission for the Reform of Personal Income Tax: "(…) At the level of real estate capital gains – and differently from what happens in the context of Corporate Income Tax and, also, Personal Income Tax, in this case when such capital gains are taxed under B category – taxation under G category does not provide for the possibility of departure from the rule that determines that the value of realization corresponds to the value to be considered for purposes of Municipal Property Transfer Tax assessment whenever this is higher than declared. No reasons are seen that prevent the rebuttal of said presumption in the context of G category and such prevention could have serious and unjustified consequences for taxpayers, it is proposed to expressly establish that, also in this case, such possibility exists."

No. 2 of article 44 of the Personal Income Tax Code, as applied and served as the basis for the assessment act now challenged, violates the Constitution, leading to an arbitrary, because unjustified, differentiation between individual and collective transferors, and also between individual business or professional transferors and others.

Nothing justifies, as sought by the reasoning of the act now challenged, establishing that the value of realization in onerous transfers of real estate made by persons who are not businessmen cannot in any case be lower than the tax property value, constituting a gross violation of the Constitution of the Republic, by breach of the principle of proportionality inherent in the principle of democratic rule of law, enshrined in article 2 of the CPR.

Therefore, they should be allowed the possibility of demonstrating that the actual values of sale of real estate do not correspond to the tax property values, that is, they should be allowed to rebut the presumption provided for in no. 2 of article 44 of the Personal Income Tax Code, under article 73 of the General Tax Law which provides that "presumptions enshrined in tax incidence rules always admit evidence to the contrary."

It concludes, arguing for the success of the request for arbitral decision and by way of that for the annulment of the order of the Chief of the Division of Tax Justice–Contentious of the Finance Office of …, of 12-02-2016, issued in the gracious complaint proceedings no. …2015… as well as the annulment of the assessment with the consequent reimbursement of the tax unduly paid, increased by the respective compensatory interest.

3.2 Of the Respondent

Defending itself by way of objection, it invokes the following arguments:

Under no. 2 of article 44 of the PIT Code and in the strict application of this rule and the aforementioned legal framework, the TCA determined as the value of realization, for purposes of capital gains framed in the "G" category, that of the tax property values of the respective real estate alienated, given that those values prevailed (because higher) over the values of the contracts.

In contrast with the rule of article 31-A of the PIT Code, which concerns income obtained in the scope of "B" category, which, in its no. 5, expressly provides that in case the tax property value is higher than the contract value, it does not apply if proof is made that the value of realization was lower.

With the Personal Income Tax Reform, approved by Law no. 82-E/2014, of 31/12, nos. 5 and 6 were added to said article 44, applicable to "G" category income, now creating a similarity of regime, for purposes of "values of realization", between "B" category and "G" category income, establishing the possibility, for the latter, of departure from the tax property value through proof of the actual price of alienation.

That the TCA is subject to strict compliance with the principle of legality, under article 266 of the CPR, whereby the appreciation of the alleged issue of unconstitutionality is not within the material competence of the arbitral tribunal.

That at the time of the facts it was that the meaning and scope of the rule of no. 2 of article 44 of the PIT Code and that the TCA applied in strict compliance with the principle of legality.

Having applied the tax property values in force (1st assessment under CIMI) as of 31/12/2011, since Personal Income Tax is a direct and periodic tax of an annual character in which all income received in a given year is taxed, whereby the taxation period only stabilizes at the end of the fiscal year, that is, on 31 December.

Even if it were understood that the Applicants could, in light of no. 2 of article 44 of the PIT Code, depart from the tax property value as the value of realization, which it does not accept, nonetheless, the proof requested would not contribute to the discovery of material truth, predominantly based on documentary evidence.

Regarding the property located in …, the Applicants declared that it had been alienated for €150,000.00 (contract value), with a mortgage loan (secured by mortgage) in the amount of €100,000.00 associated with it.

However, the Applicants did not prove that they received the €150,000.00 (price declared in the deed), satisfying themselves with presenting proof of receipt of the amount of €100,000.00 (which corresponds to the value of the bank cheques issued by C… inherent to the loan contracted by the buyer, the daughter of the Applicants) – docs. 4 and 5 attached to the p.i.

The Applicants' argument lacking substance that, because it is their daughter, the sale was effected for only €100,000.00, because if that were so, there is no reason why they declared the value of €150,000.00 in the deed.

Regarding the alienation of the property located in X..., the Applicants submit a copy of a cheque in the amount of €50,000.00, with a date after that of the alienation and which, therefore, cannot provide the proof sought.

That the cheque was not deposited in the seller's account and no proof was made regarding the alleged loan to the sister-in-law (where the cheque was allegedly deposited).

Even if it were understood that no. 2 of article 44 of the PIT Code, at the time of the facts, permitted the rebuttal of the presumption that the tax property value prevails over the contract value, nonetheless the proof produced, because it is insufficient and little enlightening, would not dispel the prevalence of the tax property values, determined, in a 1st assessment, under CIMI.

It should also be stated that the Applicants knew what the tax property value was that had been determined for the real estate alienated, and the alleged in articles 10 and following of the p.i. do not have a place here.

It concludes, arguing for the total dismissal of the request for arbitral decision and absolution of the Respondent, since the contested assessment constitutes a correct interpretation and application of law to the facts, not suffering from the vice of breach of law.

4. Subject Matter of the Dispute

The issue that constitutes the thema decidendum comes down to knowing whether no. 2 of article 44 of the Code of Personal Income Tax, before the reform carried out by Law no. 82-E/2014, of 31 December, admitted proof that the value of the consideration provided for in subsection f), no. 1 of the same article, as the value of realization for determining gains subject to Personal Income Tax, was lower than the tax property value, considered for purposes of Municipal Property Transfer Tax assessment.

5. Reasoning

5.1 Proven Facts

Relevant to the appreciation and decision of the merit question raised, the following facts are given as established and proven:

5.1.1 On 16 June 2011, the Applicants sold to their daughter D…, the urban property located in the Urbanization …, Lot…, …, parish of …, municipality of Z..., registered in the respective property registry under article…, with the tax property value (TPV) of €100,985.06, in accordance with the deed of sale and purchase and mortgage loan with surety, executed at the Property Registry Office of X... (cf. doc. 2, attached to p.i., whose contents are hereby given as fully reproduced).

5.1.2 The price of €150,000.00 was declared (cf. doc. 2).

5.1.3 The property was sold free of liens or encumbrances, namely the voluntary mortgage registered by no. 6 of 2001/06/30 in favor of "Bank C…, SA", whose cancellation was effected in the same act (cf. doc. 2).

5.1.4 E…, the other daughter of the Applicants, and husband F…, consented to the sale in accordance with the provisions of no. 1 of article 877 of the Civil Code (cf. doc. 2).

5.1.5 For the acquisition of the property, D… contracted a loan from said bank, in the amount of €100,000.00, under the General Regime of Housing Credit, regulated by Decree-Law no. 349/98, of 11 November (cf. doc. 2).

5.1.6 As security and guarantee of the loan, a voluntary mortgage was constituted, in favor of the lender, on said property (cf. doc. 2).

5.1.7 From the loaned amount, Bank C…, on 16-06-2011, issued the following cheques in favor of the seller A…:

No. …, in the amount of €56,546.33, deposited in the same bank on 20-06-2011 (cf. docs. 5 and 6 attached to p.i., whose contents are hereby given as fully reproduced); and

No. …, in the amount of €43,453.67, deposited on the date of issuance at said bank in "Funds Received for Various Operations," intended to pay off the full principal balance relating to the housing loan that, with the same bank, the Applicants contracted for acquisition of the same property, thus achieving the definitive cancellation of the mortgage referred to in 5.1.3 (cf. docs. 4 and 7 attached to p.i., whose contents are hereby given as fully reproduced).

5.1.8 The actual price of the contract was €150,000.00.

5.1.9 There remained unpaid from the price the amount of €50,000.00.

5.1.10 The assessment and collection of municipal tax on onerous transfers of real estate and stamp duty (item 1.1 of the General Schedule of Stamp Duty) was effected, cf. single collection documents nos. … and …, respectively (cf. doc. 2).

5.1.11 The property (article … of the parish of…) was assessed on 17-10-2011, in accordance with no. 1, article 15 of Decree-Law no. 287/2003, of 12 November, being assigned the TPV of €348,660.00 (cf. AP, page 85, whose contents are hereby given as fully reproduced).

5.1.12 On 4 July 2011, the Applicants sold to the company operating under the name "G…, SA", NIPC…, with headquarters at Street of …, no. …, place of …, parish of …, municipality of Leiria, the urban property located on Street …, parish and municipality of …, registered in the respective property registry under article…, with the tax property value (TPV) of €5,072.29, in accordance with the deed of sale and purchase executed at the Property Registry Office of X... (cf. doc. 3, attached to p.i., whose contents are hereby given as fully reproduced).

5.1.13 The price of €50,000.00 was declared (cf. doc. 3).

5.1.14 Payment of the price was effected by cheque no. …, drawn on C…, issued on 30-07-2011 in said amount and, on 15-09-2011, deposited in the account of H…, sister-in-law of the Applicant, opened at the same bank, to pay off the debt that the Applicants had to her and her husband I… (cf. docs. 8 and 9, attached to p.i., whose contents are hereby given as fully reproduced).

5.1.15 The actual price of the contract was €50,000.00.

5.1.16 The property (article … of the parish of …) was assessed on 14-10-2011, in accordance with no. 1, article 15 of Decree-Law no. 287/2003, of 12 November, being assigned the TPV of €83,640.00 (cf. doc. 1 (page 2), attached to p.i. and AP, page 86, whose contents are hereby given as fully reproduced).

5.1.17 On 01-04-2015 an additional Personal Income Tax assessment no. 2015… was made, in the amount of €59,424.92, already including compensatory interest in the amount of €6,033.14 (cf. doc. 1-A, attached to p.i. and AP, page 22, whose contents are hereby given as fully reproduced).

5.1.18 In the assessment were considered as values of realization, for purposes of determining gains subject to capital gains, the TPVs resulting from the assessments effected and referred to in 5.1.10 and 5.1.14, in the amounts of €348,660.00 and €83,640.00 (cf. annex G of the return on page 65 of AP).

5.1.19 This assessment was the subject of a gracious complaint, as per Proceedings no. …2015…, dismissed by order of the Chief of the Division of Tax Justice–Contentious of the Finance Office of…, of 12-02-2016, notified to the Applicants on 18-02-2016 (cf. doc. 1, attached to p.i. and AP, pages 110/112).

5.2 Unproven Facts

There are no facts relevant to the decision of the case that should be considered unproven.

5.3 Reasoning on Facts

Regarding the matter of fact, the Tribunal is not obligated to rule on all alleged matters, but rather has the obligation to select that which is relevant to the decision, taking into account the cause (or causes) of action that underlies the claim formulated by the claimant [(cf. articles 596, no. 1 and 607, nos. 2 to 4 of the Code of Civil Procedure, applicable ex vi of article 29, no. 1, subsections a) and e) of the LRATM)] and to state whether it considers it proven or unproven (cf. article 123, no. 2 of the CTPP).

According to the principle of free appreciation of evidence, the Tribunal bases its decision, in relation to evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of evidence brought before the proceedings and in accordance with its experience of life and knowledge of people (cf. article 607, no. 5 of the Code of Civil Procedure). Only when the probative force of certain means is pre-established in law (e.g. full probative force of authentic documents, cf. article 371 of the Civil Code) does the principle of free appreciation of evidence not dominate in the appreciation of evidence produced.

Thus, the Tribunal's conviction was based on the set of documents attached to the proceedings, the positions assumed by the parties as well as the testimony of the witnesses and the statements of the Applicants.

Regarding the facts stated in points 5.1.8, 5.1.9 and 5.1.5 of the probatoria, the Tribunal based itself on the statements given by Applicant A… as well as on the testimony of witness D…, daughter of the Applicants.

As for the facts stated in point 5.1.14 of the probatoria, the Tribunal based itself on docs. 8 and 9, attached to p.i., as well as on the statements given by Applicant A… and also on the testimony of witness D… as well as that of H…, sister-in-law of Applicant B…, although as to the latter only regarding the loan effected and its payment.

All witnesses demonstrated knowledge of the subject matter under discussion in the present proceedings, revealing their respective statements and testimony to be enlightened, assertive, consistent and spontaneous, resulting from fluent discourse and without difficulties in recalling, expressing and contextualizing the asserted facts.

5.4 Matter of Law (Reasoning)

Questions to be decided:

  • On the illegality of the contested assessments; and

  • On the request for payment of compensatory interest.

On the illegality of the contested assessments

In the original version of the Code of Personal Income Tax (CPIT), approved by article 1 of Decree-Law no. 442-A/1988, of 30 November, in force since 01-01-1989, capital gains were taxed differently depending on whether the respective gains derived or not from the exercise of a commercial, industrial or agricultural activity.

In fact, in accordance with the provisions of article 4, no. 2, subsection d) of the CPIT (current article 3, no. 2, subsection c)), capital gains resulting from commercial and industrial activities as defined in the terms of the Code of Corporate Income Tax (CCIT) were considered commercial and industrial income, following in the determination of taxable profit the rules established in this code, cf. article 31 of the CPIT (current article 28).

Thus, realized capital gains were considered revenues or gains, and capital losses costs or losses, cf., respectively, articles 20, subsection f) (current article 20, no. 1, subsection h) and 23, subsection i) (current article 23, no. 2, subsection l)), of the CCIT.

Their determination was given by the difference between the value of realization net of the charges inherent to it and the acquisition value deducted from the depreciations or amortizations practiced, cf. article 42, no. 2 of the CCIT (current article 46, no. 2).

The value of realization, in cases of sale, was the value of the respective consideration, cf. article 42, no. 3, subsection e) of the CCIT (current article 46, no. 3, subsection g).

As for gains obtained which, not being considered commercial, industrial or agricultural income, resulted from onerous alienation of rights in rem over real estate, constituted capital gains, cf. article 10, no. 1, subsection a) of the CPIT.

The gain subject to Personal Income Tax was given by the difference between the value of realization and the acquisition value, cf. article 10, no. 4, subsection a) of the CPIT.

The value of realization, in cases of sale, was the value of the respective consideration, cf. article 42, no. 1, subsection d) (current article 44, no. 1, subsection f).

However, where it concerned rights in rem over real estate, would prevail, when higher, the values at which the goods had been considered for purposes of transfer tax assessment or, if no such assessment took place, those that should be, had the tax been due, cf. article 42, no. 2 of the CPIT (current article 44, no. 2).

It is thus noted the difference in the taxation of capital gains, depending on whether the respective gains derived or not from the exercise of a commercial, industrial or agricultural activity, namely regarding the concept of value of realization.

With the reform of property taxation, carried out by Decree-Law no. 287/2003, of 12 November, article 31-A was added to the CPIT and articles 58-A and 129 were added to the CCIT.

In the preamble of said decree-law can be read: "(…) The amendments to the Personal Income Tax and Corporate Income Tax Codes are based on two types of measures that are among the most emblematic of this reform. On the other hand, since the tax property values that serve as the basis for the Municipal Property Transfer Tax assessment now constitute the minimum value for determining taxable profit, both for Personal Income Tax, business income, and for Corporate Income Tax, it became necessary to make various adaptations to the respective Codes, to establish these measures, which are also the subject of the present decree-law."

The following is the wording of said article 31-A of the CPIT:

"Final value considered for purposes of Municipal Property Transfer Tax assessment

1 — In case of onerous transfer of rights in rem over real estate, whenever the value contained in the contract is lower than the final value that serves as the basis for the Municipal Property Transfer Tax assessment, or that would serve in the case of no such assessment taking place, it is this the value to be considered for purposes of determining taxable income.

2 - ………………………………………………………………………………………….

3 - ………………………………………………………………………………………….

4 - ……………………………………………………………………………………..…."

And those of articles 58-A and 129 of the CCIT:

"Article 58-A (current article 64)

Corrections to the value of transfer of rights in rem over real estate

1 - Alienators and acquirers of rights in rem over real estate must adopt, for purposes of determining taxable profit under the terms of the present Code, fair market values that cannot be lower than the final tax property values that served as the basis for the Municipal Property Transfer Tax (MPTA) assessment or that would serve in the case of no assessment of this tax.

2 - Whenever, in the onerous transfers provided for in the preceding number, the value contained in the contract is lower than the final tax property value of the real estate, it is this the value to be considered by the alienator and acquirer, for determining taxable profit.

3 - ………………………………………………………………………………………….

4 - ………………………………………………………………………………………….

5 - ………………………………………………………………………………………….

6 - ………………………………………………………………………………………"

"Article 129 (current article 139)

Proof of the effective price in the transfer of real estate

1 — The provisions of no. 2 of article 58-A (current article 64, no. 2) do not apply if the taxpayer proves that the price effectively practiced in transfers of rights in rem over real estate was lower than the tax property value that served as the basis for the Municipal Property Transfer Tax assessment.

2 — For purposes of the preceding number, the taxpayer can, in particular, demonstrate that construction costs were lower than those fixed in the ministerial order referred to in no. 3 of article 62 of the Municipal Property Tax Code, in which case to the amount of construction costs should be added the other objective indicators provided for in said Code for determining the tax property value.

3 — The proof referred to in no. 1 must be effected in proceedings instituted by way of application directed to the director of competent finance and presented in January of the year following that in which the transfers occurred, if the tax property value is already definitively fixed, or within 30 days after the date on which the assessment became final, in other cases.

4 — The request referred to in the preceding number has suspensive effect on the assessment, in the part corresponding to the value of the adjustment provided for in no. 2 of article 58-A (current article 64, no. 2), which, in the case of total or partial dismissal of the request, will be the responsibility of the Directorate-General of Taxes.

5 — The proceedings provided for in no. 3 are governed by the provisions of articles 91 and 92 of the General Tax Law, with the necessary adaptations, and the provisions of no. 4 of article 86 of the same law are equally applicable.

6 — In case of presentation of the request for demonstration provided for in the present article, the tax administration may access the banking information of the applicant and the respective administrators or managers for the fiscal year in which the transfer occurred and the preceding fiscal year.

7 — Judicial challenge against the assessment of tax relating to the transfer of real estate whose taxable profit has been fixed in accordance with article 58-A (current article 64), or if there is no assessment of taxable profit provided for in the same legal rule, depends on prior presentation of the request provided for in the present article, with no gracious complaint taking place.

8 — Challenge of the act of fixing the tax property value, provided for in article 77 of the Municipal Property Tax Code and in article 134 of the Code of Tax Procedure and Process, has no suspensive effect on the Corporate Income Tax assessment nor suspends the period for deduction of the request for demonstration provided for in the present article."

With the addition of these articles to the CPIT and CCIT there was a bringing together of the concept of value of realization, contained in article 42, no. 2 of the CPIT (current article 44, no. 2), with capital gains realized by taxpayers who exercise commercial, industrial or agricultural activities as well as with legal entities subject to Corporate Income Tax.

However, with regard to capital gains realized under this tax, the legislator began to provide for a procedure aimed at the non-applicability of the presumption provided for in no. 2 of article 58-A (current article 64, no. 2), through proof of the effective price in the transfer of real estate, cf. article 129 (current 139).

Which was not the case, from the outset, with capital gains realized under Personal Income Tax by taxpayers who exercise activities of a commercial, industrial or agricultural nature, this occurring later, with the addition to article 31-A of the CPIT of nos. 5 and 6, made by article 46 of Law no. 53-A/2006, of 29 December, in the following terms:

"Article 31-A

[…]

1 — ....................................................................................................................................

2 — ....................................................................................................................................

3 — .....................................................................................................................................

4 — For purposes of the provisions of no. 3 of article 3, nos. 2 and 6 of article 28 and nos. 2 and 6 of article 31, the value referred to in no. 1 shall be considered, without prejudice to the provisions of the following numbers.

5 — The provisions of nos. 1 and 4 do not apply if proof is made that the value of realization was lower than that provided for therein.

6 — The proof referred to in the preceding number must be effected in accordance with the procedure provided for in article 129 (current article 139) of the Corporate Income Tax Code, with the necessary adaptations."

Finally, with the reform of the CPIT, carried out by Law no. 82-E/2014, of 31 December, in force since 01-01-2015, nos. 5, 6 and 7 were added to article 44, this article now having the following wording:

"Article 44

Value of realization

1 - For determining gains subject to Personal Income Tax, the value of realization is considered:

a) In the case of exchange, the value attributed in the contract to the goods or rights received, or the market value, when that does not exist or this is higher, increased or decreased, one or the other, by the amount in money to be received or paid;

b) In the case of expropriation, the value of the indemnification;

c) In the case of assignment of any assets from the personal assets of the holder of B category income to business and professional activity, the market value on the date of assignment;

d) In the case of securities alienated by the holder of the right to exercise autonomous put warrants, and for purposes of subsection b) of no. 1 of article 10, the market price at the moment of exercise;

e) Where assets or rights referred to in subsection d) of no. 4 of article 24 are concerned, when there is no previously fixed price or value, the market value on the date referred to;

f) In other cases, the value of the respective consideration.

2 - In the cases of subsections a), b) and f) of the preceding number, where rights in rem over real estate are concerned, will prevail, when higher, the values at which the goods have been considered for purposes of Municipal Property Transfer Tax assessment or, if no such assessment takes place, those that should be, were the tax due.

3 - In the case of exchange for future goods, the values referred to in subsection a) of no. 1 are as of the date of execution of the contract.

4 - In the case provided for in subsection c) of no. 1 will prevail, if it exists, the value resulting from the correction referred to in no. 4 of article 29.

5 - The provisions of no. 2 do not apply if proof is made that the value of realization was lower than that provided for therein.

6 - The proof referred to in the preceding number must be effected in accordance with the procedure provided for in article 139 of the Corporate Income Tax Code, with the necessary adaptations.

7 – In cases where positive or negative adjustments are made to the value of realization, and if by the date on which the final value becomes known the period for filing the income return referred to in article 57 has elapsed, the taxpayer must file a substitute return during the month of January of the following year."

The addition of said nos. 5, 6 and 7 to article 44 of the CPIT was based on the draft of the Personal Income Tax reform, prepared in September 2014 by the respective Commission for the Reform of Personal Income Tax, chaired by Professor Rui Duarte Morais, on page 44 of which can be read:

"5.1.11.11 Possibility of departure from the TPV criterion through proof of the effective transfer price

At the level of real estate capital gains – and differently from what happens in the context of Corporate Income Tax and, also, Personal Income Tax, in this case when such capital gains are taxed under B category – taxation under G category does not provide for the possibility of departure from the rule that determines that the value of realization corresponds to the value to be considered for purposes of Municipal Property Transfer Tax assessment whenever this is higher than declared.

No reasons are seen that prevent the rebuttal of said presumption in the context of G category and such prevention could have serious and unjustified consequences for taxpayers, it is proposed to expressly establish that, also in this case, such possibility exists."

With the addition of nos. 5, 6 and 7 to article 44 of the CPIT, the legislator created a procedure intended to rebut the presumption inherent in no. 2, which already existed in article 31-A of the CPIT for capital gains realized by individual persons with business and/or professional income and in article 64, for legal entities.

Having made a historical and chronological summary of the relevant provisions as well as the reasons underlying their genesis, let us proceed to the analysis of the question to be decided, which consists in knowing whether no. 2 of article 44 of the Code of Personal Income Tax, before the reform carried out by Law no. 82-E/2014, of 31 December, admitted proof that the value of the consideration provided for in subsection f), no. 1 of the same article, as the value of realization for determining gains subject to Personal Income Tax, was lower than the tax property value, considered for purposes of Municipal Property Transfer Tax assessment.

And, if affirmative, whether the Applicants managed to produce such proof.

The income in question is qualified as capital gains and does not derive from the exercise, by the Applicants, of any commercial, industrial or agricultural activity, whereby, in accordance with article 12 of the General Tax Law, it is necessary to invoke the applicable rule (article 44 of the CPIT) in the wording in force at the time of the facts (year 2011), which was as follows.

"Value of realization

1 - For determining gains subject to Personal Income Tax, the value of realization is considered:

a) - ………………………………………………………………………………………..

b) - ………………………………………………………………………………………..

c) - ………………………………………………………………………………………...

d) - ………………………………………………………………………………………..

e) - ………………………………………………………………………………………..

f) In other cases, the value of the respective consideration.

2 - In the cases of subsections a), b) and f) of the preceding number, where rights in rem over real estate are concerned, will prevail, when higher, the values at which the goods have been considered for purposes of Municipal Property Transfer Tax assessment or, if no such assessment takes place, those that should be, were the tax due.

3 - ………………………………………………………………………………………….

4 - ……………………………………………………………………………………….. "

In point 5 of the preamble of the decree-law that approved the CPIT, it is stated: "In the construction of the concept of taxable income, the conception of the source, which leads to taxing the flow of income linked to the traditional categories of functional distribution (income-product) is contrasted with the conception of property income, which expands the tax base to every increase in purchasing power, including in it capital gains and, in general, irregular income and fortuitous gains (income-increment).

In practical terms, the principal difference between the two conceptions lies precisely in the tax treatment of capital gains, which, not being gains arising from participation in productive activity, are by the former excluded from the scope of the tax. Now, reasons of justice recommend the taxation of capital gains, which constitute increases in purchasing power obtained without effort or by stroke of fortune and which, moreover, tend to concentrate themselves in high income brackets."

For Xavier de Bastos, "capital gain should be defined, in principle, by the difference between the value of realization and the acquisition value, one of the general principles of its taxation being the realization principle. From the realization principle results, among other things, that only realized patrimonial increases are taxed – those that translate into a net increase in the monetary means of its holder (cash basis)."

Thus, from the totality of the Personal Income Tax provisions it follows that it should only apply to effective income and, in each year, only to the effective income of that year, cf. summary of the judgment of the Supreme Administrative Court of 09-04-2003 (Case no. 0320/03).

In the same sense can be read in the judgment of the Central Administrative Court South, of 09-04-2013, Case no. 06052/12: "The value of realization for purposes of taxation of capital gains under Personal Income Tax, when the declared sale price of urban real estate is lower than the tax property value, this found by the rules of CIMI, is this value that is considered as the value of realization. (…) In this case, if such value of realization was lower than that thus declared, it is upon the taxpayer that the burden of this allegation and proof lies, in the sense of rebutting the presumption resulting from this declaration."

In the judgment of the same superior court, of 04-02-2016, Case no. 08157/14, can be read: "It is certain that the provision contained in no. 2 of article 44 of the CPIT should be interpreted as establishing a presumption regarding the value of realization, which yields to evidence to the contrary, that is, proof that the value of realization was effectively lower than the value taken as the basis for the Municipal Property Transfer Tax assessment, to the extent that the General Tax Law establishes that presumptions enshrined in tax incidence rules always admit evidence to the contrary cf. article 73 of the GTL."

It is clear that no. 2 of article 44 of the CPIT, in the wording in force at the time of the facts, that is, in the year 2011, contains within itself an implicit presumption that the tax property values of the real estate alienated by the Applicants, that is, the values at which the goods were considered for purposes of Municipal Property Transfer Tax assessment, correspond to the prices declared in the respective contracts.

Regarding the provision under analysis, Xavier de Basto also expressly states that "(…) it should be interpreted in the sense that it merely establishes a presumption regarding the value of realization, which yields to evidence to the contrary, that is, proof that the value of realization was effectively lower than the value taken as the basis for the Municipal Property Transfer Tax assessment," because, otherwise, "we would end up taxing not the actual income realized by the transfer, but a normal income." (emphasis ours).

Adding that, since the rule "is included in the systematic of the CPIT, in the chapter of determining taxable matter and not in the chapter of incidence, it is materially a rule of incidence, because it determines in the final analysis the value that is to be subject to tax. We would say, therefore, that in this no. 2 what was established was a presumption regarding the value of realization, which can be set aside by evidence to the contrary."

A presumption which, like all presumptions in tax incidence matters, admits evidence to the contrary, in accordance with article 73 of the General Tax Law (GTL).

And even if it were a rebuttable presumption of law, and as such irrebuttable, it would always be susceptible to rebuttal, by force of the same legal provision.

As to the fact that articles 31-A of the CPIT and 64 of the CCIT already provide for the possibility of rebutting presumptions similar to that contained in said no. 2 of article 44 of that code, Xavier de Bastos already warned that it is not to be accepted a different regime for property capital gains by comparison to business and professional income because "There would then, for equal income, different treatments, without any valid justification, to the detriment of the principle of equality. It must, therefore, in our view be considered that no. 4 of article 44 contains a presumption, which can be set aside, proving that the value of the realization was after all lower than the "tax value" for purposes of a property tax such as MPTA."

It should be noted, finally, that at the time of the facts (year 2011) the application of the procedure provided for in no. 3 of article 139 to situations in which no. 2 of article 44 of the Personal Income Tax Code was applied was not provided for, whereby it was neither required nor legally possible for the Applicants to initiate said procedure in the case at hand, being able, it is true, to resort to the adversarial procedure provided for in article 64 of the CTPP, but always as an alternative means to the avenues of gracious complaint, judicial challenge or request for arbitral decision, cf. no. 1 of said provision.

As to the implicit presumption contained in no. 2 of article 44 of the CPIT, in the wording prior to that introduced by Law no. 82-E/2014, of 31 December, as well as to the admissibility of its rebuttal, the Administrative Arbitration Centre (CAAD) has already ruled, in accordance with decision of 23-10-2015 issued in case no. 107/2015, with which we also agree and from which we made our own some of the expressions used therein.

With regard to the evidence produced in the proceedings, whether documentary or testimonial as well as that given by statements of the Applicant, it is the conviction of the Tribunal that the same was sufficient to rebut the presumption of no. 2 of article 44 of the CPIT.

In fact, in accordance with article 12, no. 1 of the Municipal Property Tax Code, the Municipal Property Transfer Tax will apply to the value contained in the act or contract or to the tax property value of the real estate, whichever is higher.

The property located in the municipality of Z… was acquired for the value declared, in the respective contract, of €150,000.00, although the price was not paid in full (€50,000.00 remains unpaid), which by itself is irrelevant to the validity of the contract, the TPV being determined at €348,660.00, by assessment effected in accordance with no. 1, article 15 of Decree-Law no. 287/2003, of 12 November.

Already the property located in the municipality of X… was acquired for the value declared, in the respective contract, of €50,000.00, the TPV being determined at €83,640.00, by assessment effected in accordance with the same legal provision.

Thus for the Municipal Property Transfer Tax assessment the tax property values were considered as being higher than those contained in the respective acquisition contracts.

Whereby, in accordance with no. 2 of article 44, it was those values of realization that served as the basis for the contested assessment.

However, from the evidence produced, the Tribunal was convinced that the values of realization actually corresponded to the values contained in the contracts.

On the legality of the assessments

In light of the foregoing, the alleged vice of breach of law is deemed verified by error in the legal premises, which determines the declaration of illegality and consequent annulment of the assessment made.

On the request for payment of compensatory interest

The Applicants further request that they be paid compensatory interest, for error of the services, in accordance with no. 1 of article 43 of the General Tax Law (GTL), having proven that they paid the assessed amount, with respect to the first installment.

This provision, applicable subsidiarily to tax arbitral proceedings, by force of the provisions of article 29, no. 1, subsection a), of the LRATM, states "Compensatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than that legally due."

The existence of error attributable to the services is deemed verified, according to uniform case law of the Supreme Administrative Court, whenever they proceed with gracious complaint or judicial challenge of the assessment act (in the same sense, the decision in arbitral case no. 218/2013-T).

Having been demonstrated the incorrect application of the rule of objective incidence contained in item 28.1 of the General Schedule of Income Tax, which justifies the annulment of the contested assessments, the right of the Applicants to compensatory interest is recognized at the legal default rate, in accordance with articles 43, nos. 1 and 4, and 35, no. 10, of the GTL, article 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April, from the date of actual payment of each of the installments into which the assessed amount was divided, until the date of processing of the respective credit note, in accordance with the provisions of no. 5 of article 61 of the CTPP.

6. Decision

In light of the foregoing, it is decided:

a) To uphold the request for annulment of the order of the Chief of the Division of Tax Justice–Contentious of the Finance Office of…, of 12-02-2016, issued in the gracious complaint proceedings no. …2015…;

b) To uphold the request for annulment of the additional Personal Income Tax assessment no. 2015…, in the amount of €59,424.92 (fifty-nine thousand, four hundred and twenty-four euros and ninety-two cents), relating to the year 2011; and

c) To uphold the request to condemn the Tax and Customs Authority to reimburse the amounts unduly paid by the Applicants, increased by interest, at the legal rate, from the date of payment until the date of issuance of the respective credit notes.

7. Value of the Case

In accordance with the provisions of articles 306, no. 2, of the Code of Civil Procedure, 97-A, no. 1, subsection a) of the Code of Tax Procedure and Process and 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the case is assigned the value of €59,424.92.

8. Costs

In accordance with article 22, no. 4 of the LRATM, the amount of costs is fixed at €2,142.00, in accordance with Table I, annexed to the RCPAT, to be charged to the Tax and Customs Authority.

Notify.

Lisbon, 14 January 2017.

The Arbitrator,

(Rui Ferreira Rodrigues)

Text prepared by computer, in accordance with the provisions of article 131, no. 5, of the Code of Civil Procedure, applicable by reference to article 29, no. 1, subsection e), of the LRATM.

Frequently Asked Questions

Automatically Created

What is the juris tantum presumption under Article 44(2) of the Portuguese IRS Code for capital gains?
The juris tantum presumption under Article 44(2) of the Portuguese IRS Code establishes that the realization value of real estate for capital gains purposes corresponds to the tax property value (valor patrimonial tributário) used for Municipal Property Transfer Tax assessment when this value exceeds the declared transaction price. This presumption is rebuttable, meaning taxpayers can present evidence proving the actual realization value was lower. However, this rebuttable nature only applies after the 2015 IRS reform; prior to that, the presumption was irrebuttable for Category G income.
Can taxpayers challenge the presumed realization value used by the Portuguese Tax Authority in capital gains assessments?
Yes, taxpayers can challenge the presumed realization value, but only after the 2015 IRS Code reform. The reform added paragraphs 5 and 6 to Article 44, allowing Category G taxpayers to rebut the presumption that the realization value equals the tax property value. Before 2015, such challenges were not permitted for capital gains, creating an inequality compared to Category B taxpayers (business income) who could already rebut similar presumptions under Article 31-A(5). The rebuttal procedure follows the framework established in Article 139 of the Corporate Income Tax Code (formerly Article 129).
How does CAAD arbitration work for disputes over additional IRS liquidation on mais-valias?
CAAD (Centro de Arbitragem Administrativa) arbitration for IRS disputes over additional liquidations on mais-valias (capital gains) begins with a taxpayer's request under the Legal Regime for Arbitration in Tax Matters (RJAT). The taxpayer must first exhaust administrative remedies by filing a gracious complaint (reclamação graciosa). If denied, they can request arbitration within the legal deadline. A single arbitrator or tribunal panel is constituted, and the Tax Authority submits a reply and the administrative file. The tribunal examines legality, constitutional issues, and evidence. Proceedings are typically quicker than judicial courts, with decisions usually issued within 6-9 months. The tribunal can annul illegal assessments and order reimbursement of improperly collected taxes.
What evidence can rebut the Article 44(2) presumption on the realization value of property transfers?
To rebut the Article 44(2) presumption on realization value, taxpayers must follow the evidentiary procedure established in Article 139 of the Corporate Income Tax Code (IRC). Acceptable evidence includes: (1) bank transfer records and payment documentation showing the actual amount received; (2) the deed of sale (escritura) with declared price; (3) financing documents demonstrating the purchaser's payment capacity was limited to the lower amount; (4) witness testimony from parties to the transaction; (5) expert appraisals proving market value was lower than the tax property value; (6) correspondence or contracts establishing the agreed price; and (7) any other documentary evidence demonstrating the actual consideration received was less than the VPT used for IMT purposes.
What was the outcome of CAAD Process 276/2016-T regarding the €59,424.92 additional IRS assessment?
The excerpt does not include the final decision of CAAD Process 276/2016-T regarding the €59,424.92 additional IRS assessment. The case record shows the applicants argued that Article 44(2) as applied in 2011 constituted an unconstitutional irrebuttable presumption violating equality and tax capacity principles. They contended the differential treatment compared to Category B and corporate taxpayers was unjustified. The tribunal heard witness testimony and received submissions from both parties. The decision would determine whether the assessment based on the tax property value—without allowing evidence that the actual realization value was lower—should be annulled as unconstitutional or illegal, potentially requiring reimbursement of the tax and compensatory interest.