Summary
Full Decision
AWARD
The arbitrators Judge José Poças Falcão (presiding arbitrator), Dr. Diogo Feio and Dr. Maria Manuela Roseiro (arbitrators), appointed by the Ethics Council of CAAD to form the Arbitral Tribunal, constituted on 6-4-2016, hereby decide as follows:
1. Report
On 22 January 2016, A…, taxpayer No…, and his wife B…, taxpayer No…, both with address at Rua …, No…, …-… Cascais, hereinafter referred to as the Claimants, pursuant to and for the purposes of Articles 2, No. 1, paragraph a), and 10, No. 1, paragraph a), both of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as LRAT), requested the constitution of an Arbitral Tribunal with a view to obtaining a declaration of illegality and annulment of the Personal Income Tax (PIT) assessment No. 2011…, relating to the year 2010, in the amount of €208,551.67 and, likewise, of the decision of tacit rejection of the request for official revision of the assessment act, as well as an order for reimbursement of the tax paid unduly in excess by the claimants and payment of compensatory interest at the legal rate.
The Respondent is the Tax Authority and Customs Authority (TA).
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority.
Pursuant to paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the LRAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.
The parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with Article 11, No. 1, paragraphs a) and b) of the LRAT and Articles 6 and 7 of the Code of Ethics.
Thus, in accordance with the provision of paragraph c) of No. 1 of Article 11 of the LRAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 6 April 2016.
Before the presentation of the Response, the Respondent raised the lack of attachment of a document and the Claimants requested an expansion of the claim, arguing that they had been notified in the meantime of the express rejection decision of the request for official revision.
In the Response, presented on 13 May 2016, the TA raised the following issues: (i) failure to comply with the formality prescribed in Article 59 of the CPPT, (ii) untimeliness of the request for official revision, (iii) non-fulfillment of the requirements for the examination of the request for official revision, (iv) abuse of rights due to contradiction between the request for official revision and the request for arbitral pronouncement and the conduct previously assumed by the Claimants. The TA further argued for the legality of the assessment and the non-existence of error attributable to its services.
The Claimants presented a response to the exceptions and, by arbitral order of 16 June 2016, the expansion of the claim was rejected and a date was set for a meeting/examination of witnesses as well as a deadline for successive submissions.
Subsequently, the meeting provided for in Article 18 of the LRAT was dispensed with, with the agreement of the parties, given the granting of the Claimants' request to take advantage of the witness evidence produced in case No. 26/2016-T (identical factual matter) and whose sound recordings were ordered to be attached to this file.
The Claimants attached to the file, on 17-8-2016 and 26-9-2016, arbitral decisions handed down in cases Nos. 27/2016-T and 26/2016-T, arguing that the subject matter of the disputes discussed in those cases were identical to that discussed herein, which attachments are now expressly admitted.
Both parties presented final written submissions which, in essence, maintained their respective initial positions.
Preliminary Ruling
The arbitral tribunal is regularly constituted and is materially competent, in accordance with Articles 2, No. 1, paragraph a), and 10, No. 1, of Decree-Law No. 10/2011, of 20 January.
The parties are duly represented, possess legal capacity and procedural capacity, are legitimate and are legally represented (Articles 4 and 10, No. 2, of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March).
The proceedings do not suffer from any nullities.
The preliminary issues and exceptions raised by the Respondent Tax Authority and Customs Authority shall be examined as a priority matter, immediately following the determination of the facts.
2. Statement of Facts
2.1. Proven Facts
Based on the elements contained in the procedural documents and documents attached by the Claimants and Respondent, the following facts are considered proven:
a) By deed of 28 June 1983, the limited liability company "F…, Lda.", was established between C…, B…, D… and E…, with the principal purpose of operating hotel industry and similar activities (Article 28 of the request for arbitral pronouncement and Documents Nos. 3 and 4 attached thereto).
b) At the date of its incorporation, the said company had share capital fully subscribed and paid in the amount of 300,000$ (three hundred thousand escudos), which was divided into one share in the amount of 200,000$ (two hundred thousand escudos), belonging to the Claimant, and two equal shares in the amount of 50,000$ (fifty thousand escudos) each, belonging to C… and D… (Article 29 of the request and Documents 3 and 4).
c) The Claimant subsequently divided her share into three new shares, reserving for herself a share of 50,000$ and transferring a share of 100,000$ (one hundred thousand escudos) to G… and a share of 50,000$ (fifty thousand escudos) to Mr. H… (Article 30 of the Request and Documents Nos. 3 and 4 attached thereto).
d) On 20 December 1988, the share capital of F…, Lda. was increased from 300,000$ (three hundred thousand escudos) to 40,000,000$ (forty million escudos), with the contribution of 39,700,000$ corresponding to share capital subscribed by two new shareholders, C… and D…, who came to hold 99.25% of the capital, divided into two shares of 49.625% each, in the amount of 19,850,000$ each (Article 32 of the Request and Documents Nos. 5 and 6).
e) On 29 May 1996, the company F…, Lda. was transformed into a joint-stock company, now designated as "I… – ..., S.A.", with shareholders C… (49.625% of the share capital), D… (49.625% of the share capital), C… (0.125% of the share capital), G… (0.25% of the share capital), D… (0.125% of the share capital) and H… (0.125% of the share capital) (Article 35 of the Request).
f) Also on 29 May 1996, an increase of the share capital of I…-..., S.A. was undertaken from 40,000,000$ (forty million escudos) to 200,000,000$ (two hundred million escudos), by means of an increase of 160,000,000$ (one hundred sixty million escudos), carried out as follows:
– incorporation of revaluation reserves of fixed assets in the amount of 70,470,000$ (seventy million, four hundred seventy thousand escudos), to be subscribed by each of the aforementioned shareholders, in proportion to the capital held by each;
– new contributions in kind of movable assets, in the amount of 18,130,000$ (eighteen million, one hundred thirty thousand escudos), corresponding to 18,130 new ordinary shares, with a nominal value of 1,000$ each, subscribed and paid, in equal parts, by shareholders C… and D…;
– new contribution in cash by company J…– ..., S.A., in the amount of 150,000,000$ (one hundred fifty million escudos), for subscription and payment of 71,400 ordinary shares with a nominal value of 1,000$ each (Article 36 of the Request and Documents Nos. 9 and 10, attached thereto),
g) It being verified that in the resulting capital distribution, the Claimant, B…, ended up with 138 shares with a nominal value of 138,000$ each, corresponding to 0.069% of the capital (Articles 36 to 38 of the Request and Document 10).
h) On 27 July 2000, C… and D… sold all the shares they held in company I…– ..., S.A., to the Claimant and other shareholders, including a new shareholder, K…, resulting in the following distribution of shareholdings: the Claimant, B… (10.7165% of the share capital), G… (10.717% of the share capital), H… (10.7165% of the share capital), C… (10.717% of the share capital), D… (10.7165% of the share capital), K… (10.7165% of the share capital) and J…– ..., S.A. (35.7% of the share capital) (Articles 39 to 41 of the Request and Document 11).
i) The same proportions were maintained with the redenomination, in 2000, of the share capital and shares into euros – the capital became 1,000,000 (one million euros) represented by 200,000 shares with a nominal value of 5 euros each (Article 42 of the Request).
j) On 13 May 2003, shareholder J…– ..., S.A. sold to company I…– ..., S.A. its 71,400 shares, corresponding to 35.7% of the share capital, with the Claimant B… coming to hold 21,433 shares with a nominal value of 107,165 euros, corresponding to 10.7165% of the share capital (Articles 44 and 45 of the Request and Document 12).
k) Subsequently, "I…– ..., S.A." resolved a capital reduction (by extinction of treasury shares held by it), a cancellation of the discount on the acquisition of extinct treasury shares and an increase of share capital by incorporation of free reserves and attribution of new shares to the shareholders in proportion to their respective shareholdings, resulting in a new distribution of shareholdings whereby the Claimant B… ended up with 33,333 shares with a nominal value of 166,665 euros, corresponding to 16.6665% of the share capital (Articles 46 and 47 of the Request)
l) On 24 May 2010, the shareholders of "I… – ..., S.A." disposed of all the shares they held in this company: 200,000 shares with a nominal value of €5.00 each, for the total price of €14,000,000.00. (Article 48 of the Request and Document 13)
m) B…'s shareholding in the share capital of "I…– ..., S.A." was sold for a price of €2,333,310.00 (33,333 shares, with a nominal value of €166,665.00, the price corresponding to 16.6665% of €14,000,000.00).
n) The Claimants considered as capital gains resulting from this transaction €2,166,645.00, corresponding to the difference between the realization value (€2,333,310.00) and the acquisition value (€166,665.00) of shares held by them for more than 12 months and that only 50% of its value (€1,083,322.50) would be considered in accordance with Article 43, paragraph 3 of the PIT Code, as it concerns a small enterprise (Articles 52 and 53 of the Request).
o) On 11 May 2011, the Claimants submitted a PIT declaration Form 3 relating to 2010 with annexes A and H identified with No. …-2010-… -…, and on 22 May 2011, they submitted a substitute declaration with annexes A, G and H, identified with No. …-2010-… -… (Articles 9 to 11 of the TA's Response).
p) In field 8 of Annex G of the declaration submitted on 22-5-2011, the Claimants indicated that in the month of May 2010 they had obtained, by paid disposal of shareholdings, a realization value of €2,341,644.00 (= €2,333,310.00 + €8,334.00) opposed to an acquisition value of €174,999.00 (= €166,665.00+ €8,334.00), having opted for the non-aggregation of income.
q) Ordinance No. 1303/2010, of 22 December, modified Form 3 declaration and its corresponding Annex G1 so as to reflect, as from 1 January 2011, the legislative amendment resulting from Law No. 15/2010, of 26 July, whereby Field 4 of said Annex G1 came to refer to "paid disposal of shares held for more than 12 months (Years 2009 and prior)" and the "Instructions for Completion" of Annex G1 indicated that the declaration of disposals carried out in the years 2009 and prior relating to shares held by taxpayers for more than 12 months was only admitted (which was corroborated by witness testimony).
r) The declaration submitted on 22 May 2011 resulted in assessment No. 2011…, in the amount of €208,551.67 and, subsequently, based on an official declaration correcting health expense items, assessment No. 2011…, of 14-11-2011, was issued, with tax due in the amount of €208,602.07 (Articles 14 and 15 of the TA's Response).
s) In the assessment act referred to in the preceding number, the amount indicated as autonomous taxation in the amount of €216,664.50 results from the application of the special rate of 20% to the positive balance between capital gains and capital losses obtained in the year in question (€216,664.50 = €1,083,322.50 x 20%). (Article 59 of the Request and Document 2 attached to the Request).
t) On 30 September 2011, the Claimants paid in full the tax owed, in the amount of €208,378.05 (Article 60 of the Request and Document 16).
u) The Claimant presented on 26 June 2015 a request for official revision of the PIT assessment act No. 2011…, made by the Director-General of the Directorate-General of Taxation and relating to the year 2010, on the grounds of error attributable to the services (Articles 61 to 63 of the Request and Document 1 attached thereto).
v) On 22 January 2016, no decision had been handed down on the request for revision of the said tax act.
w) On this date (22 January 2016), the Claimants presented the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.2. Unproven Facts
There are no other essential facts, proven or unproven.
It is considered not relevant the apparent lack of documentary evidence regarding the alleged delivery by the Claimants, on 8 July 2010, of a Form 4 declaration, since the Respondent did not expressly contest or challenge such fact nor would it be essential to the subject matter of the dispute.
2.3. Reasoning
In addition to the administrative instructional proceedings, the position of the parties in their respective pleadings and the other documents attached, the testimony given by the Claimant's Official Accountant, L… [testimony given in the aforementioned case No. …/2016, with sound recording attached to this file] was also relevant, who stated, in terms that merit credibility, that the law (the PIT Code) had been amended in mid-2010 and the TA's instructions were to the effect that all sales occurring in that year would not benefit from the exclusion from taxation and, on the other hand, it was the only way to complete Form 3 declaration (by presenting Annex G and not Annex G1, which could only be used to declare sales occurring in the years 2009 and prior. This is what resulted from Annex G1 and its instructions for completion, simply following the TA's instructions in completing Form 3 declaration for Mr. H…, there being no other possible way of completing said income declaration.
3. Legal Analysis
3.1. Subject Matter of the Proceedings
The Claimants, through the request for arbitral pronouncement presented on 22/01/2016, request: a declaration of illegality and consequent annulment of the Personal Income Tax (PIT) assessment act No. 2011…, made on 27/06/2011, by the Director-General of the (then so denominated) Directorate-General of Taxation, with reference to the year 2010; a declaration of illegality and consequent annulment of the decision of tacit rejection of the request for official revision presented against that act; lastly, they request reimbursement of tax paid unduly in excess, plus corresponding compensatory interest at the legal rate.
The Claimants allege as defects: lack of grounds for the assessment act, violation of the right to be heard, illegality of the assessment act and of the tacit rejection of the request for official revision, violation of the prohibition on retroactive application of tax legislation and violation of the protection of legitimate expectations.
For its part, the Respondent (Tax Authority and Customs Authority) invokes: failure to comply with Article 59 of the CPPT, untimeliness of the request for official revision, non-existence of error attributable to its services, and abuse of rights on the part of the Claimants.
The Claimant disposed of shares before 27/07/2010, more specifically on 24/05/2010, of a joint-stock company she had held for more than twelve months, having obtained capital gains. It is important to determine which law is applicable for taxation purposes of these capital gains.
Before 27/07/2010, the following wording of the PIT Code applied to this matter, resulting from Law No. 109-B/2001, of 27/12, and Decree-Law No. 228/2002, of 31/10:
Article 10
Capital Gains
1 - Capital gains are gains obtained which, not being considered as business and professional income, capital or real estate income, result from:
(...)
b) Paid disposal of shareholdings, including their redemption and amortization with capital reduction, and of other securities and, likewise, the value attributed to associates as a result of distribution
which, in accordance with Article 75 of the Corporation Income Tax Code, is considered as a capital gain; (Wording of Law No. 109-B/2001, of 27/12)
(...)
2 - Excluded from the above provisions are capital gains resulting from the disposal of:
a) Shares held by their holder for more than 12 months; (Wording of Decree-Law No. 228/2002, of 31/10)
b) Bonds and other debt securities. (Wording of Decree-Law No. 228/02, of 31/10)
No. 2 of the said article was to be repealed by Law No. 15/2010, of 26/07, which came into force on 27/07/2010 (cf. Article 5 of said Law).
The Tax Authority and Customs Authority understood, in the contested assessment, to subject to taxation, under PIT, the capital gains resulting from the disposal of shares held for more than 12 months by the Claimant, such disposal having occurred before the publication and coming into force of said Law No. 15/2010, by applying the rate of 20% provided for in Article 72, paragraph 4 of the PIT Code (in the wording given by the same Law) to the entire balance of capital gains and losses resulting from that disposal.
This understanding of the Tax Authority and Customs Authority clashes with several decisions to the contrary handed down by the Supreme Administrative Court, including the Uniformizing Award No. 5/2015, of 16/09/2015, handed down in the context of case No. 1292/14, published in the Official Gazette, Series I, of 26/10/2015, in which it was decided that "the capital gains resulting from acts of disposal of shares held for more than 12 months that occurred before the coming into force of Law No. 15/2010, of 26 July, particularly in the period between 1 January and 26 July 2010, continue to follow the legal regime of non-subjection to taxation provided for in No. 2, paragraph a), of Article 10 of the Personal Income Tax Code, and, as such, do not contribute to the formation of the annual taxable balance of capital gains referred to in Article 43 of the PIT Code".
As already stated in another case with which this Arbitration Center pronounced itself (cf. case No. 27/2016-T), which had as its subject a situation similar to that of the present case, as regards factuality and the applicable legal framework, "there is the duty to follow the jurisprudence uniformized, both by the Tax Authority and Customs Authority" (cf. Article 68-A, paragraph 4 of the LGT), "and by the Courts, thus implementing 'a uniform interpretation and application of law' (Article 8, No. 3, of the Civil Code), postulated by the principle of equality (Article 13 of the Constitution of the Portuguese Republic)".
Consequently, adopting the understanding adopted in said case No. 27/2016-T, which we shall follow closely here due to the similarities already noted, "it must be assumed that said assessment suffers from error as to the premises of law by applying the new taxation regime to capital gains resulting from disposals of shares held for more than 12 months occurring before 27-07-2010".
Starting from this assumption, we shall begin by examining the issues raised by the Tax Authority and Customs Authority as obstacles to the application of this understanding to the present case.
3.2. Issue of Non-Compliance with Article 59 of the CPPT
The Tax Authority and Customs Authority makes the admissibility of the request for official revision of the assessment act dependent upon the presentation of a substitute declaration in accordance with Article 59 of the CPPT. This is because, in the understanding of the Tax Authority and Customs Authority, if the claimants intended to exclude from taxation the paid disposal of shares they should have declared such fact in Annex G1 of the income declaration, and not in Annex G, as they came to do, this error being, according to the Respondent, solely attributable to the Claimants (an argument which we shall analyze below).
As far as it matters here, it follows from an analysis of the applicable legal provisions in the case that "there is no legal support for making the official revision requested by the claimants dependent upon the prior presentation of a substitute declaration", as this Arbitration Center had already emphasized in said case No. 27/2016-T.
3.3. Issue of Untimeliness of the Request for Official Revision
The Tax Authority and Customs Authority understands that the request for official revision is clearly untimely due to clear and manifest violation of the time limits set out in Article 78 of the LGT.
It follows from the file that the PIT assessment act No. 2011… under scrutiny is dated 27/06/2011, the Claimants having submitted a request for official revision of said assessment act on 26/06/2015, before the expiry of the 4-year period provided for in No. 1 of Article 78 of the LGT, and this period being interrupted by this request (Article 78, paragraph 7 of the LGT).
Pursuant to that No. 1, the revision of the tax act by the initiative of the tax administration may be made "within four years after the assessment or at any time if the tax has not yet been paid, on the grounds of error attributable to the services".
According to the Respondent, the Claimants, in making use of this 4-year period, did so on the presumption of "error attributable to the services", as required by the cited provision. However, as already mentioned (and shall be analyzed in greater detail), according to the Respondent, there is no error attributable to the services, whereby it understands the said period to be inapplicable, admitting at most the application of the 3-year period provided for in No. 4 of the same provision, which in the present case had already expired. It thus concludes for the untimeliness of the request for official revision due to violation of the time limits set out in Nos. 4 and 1 of Article 78 of the LGT.
Now, strictly speaking, only the 4-year period laid down in No. 1 of the said article is applicable, "not the three-year period provided for in No. 4 of the same article which pertains to revision of the taxable matter and not to illegalities resulting from the applicable legal regime" (cf. case No. 27/2016-T).
In this manner, following the same line of reasoning as the said case, if one concludes for the existence of error attributable to the services, it becomes imperative to conclude that the request for official revision was presented in due time.
3.4. Issue of Non-Existence of Error Attributable to the Services
As already mentioned, the Tax Authority and Customs Authority understands that, if error exists, the same is solely attributable to the Claimants, as they presented in the PIT Form 3 declaration of the year 2010, more specifically in Field 8 of Annex G, instead of having declared such fact in Annex G1, the latter being the proper one for disposal of shares excluded from taxation. It concludes that, in this manner, the prerequisites upon which the examination of the request for official revision depends, set out in No. 1 of Article 78 of the LGT, are not met.
In fact, the Claimants proceeded with the completion of Field 8 of Annex G of the PIT Form 3 declaration submitted with reference to the year 2010.
As this Arbitration Center well emphasized (case No. 27/2016-T), "the error affecting an assessment act is attributable to the services when it is not attributable to the taxpayer. The error shall be attributable to the taxpayer, namely, when the latter omits information or provides incorrect information on the facts on which taxation is based or fails to comply with any requirement of a declarative nature by the appropriate means".
The Tax Authority and Customs Authority, however, is not correct. Let us see why. The Claimant drew the attention of this Tribunal, and correctly so, to the existence of Ordinance No. 1303/2010, of 22/12, which approved the models of annexes to Form 3 declaration to be used with reference to the year 2010, where it is expressly stated that Annex G1 serves exclusively to indicate the paid disposal, occurring in 2009 or prior years, of shares held for more than 12 months. In fact, from the "instructions for completion" relating to Annex G1, contained in said Ordinance, it follows that:
"This annex is intended to declare the paid disposal of real property not subject to taxation, in accordance with No. 4 of Article 4 and Article 5 of Decree-Law No. 442-A/88, of 30 November, as well as the disposal of real property to real estate investment funds for residential rental (FIAH) and real estate investment companies for residential rental (SIIAH) covered by the special regime approved by Article 102 and following of Law No. 64-A/2008, of 31 December, and also the paid disposal, carried out in the years 2009 and prior, of shares held for more than 12 months".
This Ordinance, in reflecting the legislative amendment resulting from Law 15/2010, of 26 July, brought as a consequence that in Annex G1, in force as from 1 January 2011, it was no longer possible to declare the disposal of shares held for more than 12 months.
In this manner it is concluded that the Claimants did not omit any declarative duty arising from the rules applicable to Form 3 declaration, whereby no error occurred that is attributable to them.
We conclude in the same sense as followed in said case 27/2016-T: "the error embodied in the application of a regime that is considered illegal, in light of the said uniformized jurisprudence, is attributable to the Tax Authority and Customs Authority which had the relevant elements to apply the regime adopted in it".
3.5. Issue of Abuse of Rights
The Tax Authority and Customs Authority alleges, finally, that the attitude of the Claimants – in initially declaring in Field 8 of Annex G the disposal of shares not excluded from taxation, to then, and as a result of the assessment based on the values declared by them, come to challenge the legality of the assessment act – constitutes the exercise of a legal position that contradicts the conduct previously assumed ("venire contra factum proprium", which falls within the prohibition of abuse of rights established in Article 334 of the Civil Code).
However, as already mentioned, the Claimants correctly completed their declaration, in light of the mentioned Ordinance. As error is not attributable to the Claimants, one cannot assert the existence of conduct on their part that leads to "venire contra factum proprium", whereby the argument of the Tax Authority and Customs Authority is also unfounded in this regard.
3.6. Issue of Lack of Grounds for the Assessment Act and Violation of the Right to be Heard
We shall now review the arguments put forward by the Claimants with the objective of obtaining the success of their claims.
They invoke lack of grounds for the assessment act and violation of the right to be heard, which consist of defects of a formal and procedural nature.
However, as follows from Article 78, No. 1 of the LGT, official revision of tax acts presupposes the existence of "error attributable to the services, which rules out the relevance of procedural and formal defects of assessment acts, which do not fall within the concept of 'error', which covers only error as to the premises of fact and error as to the premises of law" (Award handed down in case No. 27/2016-T).
In this regard, as to the request for a declaration of illegality and annulment on the grounds of these defects, the request for arbitral pronouncement of the Claimants is without merit.
3.7. Issue of Illegality of the Assessment Act and of the Tacit Rejection of the Request for Official Revision
The Claimants understand that the assessment act under scrutiny suffers from a defect of illegality, since it did not take into account the exclusion from taxation of the capital gains provided for in Article 10, No. 2, paragraph a) of the PIT Code (in the wording prior to Law No. 15/2010, of 26/07), in contradiction with the recent and uniformized jurisprudence of the Supreme Administrative Court and, equally, of the Administrative Arbitration Center (CAAD).
In the present case, the capital gains obtained by the Claimants in the course of the year 2010 result from a single operation of disposal of shares held for more than 12 months, carried out before the coming into force of Law No. 15/2010, of 26/07 – that is, between 01/01/2010 and 26/07/2010 –, more specifically on 24/05/2010.
As we mentioned above, one should heed the said jurisprudence of the Uniformizing Award No. 5/2015, according to which: "the capital gains resulting from acts of disposal of shares held for more than 12 months that occurred before the coming into force of Law No. 15/2010, of 26 July, particularly in the period between 1 January and 26 July 2010, continue to follow the legal regime of non-subjection to taxation provided for in No. 2, paragraph a), of Article 10 of the Personal Income Tax Code, and, as such, do not contribute to the formation of the annual taxable balance of capital gains referred to in Article 43 of the PIT Code".
Consequently, the assessment and the subsequent tacit rejection of the request for official revision, in question in this case, suffer from error as to the premises of law, by violation of Article 10, No. 2, paragraph a) of the PIT Code.
Thus, the declaration of illegality of the assessment is justified, in the part corresponding to the taxation of capital gains obtained with the disposal of shares indicated in fields 801 and 802 of Field 8 of Annex G of the Form 3 declaration under scrutiny, as well as its respective annulment, in that part (Article 163, No. 1 of the CPA of 2015, subsidiarily applicable by virtue of Article 2, paragraph c) of the LGT).
3.8. Issue of Violation of the Prohibition on Retroactive Application of Tax Legislation
The Claimants further contend that this Tribunal should consider violated the prohibition on retroactive application of tax legislation, inherent in Article 103, No. 3 of the Constitution of the Portuguese Republic and Article 12 of the LGT. They argue that the Tax Administration, in interpreting Articles 1 and 2 of Law No. 15/2010, of 26/07 to the effect that these allow the application of a higher tax rate (and, including, the subjection to taxation, in the case of capital gains resulting from shares held for more than 12 months) to capital gains obtained at a moment prior to the coming into force of said law, grants those rules a retroactive application, in violation of the said constitutional provision.
Article 103, No. 3 of the Constitution of the Portuguese Republic provides that "no one may be required to pay taxes that have not been created in accordance with the Constitution, that are retroactive in nature, or whose assessment and collection are not carried out in accordance with the law". For its part, Article 12, No. 1 of the LGT establishes that "tax rules apply to facts occurring after their coming into force, and no retroactive taxes may be created".
Article 103, No. 3 of the Constitution of the Portuguese Republic reflects a special specification, "thus making explicit a principle that could already be considered as a consequence of the principle of protection of legitimate expectations, inscribed in the principle of the rule of law (Article 2 (…))" (cf. Gomes Canotilho/Vital Moreira, Constitution of the Portuguese Republic Annotated, Vol. I, 4th ed., Coimbra, 2014, pp. 1092-1093). We should consider included in the prohibition of this provision "retroactive tax rules of an onerous or aggravating effect on the legal situation of taxpayers" (cf. Casalta Nabais, Tax Law, 7th ed., Coimbra, p. 150), the "rules that interfere in the definition of a tax obligation, with its respective predictive and prescriptive elements" (cf. Bacelar Gouveia, "The Non-Retroactivity of Tax Rules in the Portuguese Constitution", in Constitutional Perspectives – On the 20 Years of the Portuguese Constitution, Vol. III, Coimbra, 1998, p. 466.) or, simply, "any unfavorable tax rule (…) when it assumes a retroactive nature" (cf. Award of the Constitutional Court No. 135/2012).
The scope of application of the said provision encompasses rules that define the tax relationship as to its essential elements – that is, the legal rules that set the personal scope, the taxable matter, the tax rate and the exemptions. Outside of it remain rules that do not pertain to such essential elements – such as, for example, those relating to acts comprising the procedures for assessment and collection of the tax, or rules of organization of services – and, as well, rules that concretely establish a more favorable tax regime for the taxpayer.
It is important to note, before we consider the positions assumed by the parties. It is relevant to the treatment of the case sub judice to recover the classification advocated by Alberto Xavier and subsequently adopted by other authors. We refer to the distinction between three degrees of retroactivity of tax laws. Assuming that retroactivity always implies a succession of laws in time, that author distinguished between:
i) Retroactivity of the first degree: the new law intends to regulate a tax fact that occurred and produced all its effects under the prior law, with the new law seeking to withdraw from that fact legal effects that are distinct;
ii) Retroactivity of the second degree: the tax fact occurred under the prior law, but not all of its effects were exhausted under that law, continuing instead to produce themselves in the time domain of the new law; among the effects not yet exhausted may be mentioned, for example, those relating to the assessment and payment of the tax; and
iii) Retroactivity of the third degree: the law intends to regulate a tax fact that was not wholly formed under the prior law, but continues to form in the validity of the new law (cf. Alberto Xavier, Manual of Tax Law, Lisbon, 1974, pp. 196 et seq.; in the same terms, Nuno Sá Gomes, Manual of Tax Law, Vol. II, Lisbon, 1996, pp. 414 et seq.; Américo Fernando Brás Carlos, Taxes – General Theory, 3rd ed., Coimbra, 2010, pp. 142 et seq.).
The next logical step is to know which degrees of retroactivity find support in the content of Article 103, No. 3 of the Constitution of the Portuguese Republic.
That retroactivity of the first degree is covered by the prohibition of Article 103, No. 3 of the Constitution seems something secure for the doctrine and national jurisprudence. According to the Award of the Constitutional Court No. 128/2009, Article 103, No. 3 "prohibits the retroactivity that translates into the application of new law to old facts (in the case, tax facts) (prior, therefore, to the coming into force of the new law)".
One should equally understand – given that this is the position of the Constitutional Court (cf., in particular, Award No. 310/2012, subsequently confirmed by the Plenary of the Constitutional Court through Award No. 617/2012, followed subsequently by other decisions - for example, Award No. 85/2013), which is also followed by the majority of doctrine – that Article 103, No. 3 of the Constitution equally prohibits retroactivity of the second degree.
Outside the scope of Article 103, No. 3 is the said retroactivity of the third degree (cf., in particular, Award No. 399/2010, from which it appears that the Court only resorts to the category of improper retroactivity to exclude from the prohibition contained in Article 103, No. 3 the situations of retroactivity of the third degree).
Which retroactivity can we discern in the present case?
We have as certain that it is not retroactivity of the third degree, since the tax fact, which consists of a disposal (cf. Article 10, No. 1, paragraph b) and 3 of the PIT Code), has already occurred.
Thus, whether this retroactivity may be qualified as retroactivity of the first degree or of the second degree, in either case we are faced with a violation of the Constitution, since both modes of retroactivity are prohibited by Article 103, No. 3 of the Constitution of the Portuguese Republic.
In conclusion, the Tax Authority and Customs Authority, by applying retroactively Law No. 15/2010, of 26/07, violated the said constitutional provision.
3.9. Issue of Violation of the Protection of Legitimate Expectations
Finally, the Claimants further claim that the action of the Tax Authority and Customs Authority in applying the new legal regime of taxation of capital gains (Law No. 15/2010, of 26/07) to capital gains resulting from disposals that occurred before the date of coming into force of the said legal instrument was unconstitutional, in so far as it violated the principle of legal certainty and the protection of legitimate expectations, inherent in the principle of the rule of law (Article 2 of the Constitution of the Portuguese Republic).
The Claimants assert themselves to be possessors of legitimate expectations resulting directly from the conduct of the legislature in not proceeding with any amendments to the taxation rate of capital gains in the years preceding the legislative amendment carried out by Law No. 15/2010, of 26/07. They further assert that such legislative conduct motivated them to opt, at that moment, to dispose of the securities in question and that, had they had knowledge of the said legislative amendment, they could have opted not to dispose of the shares in question.
The Claimants, however, are not correct in this regard.
The principle of legal certainty, inherent in Article 2 of the Constitution of the Portuguese Republic, "projects differentiated requirements directed at the State, ranging from the most generic of predictability and calculability of state action, of clarity and density of legal rules and of publicity and transparency of acts of public authorities, particularly those capable of negatively affecting the rights of individuals, to the most specific of observance of their rights, expectations and legitimate interests and objectively worthy of protection" (Cf. J. Reis Novais, The Restrictions to Fundamental Rights not Expressly Authorized by the Constitution, Coimbra, 2003, p. 816.).
What interests us particularly is this last dimension, as a subjective aspect of protection of the confidence of individuals in the constancy of the legal framework in force. Confluent here are requirements of opposite sense to which it is important to pay attention, in order to select the prevailing one, in each concrete case (this is, therefore, a case-by-case analysis).
What requirements?
On the one hand, individuals enjoy the right to know what they can legitimately count on from the State, but equally the right not to see frustrated the expectations that they legitimately built regarding the subsistence of a certain legal framework.
But, on the other hand, within the framework of a Democratic State of Law, the legislature is bound to the pursuit of the public interest, which involves, always and necessarily, the disposition of a margin of discretion to shape the ordinary legal order, which includes the possibility of amending the laws in force.
4. Compensatory Interest
The Claimants request reimbursement of tax paid unduly in excess together with the respective compensatory interest at the legal rate.
The partial annulment of the assessment gives rise to reimbursement of the amount unduly paid.
In the case at hand, it is important to recall what was stated in the Award of the SAC of 12/07/2006, handed down in case No. 402/06: "in cases of official revision of the assessment (when not made at the request of the taxpayer, within the time limit for administrative reclamation, a situation that is equivalent to that of gracious reclamation) (...) there is only a right to compensatory interest in accordance with Article 43, No. 3, of the LGT".
Such a regime finds its justification in the absence of diligence on the part of the taxpayer in presenting administrative reclamation or a revision request within such period, as provided in Article 78, No. 1 of the LGT.
In this manner, the taxpayer does not have a right to compensatory interest from the date of unduly payment, but only from the date on which one year has elapsed after having presented the revision request, as follows from Article 43, No. 3, paragraph c) of the LGT, the norm that applies in the present case of the file. According to this, compensatory interest is due "when the revision of the tax act at the initiative of the taxpayer is effected more than one year after the request thereof, unless the delay is not attributable to the tax administration".
As follows from the facts established, the request for official revision was presented on 26-06-2015, whereby only as from 27-06-2016, date of more than one year subsequent to the submission of the request, there is a right to compensatory interest.
Compensatory interest is due at the supplementary legal rate, in accordance with Articles 43, No. 4, and 35, No. 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.
The amount to be reimbursed and the compensatory interest shall be calculated in execution of this award.
5. Decision
For these reasons, the Arbitral Tribunal hereby decides:
– to judge as groundless the issues raised by the Tax Authority and Customs Authority as an obstacle to the examination of the merits of the case;
– to judge as well-founded the request for arbitral pronouncement and to declare illegal the PIT assessment No. 2011…, in the part in which it was based on the capital gains obtained with disposals of shares that occurred before 27-07-2010 indicated in fields 801 and 802 of Field 8 of Annex G of Form 3 declaration submitted by the Claimants relating to the year 2010;
– to annul the aforesaid assessment No. 2011…;
– to judge as well-founded the requests for reimbursement of the amount paid unduly and for payment of compensatory interest, as from 27-06-2016, at the supplementary legal rate, on the amount to be reimbursed and to condemn the Tax Authority and Customs Authority to effect these payments to the Claimants.
6. Value of the Case
In accordance with the provisions of Article 306, No. 2, of the CPC and Article 97-A, No. 1, paragraph a) of the CPPT and Article 3, No. 2, of the Regulation of Costs in Arbitration Proceedings in Tax Matters, the value of the case is set at €208,551.67.
7. Costs
Pursuant to Article 22, No. 4, of the LRAT, the amount of costs is set at €4,284.00, in accordance with Table I annexed to the Regulation of Costs in Arbitration Proceedings in Tax Matters, to be borne by the Tax Authority and Customs Authority.
Lisbon, 11-10-2016
The Arbitrators
(José Poças Falcão)
(Diogo Feio)
Dissenting Opinion of Arbitrator Maria Manuela Roseiro: I vote for this decision in the opposite sense to that by me subscribed in arbitral case No. 771/2014-T, having regard to the content of the Uniformizing Award No. 5/2015, issued by the Plenary of the Tax Court Section of the SAC in the context of the decision of the appeal that annulled the arbitral decision handed down in case 107/2014-T.
(Maria Manuela Roseiro)
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