Process: 287/2016-T

Date: November 16, 2016

Tax Type: Selo

Source: Original CAAD Decision

Summary

Process 287/2016-T addresses Stamp Tax (Imposto do Selo) assessment on the gratuitous transfer of unlisted shares in Portugal. The taxpayer received a donation of 130 shares in F... Management Company for Social Participations, S.A., comprising both bare ownership and usufruct rights. The Portuguese Tax Authority (Autoridade Tributária e Aduaneira) assessed Stamp Tax using the statutory valuation formula under article 15(3)(a) of the Stamp Tax Code (Código do Imposto do Selo), resulting in four assessment acts totaling approximately €151,251.94. The valuation formula applies when the aggregate value of transferred shares exceeds €500, calculating share value as: Va = 1/2n[S + ((R1+R2)/2)f], where Va represents individual share value, n is total shares, S is substantive company value based on adjusted book value, R1 and R2 are net results from the two preceding fiscal years, and f is the capitalization factor derived from ECB refinancing rates. The taxpayer exercised their right to challenge the assessments through the Centre for Administrative Arbitration (CAAD), which constituted a three-arbitrator tribunal pursuant to Decree-Law 10/2011. The case demonstrates the application of mandatory valuation methodologies for unlisted securities in gratuitous transfer scenarios, the procedural requirements for Stamp Tax declarations following share donations, and taxpayers' access to specialized tax arbitration as an alternative dispute resolution mechanism for contesting property tax assessments in Portugal.

Full Decision

The Arbitrators Eng. Jorge Manuel Lopes de Sousa (president-arbitrator), Dr. A. Sérgio de Matos and Prof. Doctor Miguel Patrício (arbitrator members), designated by the Deontological Council of the Centre for Administrative Arbitration to constitute the Arbitral Tribunal, constituted on 04-08-2016, agree as follows:

  1. Report

A…, taxpayer no.…, with tax residence at Travessa …, …-… …, (hereinafter simply "Claimant"), came, under the terms of paragraph a) of no. 1 of article 2 and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (hereinafter referred to only as RJAT) to submit a request for constitution of the arbitral tribunal with a view to reviewing the legality of the Stamp Tax ("IS") assessment acts nos. 2016…, 2016…, 2016…, and 2016… and the corresponding account adjustments.

The AUTHORITY FOR TAXATION AND CUSTOMS is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Taxation and Customs on 06-06-2016.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 20-07-2016 the parties were duly notified of this designation and did not express an intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11 no. 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 04-08-2016.

The Authority for Taxation and Customs responded arguing that the claim should be dismissed.

By order of 02-10-2016 it was decided to dispense with a hearing and that the process should proceed with written pleadings.

The Parties submitted pleadings.

The arbitral tribunal was regularly constituted in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of DL no. 10/2011, of 20 January, and is competent.

The parties are duly represented, have legal standing and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same decree-law and article 1 of Order no. 112-A/2011, of 22 March).

The process does not suffer from nullities and no exceptions have been invoked nor is there any obstacle to the examination of the merits of the case.

  1. Facts

2.1. Established Facts

On the basis of the documents submitted with the request for arbitral pronouncement and the Response, the following facts are considered established:

a) By contract executed on 12-01-2015, B… (taxpayer no.…), C… (taxpayer no.…), D… (taxpayer no.…) and E… (taxpayer no.…) agreed to freely transfer the bare ownership of 130 (one hundred and thirty) shares with a nominal value of € 5.00 (five euros), of which they were co-holders, of the company F… MANAGEMENT COMPANY FOR SOCIAL PARTICIPATIONS, S.A. (hereinafter only "F…"), to the here Claimant (document no. 6 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

b) By the same contract, the then usufructuary G… (taxpayer no.…), holder of the usufruct of the aforementioned shares subject of this contract, freely transferred the usufruct thereof to the here Claimant;

c) Thus, the Claimant A… was the beneficiary of the donation of the bare ownership and the usufruct of 130 shares of the Company F…- Management Company for Social Participations, S.A.;

d) F… is a joint-stock company with registered office at Rua…, no.…, parish …, in …, with the collective person identification number / registration number …, with share capital of € 1,093,500.00;

e) On 20-05-2015 Stamp Tax declarations were then filed relating to the participation of the free transfers, and to which the numbers …, …, … and … were assigned (document no. 7 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

f) The Finance Directorate of Porto proceeded to evaluate the shares of the company F…– Management Company for Social Participations, S.A., for purposes of Stamp Tax assessment, as the shares were not listed;

g) The Claimant was notified to exercise the right of hearing pursuant to article 60 of the LGT by letter from the Division of Assessment of Property Taxes and Other Taxes of the Finance Directorate of Porto dated 05-11-2015, having thereby been notified of the appraised values and the respective calculation formula provided for in article 15, no. 3, paragraph a) of the Stamp Tax Code (IS);

h) The Claimant did not exercise the right of hearing;

i) Following this, the following Stamp Tax assessments were issued:

– as a result of the Stamp Tax filing no.… assessment no. … was issued, dated 17-12-2015, in the amount of € 37,812.98;

– as a result of the Stamp Tax filing no.… assessment no. .../... was issued, dated 29-02-2016, in the amount of € 37,812.98;

– as a result of the Stamp Tax filing no.… assessment no.… was issued, dated 29-02-2016, in the amount of € 37,812.99;

– as a result of the Stamp Tax filing no.… assessment no.… was issued, dated 29-02-2016, in the amount of € 37,812.99 (documents with the request for arbitral pronouncement whose contents are hereby reproduced);

j) On 23-05-2016, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present process.

2.2. Facts Not Established

There are no facts relevant to the decision of the case that have not been established.

2.3. Reasoning for the Determination of Facts

The established facts are based on the documents submitted by the Claimant with the request for arbitral pronouncement and on the administrative file, with no controversy over them.

  1. Law

3.1. Question of Illegality of the Assessments

The issue in the present case is to review the legality of Stamp Tax assessments relating to free transfer of unlisted shares.

In determining the value of the shares, the Authority for Taxation and Customs used the formula provided for in article 15, no. 1, paragraph c), of the Stamp Tax Code (CIS), which establishes the following, in the version in force in 2015:

3 - The value of shares, securities and certificates of public debt and other credit instruments is the quoted price on the date of transfer and, if there is none on that date, that of the last one closest within the six months preceding, observing the following, in the absence of official quotation:

a) The value of shares is that corresponding to their nominal value, when the total of the value thus determined, in relation to each subsidiary company, corresponding to the shares transferred, does not exceed (euro) 500 and that resulting from the application of the following formula in the remaining cases:

Va =1/ 2n[S + ((R1 + R2)/2)f]

where:

Va represents the value of each share on the date of transfer;

n is the number of shares representing the capital of the subsidiary company;

S is the substantive value of the subsidiary company, which is calculated from the book value corresponding to the last fiscal year prior to the transfer with the corrections that prove justified, considering, whenever applicable, the provision for income taxes;

R1 and R2 are the net results obtained by the subsidiary company in the two last fiscal years prior to the transfer, with R1 + R2 = 0 in cases where the sum of those results is negative;

f is the capitalization factor of net results calculated on the basis of the interest rate applied by the European Central Bank to its main refinancing operations, as published in the Official Journal of the European Union and in force on the date the transfer occurs;

In the case at hand, the aforementioned formula resulted in the determination of the value of € 11,634.77 per share, as follows:

n = 218,700

S = € 18,421,509.48

R1 = € 2,578,354.90

R2 = € 2,492,270.13

therefore,

and,

Va = € 11,634.77

In the case at hand, in light of the result achieved, the total value of the shares of F… would be € 2,544,524,199.00.

The Claimant accepts that this is the result that derives from the application of the aforementioned formula and that it was correctly applied by the Authority for Taxation and Customs, but contends that it was adopted legislatively when the capitalization factor of net results was calculated on the basis of an interest rate much higher than that in force in 2015 and leads to an exaggerated value when the interest rates currently in force are applied, abnormally low, in particular, in the case at hand, that of 0.05%.

To demonstrate the exaggeration to which the application of that formula leads, the Claimant states, among other things, that that formula, in light of the wording of the Municipal Property Transfer Tax Code and the Inheritance and Gift Tax Code, introduced by Decree-Law no. 119/94, of 7 May, which referred to the basic discount rate of the Bank of Portugal in force on the date of transfer, resulted in a capitalization factor of 12.121212, calculated on the basis of the rate of 8.25%, while the capitalization factor used in the case at hand was 2000, based on the interest rate of 0.05%, which amounts to a value for the shares 165 times higher than that.

The distorted results to which the application of the aforementioned formula leads are evident when the interest rate applied is close to zero, as is evident from the fact that any small change in the interest rate of a few hundredths would imply enormous changes in the value of the shares: for example, if the interest rate to be considered decreased from 0.05% to 0.01% the capitalization factor would change from 2000 to 10,000 (100/0.01), which would be equivalent to an immediate fivefold increase in the fiscal value of the shares without plausible economic correspondence.

The evidence of this distortion was legislatively recognized by Decree-Law no. 41/2016, of 1 August, by adding a spread of 4% to the interest rate used in calculating the capitalization factor, which is explained in the Preamble, which states that it "corrects a distortion created by the previous wording, insofar as the reference rate of the European Central Bank is currently at levels close to zero, thus altering the ratio underlying the formula created for this purpose".

Being so, it is to be presumed that the real value of the transferred shares is much lower than the value that was considered for issuing the contested assessments, whereby it is to be considered that the presumption that the real value of the shares is what results from the application of that formula has been rebutted.

Furthermore, in view of the evident exaggeration of the share valuation to which the application of the aforementioned formula leads, confirmed by legislative recognition, it cannot be concluded otherwise than that article 15, no. 1, paragraph a), of the Stamp Tax Code, in the initial wording, in force in 2015, is materially unconstitutional when applied on the basis of the interest rate of 0.05%.

In fact, from that application results a fiscal value of the transfers of unlisted shares much higher than their presumed real value and that exaggerated value and consequent excessive taxation do not occur with other transfers of economically comparable social participations, namely listed shares and quotas, without there being any reasonable justification for imposing additional taxation on the former.

Being so, article 15, no. 1, paragraph a), of the Stamp Tax Code, in the initial wording, in force in 2015, is materially unconstitutional when applied on the basis of the interest rate of 0.05% for calculation of the capitalization factor, by violation of the constitutional principle of equality (article 13 of the CRP), which requires that those in equal situations be treated equally and those in unequal situations be treated unequally, in such a way as not to create arbitrary and unreasonable discriminations, because lacking objective and rational justification.

For the foregoing, the contested assessments are vitiated by the defect of error regarding the factual premises by having considered as the value of the shares a value much higher than the real value and by the defect of violation of law, by error regarding the legal premises, by violation of the principle of equality, in applying that formula with the application of an interest rate of 0.05%.

These defects justify the annulment of the contested assessments [article 163, no. 1, of the Code of Administrative Procedure of 2015, subsidiarily applicable by virtue of the provisions of article 2, paragraph c), of the LGT]. ([1])

3.2. Question of the Consequences of the Illegality of the Assessments

The Authority for Taxation and Customs argues that the tax assessment acts sub judice cannot be merely annulled, since only the determination of the taxable value is in question, the existence of the taxable fact subject to taxation never being called into question.

The tax arbitral process, as an alternative means to judicial review proceedings (no. 2 of article 124 of Law no. 3-B/2010, of 28 April), is, like the latter, a procedural means of mere legality, which aims to eliminate the effects produced by illegal acts, by annulling them or declaring their nullity or non-existence [articles 2 of the RJAT and 99 and 124 of the CPPT, applicable by virtue of the provisions of article 29, no. 1, paragraph a), thereof], whereby the Arbitral Tribunal must limit itself to reviewing the legality of the contested acts as they were performed, and cannot, in the face of the finding of the invocation of an illegal ground as support for the administrative decision, review whether its action could be based on other grounds.

At the level of the consequences of the annulment it has been understood, following consistent and reiterated case law of the Supreme Administrative Court, that in tax annulment litigation it is possible to review claims for reimbursement of amounts paid and indemnity interest ([2]), as well as claims for compensation for improper guarantee (article 171, no. 1, of the CPPT), but outside the scope of the tribunal's cognition power is the review of the possibility of renewal of the annulled acts, which depends on the initiative of the Tax Administration, within the scope of its powers/duties to enforce the judgment (article 24, no. 1, of the RJAT).

For the foregoing, no cognizance is taken of the pretension of the Authority for Taxation and Customs that the Arbitral Tribunal determine the effects arising from the annulment of the assessments.

  1. Decision

Whereupon this Arbitral Tribunal agrees to:

– find the claim for arbitral pronouncement well-founded;

– declare the illegality of the Stamp Tax assessments nos.…, …/…, … and …;

– annul the aforementioned assessments;

– take no cognizance of the pretension of the Authority for Taxation and Customs that the Arbitral Tribunal determine the effects arising from the annulment of the assessments.

  1. Value of the Process

In accordance with the provisions of article 306, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Rules of Costs in Tax Arbitration Processes, the process is valued at € 151,018.71.

  1. Costs

Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at € 3,672.00, in accordance with Table I attached to the Rules of Costs in Tax Arbitration Processes, to be borne by the Respondent.

Lisbon, 16-11-2016

The Arbitrators

(Jorge Lopes de Sousa)

(A. Sérgio de Matos)

(Miguel Patrício)

[1] It should be noted that for purposes of contesting the assessments, no relevance attaches to the fact that the Claimant was notified of the evaluation of the shares for purposes of exercising the right of hearing and did not exercise it.

In fact, a notification to exercise the right of hearing on a draft evaluation is not an administrative act that defines a legal situation, being merely an interlocutory act of an assessment procedure, which may be contested in the challenge to the assessment act that incorporates it. The situation would be different if one were faced with an act of valuation of patrimonial values issued in autonomous proceedings, which would be susceptible to autonomous challenge, pursuant to article 134, no. 1, of the CPPT and article 2, no. 1, paragraph b), of the RJAT.

The exercise of the right of hearing is a mere faculty that the Taxpayer may or may not use, and no negative consequences may arise to the Taxpayer from choosing not to exercise it.

[2] On these possibilities, see, among many others, the arbitral judgment of 29-06-2012, issued in process no. 14/2012-T.

Frequently Asked Questions

Automatically Created

How is Stamp Tax (Imposto do Selo) applied to the valuation of unlisted shares in Portugal?
Stamp Tax (Imposto do Selo) on unlisted shares applies to gratuitous transfers including donations, inheritances, and gifts. Under article 15(3)(a) of the Stamp Tax Code, when shares lack official market quotation and the aggregate transfer value exceeds €500 per subsidiary company, the Tax Authority must apply a statutory valuation formula. This formula calculates share value using a weighted average of the company's substantive value (adjusted book value from the last fiscal year) and the capitalized average of net results from the two preceding fiscal years. The capitalization factor derives from the European Central Bank's main refinancing operations interest rate. For transfers not exceeding €500 in total value, nominal share value applies. The valuation determines the taxable base upon which the 10% Stamp Tax rate is applied for gratuitous transfers between non-exempt parties.
What methods are used to determine the value of unlisted shares for Stamp Tax purposes?
Portuguese law prescribes specific valuation methods for unlisted shares depending on transfer circumstances. For Stamp Tax purposes under article 15 of the Stamp Tax Code: (1) Official quotation on the transfer date or the most recent quotation within the preceding six months applies to listed securities; (2) Nominal value applies when total transferred share value per subsidiary does not exceed €500; (3) The statutory formula Va=1/2n[S+((R1+R2)/2)f] applies when values exceed €500, incorporating substantive company value (S), average net results from two prior years (R1, R2), total shares (n), and an ECB-based capitalization factor (f). The Tax Authority's Finance Directorates conduct these evaluations, applying book value corrections and provisions for income taxes. Taxpayers receive notification and pre-assessment hearing rights under article 60 of the General Tax Law before final assessment issuance.
Can taxpayers challenge Stamp Tax assessments on share valuations through CAAD arbitration?
Yes, taxpayers may challenge Stamp Tax assessments on share valuations through CAAD (Centro de Arbitragem Administrativa) arbitration under Decree-Law 10/2011. Process 287/2016-T exemplifies this mechanism, where the taxpayer contested four assessment acts totaling approximately €151,251.94. Arbitration requests must be filed within the legal time limits following assessment notification. The CAAD Deontological Council designates a three-arbitrator tribunal for collective proceedings or a single arbitrator for simplified proceedings. Parties may refuse arbitrator designations within prescribed periods. Grounds for challenge include: incorrect application of valuation formulas, mathematical errors, improper adjustments to book values, erroneous capitalization factor calculations, or violation of procedural rights such as the pre-assessment hearing. CAAD arbitration offers a faster, specialized alternative to judicial courts for resolving administrative tax disputes, with binding decisions subject only to limited court review.
What is the role of the CAAD Tax Arbitration Tribunal in resolving Stamp Tax disputes in Portugal?
The CAAD Tax Arbitration Tribunal serves as an alternative dispute resolution forum for administrative tax matters in Portugal, established under Decree-Law 10/2011. In Stamp Tax disputes like Process 287/2016-T, CAAD provides specialized adjudication by arbitrators with tax law expertise designated by the Deontological Council. The tribunal reviews the legality of tax assessments, examining whether the Tax Authority correctly applied substantive law (valuation methodologies, tax rates, exemptions) and respected procedural requirements (notification, hearing rights, assessment deadlines). Arbitrators analyze administrative files, party submissions, and applicable legal provisions including the Stamp Tax Code, General Tax Law, and Tax Procedure Code. The tribunal issues binding decisions that may uphold, modify, or annul contested assessments. CAAD arbitration offers advantages over traditional judicial review including faster resolution (typically 6-12 months), lower costs, specialized expertise, and procedural flexibility while maintaining due process guarantees and party equality.
What are the legal grounds for contesting Imposto do Selo liquidation acts on unlisted company shares?
Legal grounds for contesting Stamp Tax liquidation acts on unlisted shares include: (1) Incorrect application of article 15 of the Stamp Tax Code, such as applying the complex formula when nominal value should apply or vice versa; (2) Mathematical errors in calculating the statutory formula components including substantive value (S), net results (R1, R2), capitalization factor (f), or share count (n); (3) Improper adjustments to book values when determining substantive company value without justified corrections; (4) Errors in identifying or calculating provisions for income taxes; (5) Incorrect capitalization factor based on wrong ECB refinancing rates or calculation periods; (6) Violation of pre-assessment hearing rights under article 60 of the General Tax Law; (7) Assessment issued outside legal time limits; (8) Lack of proper notification of assessment acts; (9) Misclassification of the transfer nature (gratuitous vs. onerous); (10) Application of incorrect tax rates; (11) Failure to consider applicable exemptions. Taxpayers must substantiate grounds with documentary evidence and may request expert valuations to counter the Tax Authority's calculations.