CAAD Arbitration on IRS Taxation of Securities Capital Gains and Official Review Request

ARBITRAL DECISION

I. REPORT

A…, taxpayer no. …, resident at Rua de … no. …, Floor … Apt., …-… Estoril (hereinafter abbreviated as Claimant), hereby, pursuant to the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter referred to only as RJAT) submits a Request for Establishment of an Arbitral Tribunal, with a view to the declaration of illegality and annulment of the tax assessment act for Personal Income Tax (IRS) no. 2011…, relating to the year 2010, in the amount payable of €215,369.84 (two hundred and fifteen thousand, three hundred and sixty-nine euros and eighty-four cents), as well as the rectification statement no. 2011… of 25-07-2011, with a balance payable of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents), and likewise, the decision of tacit dismissal of the request for official revision submitted against the aforementioned tax acts and also against the order of 04.03.2016 which determined the express dismissal of the aforementioned request for official revision, with reimbursement of the tax paid unduly by the Claimant, plus the respective statutory interest at the legal rate.

The Claimant opted not to appoint an arbitrator, wherefore the Ethics Board of CAAD proceeded to appoint the arbitrators Dr. José Pedro Carvalho (president), Prof. Doctor Vasco Valdez and Dr. Paulino Brilhante Santos which was accepted by the parties – Claimant and by the Tax and Customs Authority (hereinafter abbreviated as Respondent Authority).

The Arbitral Tribunal was duly established at CAAD, on 06-04-2016, to hear and decide the subject matter of the present arbitral proceedings, as appears from the respective minutes.

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

The Tribunal has jurisdiction and the claim is legitimate.

On 19-04-2016 the Claimant submitted an Application in the proceedings requesting the expansion of the claim so as to encompass the express dismissal of the request for official revision, whose tacit dismissal had, herein, been challenged, and the respective request was admitted on 15-05-2016.

An Arbitral Order was issued on 12-06-2016 which founded the waiver of production of additional evidence beyond the documentary evidence incorporated in the case file, the waiver of the holding of the meeting referred to in article 18 of RJAT and granted the parties the possibility of submitting written submissions.

The parties submitted written submissions on 23-06-2016 (Claimant) and on 05-07-2016 (Respondent).

Given the above, it is necessary to describe the facts contained in the initial petition (IP).

I.I – OF THE INITIAL PETITION

The Claimant identified above submitted to the Arbitral Tribunal a request for arbitral pronouncement seeking the declaration of illegality and annulment of the act of tax assessment of IRS no. 2011…, relating to the year 2010, in the amount payable of €215,369.84 (two hundred and fifteen thousand, three hundred and sixty-nine euros and eighty-four cents), as well as the rectification statement no. 2011… of 25-07-2011, with a balance payable of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents), and likewise, the decision of tacit dismissal of the request for official revision submitted against the aforementioned tax acts and also against the order of 04.03.2016 which determined the express dismissal of the aforementioned request for official revision, with reimbursement of the tax paid unduly by the Claimant, plus the respective statutory interest at the legal rate.

In the first part of the IP, the Claimant invokes the lack of reasoning, in fact and in law, of the act of tax assessment subject to arbitral pronouncement (no. 2011…), of 27 June 2011, in violation of the provisions of article 77 of LGT.

The Claimant states that in the act of tax assessment notified, the factual and legal grounds which determined its issuance are not explicit, only a set of values being indicated, without any identification as to their nature and origin, wherefore it is tainted with a defect of form, for lack of reasoning, and should be annulled accordingly.

The Claimant further alleges that the right of hearing before the assessment, provided for in article 60, no. 1, paragraph a) of LGT, was not observed, which also implies the annulment of the act of tax assessment.

The IP continues with the description of the facts which it considers relevant to the case file, namely the sale on 24 May 2010 of the Claimant's participation in the share capital of company B… – Tourist Activities, S.A. - 33,333 shares with a nominal value of 166,665, held for more than 12 months – for the amount of €2,333,310.00 (two million, three hundred and thirty-three thousand, three hundred and ten euros).

Following the aforementioned disposition, the Claimant realized a capital gain which it declared in annex G of the Income Tax Return Model 3.

It was mentioned by the Claimant that the capital gain resulting from the aforementioned operation was considered at only 50% (fifty percent) of its value because it concerned the disposition of shareholdings in a small unlisted company under article 43, no. 3 of CIRS.

Thus, the balance between the gains and losses realized would amount to €1,083,322.50 (one million and eighty-three thousand, three hundred and twenty-two euros and fifty cents) (€2,333,310.00 – €166,665.00 = €2,166,645.00 * 50% = €1,083,322.50).

Subsequently, the Claimant was notified of the act of tax assessment of IRS no. 2011…, by reference to the year 2010, under which tax payable was determined in the amount of €215,369.84 (two hundred and fifteen thousand, three hundred and sixty-nine euros and eighty-four cents), as well as the rectification statement no. 2011…, of 25 July 2011, which resulted in a balance payable of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents).

The Claimant states that from the analysis of the aforementioned IRS assessment note it results that the entirety of the positive balance of the capital gains determined during the year 2010 – €1,083,322.50 (one million and eighty-three thousand, three hundred and twenty-two euros and fifty cents) - was taxed at the special rate of 20% in accordance with the legal regime established by Law no. 15/2010, of 26 July, which entered into force on 27 July of the same year 2010.

On 30 September 2011, the Claimant, although not agreeing with the calculation of the tax resulting from the aforementioned assessment, proceeded to pay in full the tax owing in the amount of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents).

On 26 June 2015, having become aware of the content of the Decision of the Supreme Administrative Court rendered in the scope of Process no. 013/15 of 20 May 2015, under which it was ruled illegal the taxation of capital gains resulting from acts of disposition of shares held for more than 12 months, which occurred before the entry into force of Law no. 15/2010, of 26 July, the Claimant submitted a request for official revision against the aforementioned act of tax assessment of IRS of 2010.

Following the tacit dismissal of the aforementioned request, the Claimant submitted the Request for Arbitral Pronouncement against the act of tax assessment of IRS and against the tacit dismissal of the request for official revision.

However, in the course of the present arbitral proceedings, the Claimant was notified by Letter dated 16 March 2016, of the practice of an express act of dismissal of the aforementioned request for official revision whose annulment is also petitioned.

In sum, and on the basis of an extensive review of doctrine and jurisprudence, the Claimant understands that the capital gain relating to the year 2010, in the amount of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four thousand and fifty cents), is excluded from taxation for IRS purposes as it results from the disposition of shares held by the Claimant for more than 12 months and as it was obtained before 27 July 2010, the date of entry into force of Law no. 15/2010.

The Claimant further invokes, as already mentioned above, that the act of tax assessment also suffers from defects of form of lack of reasoning and from breach of an essential legal formality by non-observance of the right of prior hearing of the taxpayer, formalities prescribed, respectively, in articles 77 and 60, no. 1, paragraph a) of LGT.

It requests the annulment of the aforementioned act of tax assessment of IRS no. 2011…, relating to the year 2010, in the amount of €215,369.84 (two hundred and fifteen thousand, three hundred and sixty-nine euros and eighty-four cents), as well as the rectification statement no. 2011… of 25-07-2011, with a balance payable of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents), whose value has already been paid in full by the Claimant on 30 September 2011, and whose restitution it requests, plus the respective statutory interest at the legal rate, on the basis of articles 100 and 43 of LGT.

I.II – OF THE RESPONDENT AUTHORITY'S REPLY

The Respondent Authority replied first by exception, raising the exception of breach of formality set forth in article 59 of CPPT by the Claimant and arguing that the request for official revision should be declared untimely by clear violation of the periods of 3 and 4 years established in nos. 4 and 1 of Article 78 of LGT.

It also raises by way of exception that there is no error attributable to the services, no legal procedural requirements being met upon which the request for official revision depends under the terms of the aforementioned nos. 4 and 1 of Article 78 of LGT and that the request for official revision and the arbitral request are in clear contradiction with the conduct previously assumed by the Claimant which constitutes an abuse of right established in article 334 of the Civil Code.

By way of defence, the Respondent Authority argues that there is no defect of lack of reasoning, justifying that the act of tax assessment results from the elements which had been declared by the Claimant and that "the reasoning is sufficiently clear and unambiguous, all the more so that the Claimant by way of the present request for arbitral pronouncement, demonstrates, in the light of the arguments expounded by it throughout its pleading, to have fully understood the factual and legal framework on which the decision of the Respondent was based...". Among other arguments, it states that the act of tax assessment allows the complete clarification of its recipient, enabling it to challenge it, as the Claimant did by way of the present request for arbitral pronouncement and as for the breach of prior hearing alleged by the Claimant, the Respondent Authority understands that it was exempt from proceeding to the prior hearing of the Claimant under the terms of paragraph b) of no. 2 of article 60 of LGT, since the assessment was carried out on the basis of the declarations of the Claimant.

As for the alleged illegality of the assessment and the alleged violation of the principle of non-retroactivity of tax law and of the principle of protection of legitimate expectations, the Respondent Authority, relying on doctrine, jurisprudence and on the economic and social context in which Law no. 15/2010, of 26 July, was approved, and in particular on the principle of the annual nature of IRS (the taxable event generating the tax is as of 31 December of each year), understands that the positive balance of all capital gains and losses in securities obtained in 2010 should be taxed, the IRS assessment not suffering from any unconstitutionality.

Subsidiarily, the Respondent Authority understands that the request for arbitral pronouncement should be ruled unfounded.

I.III – OF THE FINAL COUNTER-SUBMISSIONS

In its counter-submissions, the Claimant reinforces the arguments referred to in its response to the exceptions raised by the Respondent Authority and insists on the arguments invoked in the IP, highlighting the reference to the Decision for Uniformization of Jurisprudence rendered by the Plenum of the Tax Contentious Section of the Supreme Administrative Court on 2 December 2015, to which we will refer later.

The Respondent Authority did not submit submissions, maintaining entirely the content of its reasoning set forth in the Reply and ruling unfounded the Claimant's request.

II. ISSUES TO BE DECIDED

It is necessary to decide the following issues under the terms described above:

i. Preliminary issues raised by the Respondent Authority;

ii. Alleged lack of reasoning of the acts of assessment and breach of essential legal formality by absence of prior hearing of the taxpayer;

iii. Taxation of capital gains obtained from the disposition of shares held for more than 12 months, before the entry into force of Law no. 15/2010, of 26 July.

III. MATTER OF FACT

III.I - PROVEN FACTS

Based on the elements in the case file and in the administrative proceedings joined to the case file, the following facts are considered proven:

By public deed dated 28-06-1983, the limited liability company called "F…, Lda" was established between the Claimant, C…, D… and E… (Documents nos. 3 and 4, joined with the request for arbitral pronouncement, whose contents are given as reproduced).

At the time, the aforementioned company had a fully subscribed and realized share capital 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 D…, and two equal shares in the amount of 50,000$ (fifty thousand escudos) each, belonging to C… and to the now Claimant (see cited Documents nos. 3 and 4).

The shareholder D… would later divide its share into three new shares, reserving for itself a share of 50,000$ (fifty thousand escudos) and assigning a share of 100,000$ (one hundred thousand escudos) to G… and a share of 50,000$ (fifty thousand escudos) to H… (see cited Documents nos. 3 and 4).

By public deed of 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), by means of a capital increase of 39,700,000$ (thirty-nine million seven hundred thousand escudos), fully paid in cash and subscribed in equal parts, that is, each in the amount of 19,850,000$ (nineteen million, eight hundred and fifty thousand escudos), by C… and by A…, who were admitted as new shareholders (Documents nos. 5 and 6, joined with the request for arbitral pronouncement, whose contents are given as reproduced).

The share capital of F…, Lda. then became 40,000,000$ (forty million escudos) and corresponded to the sum of the following shares: (see cited Documents nos. 5 and 6)

a) A share of 19,850,000$ (nineteen million, eight hundred and fifty thousand escudos) belonging to shareholder C…;

b) A share of 19,850,000$ (nineteen million, eight hundred and fifty thousand escudos) belonging to shareholder A…;

c) A share of 50,000$ (fifty thousand escudos), belonging to shareholder C…;

d) A share of 50,000$ (fifty thousand escudos), belonging to shareholder D…;

e) A share of 50,000$ (fifty thousand escudos), belonging to shareholder A…, now Claimant;

f) A share of 100,000$ (one hundred thousand escudos), belonging to shareholder G…;

g) A share of 50,000$ (fifty thousand escudos), belonging to shareholder H…

On 29-05-1996, the company F…, Lda. was transformed into a joint-stock company, becoming known as "B… – Tourist Activities, S.A.", with a share capital of 40,000,000$ (forty million escudos) and divided into 40,000 shares with a nominal value of 1,000$ (one thousand escudos) each (Documents nos. 7 and 8, joined with the request for arbitral pronouncement, whose contents are given as reproduced).

On the same date, an increase in the share capital of "B… – Tourist Activities, S.A." from 40,000,000$ (forty million escudos) to 200,000,000$ (two hundred million escudos) was carried out, by means of a capital increase of 160,000,000$ (one hundred and sixty million escudos), effected as follows: (Documents nos. 9 and 10, joined with the request for arbitral pronouncement, whose contents are given as reproduced)

a) Incorporation of revaluation reserves of fixed assets in the amount of 70,470,000$ (seventy million, four hundred and seventy thousand escudos), to be subscribed by each of the shareholders mentioned above, in the proportion of the capital which each holds;

b) New contributions in kind of movable property, in the value of 18,130,000$ (eighteen million, one hundred and thirty thousand escudos), corresponding to 18,130 new ordinary shares, with a nominal value of 1,000$ (one thousand escudos) each, subscribed and realized, in equal parts, by shareholder C… and A…;

c) New cash contribution by company I… – Risk Capital, S.A., in the amount of 150,000,000$ (one hundred and fifty million escudos), for the subscription and realization of 71,400 ordinary shares with a nominal value of 1,000$ (one thousand escudos) each.

The share capital of the company thus became represented by 200,000 (two hundred thousand) shares, with a nominal value of 1,000$ (one thousand escudos) each (see cited Documents nos. 9 and 10).

On 27-07-2000, the shareholders C… and A… sold, at their respective nominal value, all the shares they held in the company "B… – Tourist Activities, S.A." – 127,772 shares, in the proportion of 50% to each, with a nominal value of 1,000$ (one thousand escudos) per share to the shareholders C…, G…, D…, A… and H…, and also to J… who was initiating participation in that company (Document no. 11 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

With the redenomination of the share capital and shares to euros, the share capital of the company "B… – Tourist Activities, S.A." became €1,000,000 (one million euros), represented by 200,000 (two hundred thousand) shares, with a nominal value of €5 (five euros), each (Document no. 12 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

By contract of purchase and sale concluded on 13 May 2003, the shareholder I… – Risk Capital, S.A. sold to the company "B… – Tourist Activities, S.A.", its 71,400 shares, corresponding to 35.7% of the share capital (see cited Document no. 12).

The distribution of shareholdings in the company "B… – Tourist Activities, S.A." then became as follows:

a) C… – 21,434 shares, with a nominal value of €107,170, corresponding to 10.717% of the share capital;

b) G… – 21,434 shares, with a nominal value of €107,170, corresponding to 10.717% of the share capital;

c) D… – 21,433 shares, with a nominal value of €107,165, corresponding to 10.7165% of the share capital;

d) A… – 21,433 shares, with a nominal value of €107,165, corresponding to 10.7165% of the share capital;

e) H… – 21,433 shares, with a nominal value of €107,165, corresponding to 10.7165% of the share capital;

f) J… - 21,433 shares, with a nominal value of €107,165, corresponding to 10.7165% of the share capital;

g) B… – Tourist Activities, S.A. – 71,400 shares, with a nominal value of €357,000, corresponding to 35.7% of the share capital.

Subsequently, the distribution of shareholdings in the company B… – Tourist Activities, S.A., became as follows: (Document no. 13 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

a) C… – 33,334 shares, with a nominal value of €166,670, corresponding to 16.667% of the share capital;

b) G… – 33,334 shares, with a nominal value of €166,670, corresponding to 16.667% of the share capital;

c) D… – 33,333 shares, with a nominal value of €166,665, corresponding to 16.6665% of the share capital;

d) A… – 33,333 shares, with a nominal value of €166,665, corresponding to 16.6665% of the share capital;

e) J… – 33,333 shares, with a nominal value of €166,665, corresponding to 16.6665% of the share capital;

f) H… – 33,333 shares, with a nominal value of €166,665, corresponding to 16.6665% of the share capital.

On 24 May 2010, the shareholders of the company B… – Tourist Activities, S.A. disposed of all the shares they held in this company – 200,000 (two hundred thousand) shares with a nominal value of €5.00 (five euros) each, representing 100% (one hundred percent) of its respective share capital - for the global price of €14,000,000 (fourteen million euros) (Document no. 13, joined with the request for arbitral pronouncement, whose contents are given as reproduced).

For what is relevant here, the Claimant's participation in the share capital of B… – Tourist Activities, S.A. – 33,333 shares, with a nominal value of €166,670 - was sold for a price corresponding to €2,333,310.00 (two million, three hundred and thirty-three thousand, three hundred and ten euros) [€14,000,000 x 16.6665%] (see cited Document no. 13).

The price for the purchase of the shares (€14,000,000) was paid in full to the shareholders of B… – Tourist Activities, S.A. (see cited Document no. 13).

On 09 July 2010 the Claimant submitted the declaration Model 4 (Document no. 14 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

In sum, the capital gains in securities determined by the Claimant, in the course of the year 2010, result solely from the operation of disposition, carried out on 24 May 2010, of 33,333 shares of the company B… – Tourist Activities, S.A., with a nominal value of €166,665, held by it for more than 12 months (see cited Documents nos. 13 and 14).

The capital gain resulting from the aforementioned operation (€2,333,310.00 – €166,665.00 = €2,166,645.00) was considered at only 50% of its value (€2,166,645.00 * 50% = €1,083,322.50), because it concerned the disposition of shareholdings in a small unlisted company (see article 43, no. 3, of the IRS Code).

The balance between the gains and losses realized up to 27-07-2010, relating to shares held for more than 12 months, amounts to €1,083,322.50 (one million and eighty-three thousand, three hundred and twenty-two euros and fifty cents).

Based on the aforementioned calculations, the Claimant proceeded to fill in field 8 of Annex G of the Income Tax Return Model 3 submitted for reference to the year 2010 (Document no. 15 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

Following the submission of the aforementioned Income Tax Return Model 3, the Respondent Authority issued the act of tax assessment of IRS no. 2011…, by reference to the year 2010, under which an amount to be reimbursed of €1,294.66 (one thousand two hundred and ninety-four thousand euros and sixty-six cents) was determined (see Document no. 16, joined with the request for arbitral pronouncement, whose contents are given as reproduced).

Subsequently, the now Claimant was notified of the act of tax assessment of IRS no. 2011…, by reference to the year 2010, under which tax payable was determined in the amount of €215,369.84 (two hundred and fifteen thousand, three hundred and sixty-nine euros and eighty-four cents), as well as the rectification statement no. 2011…, of 25 July 2011, which resulted in a balance payable of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents) (Document no. 2 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

From the IRS assessment carried out it results that the entirety of the aforementioned positive balance of capital gains in securities determined in the course of the year 2010 - €1,083,322.50 (one million and eighty-three thousand, three hundred and twenty-two euros and fifty cents) - was taxed at the rate of 20% in accordance with the legal regime established by Law no. 15/2010, of 26 July, which entered into force on 27 July of the same year, resulting in the amount of tax of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents).

On 30 September 2011 the Claimant proceeded to pay in full the tax owing, in the aforementioned amount of €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents) (Document no. 17 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

On 26 June 2015, the Claimant proceeded to submit a request for official revision against the act of tax assessment of IRS no. 2011…, practiced with reference to the year 2010, ultimately petitioning for the respective annulment, with the other legal consequences (Document no. 1 joined with the request for arbitral pronouncement, whose contents are given as reproduced).

Until the date of entry of the request for arbitral pronouncement, the Claimant was not notified of any final decision on the aforementioned request for official revision (see cited Document no. 1 and Document no. 1 joined with the request for expansion of jurisdiction, whose contents are given as reproduced).

On 16 March 2016 the Claimant was notified of the practice of an express act of dismissal of the request for official revision (see cited Document no. 1 joined with the request for expansion of jurisdiction).

On 22-01-2016, the Claimant submitted the request for establishment of the arbitral tribunal which gave rise to the present proceedings.

III.II - UNPROVEN FACTS

There are no facts relevant to the decision which have not been proven.

IV. APPLICABLE LAW

i. Preliminary issues raised by the Respondent Authority

Having summarized the relevant factual elements and the position of the Parties, it is necessary, first and foremost, to analyze and decide the preliminary issues raised by the Respondent Authority.

In the Reply submitted in the present arbitral proceedings, the Respondent Authority came to defend itself by raising the following exceptions:

a) Breach of formality set forth in article 59 of CPPT by the Claimant;

b) Untimeliness of the request for official revision;

c) Non-fulfillment of the requirements for the examination of the request for official revision;

d) The request for official revision and the arbitral request are in clear contradiction with the conduct previously assumed by the Claimant which constitutes an abuse of right established in article 334 of the Civil Code.

a) Breach of formality set forth in article 59 of CPPT by the Claimant

The Respondent Authority first notes that the Claimant, when filling in the Income Tax Return Model 3, entered in Annex G the onerous disposition of shareholdings, in accordance with the provisions of paragraph b) of no. 1 of Article 10 of CIRS and, for that reason, subject to taxation, instead of entering such fact in annex G1 to exclude it from taxation.

"The act of tax assessment of IRS under scrutiny was effected in accordance with and on the basis of the elements provided by the Claimant itself".

The Respondent Authority understands that if official revision of the tax act is viable, it is necessary to present a substitute return in accordance with article 59 of CPPT.

The Respondent Authority argues that, if a substitute return is not submitted within the periods defined in no. 3 of the aforementioned article 59 of CPPT, no. 6 of the aforementioned legal provision prevents the submission of a request for official revision against the act of assessment.

Now, the use of the request for official revision for annulment of an act of assessment is not dependent on the submission of any substitute return but on the verification of the requirements established in article 78 of LGT.

As results from article 78 of LGT, the revision of tax acts does not depend solely on the initiative of taxpayers, being able to be effected on the initiative of the tax administration, within the period of four years after the assessment or at any time if the tax has not yet been paid, based on error attributable to the services.

No. 7 of the same article 78 of LGT concludes that, although the revision is denominated as "official", the taxpayer may initiate the revision by the Tax and Customs Authority, through a request for its realization, which is confirmed by no. 1 of article 49 of LGT by reference to the "request for official revision of the tax assessment".

In these terms, it shall be concluded that there is no legal support for making the request for official revision dependent on the prior submission of a substitute return, wherefore this exception raised by the Respondent Authority is unfounded.

b) Untimeliness of the request for official revision

The Respondent Authority alleges that the request for official revision was submitted untimely by clear violation of the periods of 3 and 4 years established in nos. 4 and 1 of article 78 of LGT.

As noted above, the Respondent Authority notes that the assessment under scrutiny was effected in accordance with the elements provided by the Claimant itself, wherefore if there is error it is of the exclusive responsibility of the Claimant and cannot be attributable to the services.

In this regard, with no error attributable to the services, the request for arbitral pronouncement would be untimely by violation of the 4-year period established in the provisions of no. 1 of Article 78 of LGT insofar as the Claimant was notified of the assessment of IRS no. 2011… on 27.06.2011, having submitted the request for revision on 26.06.2015.

However, under no. 1 of article 78 of LGT, the revision of the tax act on the initiative of the tax administration may be effected within the period of four years after the assessment or at any time if the tax has not yet been paid, based on error attributable to the services.

Precisely in this case, this should be the applicable period and not the three-year period provided for in no. 4 of the same article 78 of LGT which refers to the revision of the taxable matter and not to potential illegalities of the tax act resulting from the applicable legal regime.

Now, the request for official revision of the tax act in the present case was submitted before the expiration of the aforementioned four-year period.

On the other hand, the submission of the request for revision caused the interruption of the period to effect the revision, as results from the same article 78, no. 7, of LGT.

For this reason, if there is error attributable to the services- which is already being considered, as explained below- it must be concluded that the request for official revision was timely submitted by the Claimant wherefore this exception raised by the Respondent Authority is also unfounded.

c) Non-fulfillment of the requirements for the examination of the request for official revision

The Respondent Authority considers that the error cannot be attributable to the services but only to the Claimant, as it submitted in its Income Tax Return Model 3 of the year 2010, more specifically in Table 8 of Annex G, the dispositions of shares which it thought to be excluded from taxation, instead of having declared such fact in Annex G1, the one destined for disposition of shares excluded from taxation.

Wherefore, with no error attributable to the services, the Respondent Authority considers that the legal procedural requirements on which the request for official revision depends are not met, to be submitted within the 4-year period, under the terms of the provisions of no. 4 of Article 78 of LGT.

In this conformity, it invokes the lack of the requirements on which the examination of the request for official revision depends, established in the provisions of no. 1 of Article 78 of LGT.

Now, the error which affects an act of assessment is attributable to the taxpayer when the latter omits information or provides incorrect information on the facts on which the taxation is based or does not satisfy any requirement of a declarative nature by the appropriate means.

From the outset, no. 2 of article 78 of LGT provides that "error in self-assessment is considered attributable to the services".

On the other hand, in the case at hand, the Claimant communicated to the Respondent Authority the realization of an operation of onerous disposition of shareholdings acquired in the year 2000 and disposed of in May 2010 in accordance with the annexes to the income tax return model 3 and respective filling instructions in force as from 1 January 2011.

Indeed, as the Claimant correctly notes, Order no. 1303/2010, of 22 December, which approved the models of annexes to the income tax return model 3 to be used for the year 2010, expressly indicates that only the onerous disposition, in 2009 or prior years, of shares held for more than 12 months should be indicated in annex G1.

Indeed, the filling instructions for annex G1 begin by stating the following: "This annex is intended to declare the onerous disposition of real property not subject to taxation, under the terms of no. 4 of article 4 and of article 5 of Decree-Law no. 442-A/88, of 30 November, as well as the disposition of real property to real estate investment funds for residential lease (FIAH) and real estate investment companies for residential lease (SIIAH) covered by the special regime approved by article 102 and following of Law no. 64-A/2008, of 31 December, and also the onerous disposition, effected in the years 2009 and prior, of shares held for more than 12 months".

And the title of table 4 of the aforementioned annex G1 is "Onerous disposition of shares held for more than 12 months (Years 2009 and prior)".

It was thus not possible for the Claimant to declare in the aforementioned annex G1 of its Income Tax Return Model 3 for the year 2010, the capital gains in securities resulting from the operation of disposition of shares held for more than 12 months, occurred in May of the year 2010.

Given the foregoing, it shall be concluded that, by referring to the capital gains resulting from the disposition operation in question in Table 8 of annex G, the Claimant did not omit any declarative duty resulting from the rules applicable to the income tax return model 3, wherefore it shall not be considered that we are before an error attributable to it but rather attributable to the Respondent Authority since it acted in accordance with the understanding thereof.

Finding that all the requirements provided for in article 78, no. 1, of LGT for submission of a request for official revision against the act of assessment now under scrutiny are met, namely the existence of error attributable to the tax services in the aforementioned assessment, it shall be considered unfounded the exception raised by the Respondent Authority of non-fulfillment of the requirements for the examination of the request for official revision of the tax act.

d) Of Venire Contra Factum Proprium

Finally, the Respondent Authority invokes that the request for official revision and the arbitral request are in clear contradiction with the conduct previously assumed by the Claimant which constitutes an abuse of right established in article 334 of the Civil Code.

To support such a statement, the Respondent Authority states that the Claimant first declared in Table 8 of Annex G the disposition of the shares not excluded from taxation, to then, and following the assessment based on the values declared by it, come to challenge the legality of the act that it itself carried out.

Now, as already noted, that was precisely the appropriate framework for the purpose under the terms of the aforementioned Order no. 1303/2010.

The conduct of the Claimant was the only possible conduct given the limitations (and filling instructions) of the income tax return model 3 and respective annex G1 wherefore it cannot be considered that the Claimant induced in error the Tax and Customs Authority.

ii. Alleged lack of reasoning of the acts of assessment, breach and essential formalities;

The Claimant alleges lack of reasoning, in fact and in law, of the act of tax assessment subject to arbitral pronouncement in violation of the provisions of article 77 of LGT.

The Claimant states that in the act of tax assessment notified, the factual and legal grounds which determined its issuance are not explicit, only a set of values being indicated, without any identification as to their nature and origin, wherefore it is tainted with a defect of form, for lack of reasoning, and should be annulled accordingly.

1. Now, to begin first by noting that the aforementioned act of tax assessment results from the elements declared by the Claimant in its Income Tax Return Model 3 and respective annex G.

2. It should be considered that the reasoning is sufficiently clear and unambiguous, since the Claimant by way of the present request for arbitral pronouncement, demonstrates, in the light of the arguments expounded by it throughout its pleading, to have fully understood the factual and legal framework on which the decision of the Respondent Authority was based, enabling it to challenge it.

3. In this sense, as noted by the Respondent Authority, see Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes De Sousa: (In "General Tax Law commented and annotated", 3rd edition – Vislis; 2003, pages 381-382. "(...) It should be borne in mind that the defects may be considered healed when it is demonstrated that, despite the imprecision or omission or irregularity of the content of the act, the objective which was intended to be achieved with the imposition of this content was attained, namely that its recipient understood correctly its exact scope. The STA has consistently understood, regarding defects of form of administrative acts, that irregularities should be considered as non-essential provided that the objective envisaged by law with their imposition is achieved."

4. In the same sense the section of administrative contentious of the STA has formed a solid orientation to the effect that defects of form do not necessarily impose annulment of the act to which they relate, and that essential procedural formalities degrade into non-essential if, despite them, satisfaction was given to the interests which the law had in view in foreseeing them (in this sense, the following decisions referred to by the Respondent Authority can be seen: of 1989-07-13, in appeal no. 18,270, in Appendix to the Official Journal of 1991-04-30; of 1997-12-17, in appeal no. 36,001, in Bulletin of the Ministry of Justice no. 472, page 246; of 1997-11-20, in appeal no. 41,719, in Administrative Justice Notebooks no. 13, page 14; of 2001-10-03, in appeal no. 36,037, in Appendix to the Official Journal of 2003-10-23).

5. The Claimant further alleges that the right of hearing before the assessment, provided for in article 60, no. 1, paragraph a) of LGT, was not observed, which also implies the annulment of the act of tax assessment.

6. In the case at hand, the act of tax assessment under scrutiny was based solely and exclusively on the elements declared by the Claimant, in its Income Tax Return.

7. In this regard, paragraph a) of Article 76 of CIRS prescribes that, having the return been submitted within 30 days after the end of the legal period, the assessment has as its object the taxable income detected based on the elements declared.

8. Thus and under the terms of paragraph b) of no. 2 of Article 60 of LGT, the Respondent Authority was exempt from proceeding to the prior hearing of the Claimant in the event that the assessment was effected on the basis of the declaration thereof, as indeed would happen.

9. As results from the express tenor of article 78, no. 1, of LGT, official revision is only viable in cases of error attributable to the tax services, which excludes the relevance of procedural and formal defects of the acts of assessment, which do not fall within the concept of "error", which encompasses only error regarding the factual assumptions and error regarding the legal assumptions of the tax act.

10. For this reason, procedural and formal defects invoked by the Claimant cannot justify the official revision of the tax act of assessment.

11. It is thus unfounded, the request for arbitral pronouncement as to the request for declaration of illegality and annulment of the tax act and the subsequent acts of dismissal of the request for official revision thereof based on these defects of form.

iii. Taxation of capital gains obtained from the disposition of shares held for more than 12 months, before the entry into force of Law no. 15/2010, of 26 July.

1. The main or substantial issue subject of the present decision concerns the taxation of capital gains obtained from the disposition of shares held for more than 12 months, before the entry into force of Law no. 15/2010, of 26 July.

2. The entry into force of Law no. 15/2010, of 26 July, on 27 July 2010, came to end the exclusion from taxation of capital gains obtained with the sale of shares held for more than twelve months, repealing paragraph a) of no. 2 of article 10 of CIRS, and altered the special rate provided for in article 72, no. 4 of CIRC from 10% to 20%.

3. The essential question is whether all capital gains resulting from the sale of shares held for more than twelve months during the year 2010 should be taxed in the same manner or, alternatively, in a different manner, depending on whether the sale took place before or after 27 July 2010.

4. Confronting the theses accepted by Jurisprudence, the point of disagreement rests on the moment when the taxable event which gives rise to the tax obligation occurs. If it is instantaneous, it occurs at the moment of disposition; if it is complex and of successive formation, at the end of the fiscal year, the date on which it is possible to determine the balance, positive or negative, of capital gains and losses obtained during the financial year.

5. The Decision of the Supreme Administrative Court no. 5/2015 (Process no. 1292/14-Plenum of the 2nd Section), of 16 September 2015, published in the Official Journal 1st series, no. 209, of 26 October, hereinafter Decision of the STA, came to standardize the jurisprudence relating to the essential issue raised.

6. The grounds expressed therein were reinforced by the Decision of the Supreme Administrative Court, of 2 December 2015 (Process no. 0734/15 – Plenum of the Section of Tax Contentious Matters)

7. The Decision ruled that «capital gains resulting from acts of disposition of shares held for more than 12 months which occurred before the entry 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 Code of Personal Income Tax, and, as such, do not contribute to the formation of the annual taxable balance of capital gains referred to in article 43 of CIRS».

8. The STA Decision adheres to the thesis that the taxable event is as of the moment when the capital gains are realized, being, therefore, instantaneous and not complex and of successive formation. In the words of the Decision, "capital gains arise as soon as the amount collected by the respective holder/transferor is greater than the value at which it had acquired the asset, that is, as soon as the disposition occurs and the inherent gain is achieved. Which means that it is in this gain, obtained at the moment of disposition, that the taxable fact generating capital gains resides. And being the gain measured by the difference between the realization value and the acquisition value of the asset itself, and, therefore, assessed in each concrete act of disposition, it becomes clear that the capital gain refers to each gain of per se".

9. The STA Decision distinguishes the positive balance of capital gains and losses realized, which will be taxed, from the taxable event.

10. It maintains that "the rule providing for the necessary aggregation to calculate the positive balance between capital gains and losses in the light of all acts of disposition occurring in the year, constitutes a rule on the determination of the tax base for IRS purposes, that is, a rule on the determination of taxable income, and not a rule on taxable income, as, moreover, results from the systematic organization of the Code of IRS (…)"

11. This position standardizing jurisprudence of the STA is probably based on the fact that article 10, no. 1, paragraph a) of the Code of IRS defines as taxable income not the balance between gains and losses but only capital gains resulting from the disposition of shareholdings.

12. In turn, article 42 of the same Code of IRS provides that "without prejudice to the provisions relating to capital gains, no deductions shall be made to the remaining income qualified as patrimonial increments."

13. This legal provision precedes precisely article 43, no. 1 of the same statute which provides that these patrimonial increments shall be given by the balance between the gains and losses realized in the same fiscal year, which seems to support the STA thesis to the effect that it is a rule not of taxable income but of calculation or determination of the tax base.

14. Losses would thus be only like a specific deduction to the specific type of patrimonial increment constituted by capital gains in securities, namely, capital gains obtained with the disposition of securities.

15. In this line of reasoning capital gains would constitute a type of income of instantaneous formation and not income of successive formation.

16. It is acknowledged, however, that the issue is highly controversial and that a large part of the doctrine diverges from this orientation.

17. Note that, however, the standardizing decisions of the STA "have special persuasive force, so that the standardized jurisprudence fixed therein should be respected in subsequent decisions as long as the assumptions leading to it in a given context are maintained, given its function, and the manner in which the appeal for standardization of jurisprudence is configured". Thus, "there must be strong reasons or circumstances to contravene the doctrine standardized by the Supreme, so as to justify the adoption of an understanding divergent from that which came to prevail in the appeal for standardization of jurisprudence in enlarged judgment of the Supreme Administrative Court and with consideration of opposed theses (between decisions of the STA, between decisions of the TCA or between decision thereof and the STA, see no. 1 of article 152 of CPTA), which justified their admission", only being justified the departure from that jurisprudence, by means of "the convergence namely of the following circumstances: i) a significant period of time having elapsed since the standardizing decision; ii) a doctrinal debate thereafter questioning the standardized jurisprudence; iii) relevant legal arguments being used which have not been discussed in the standardizing decision; iv) the composition of the Supreme Court having been altered so as to anticipate the possibility of prevalence of a different solution" (Decision of the Central Administrative Court of the South, of 9-07-2015, rendered in process no. 12282/15). This is not the situation which now exists.

18. Given the authority of the Supreme Administrative Court and the fact that the jurisprudence has been adopted unanimously in a standardizing decision, this jurisprudence should be accepted, which, moreover, is mandatory for the Tax and Customs Authority, given article 68-A, no. 4, of LGT, in which it is established that «the tax administration must review the generic orientations referred to in no. 1 taking into account, namely, the jurisprudence of the superior courts».

19. Now, we shall conclude, given the recent character of the STA's standardizing jurisprudence and the current state of the doctrinal debate, that none of the assumptions to be able to overturn the jurisprudence of this Supreme Court exist, as, moreover, already concluded the arbitral decisions taken in the processes which came through CAAD under the numbers 412/2015-T of 12/14/2015 and 27/2017-T of 06/29/2016.

20. It is worth noting in the Arbitral Decision taken in process no. 412/2015-T of 12/14/2015 the learned dissenting opinion of the President of the Arbitral Tribunal who voted in agreement to the effect that there is a need to respect the jurisprudential authority of the STA but not necessarily the doctrine thereof which, as we have emphasized above, is not effectively unanimous.

21. It is, therefore and with decisive character, because we do not find reason to be able to affront a standardizing Decision of the Plenum of the STA adopted unanimously recently, in the absence of legal assumptions for the effect, that we conclude that adopting in this decision any other orientation divergent from that of such Decision of the STA would be an illegal and useless decision, which adopts such jurisprudence.

22. Thus, the gains constituted by capital gains resulting from the onerous disposition of shares are considered to be obtained on the date of realization (5 July 2010), wherefore the regime introduced by Law no. 15/2010, of 26 July does not apply given that on the date of realization of the capital gains by the Claimant such statute was not yet in force.

23. On 24 May 2010, the provisions of article 10, no. 2, paragraph a) of CIRS were in force, thus capital gains resulting from dispositions of shares held for more than 12 months were excluded from taxation, making illegal the assessment which fell upon them.

24. Alongside the annulment of the assessment, statutory interest is petitioned. Finding that the tax debt unduly paid due to error attributable to the services of the Respondent Authority remains, the right to statutory interest remains (no. 1 of article 43 of LGT).

25. These shall be calculated on the amount unduly assessed and paid, with computation from the day following that of the aforementioned payment until the date of reimbursement of the tax unduly paid by the Claimant. (articles 43 of LGT and 61 of CPPT).

V. DECISION

1. Given the foregoing, the arbitrators composing the collective Arbitral Tribunal agree to:

136.1 Rule unfounded the preliminary issues raised by the Respondent Authority;

136.2 Rule unfounded the allegations of defects of form for lack of reasoning and for breach of essential legal formality by absence of the right to prior hearing invoked by the Claimant;

136.3 Rule entirely well-founded as proven the request for arbitral pronouncement formulated by the Claimant and consequently, declare illegal and annul the act of tax assessment of IRS no. 2011..., relating to the year 2010, in the amount payable of €215,369.84, the rectification statement no. 2011... of 25-07-2011, with a balance payable of €216,664.50, the decision of tacit dismissal of the request for official revision submitted against the aforementioned tax acts and also the order of 04.03.2016 which determined the express dismissal of the aforementioned request for official revision;

136.4 Rule well-founded the request for reimbursement of the amount paid unduly and condemn the Respondent Authority to the restitution of €216,664.50 paid on 30 September 2011;

136.5 Rule well-founded the request for payment of statutory interest by the Respondent Authority owed from the day following that of such payment, calculated day by day at the legal rate until the day of the effective reimbursement of the tax paid unduly.

1. In accordance with the provisions of articles 97-A of CPPT and 3, no. 2, of the Regulations of Fees in Tax Arbitration Proceedings (RCPAT), the value of the case is €216,664.50 (two hundred and sixteen thousand, six hundred and sixty-four euros and fifty cents).

2. Under the terms of article 4, no. 4 of RCPAT and Table I, the value of the arbitration fee to be borne entirely by the Respondent Authority is fixed at €4,284 (four thousand, two hundred and eighty-four euros).

Lisbon, 15 September 2016

The Collective Arbitral Tribunal

José Pedro Carvalho
(President – with dissenting opinion)

Vasco Valdez

Paulino Brilhante Santos
(Rapporteur)

DISSENTING OPINION

With all due respect reserved, I disagree with the decision in the Decision of the Plenum of the Tax Contentious Section of the STA, of 16-09-2015, in process no. 1292/14, because it seems to me, in the sense of earlier decisions in which I participated, that it empties the provisions of article 43, no. 1 of CIRC.

Indeed, I have no doubts – nor has the divergent arbitral jurisprudence from that in which I participated – regarding the continued character of the taxable fact relating to the taxation of capital gains in IRS, which is a completely different fact from what occurs, for example, in autonomous taxation resulting from the realization of certain expenses, and the argument – the only one – on which the fixed jurisprudence rests, resulting from the rule of no. 3 of article 10, does not seem to me to have the scope given to it by that jurisprudence, insofar as, in my view, it will be, solely, a rule relating to the periodization of financial years, having the same nature, for example, as the rules of articles 7, no. 1 and 24, no. 4 of CIRS, to stay with this Code.

The jurisprudence of the STA, moreover, leaves unanswered – and no convincing answer appears to be in sight – the question of knowing, given what has been decided by that Supreme Court, what happens – in IRS taxation for the year 2010 – to losses resulting from the disposition of shareholdings held for less than 12 months suffered before the entry into force of Law no. 15/2010, of 26 July. Do they contribute to the annual balance referred to in article 43, no. 1 of CIRS? Or not? Will losses – which are not, evidently, subject to taxation – also be an instantaneous taxable fact?

On the other hand, the fixed jurisprudence does not address the issue of capital gains subject to aggregation (under the terms of articles 22, no. 3, paragraph b) and 72, no. 4 of CIRS), taking into account that the option for this only occurs at the end of the year/period, nor, either, the expiration of the right to assess IRS on capital gains, in the light, equally, of that possibility of aggregation.

Beyond these, several other questions of systematic and dogmatic coherence remain unanswered, such as knowing what the justification is for a capital gain, being an instantaneous fact, not being taxed, or being less taxed, in function of the occurrence of a subsequent loss, as well as knowing what the justification is for the relevance of this (subsequent loss), if limited to its occurrence in the same calendar year.

It also seems to me unconstitutional, foremost by violation of the principle of equality, the discrimination between income resulting from capital gains and income from work, resulting from the jurisprudence established by the STA, combined with the jurisprudence of the Constitutional Court. Indeed, according to the latter – under the terms analyzed in the various decisions on the matter – income from work, although resulting from objectively instantaneous facts – such as receiving a salary or the payment of a service – are taxed in IRS in the light of the law in force on 31 December, whereas the balance resulting from capital gains and losses, under the jurisprudence of the Plenum of the STA, are not. Except for better understanding, one continues not to perceive (also) material ground for such inequality.

Notwithstanding, and given the provisions of article 25, no. 2 of RJAT, the futility of an arbitral decision divergent with the Jurisprudence – although unjust – established by the Plenum of the STA is recognized.

The arbitrator president,

(José Pedro Carvalho)

[1] See, e.g., the decision in arbitral process 135/2013-T.

[2] It being certain that the CIRS does not define losses, contrary to what it does with capital gains, these must be understood as the losses resulting from operations which, generating gains, would constitute capital gains. In the light of this understanding – and except for better study, no better view appears – not constituting, up to 2010 and in the light of article 10 of CIRS, gains resulting from the disposition of shareholdings held for less than 12 months capital gains, the losses resulting from identical operations should not, except for better opinion, be considered losses.

[3] Indeed, and except for better opinion, the statement of the capital gain relevant for taxation in IRS as an instantaneous fact, operated by the STA, except for better opinion, conditions the nature (instantaneous or continued) of the taxable fact to a later option to its occurrence, given that, aggregated in taxable income in IRS, nothing will distinguish (material or at the level of the applicable legal framework) the income resulting from the capital gain, from a provision of isolated services, or from a single rent or salary earned in the year...