IRS Withholding Tax on Company Dissolution and Partition: Liability of Former Manager (CAAD 293/2017-T)

ARBITRAL DECISION

REPORT

On 25 April 2017, A…, with Tax Identification Number… and domiciled at… Street…, …, …-… – …, (hereinafter referred to as the Claimant), came, pursuant to article 2, section 1, paragraph a) of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration (RJAT), to request the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the party being claimed against, with a view to declaring the illegality and consequent annulment of the Personal Income Tax assessments (Tax at Source) no. 2016…, in the amount of €49,716.86 and of compensatory interest no. 2016…, in the amount of €9,087.96, in the total amount of €58,804.82, relating to the fiscal year 2012, issued in the name of the dissolved company "B…, Ltd.", with Company Tax Identification Number…, which were notified to it in the capacity of Representative of the Dissolution.

Summary of the Parties' Positions

Of the Claimant:

As grounds for the request to annul the Personal Income Tax assessment acts (Tax at Source) and compensatory interest identified in the request for arbitral decision, the Claimant invokes, in summary, the following factual and legal reasons:

- The company "B…, Ltd." was subject to an internal inspection action relating to the year 2012, which had as its object the control of operations related to its dissolution and distribution;

- As a result of the aforementioned inspection, the contested assessments were issued, of which the Claimant only became aware on 5/01/2017, through the communication sent to it by the AT, pursuant to article 233 of the Civil Procedure Code;

- "B…, Ltd." was a family limited partnership company established by the Claimant's Father, C…, for the operation of a petrol station, which ceased activity in 2012 and whose installations were located on land owned by him;

- Although the Claimant had accepted joint management with her Father, from 2010 onwards, following the death of her sister who was a partner, the actual management of the company was always exercised exclusively by the Claimant's Father;

- On 28/12/2012, given the financial difficulties, the Claimant's Father decided to proceed with the dissolution, closure and immediate liquidation of the company, assuming the burden of carrying out all necessary acts for this purpose;

- The Claimant being under the conviction that, once social debts were paid, there would be no assets to be distributed among the partners;

- The Claimant was never appointed liquidator of the company nor carried out any steps relating to its liquidation, which was entrusted to her Father, in particular the transfer to the company of the property right over the land where the petrol station was located, for subsequent sale and payment to social creditors;

- The Claimant was never appointed liquidator or representative of the company and should not have been notified of any inspection report or tax assessment, in the capacity of "Representative of Dissolution", a position which she never accepted, having only agreed to be a custodian of the books of the dissolved company;

- Although it was her Father's responsibility, in the capacity of liquidator, to pay all debts of the company, beginning with tax debts, the Claimant proceeded to pay the contested assessments from her own pocket;

- The Personal Income Tax debt in question results from a phenomenon of tax substitution (articles 81 of the Corporate Income Tax Code, 5, section 2, paragraph i) and 71, section 1, paragraph c), of the Personal Income Tax Code), in which the result of the distribution was taxable in the individual sphere of the partners, by final and liberatory withholding tax, which could only have been carried out by the Claimant's Father, sole representative of the company, to whom notification for payment of the assessment should have been made;

- But the dissolved company lost tax personality, making tax substitution with withholding tax impossible, on a final basis, shifting the sphere of the legal-tax relationship, on one hand, to the partner beneficiaries, true bearers of tax capacity and, on the other, to the AT as active subject;

- The AT sued an extinct company for payment of the Personal Income Tax debt of the partners, who could have been individually sued, in the capacity of original debtors and subsidiary liable parties for payment of the tax;

- Individual notification to the partners of the respective assessments would be the action most in accordance with the provisions of article 28 of the General Tax Law, which separates the two situations of tax substitution, payment on account of the tax due finally and withholding on a final basis, being, in this latter situation and in the absence of withholding by the substitute, the tax due by the substituted parties, that is, by each of the partners;

- The contested Personal Income Tax assessment is illegal, as it was notified to the person of the Claimant, within the scope of a representation of the company, which she never accepted nor assumed, already after the lapse of the statute of limitations period;

- Thus, to this day, neither the original debtor partners, nor the company "B…, Ltd." were validly notified of the assessments whose legality is being examined in this case;

- The AT claims to have made a personal notification with time notice on 29/12/2016, at the Claimant's residence, but which she was unaware of;

- Both the Claimant and her family habitually spend Christmas and New Year at a property they have in the Algarve, to which they moved and remained between 23/12/2016 and 1/01/2017, having found no notification affixed to the door of her house upon return;

- The Claimant only became aware of the demonstration of the assessment and the collection note through the communication from the AT, received on 5/01/2017, for a reason not attributable to her;

- On the other hand, the Personal Income Tax assessment in question is based on an erroneous quantification of taxable matter, since the balance sheet and statement of results of the dissolution of the company "B…, Ltd." did not reflect a social debt of €83,111.64, nor the transfer to the company of the property right over the land, with the proceeds of whose sale that debt was paid;

- Which constitutes, in terms of the SNC (Accounting Standardization System), a material error of a prior period, to be excluded from the results of the period in which it is detected, directly in equity, implying a reduction of €20,777.91 in the amount of the assessed tax (capital gains) and compensatory interest to €5,289.87;

- Thus, from the proper calculation of taxable income in the company's sphere would result the withholding tax at the total value of €34,228.71;

- However, given that tax substitution is not possible and the substitute is not responsible for payment of the withheld tax, only the Claimant should pay, if applicable, the amount of €1,446.90.

Of the Respondent:

Notified in accordance with the terms and for the purposes provided in article 17 of the RJAT, the AT presented a response and attached the administrative file, defending the legality and maintenance of the assessment acts that are the subject of the present request for arbitral decision, with the following grounds that are, summarily, reproduced:

- The assessments in question were made following an internal inspection procedure, of partial scope, relating to Corporate Income Tax for 2012, to the taxable person B…, Ltd., aiming at the control of the withholding of Personal Income Tax resulting from the liquidation and distribution of the company;

- In view of the elements collected, it was found that on the date of dissolution and distribution, the company allocated to each of the partners, as a result thereof, a value exceeding the acquisition value of the corresponding shares, the value distributed by the partners, as a result of the liquidation, being €198,867.43;

- Although that value was subject to taxation in the individual sphere of each of the partners (paragraph a), of section 2 of article 81 of the CIRC, combined with paragraph i) of section 2 of article 5 of the CIRS, by withholding tax, at the liberatory rate of 25%, as per paragraph c) of section 1 of article 71 of the CIRS), on the date on which it was placed at the disposal (section 2 of paragraph a) of section 3 of article 7, combined with articles 98 and 101, all of the CIRS), the taxable person did not file the forms relating to the distribution of the company's assets;

- The Personal Income Tax and compensatory interest assessments contested were notified to the Respondent, by notification with time notice, on 29/12/2016, at 10:00, in the capacity of partner and representative of the dissolution, as certified validated by two witnesses, pursuant to article 232, section 1 of the Civil Procedure Code;

- Article 19, section 6, of the General Tax Law provides that legal entities that cease activity (in VAT and/or Corporate Income Tax) must, for tax purposes, designate a representative with residence in national territory, whose acts in tax matters, carried out in the name of the represented party, produce effects in their legal sphere, within the limits of the powers of representation conferred on them by law or by mandate (article 16, section 1, of the General Tax Law);

- Also article 23-A of the Commercial Registry Code requires that, at the time of registration of the closure of liquidation or cessation of activity, the representative be indicated for tax purposes, for mandatory communication, and electronically, to the tax administration services;

- In compliance with those legal provisions, "B…, Ltd." appointed the Claimant as representative before the AT, during and after the cessation of the company's activity, as appears in that company's tax registry, whose elements were communicated to the AT and have the evidentiary value provided for in articles 54, section 4 and 76 of the General Tax Law;

- Even if this were not the case, having been a partner-manager of the company, she would always represent it, so the notification of the Personal Income Tax and compensatory interest assessments was valid and effectively made to her person;

- The Claimant does not prove the mandatory commercial registration and publication of the minutes (resolutions) of appointment and cessation of whom she claims to have been the liquidator, a formality required by articles 151, section 7, of the Commercial Companies Code (CSC) and 3, section 1, paragraphs s) and t) and section 2, paragraph h), 14, 69, section 1, paragraph l) and 70, section 1, paragraph a), of the Commercial Registry Code (CRC), on pain of not being enforceable against third parties (as is the case of the State);

- The appointment of Mr. C… as liquidator does not clearly result from the content of Minutes no. 29, and should be understood that all administrators of the company are liquidators, according to the general rule provided in article 151, section 1, of the CSC;

- As for the alleged error in the quantification of the tax, the accounting was approved, registered and published in the commercial registry, having produced all effects in relation to third parties (which includes the AT) on that same date, as results from the legal provisions above mentioned of the CSC and CRC;

- As results from the Final Inspection Report, the Claimant was notified to, if it so wished, exercise the right of hearing within a period of 15 days on the draft corrections;

- The notification was received on 25/11/2016, without the Claimant having challenged the corrections which she now questions, or attached any documentation, so the draft report became a final report;

- The Claimant cannot say that the notification was a surprise to her, because if she thought that it should not be made to her person and that the corrections were wrong because they concerned accounting which she herself approved, also wrong, she had the opportunity to say so in the hearing on the merits and said nothing;

- However, if the Tribunal considers that the corrections were made in an amount exceeding what was due (by €24,576.11), because the debt to D… was not recognized, then the litigation costs must be entirely paid by the Claimant, who gave rise to the case;

- If the Claimant had exercised her right to prior hearing, pronouncing on the facts in question and attaching the documentation which she now attached, perhaps the present action would not exist, at least in that part;

- As for the arguments put forward by the Claimant arguing that the AT should have notified the partner C… or all partners of the company, she well knows that this could not have been done in those terms and that such notifications would be invalid, because the Claimant was indicated by the company as its representative before the AT.

On 23/11/2017, at 11 o'clock, a meeting took place at the CAAD premises, as referred to in article 18 of the RJAT, in which two of the witnesses called by the Claimant were examined, which dispensed with the hearing of the third witness indicated.

The witness, Mr. E…, who identified himself as the Claimant's husband, resident at the same address as hers, gave the following testimony:

- He has been married to the Claimant for about 30 years and the company "B…, Ltd." existed for twenty and some years, managed by his father-in-law (Mr. C…), who was the one who "called the shots" (2.40) and that the Claimant was only "the daughter of the owner of the company";

- The Claimant was appointed manager after the death of her sister (3.45), because it might be necessary to carry out some urgent act, which happened very few times, because it was the father-in-law who "took care of the activity";

- They had no knowledge of this appointment [of the Claimant as representative of the company], so it was with surprise that they saw a notification appear at their personal residence from a company that belonged to the father-in-law and with which they had nothing to do (6.34);

- He was not aware that the Claimant had accepted the representation of the company, on 28/03/2012, as appears in the AT's registry (9.47);

- Since the mother-in-law died, about three or four years ago, the whole family spends Christmas and New Year in the Algarve, at a property they have there (the family is small, as neither the Claimant nor her husband have siblings and the witness's parents have also passed away): the father-in-law and the children also go; they leave before Christmas and only return after New Year, as happened in 2016; they usually invite friends, as also happened on the passage from 2016 to 2017; the friends returned on the 1st and the Claimant's family only on 2/01/2017 (11.20);

- At Christmas time 2016, they went to the Algarve by car driven by the witness, via motorway (16.37);

- They did not take photographs (17.20);

- Upon return, they found no notification affixed to the door of their house; the entrance door is next to the public way (18.14).

The witness, Mr. F…, said he had been a friend of the Claimant and her husband for many years, in whose company he was during the passage from 2016 to 2017, at the house they own in the Algarve, in the Salgados area (24.38), to which he travelled by car, via motorway, accompanied by his wife and children, on 26/12/2016 (26.44); that the Claimant, her husband, the couple's children and Mr. C… (the Claimant's Father) spent Christmas there, from where they only returned on 2/01/2017 (27.09).

The witness said he returned home on 1/01/2017. He said they did not take photographs, but that probably the children did (27.35).

Following the examination of the first witness, two requests were dictated to the AT, pursuant to the principles of material truth and cooperation between the Parties:

- The AT requested that documentary proof be attached to the file of the Claimant and family's departure and return to and from the Algarve on the dates indicated in point 97 of the P.I., that is, the departure on 23/12/2016 and return on 02/01/2017, as well as other documentary evidence, namely photographic, of the stay in the Algarve;

- The Claimant requested that the AT attach to the file documentary evidence of her express acceptance of the capacity of representative of the dissolution of the company "B…, Ltd.".

By agreement between the Parties, it was decided that the case would proceed with successive written arguments, for a period of thirty days, starting with the Claimant, which led to the extension of the deadline referred to in section 1 of article 21 of the RJAT, pursuant to section 2 of the same article, fixing 2/03/2018 for the delivery of the arbitral decision and warning the Claimant that, until that date, she should proceed to pay the remaining arbitration fee.

The Claimant presented her Written Arguments on 5/01/2018, in which she reiterated the arguments put forward in the request for arbitral decision, without producing the additional documentary evidence requested by the Respondent.

The AT did not present counter-arguments.

II. PROCEEDINGS MANAGEMENT

The sole arbitrator is competent and was regularly constituted on 4/07/2017, in accordance with articles 2, section 1, paragraph a), 5 and 6, all of the RJAT.

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

The case is not afflicted with defects that would invalidate it.

No exceptions were raised that the tribunal should examine and decide.

III. GROUNDS

III.1 MATTER OF FACT

With regard to the matter of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather it is its duty to select the facts that matter for the decision and discriminate between the proven and unproven facts (see article 123, section 2 of the Code of Tax Procedure and Process and article 607, section 3 of the Civil Procedure Code, applicable by virtue of article 29, section 1, paragraphs a) and e) of the RJAT).

Thus, the factual matter relevant for the understanding and decision of the case, after critical examination of the documentary evidence attached to the P.I., of the facts alleged and not contested, of the testimonial evidence produced and of the administrative file (P.A.) attached to the file, is set out as follows:

A – Proven Facts

- The company "B…, Ltd." was a limited partnership company established on 22/09/1992, with headquarters at… Street, no.…, …-…, …, whose dissolution and closure of liquidation was registered at the Commercial Registry Office of… by Entry…, AP 6/…, with cancellation of its respective enrollment by Entry..:, OF… of AP. 6/… – see permanent certificate and publication on the Justice Portal website, with copies attached to the PA;

- From the Entry relating to dissolution and closure of liquidation, there is no identification of any liquidator, with the Claimant, partner-manager appointed on 4/08/2010 (see minutes 25, of the same date – Doc. 5 attached to the P.I., with registration by Entry no.…, AP… /…), appearing as custodian of the accounts approved on 28/03/2012 – see the Docs. indicated in the preceding point;

- The dissolution, closure and liquidation of the company with immediate effects was decided by the respective General Assembly (see Minutes 29, of 28/03/2012, attached to the P.I. – Doc. 6), on the grounds of debts to suppliers, in particular to D…. In order to amortize the said debt, it was decided that the partner C…, mandated to act with the competent entities in accordance with what was decided, would transfer to the company the property right over the land where the operational headquarters of the company was located;

- From the company's registry in the AT's System of Management and Registry of Taxpayers, on 17/03/2012, there is the cessation of activity for VAT purposes, on 29/02/2012 and, as representative of the cessation, C…, with Tax Identification Number…; on 28/03/2012, from that date onwards, the cessation for income tax purposes was registered, motivated by the closure of liquidation, with the Claimant appearing as representative of the same cessation – Doc. 6, attached to the P.I.;

- On 6/09/2012, by public deed of purchase and sale executed at the notary office under the charge of Notary G…, registered therein at pages… to… v., of Book…-J, C… and his wife, H…, sold to the company "D…, SA", for the price of €83,111.64, their property right over the land of the urban property composed of a petrol station for liquid fuel for motor vehicles, registered in the property register of the parish of…, municipality of Palmela, under article… – Doc. 7, attached to the P.I.;

- Payment of the price was made on the same date above, through check no.…, from Bank I…, on the account of D…, SA and was endorsed in blank by the sellers – Doc. 7, attached to the P.I.;

- On the same date as the sale, the sellers issued a statement, whose signatures were notarially recognized, in which they declare having sold to D…, SA the urban property identified in 5, to have received the amount of €83,111.64, evidenced by check no.…, from Bank I…, which, simultaneous act, they endorsed to D… for payment of the debt of the company "B…, Ltd.", "resulting from the supply of fuel and other products delivered by D… to the commercial establishment (petrol station) operated by that B…, Ltd.". The representatives of D… declared that they received and agreed with the text of the statement. – Doc. 8, attached to the P.I.;

- The "Individual Financial Statements" of the company, presented on 17/09/2012, reported on the date of dissolution, do not reflect any liability – Doc. 9, attached to the P.I.;

- The company B…, Ltd. was subject to a tax inspection procedure promoted by the Finance Department of…, from whose Tax Inspection Report, hereinafter RIT, attached as Doc. 1 to the P.I. and to the P.A., the following appears:

It is an internal procedure determined by service order no. OI2016…, of 01/02/2016, of partial scope, relating to the year 2012, which had as its object "the control of operations related to the liquidation and distribution of the company (…), as well as whether the respective withholding tax was made in Personal Income Tax (IRS), in accordance with the provisions of paragraph i) of section 2 of article 5, as a result of the provision of paragraph c) of section 1 of article 71, combined with article 101, all of the CIRS" – page 5 of the RIT;

"According to the declaration of commencement of activity (…), as well as from the permanent certificate of the Commercial Registry Office (Annex 1) (…) it was a limited partnership company, with capital of €24,939.90, fully paid up (…)" – page 5 of the RIT and Annex 1;

As at the date of dissolution and closure of liquidation, the share capital was distributed among four shares: €11,222.95, €11,222.95, €1,247.00 and €1,247.00, the latter belonging to the Claimant – page 5 of the RIT and Annex 1;

"With regard to the period under analysis, the taxable person presented the income declaration Model 22, within the deadline provided for by law"; (…) "presented the annual statement of accounting and fiscal information – IES (…)"; (…) "did not file the withholding tax forms, relating to the distribution of the company's assets, as provided for in article 71 of the Personal Income Tax Code (CIRS)" – page 7 of the RIT;

At the beginning of the inspection action, a telephone contact was made with the Claimant, in order to locate the company's accounting, with her informing that it was in the possession of the Certified Accountant – page 7 of the RIT;

(…) "various elements were requested (…) from the Certified Accountant, namely the analytical trial balance prior to and after the appraisal of results as at 2012-03-28, the Diary of movements relating to the operations of dissolution and liquidation of the company (Annex 2) and the minutes relating to the closure" – page 7 of the RIT;

(…) "the company on the date of dissolution and closure of liquidation allocated to each of the partners, a value exceeding the acquisition value of the corresponding shares" – page 8 of the RIT;

(…) "This value is subject to taxation in the individual sphere of each of the partners, as provided in section 1 and 2 of article 81 of the CIRC, in the 2012 version (…) are subject to taxation at the moment they are placed at the disposal of the partners (…) this moment occurred on 2012-03-28, the value of withholding being calculated in accordance with the trial balance and the IES of the year 2012 (Annex 3), which appears in the following table (pages 8/9 of the RIT):

[Table in original]

- The taxable person was notified on 25/11/2016 to, if it so wished, exercise the right of hearing on the draft RIT, a right which it did not exercise, and a final RIT was drawn up, in accordance with article 62 of the RCPITA;

- The final version of the RIT was notified to the Claimant, in the capacity of Representative of the Dissolution of the company "B…, Ltd.", by means of office no.… of the Finance Department of…, of 15/12/2016, sent to her address under registered letter with acknowledgment of receipt (CTT registration no. RF…PT), where it was received on 27/12/2016;

- The said notification contained the following information: "(…) Shortly, the AT services will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable. No complaint or challenge is available against the present notification and its grounds.";

- Following the inspection procedure, the AT issued the assessments of "Personal Income Tax – Capital – Other income", no. 2016… and of compensatory interest no. 2016…, relating to the year 2012, for the amounts of €49,716.86 and €9,087.96, respectively, to which corresponds the collection note no. 2016…, in the total amount of €58,804.82, with payment deadline of 25/01/2017 – Doc. attached to PA and Docs. 2 and 3 attached to the P.I.;

- On 27/12/2016, the Tax Inspection Services of the Finance Department of… issued a warrant for personal notification of the collection note relating to the Personal Income Tax and compensatory interest assessments for the year 2012, to the person of the Claimant, in the capacity of partner and representative of the dissolution of the company "B…, Ltd." – Doc. attached to PA;

- On 28/12/2016, two employees of the Finance Department of… went to the Claimant's house, one of them serving as witness, in order to proceed with her personal notification of the assessments mentioned and, not having found her, left indication of time notice, in accordance with section 1 of article 232 of the CPC, for 29/12/2016, at 10 a.m. – Doc. 4, attached to the P.I. and PA;

- On 29/12/2016, at 10 a.m., with neither the Claimant nor any other person being at her house, the employees who went there, effected, in the presence of two witnesses, the notification of the Personal Income Tax (withholding tax) and compensatory interest assessments for 2012, by affixing a personal notification note – Doc. 4, attached to the P.I. and PA;

- Through office no.… of the Finance Department of…, of 30/12/2016, sent under CTT registration no. RF… PT, the notification elements were sent to the Claimant – Doc. 4, attached to the P.I. and PA;

- The Claimant proceeded to payment of the collection note of the Personal Income Tax and compensatory interest assessments for the year 2012 (fact not contested).

B – Unproven Facts

It was not proved that the Claimant failed to receive personal notification of the Personal Income Tax and compensatory interest assessments for 2012, for a reason not attributable to her.

C) Grounds for the determination of the matter of fact

The determination of the matter of fact was based on the critical analysis of the documentary evidence attached to the file, testimonial evidence and the facts alleged and not contested by the Parties.

III.2 MATTER OF LAW

Issues to be decided

The issues to be decided in the present case, raised by the Claimant, are whether (i) there was irregularity in the notification of the Personal Income Tax and compensatory interest assessments for the year 2012 to her person, for not being the representative of the dissolution of the company "B…, Ltd."; (ii) whether, given that the company was extinct on the date of issuance of the assessments, the partners should have been notified individually of the portion of tax and interest corresponding to the income allocated to them as a result of the distribution, due to the impossibility of tax substitution; (iii) whether, the extinct company being responsible for withholding tax and payment of the tax due, the notification of the Personal Income Tax and compensatory interest assessments issued by the AT were validly notified within the deadline for statute of limitations on the right to assess; (iv) whether the existence, on the date of closure of liquidation, of a social debt not reflected in the company's accounting is likely to influence the result of the liquidation and distribution of the respective balance and, consequently the determination of taxable matter and the quantitative amount of the tax liability to be assessed and, finally, (v) the issue raised by the Respondent, relating to the allocation of litigation costs, in the event of partial annulment of the contested assessments.

Order of examination of the defects

In accordance with the provisions of article 124 of the CPPT, subsidiarily applicable to the tax arbitral process by virtue of the provisions of article 29, section 1, paragraph a) of the RJAT, given that no defects leading to a declaration of non-existence or nullity are attributed to the contested assessments, nor is a relationship of subsidiarity indicated between them, the order of examination of the defects should be the one which, according to the prudent discretion of the judge, ensures more stable or effective protection of the offended interests.

In the case at hand, it is believed that the examination of the issues raised by the Claimant in the request for arbitral decision should follow the order indicated above.

(i) Of the irregularity of the notification of the Personal Income Tax (withholding tax) and compensatory interest assessments for the year 2012 contested in this case:

The Claimant argues that she was never appointed liquidator or representative of the company, and cannot be considered "Representative of the Dissolution", a position which she never accepted, having only agreed to be custodian of the books of the dissolved company.

However, according to the Permanent Certificate of the company in the Commercial Registry, the dissolution and closure of liquidation were simultaneous, with immediate distribution of the available balance, in accordance with the accounts approved on 28/03/2012, which corresponds to the provision of article 147 of the Commercial Companies Code (CSC) and which is only possible if there are no social debts.

In this situation, in the case of a simplified form of liquidation, part of the doctrine considers that the absence of liquidators seems to be presupposed (although the distribution operations may require the functions of a liquidator), not preventing the distribution the existence of debts of a tax nature still not due on the date of dissolution (as would be the case with Personal Income Tax withholding, due from the 20th day of the month following the month in which they should have been made – see article 98, section 3 of the CIRS), for which "all partners are unlimitedly and jointly liable" (section 2 of article 147 of the CSC).

Even if this were not the case, the fact is that, given that there was no express appointment of liquidator, no mandatory registration in the commercial registry, nor registration of a contrary resolution, the general rule contained in section 1 of article 151 of the CSC applies, according to which "the members of the administration of the company become liquidators thereof from the moment it is considered dissolved".

And, pursuant to section 1 of article 26 of the General Tax Law, the liquidators become personally and jointly liable for the tax debts of the liquidated company.

The Claimant argues that, having been neither expressed acceptance of the capacity of liquidator nor of representative of the dissolution, she could not have been notified of the Personal Income Tax (withholding tax) and compensatory interest assessments for the year 2012 issued in the name of the company.

However, as Carolina Cunha[1] points out, if the general rule of section 1 of article 151 was not waived (as appears to be the case here), one of the problems that arises is whether expressed acceptance of the designated or appointed subjects is necessary, it seeming "reasonable the understanding that no one can be forced, against their will, to exercise the function of liquidator. Therefore, besides the possibility of resignation (which presupposes that investiture of functions has already occurred) it is admissible the hypothesis that the subjects in question simply do not accept the appointment or designation (…) the manifestation of non-acceptance should take place timely (i.e. until the moment of dissolution), under pain of entering into functions (to which they may, naturally, resign).

The Claimant therefore lacks grounds in founding the irregularity of notification of the contested assessments on the non-acceptance of the position of liquidator of the extinct company, admitting that, even with immediate distribution, this function subsists.

The same applies, mutatis mutandis, with respect to the representation of the company, for tax purposes: that, pursuant to article 23-A of the Commercial Registry Code (CRC), the representative for tax purposes must be mandatorily indicated, in accordance with section 4 of article 19 of the General Tax Law (General Tax Law) for mandatory communication to the tax administration services.

Although Mr. C… appears, on 17/03/2012, in the company's registry with the AT, as representative of the dissolution for VAT purposes, the Claimant does not deny, but rather affirms, having accepted being custodian of the company's accounting books, as, moreover, appears in the Permanent Certificate of the Commercial Registry, a situation reflected in the AT's System of Management and Registry of Taxpayers from 28/03/2012 onwards.

Commercial companies that carry on, as a main activity, a commercial, industrial or agricultural activity, with headquarters or effective management in Portuguese territory, are obliged to have organized accounting, with the books, accounting records and respective supporting documents to be kept in good order for a period of 10 years (see section 4 of article 123 of the Corporate Income Tax Code, as worded in 2012), in order to allow inspection by the AT of the fulfillment of its tax obligations.

Being the responsibility of the administrators joint and several (and of the partners, in the situation provided for in article 147 of the CSC), the AT may require the fulfillment of the tax obligation to any one of them; however, the partner-manager of the extinct company who, moreover, is custodian of the respective accounting elements, cannot fail to be regarded as a privileged interlocutor with the AT, with regard to the legal-tax relationships of the extinct company.

For the reasons set out above, it should be concluded that the notification of the company B…, Ltd." to the person of the Claimant, in the capacity of partner-manager and representative of its dissolution was regular.

(ii) Of the alleged impossibility of tax substitution by the extinct company; the individual responsibility of the partners for payment of the tax not withheld:

Tax substitution operates, as a rule, by withholding tax (article 20, section 2 of the General Tax Law), there being a distinction between situations of tax substitution in the proper sense or on a final basis, and those in the improper sense or on account.

In any of its modalities, tax substitution with withholding tax occurs whenever, by legal mandate, the tax liability is demanded of a person other than the taxpayer, in relation to whom the taxable event occurs. The substitute is thus bound by two duties: the duty of withholding and the duty of remittance to the State of the withheld tax and, the breach of either of these duties, gives rise to the responsibility of the substitute, whose scope differs depending on whether it is withholding on account or withholding on a final basis, in accordance with article 28 of the General Tax Law (as worded in 2012):

Article 28 – Responsibility in case of tax substitution

1 - In case of tax substitution, the entity obliged to withhold is responsible for the amounts withheld and not remitted to the State coffers, with the substitute being relieved of any responsibility for their payment, without prejudice to the provisions of the following sections.

2 - When withholding is made merely on account of the tax due finally, the substitute is responsible for the tax not withheld and the substitute is subsidiary responsible, remaining the latter subject to the compensatory interest due from the end of the remittance period to the end of the period for presentation of the declaration by the responsible party or until the date of remittance of the withheld tax, whichever is earlier.

3 - In other cases, the substitute is only subsidiary responsible for payment of the difference between the amounts that should have been deducted and those that actually were.

The situation in the present case, in which there was neither withholding nor remittance of the tax due by the distribution of the liquidation balance (see articles 81 of the CIRC, 5, section 2, paragraph i), 71, section 1, paragraph c) and 101, section 2, paragraph a) of the CIRS, all as worded on the date of the facts), falls within the provision of section 3 of article 28 of the General Tax Law, as clarified by Diogo Leite de Campos and Others: "Section 3 contains a collection rule in which the substitute is also only subsidiary responsible, in accordance with articles 22 and 23".[2]

This is justified, according to Ana Paula Dourado, because, "In the case of withholding with a final character, if the tax has not been withheld, (…) the substitute bears joint and several liability for payment of the tax not withheld and respective compensatory interest.

The responsibility is joint and several, because in the case of final withholding, it is more difficult for the tax authority to recover the amount due from the substitute (…).

If the substitute is resident, he does not have to include the income withheld on a final basis, does not have to include them in the annual tax declaration, which means that it may be difficult for the tax authority to obtain the revenue due by executing the assets of the substitute. In other words, there is a risk of asset dissipation by the substitute, in the case of (lack of) final withholding. Hence the justification for joint and several liability, with the tax authority choosing between the execution of the assets of the substitute or of the substitute, considering which are the best chances of recovery of the debt due."[3].

One may then question whether, in the concrete case, in which the substitute is an extinct company, whose assets were distributed, the AT's choice to notify the Claimant of the Personal Income Tax (withholding tax) and compensatory interest assessments for 2012 owed by it will have been the solution most in accordance with the satisfaction of the tax credit.

Naturally, the AT could notify each partner individually of the assessment of the tax relating to the portion that fell to him in the distribution of the company's assets. But nothing required it to do so, given the joint and several responsibility between substitute and substituted, on one hand, and the joint and several responsibility of the partners of the dissolved, liquidated company whose assets were distributed for debts of a tax nature still not due on the date of dissolution, for whose payment the partners could have reserved, by any means, the amounts necessary for this purpose (see the final segment of section 2 of article 147 of the CSC).

It is thus concluded that there is nothing to censure the AT for in the notification of the contested assessments, to the person of the Claimant.

(iii) Of the statute of limitations on the right to assess:

The statute of limitations on the right to assess is one of the causes of extinction of the legal-tax relationship and is configured as a guarantee for taxpayers[4], whose justification "derives from the general principles of Law, designed to ensure that situations of non-fulfillment of obligations do not remain eternally pending. Security and legal peace recommend the harmonization of limitation periods and that these are not too long."[5].

In our tax system, the right to assess taxes is barred if the assessment is not validly notified to the taxpayer within the general period of four years, when the law does not set another, with the statute of limitations on the right to assess constituting illegality that can be challenged pursuant to article 99 of the CPPT, as grounds for judicial challenge and request for constitution of an arbitral tribunal (article 10, section 2, paragraph c) of the RJAT).

Given that the present case concerns a situation of withholding on a final basis, the calculation of the limitation period started on 1/01/2013 and had its final term on 31/12/2016 (see section 4 of article 45 of the General Tax Law), the date until which the taxable person should have been notified of the assessments that are the subject of the request for arbitral decision.

However, the Claimant argues that such notification did not occur within the legal period because, having been made by notification with time notice, in accordance with articles 232 and following of the Civil Procedure Code (CPC), she was not at her residence, from which she was absent between 23/12/2016 and 1/01/2017, only becoming aware of the assessment on 05/01/2017, through the communication sent to her by the AT in accordance with article 233 of the CPC, after the lapse of the limitation period.

Section 3 of article 268 of the Constitution of the Portuguese Republic (CRP) guarantees taxpayers' right to notification of tax acts, "in the form provided for by law". Thus, acts in tax matters that affect their rights and legitimate interests only produce effects in relation to them when validly notified to them (article 36, section 1 of the CPPT).

Notifications of tax acts are postal (article 38, sections 1 to 4 of the CPPT) or personal, when the law so provides or when the entity proceeding with them considers it necessary (article 38, section 5 of the CPPT), in this case following the rules on personal service of process (article 38, section 6 of the CPPT)

For its part, section 6 of article 190 of the CPPT provides that "failure of notification occurs when the addressee thereof alleges and demonstrates that he did not become aware of the act for a reason not attributable to him", with the burden of proof of failure of notification, for a reason not attributable to him, falling on the notified party.

The Claimant's absence from her usual residence between 23/12/2016 and 1/01/2017 was deemed an unproven fact: not because the Claimant did not produce additional documentary proof of that absence, as requested by the AT at the meeting referred to in article 18 of the RJAT; but because the alleged absence collides with another fact affirmed by the Claimant herself and documentarily proved in the file – that of having been notified of the inspection report, sent to her address by registered letter with acknowledgment of receipt (office no.… of the Finance Department of…, of 15/12/2016, under CTT registration no. RF… PT) and received there on 27/12/2016 – see supra, points 10 and 11 of the factual record.

Now, if the Claimant affirms having received at her usual residence the notification of the RIT, on 27/12/2016 and was absent from it on 28/12/2016, when the AT employees went there to proceed with her personal notification and, not having found her, left her notification note with time notice for 29/12/2016, at 10 a.m. and, on 29/12/2016, at the indicated time, it was certified in the presence of two witnesses that, as neither the person to be notified nor any other person was present, the personal notification note referred to in section 4 of article 232 of the CPC was affixed to her door, subsequently supplemented with the sending of the notification elements by office no.… of the Finance Department of…, of 30/12/2016, notification with time notice whose regularity the Claimant does not contest, she cannot invoke non-knowledge of the notification of the contested assessments, for a reason not attributable to her, as she well knew that, in accordance with the RIT notification office, the AT services would shortly proceed with the notification of the respective assessment[6].

It is thus considered that the notification of the contested assessments occurred with the affixing of the respective note, on 29/12/2016, without the limitation period being shown to have lapsed.

(iv) Of the error in the determination of taxable matter

The Personal Income Tax (withholding tax) and compensatory interest assessments for the year 2012, whose legality is being examined in this case, were made following an internal inspection procedure and were based on the accounting of the company "B…, Ltd.".

The Claimant now invokes an error in that accounting, in which a social debt in the amount of €83,111.64 is not reflected, and from the correction of which would result a decrease in equity, the liquidation balance and, consequently, the result of the distribution. From which would result a tax assessment, in the amount of €28,938.84 and of compensatory interest, of €5,289.87, in a total payable of €34,228.71.

For this purpose, the Claimant attaches the documents indicated in points 3 and 5 to 7 of the factual record, which attest to the sale of a property belonging to the partners for payment of that social debt, of €83,111.64, documents whose veracity the Respondent does not contest.

And, in its Response, the AT states that, if the Claimant "had exercised her right to prior hearing, pronouncing on the facts in question and attaching the documentation which she now attached, perhaps the present action would not have existed, at least in that part".

According to the Conceptual Framework (CF) of the Accounting Standardization System (SNC), Financial Statements are prepared for the purpose of providing useful information to the common needs of most users, including the Government and its departments, as is the case of the AT.

They should therefore be reliable and faithfully represent "the transactions and other events that result in assets, liabilities and equity of the entity on the reporting date that meet the recognition criteria", so as to allow for "verification and substantiation, aiming at confirming compliance with the obligations of taxpayers and other obligated parties", one of the purposes of the tax inspection procedure (article 12, section 1, paragraph a) of the Complementary System of Tax and Customs Inspection Procedure – RCPITA).

On the other hand, pursuant to article 75 of the General Tax Law, declarations of taxpayers presented in accordance with the provisions of the law, as well as the data and computations recorded in their accounting or ledger, when organized in accordance with commercial and tax legislation, benefit from the presumption of veracity, a presumption that yields, in particular, when they reveal omissions, errors or inaccuracies.

However, one of the principles guiding the tax procedure is the principle of fairness (article 55 of the General Tax Law), of constitutional consecration, which imposes on the Public Administration "the pursuit of public interest, in respect of the rights and legally protected interests of citizens", for which its organs and agents should "act, in the exercise of their functions, with respect for the principles of equality, proportionality, fairness, impartiality and good faith" (article 266, sections 1 and 2 of the CRP).

The realization of the principle of fairness leads to the fact that, as written by Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa[7], "The activity of the tax administration cannot be limited to a mechanical application of the laws to situations of fact, and must always keep in mind the objective that justifies it, which is the pursuit of public interest (articles 266, section 1 CRP and 5 and 55 of the General Tax Law).

Therefore, the tax administration should refrain from acting in situations where, although the formal requirements of the abstract legal provisions of its action are met, this is not relevant for the pursuit of public interest".

In the case at hand, it is certain that the dissolved company did not recognize in its accounting a social debt in the amount of €83,111.64, which it now proves documentarily and which, had it been correctly recorded, would have determined a reduction in the tax and compensatory interest to be paid.

Not putting in question the veracity of that social debt, it is necessary to correct the taxable matter on which the Personal Income Tax (withholding tax) assessment being contested was based, from which no prejudice will result for the tax administration, as if there had been no error on the part of the taxpayer, no tax would have been assessed to the extent that it was.

Anticipating the decision, it will be said that the principle of fairness determines the partial annulment of the Personal Income Tax assessment no. 2016…, as well as of the compensatory interest assessment no. 2016… associated with it, with the tax to be assessed on the corrected taxable matter, of €115,755.79 (€198,867.43 - €83,111.64), at the rate of 25% in force on the date of the facts (article 72, section 1, paragraph c) of the Personal Income Tax Code), plus the compensatory interest to be assessed in accordance with article 35 of the General Tax Law.

(v) Of the allocation of litigation costs:

The amount and allocation of costs must be fixed in the arbitral decision, in accordance with section 4 of article 22 of the RJAT, with the general rule on costs being regulated by article 527 of the CPC, subsidiarily applicable to the tax arbitral process, by virtue of the provisions of article 29, section 1, paragraph e) of the RJAT.

Pursuant to the aforementioned provision, the party that gave rise to the costs is condemned to pay them, with the losing party being understood as giving rise to the costs of the case, in the proportion in which it is defeated.

However, the Respondent considers in its Response (article 76) that, even if the arbitral tribunal decides on the partial annulment of the Personal Income Tax and compensatory interest assessments, the Claimant should be condemned to payment of the arbitration fee, in its entirety, because "if she had exercised her right to prior hearing, pronouncing on the facts in question and attaching the documentation which she now attached, perhaps the present action would not have existed, at least in that part".

The right to prior hearing is a guarantee for taxpayers, aimed at their participation in acts or procedures that concern them, and which "seeks to ensure the co-responsibility of decisions" (…), as it "seeks to affirm the possibility of influencing, motivating, and helping the competent body to make the correct decision.".[8]

In the concrete case at hand, the corrections made by the tax inspection, which did not take into account the social debt of "B…, Ltd.", were based on an accounting error of that company, for the clarification of which the Claimant could have contributed in the exercise of the right of prior hearing on the draft RIT that was notified to her for this purpose.

Not having exercised that right, she failed to comply with the principle of cooperation referred to in section 4 of article 59 of the General Tax Law, and it cannot be said that, with respect to that portion of the correction made, it was the AT that gave rise to the case.

It is well known that the Respondent could have proceeded with the partial revocation of the contested acts, within the period referred to in section 1 of article 13 of the RJAT; however, this would entail supplementary activity on its part, contrary to the principles of promptness, effectiveness and efficiency of the administrative procedure, to which the right of participation of taxpayers in decisions affecting them tends.

Accordingly, as the Claimant gave rise to the action, in its entirety, she should bear the entire responsibility for payment of the litigation costs.

DECISION

Based on the grounds of fact and law set out above and, in accordance with article 2 of the RJAT, it is decided, partially upholding the request for arbitral decision, to determine:

- The partial annulment of the Personal Income Tax (withholding tax) and compensatory interest assessments for the year 2012, regarding the taxable matter relating to the social debt of €83,111.64;

- The condemnation of the Respondent to reimburse the Claimant the amount of the tax and compensatory interest paid in excess, to be calculated in execution of the present arbitral decision;

- The condemnation of the Claimant to payment of the entire arbitration fee.

VALUE OF THE CASE: In accordance with the provisions of article 306, sections 1 and 2 of the CPC, 97-A, section 1, paragraph a) of the CPPT and section 3, section 2 of the Regulation of Costs in Tax Arbitration Processes, the case is valued at €58,804.82 (fifty-eight thousand, eight hundred and four euros and eighty-two cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Processes and Table I attached thereto, in the amount of €2,142.00 (two thousand, one hundred and forty-two euros).

Notify.

Lisbon, 28 February 2018.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, in accordance with section 5 of article 131 of the CPC, applicable by cross-reference of paragraph e) of section 1 of article 29 of Decree-Law 10/2011, of 20 January. The wording of the present decision is governed by the 1990 spelling agreement.

[1] - See Carolina Cunha, "Commercial Companies Code in Commentary", Volume II, 2nd Edition, Jorge M. Coutinho de Abreu (Coord.), IDET, Almedina, 2015, page 697.

[2] - Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, "General Tax Law – Annotated and Commented", 4th Edition, Encontro da Escrita, 2012, page 262.

[3] - Ana Paula Dourado, "Tax Law – Lessons", Almedina, Coimbra, 2015, page 85.

[4] - Thus, José Casalta Nabais, "Tax Law", 7th Edition, Almedina, Coimbra, 2014, page 340.

[5] - Ana Paula Dourado, Op. Cit., page 117.

[6] See, in a similar sense, the Decision of the Plenary of the Tax Division of the Supreme Administrative Court, of 22/01/2014 – Case no. 01429/13, available at www.dgsi.pt, regarding the appeal of the Decision of the South Administrative Court, of 24/04/2012, Case no. 04760/11, based on the Decision of the STA in Case no. 0491/11, of 28/03/2012.

[7] - Work cited, page 452.

[8] Thus, Joaquim Freitas da Rocha, "Lessons in Tax Procedure and Process", 5th Edition, Coimbra Editora, 2014, pages 125 and 126.