Process: 306/2016-T

Date: December 26, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Case 306/2016-T addresses the taxation of capital gains from the sale of shares in a Portuguese company under Article 43(3) of the IRS Code. The central dispute concerns whether the company qualifies as a micro or small enterprise, which would allow only 50% of the capital gain (€27,016.09) to be taxed rather than the full amount (€53,899.68). The taxpayers initially received favorable treatment in an administrative review in October 2013, but the Tax Authority (AT) revoked this decision in November 2013, claiming the company was medium-sized according to IAPMEI certification. After filing an ex officio review request in January 2016 under Article 78 of the General Tax Law (LGT) that received no response for over four months, the taxpayers challenged the tacit denial through tax arbitration. The AT subsequently granted partial relief in June 2016 but refused compensatory interest. The taxpayers argued that previous CAAD precedents involving the same company and AT's own Circular 7/2014 supported classification based on material criteria in Decree-Law 372/2007 rather than formal IAPMEI certification alone. The case raises critical procedural issues regarding the challengeability of tacit denials of ex officio review requests and substantive questions about enterprise classification methodology for capital gains taxation. Additionally, it addresses taxpayers' entitlement to compensatory interest when the tax authority delays correcting erroneous assessments, with the tribunal having to determine its competence to rule on such claims.

Full Decision

ARBITRAL DECISION

PARTIES

Applicants: A…, NIF nº … and B…, NIF nº …, resident at Rua …, n.º…, ...º, …-… Lisbon.

Respondent: Tax and Customs Authority (AT)

I. REPORT

a) On 03-06-2016, the Applicants filed with CAAD a request seeking, under the Legal Framework for Arbitration in Tax Matters (RJAT), the constitution of a Singular Arbitral Tribunal (TAS).

THE REQUEST

b) The Applicants request the annulment of the IRS assessment for the year 2012 – assessment 2013 … – in the part concerning the autonomous taxation of capital gains for the year 2012, not accepting the taxation of 53,899.68 euros but only 27,016.09 euros, requesting the partial annulment of 26,883.59 euros, pursuant to the regime of article 43-3 of the IRS Code.

c) They filed an administrative review of the assessment in August 2013. They obtained a favorable decision by order dated October 2013. However, in November 2013 that decision was revoked by the AT on the ground that the company whose share had been alienated was not a small or micro enterprise, but a medium-sized enterprise according to IAPMEI certification, and therefore could not benefit from the exclusion under n.º 3 of article 43 of the IRS Code.

d) On 04.01.2016 they filed with the Tax Office of Lisbon –… a request for ex officio review under article 78 of the General Tax Law (LGT), as more than 2 years had elapsed since the date of the revocation of the favorable administrative review decision (dated November 2013) and from the date of filing with CAAD (on 03.06.2016) of the present request for arbitral pronouncement, they had not obtained an express decision from the AT.

e) It is on the basis of this ex officio review request, which they presume to have been implicitly rejected under the terms of article 57-1 of the LGT, that they hereby file this impugnation.

f) They further request the condemnation of the AT to reimburse the amounts they paid, plus compensatory interest.

g) Tax assessed on the onerous alienation of a share in the company "C…, Lda", which they argue should be assessed only at 50% of the capital gain, since it is a micro or small enterprise not listed on the securities market.

h) On 20.09.2016 the Applicants filed with the case a decision granting the ex officio review request "which preceded the request for arbitral pronouncement in the present case". Faced with the AT's position, (invoking the unarguability of the act of tacit rejection, the unarguability of the assessment act, the incompetence of the TAS to appreciate the request for compensatory interest and attributing responsibility for costs to the Applicants) they stated in their submissions: "… the AT's decision of 09-06-2016 was limited to the partial annulment of the assessment, refraining, however, from recognizing the right to compensatory interest to which the Applicants are entitled, under the legal terms. Furthermore, the materialization of the effects of that decision, through the reimbursement of the wrongfully assessed and paid amount, was only effectuated on 30 August of that year". "In these terms, not only did the assessment act that had not yet been annulled at the date the present request for arbitral pronouncement was filed constitute the object of impugnation, but the continuation of the case is justified, under the terms referred to above, regarding the recognition of the right to compensatory interest, as petitioned."

i) Arguing for the dismissal of the exceptions, they conclude that the case should proceed for recognition of the right to compensatory interest, and the costs should be attributed to the Respondent under the legal terms.

THE GROUNDS FOR THE CLAIM

j) The Applicants invoke the illegality of the impugned act, which they consider to violate the law due to possible error in the application of law by the AT.

k) Since the assessment is not in accordance with n.º 3 of article 43 of the IRS Code.

l) They state in this regard the following: "regarding the same question and the same company, CAAD has already rendered several arbitral decisions, all in the sense advocated by the applicants, namely, that we were dealing with a small or micro enterprise and that, therefore, the taxation of capital gains should apply only to 50% of the acquisition value, taking into account the material requirements contained in the annex to Decree-Law n.º 372/2007, of 6 November (e.g., cases n.º 155/2014-T and 362/2014-T)". "This understanding was, moreover, to be expressly adopted by the AT itself, according to the order of its Director-General of 24-04-2014, disclosed through Circular n.º 7/2914, of 29 July of that year".

OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)

m) The request for the constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 28-06-2016.

n) By the Deontological Council of CAAD an arbitrator was designated, the undersigned, and the parties were notified thereof on 10-08-2016. The parties did not manifest a wish to refuse the designation, under the terms of article 11 n.º 1 paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

o) The Singular Arbitral Tribunal (TAS) has been, as of 26-08-2016, duly constituted to appreciate and decide on the subject matter of this dispute (articles 2, n.º 1, paragraph a) and 30, n.º 1, of the RJAT).

p) All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 26-08-2016 which is hereby reproduced.

q) As of 26-08-2016 the AT was notified under the terms and for the purposes of article 17-1 of the RJAT.

r) By order of 26.09.2016 the AT was given a supplementary period of 15 days (counted after 30.09.2016) since the Applicants, in the course of the period for response, presented the request mentioned in h) of this report. They responded on 14.10.2016. They attached the tax file composed of 17 computer files.

s) By order of 24.10.2016 the TAS questioned the parties as to whether they waived the meeting under article 18 of the RJAT and, since exceptions were raised in the response, if they gave their assent to the subsequent procedural course only with the production of successive written submissions. Both parties expressly accepted this procedural proposal according to requests of 25.10.2016.

t) On 21.11.2016 the TAS set a deadline of 10 days for successive written submissions by the parties.

u) On 25.10.2016 the Applicants submitted written submissions. On 14.12.2016 the Respondent also submitted written counter-submissions.

v) The parties' meeting under article 18 of the RJAT was not held, as described above.

PROCEDURAL REQUIREMENTS

w) Legitimacy, capacity and representation – The parties possess legal personality, procedural capacity, are legitimate parties and are represented (articles 4 and 10, n.º 2, of the RJAT and article 1 of Order n.º 112-A/2011, of 22 March).

x) Principle of contradictoriness – The AT was notified under the terms of items q) and r) of this Report. All procedural documents and all documents attached to the case were made available to the respective opposing party in the CAAD's Case Management System (SGP). All parties were notified of their attachment. Similarly, regarding the subsequent procedural course, the TAS followed what results from the expressed position of the parties as written in paragraphs s) to u) above.

y) Dilatory exceptions – The arbitral case does not suffer from nullities and the request for arbitral pronouncement is timely since it was presented within the prescribed period in paragraph a) of n.º 1 of article 10 of the RJAT, as results from the fact that the Applicants filed the present request for pronouncement with CAAD on 03.06.2016 based on the presumption of rejection of a request for ex officio review of the IRS assessment filed with the AT on 04.01.2016, no decision or any pronouncement having been adopted within the subsequent 4 months (article 57-1 of the LGT).

SUMMARY OF THE APPLICANTS' POSITION

The request for pronouncement

z) The Applicants disagree with the IRS assessment for the year 2012 – assessment 2013 … – in the part concerning the autonomous taxation of capital gains, not accepting the taxation of 53,899.68 euros but only 27,016.09 euros, requesting the partial annulment of 26,883.59 euros, arguing for the application of the regime of article 43-3 of the IRS Code.

aa) Since, at the time of the alienation of the shares (in November 2012) "all the requirements enumerated in n.º 2 of article 2 of Decree-Law n.º 372/2007, of 06/11, were met for one to consider that one was dealing with a small enterprise".

bb) "During the course of 2015, the applicants became aware that the correctness of their position had been upheld in two arbitral cases (proc. n.º 155/2014-T and 362/2014-T) involving two colleagues of the applicant - same situation, same company and same tax and also by the AT itself in Circular n.º 7/2014, of 29 July".

cc) And they mention that "Because the AT ruled on the administrative review in November 2013, the applicants waited for the expiration of the two-year period (article 9, 2 of the CPA and 13, 2, of the NCPA) to present a Request for Review, under and in accordance with article 78 of the LGT, which was filed with the AT Services on 04-01-2016".

dd) And they conclude: "As no decision was rendered by May 2016 … by the AT it is to be presumed, under the legal terms (article 57, 1, of the LGT), the tacit rejection for purposes of judicial impugnation or request for arbitral pronouncement, whereby the present request is filed".

Regarding the exceptions raised by the AT in the Response

Unarguability of the act of tacit rejection

ee) They mention that "… the Respondent does not fail to point out the manifest possibility of the review request initially presented being rejected, on the ground of the non-existence of the duty to decide under article 56, n.º 2, al. a), of the LGT, and that the request presented secondly would have the purpose of 'opening the contentious path through tacit rejection, bypassing the limitation of the two-year period provided for in article 56, n.º 2 of the LGT.'"

ff) And they continue: "That is, the AT shows itself to have perfectly understood the intent of the review request presented in January 2016, it is not seen what may constitute grounds for criticism, as that Response seems to suggest, the fact that taxpayers seek to ensure recourse to justice, in case of rejection, very especially on the ground of the non-existence of the duty to decide, of a request for review of a manifestly unfair and admittedly illegal tax situation".

gg) Concluding: "Thus, as can well be extracted from the Respondent's response in the present case, justified was shown the Applicants' fear that the AT, aiming to avoid a decision on the merits of the request, would invoke, regarding the review request submitted on 20-03-2015, the norm of paragraph a) of n.º 2 of article 56 of the LGT, that is, precisely, the non-existence of the legal duty to decide".

hh) And concluding their reasoning: "The presentation in January 2016 of a new ex officio review request does not translate into a mere exposition or atypical petition, but aims at practical effects which, in essence, translate into ensuring for the Applicants access to tax justice which, otherwise, would be denied them before an always possible AT response in the sense of the non-existence of the duty to decide or possibly merely silent. As the Respondent does not fail to recognize, albeit drawing therefrom a conclusion precisely contrary to the application of justice, namely, by way of access to courts".

Unarguability of the assessment act

ii) Regarding the revocation of the assessment act on 09.06.2016, they mention that "… at the time the annulment decision to which the Respondent makes reference was rendered, the request for arbitral pronouncement that gave rise to the present case had already been presented". "However, recognizing the flagrant illegality of the assessment act annulled through that decision, which had as its genesis an error of law, exclusively attributable to the Tax Administration, the right was requested, and should have been recognized, to compensatory interest". "That right was not, however, recognized. And, on this matter, the Respondent intends that the present case does not constitute the appropriate means for the Applicants to be compensated for payment made in error resulting from an error of the Administration".

jj) And they conclude: "In these terms, not only did the assessment act that had not yet been annulled at the date the present request for arbitral pronouncement was filed constitute the object of impugnation, but the continuation of the case is justified, under the terms referred to above, regarding the recognition of the right to compensatory interest, as petitioned".

Incompetence of the TAS to appreciate the remaining request for compensatory interest

kk) They argue the following: "once the exception regarding the unarguability of the assessment act is judged without merit and the continuation of the case for consideration of the merits of the case is determined, as requested, the question of the Tribunal's incompetence regarding the recognition of the right to compensatory interest is rendered moot". "Indeed, the request should be judged with merit regarding the recognition of the right to compensatory interest, under the norm of n.º 1 of article 43 of the LGT, counted under the legal terms, as petitioned".

Regarding procedural costs

ll) According to the Applicants, since the exceptions raised by the AT should be judged without merit, the case should proceed for recognition of the right to compensatory interest and the procedural costs should be attributed to the Respondent under the legal terms.

SUMMARY OF THE RESPONDENT'S POSITION

Unarguability of the act of tacit rejection of the ex officio review request n.º …2016…, presented on 04.01.2016

mm) The Respondent alleges the following: "… subsequently to the order rejecting the administrative review, rendered on 08-11-2013, and at a time prior to the day 04-01-2016, date of presentation of the review request whose tacit rejection the Applicants presume, was filed with the Tax Office of Lisbon …, on 20-03-2015, the ex officio review request initiated under n.º …2015… (of 20.03.2015)",

nn) It adds, concluding " … finding itself pending appreciation the review request n.º …2015… (of 20.03.2015), the mere repetition, on the day 04-01-2016, of the same request based on the same grounds with the aim of achieving the same legal effect (perhaps with intent, only, of opening the contentious path through tacit rejection, bypassing the limitation of the two-year period provided for in article 56, n.º 2 of the LGT) does not impose on the AT a legal duty to decide, but only a duty of pronouncement, under the terms of n.º 1 of article 56 of the LGT".

oo) And terminates: "And absent a legal duty to decide there is no need to resort to the presumption of tacit rejection 'for purposes of judicial impugnation or request for arbitral pronouncement', as the Applicants intend". "Whereby, we are 'in casu' before a situation of unarguability of the act of tacit rejection of the ex officio review request presented on the day 04-01-2016".

Unarguability of the IRS assessment n.º 2013 …

pp) The Respondent states that "the ex officio review request n.º …2015…, presented on 20-03-2015, was partially granted by order from the IRC Services Directorate, dated 09-06-2016, which determined the correction of the 2012 IRS assessment, excluding from taxation the balance of capital gains calculated at 50%, on the grounds of the verification of the requirements provided for in n.º 3 and 4 of article 43 of the CIRS".

qq) And it adds: "Whereas the decision has already been materialized, the reimbursement having been issued, in the amount of € 27,058.21, paid to the Applicants by interbank transfer on 30-08-2016".

rr) Concludes: "In this manner, the present arbitral action lacks an object, in as much as the assessment act in the part that the Applicants considered to be injurious was eliminated from the legal order, they having obtained the legal effect sought, through the rendering of the decision in an administrative procedure for ex officio review initiated by them". "Hence it results that the 2012 IRS assessment act is unarguable by reason of the non-existence of a right or interest that should be legally protected, under the terms of article 95, n.ºs 1 and 2, paragraph a), of the LGT".

Material incompetence of the Arbitral Tribunal regarding the request for recognition of the right to compensatory interest.

ss) The Respondent states: "… before the demonstrated and indubitable unarguability of the IRS assessment act n.º 2013 … which prevents the continuation of the case for consideration of the existence of the defects imputed thereto, we are no longer before a request for recognition of the right to compensatory interest that is found in connection with a request for a declaration of illegality of any of the acts referred to in paragraphs a) and b) of n.º 1 of article 2 of the RJAT".

tt) And concludes: "Hence it results that, within the scope of an arbitral action decisions of condemnation or recognition of rights that do not result from the decision rendered under the declaratory powers, on the basis of illegality, set forth in article 2 RJAT, are not permitted".

uu) And since "… in casu, the only question still susceptible of judicial appreciation concerns an autonomous request for compensatory interest, in as much as no declaration of illegality of the assessment act will be rendered by the Arbitral Tribunal", concludes: "… it results that, the appreciation of the autonomous request for recognition of the right to payment of compensatory interest, formulated in the claim of the present arbitral action, does not fall within the scope of the competencies of the Arbitral Tribunal".

vv) It adds that "should the Arbitral Tribunal decide against the exceptions invoked, … determining the continuation of the action for consideration of the question regarding the request for compensatory interest, it is recalled that the Applicants identify as the object of the request for arbitral pronouncement the act of tacit rejection of the ex officio review request presented on the day 04-01-2016, under the terms of article 78 of the LGT", "… the payment of compensatory interest would be classifiable under n.º 3, paragraph c) of article 43 of the LGT, which determines that in situations of revision of the tax act by initiative of the taxpayer compensatory interest is owed only as of one year after the presentation of the review request, a period that has not yet elapsed".

Regarding procedural costs

ww) The Respondent considers that "the costs that may be fixed are the responsibility of the Applicants, as the constitution of the Arbitral Tribunal is only attributable to them".

xx) On the ground that "the object of the present request for arbitral pronouncement is the act of tacit rejection of the ex officio review request n.º …2016… (filed on 04.01.2016) that was presented when the review request n.º …2015… (presented on 20.03.2015) was already under consideration, which was to be expressly decided in the sense advocated by the Applicants".

yy) Since "… this 2nd review request is a mere repetition of the review request n.º …2015…, but enabled the Applicants to file an arbitral action through the route of tacit rejection, bypassing the limitation of the two-year period, provided for in article 56, n.º 2 of the LGT, in the course of the decision of the administrative review".

II - QUESTIONS WHICH THE TRIBUNAL MUST RESOLVE

Following the order indicated above, taking into account the response from the AT (and because the TAS should appreciate, in the first place, the exceptions as facts that are preventive, modifying or extinctive of the Applicant's claim), the questions to be resolved are as follows:

- The unarguability of the act of tacit rejection of the ex officio review request filed on 04.01.2016, which was the immediate object of the request for pronouncement;

- The unarguability of the IRS assessment n.º 2013 … which was the mediate object of the request for pronouncement;

- The material incompetence of the TAS regarding the request for recognition of the right to compensatory interest.

- Should none of the exceptions invoked be judged to have merit, the regime of procedural costs will then be appreciated in light of the partial granting of the ex officio review presented by the Applicants on 20.03.2015 and also the remaining request regarding compensatory interest to which the AT did not accede.

III. PROVEN AND UNPROVEN FACTS.
REASONING

Regarding the factual matter the Tribunal does not need to pronounce on everything that was alleged by the parties, it being incumbent upon it, rather, the duty to select the facts that matter for the decision and to discriminate between the proven and unproven matter (in accordance with article 123, n.º 2, of the CPPT and article 607, n.º 3 of the CPC, applicable ex vi article 29, n.º 1, paragraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated according to their legal relevance, which is established with attention to the various plausible solutions of the question(s) of law (in accordance with the preceding article 511, n.º 1, of the CPC, corresponding to the current article 596, applicable ex vi of article 29, n.º 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties and the documentary evidence attached, the following enumerated facts were considered proven, as they are moreover not contested by the parties, indicating the respective documents (proof by documents), as grounding.

Proven facts

1) The Applicants during the year 2012 alienated the shares they held in the company C…, Lda. to the company D…, SGPS, SA, having declared, in table 8, field 801, of Annex G of the IRS model 3 declaration filed in 2013, as the realization value the amount of € 226,395.00 and as the acquisition value the amount of € 22,500.00, as well as, in table 8-A, that the entity to which the alienation pertained was a micro or small enterprise – articles 2 and 3 of the request for pronouncement and article 3 of the response.

2) On 20-07-2013 the IRS assessment n.º 2013… was issued, in the amount of € 54,074.30, with the AT proceeding to tax the capital gains relating to the alienation of the shares in their entirety – article 8 of the request for pronouncement and article 4 of the response.

3) On 19-08-2013 the Applicants filed an administrative review, which was granted by order dated 25-10-2013, on the grounds of its illegality due to violation of the provisions of article 43-3 of the CIRC which determines the taxation of capital gains at 50%. – articles 9 and 10 of the request for pronouncement and article 5 of the response.

4) On 08-11-2013 the AT revoked the grant order referred to in the preceding number on the grounds that the company whose share was alienated was not a small or micro enterprise – article 11 of the request for pronouncement and article 6 of the response.

5) On 20-03-2015, the Applicants filed, with the Tax Office of Lisbon …, an ex officio review request, under article 78 of the LGT, of "the assessment of capital gains in the amount of € 54,074.30 collected in their IRS/2012", whose procedure was initiated on 23-03-2015 under n.º …2015… – article 7 of the response and overall position of the applicants at the level of submissions.

6) In November 2013, the Applicants received a citation notice (enforcement case n.º …2013…) to pay the amount of € 27,058.21 euros as IRS for 2012 (capital gains) which was paid in full in December 2013 – documents n.ºs 8 and 9 attached with the request for pronouncement and articles 14 and 15 of the request for pronouncement.

7) On 04-01-2016 the Applicants filed, with the Tax Office of Lisbon …, an ex officio review request, under article 78 of the LGT, of "the assessment of capital gains in the amount of € 54,074.30 collected in their IRS/2012", whose procedure was initiated on 06-01-2016 under n.º …2016… – document n.º 13 attached to the request for pronouncement, article 17 of the request for pronouncement and article 9 of the response.

8) On 03-06-2016 the Applicants filed with CAAD the present request for pronouncement – registration in CAAD's SGP.

9) On 20.09.2016 the Applicants attached to the case a request attaching "to the case … recent decision granting the ex officio review request that preceded the request for arbitral pronouncement in the present case" – request registered on 20.09.2016 in the SGP and final part of article 12 of the response.

10) The AT in the response registered in CAAD's SGP on 14.10.2016 informed that "the ex officio review request n.º …2015…, presented on 20-03-2015, was partially granted by order from the IRC Services Directorate, dated 09-06-2016, which determined the correction of the 2012 IRS assessment, excluding from taxation the balance of capital gains calculated at 50%, on the grounds of the verification of the requirements provided for in n.º 3 and 4 of article 43 of the CIRS, with only the request for payment of compensatory interest being dismissed" – article 11 of the response and tax file attached with the response.

11) The decision of partial grant referred to in the preceding number was notified to the Applicants by official notice from the Finance Directorate of Lisbon n.º …, dated 08-09-2016 and the decision was executed through the single correction document that resulted in the issuance of the reimbursement, in the amount of € 27,058.21, paid by interbank transfer on 30-08-2016 – in accordance with the tax file, articles 12 and 13 of the response and overall concordant position of the Applicants in the context of submissions.

Unproven facts

There is no other factuality alleged that was not considered proven and that is relevant to the composition of the procedural dispute.

IV. APPRECIATION OF THE QUESTIONS WHICH THE SINGULAR ARBITRAL TRIBUNAL (TAS) MUST RESOLVE

The unarguability of the act of tacit rejection of the ex officio review request filed on 04.01.2016 (which was the immediate object of the request for pronouncement)

It was proven that "on 20-03-2015, the Applicants filed, with the Tax Office of Lisbon…, an ex officio review request, under article 78 of the LGT, of 'the assessment of capital gains in the amount of € 54,074.30 collected in their IRS/2012', whose procedure was initiated on 23-03-2015 under n.º …2015…" and that "on 04-01-2016 the Applicants filed, with the Tax Office of Lisbon…, an ex officio review request, under article 78 of the LGT, of 'the assessment of capital gains in the amount of € 54,074.30 collected in their IRS/2012', whose procedure was initiated on 06-01-2016 under n.º …2016…".

The Respondent alleges that " … finding itself pending appreciation the review request n.º …2015…(of 20.03.2015), the mere repetition, on the day 04-01-2016, of the same request based on the same grounds with the aim of achieving the same legal effect (perhaps with intent, only, of opening the contentious path through tacit rejection, bypassing the limitation of the two-year period provided for in article 56, n.º 2 of the LGT) does not impose on the AT a legal duty to decide, but only a duty of pronouncement, under the terms of n.º 1 of article 56 of the LGT".

And concludes: "and absent a legal duty to decide there is no need to resort to the presumption of tacit rejection 'for purposes of judicial impugnation or request for arbitral pronouncement', as the Applicants intend". "Whereby, we are 'in casu' before a situation of unarguability of the act of tacit rejection of the ex officio review request presented on the day 04-01-2016".

First it is necessary to verify that on 08.11.2013 the AT revoked the decision that had granted the administrative review filed on 19.08.2013 (items 3) and 4) of the proven facts).

Secondly it must be verified that the request for pronouncement based on the tacit rejection of the ex officio review presented on 04.01.2016, entered CAAD on 03.06.2016 (item 8) of the settled matter).

Thirdly it happens that only on 20.09.2016 the Applicants attached to the case the decision that was notified to them, in the course of this case (item 9) of the proven facts) and that the AT only on 14.10.2016 delivered to the case the Response informing of the partial grant of the ex officio review of 20.03.2015 (items 10) and 11) of the proven matter).

Now, with these facts settled, it appears to us that the Respondent's position lacks merit. Indeed, based on the very norm invoked to allege the lack of the duty to decide the ex officio review presented on 04.01.2016, - paragraph a) of n.º 2 of article 56 of the LGT – it is verified that if there was a procedure regarding which it was not imposed with the duty to decide, it was the one presented on 20.03.2015, since it is manifest that between the date of the revocation of the grant decision of the administrative review (revocation dated 18.11.2013) and the date of its presentation (20.03.2015) the minimum period of 2 years referred to in paragraph a) of n.º 2 of article 56 of the LGT had not elapsed. And, for that reason, it could never permit the Applicants to advance to contentious means based on the presumption of tacit rejection.

The same cannot be affirmed regarding the ex officio review request presented on 04.01.2016. In fact, nothing prevented, rather on the contrary, the AT from appreciating, formulating a decision on the merits, this request and pronouncing itself regarding the previous one in the sense that it did not have the legal duty to decide it.

It is thus asserted, in this case, that it was reasonable for the Applicants to have resubmitted the ex officio review request on 04.01.2016, aiming, as they mention "to open the contentious path through tacit rejection, bypassing the limitation of the two-year period provided for in article 56, n.º 2 of the LGT.".

It will not fail to be difficult to perceive why it is that, even considering the ex officio review request presented on 20.03.2015, only after the pendency of the request for pronouncement was a decision adopted and only on 08.09.2016 was it notified to the Applicants (item 11) of the settled matter).

What truly appears to occur is a subsequent futility of the dispute with reflection at the level of responsibility for costs.

This exception fails, in this line of thinking.

Unarguability of the IRS assessment n.º 2013 … which was the mediate object of the request for pronouncement

The Respondent states that "the ex officio review request n.º …2015…, presented on 20-03-2015, was partially granted by order from the IRC Services Directorate, dated 09-06-2016, which determined the correction of the 2012 IRS assessment, excluding from taxation the balance of capital gains calculated at 50%, on the grounds of the verification of the requirements provided for in n.º 3 and 4 of article 43 of the CIRS".

And it adds: "whereas the decision has already been materialized, the reimbursement having been issued, in the amount of € 27,058.21, paid to the Applicants by interbank transfer on 30-08-2016".

Hence it concludes: "in this manner, the present arbitral action lacks an object, in as much as the assessment act in the part that the Applicants considered to be injurious was eliminated from the legal order, they having obtained the legal effect sought, through the rendering of the decision in an administrative procedure for ex officio review initiated by them". "Hence it results that the 2012 IRS assessment act is unarguable by reason of the non-existence of a right or interest that should be legally protected, under the terms of article 95, n.ºs 1 and 2, paragraph a), of the LGT".

The Respondent's reasoning does not have merit, in as much as, at the date of filing the present request for pronouncement (03.06.2016) the assessment act existed in the legal order (it is dated 09.06.2016 the act that partially granted the ex officio review and was only notified on 08.09.2016, hence only becomes effective after that date).

And the AT's failure to respond, within the legal period of 4 months referred to in n.º 1 of article 57 of the LGT, either regarding the ex officio review request filed on 20.03.2015 (reporting that it did not have the duty to decide this procedure), or regarding the one filed on 04.01.2016 (taking a decision on the merits regarding the matter), motivated the situation described in the case file.

All the more so since only after the pendency of the request for pronouncement was a decision on the ex officio review request adopted, notified, it is perceived, on 08.09.2016 to the Applicants.

The procedural dispute when it commenced, on 03.06.2016, first with the arbitral tax procedure and later with the arbitral tax case, is complete in its elements. It was only after the TAS was constituted (on 26.08.2016), in the phase of the arbitral tax case that the AT came to notify the Applicants (on 08.09.2016) of the decision it adopted regarding an ex officio review request.

As mentioned, what truly occurs, is a cause for extinction of the instance by subsequent futility of the dispute, with possible reflection on procedural costs.

This alleged exception of unarguability of the IRS assessment n.º 2013 … which was the mediate object of the request for pronouncement fails, in the reading of the facts referred to above.

The material incompetence of the TAS regarding the request for recognition of the right to compensatory interest

The Respondent believes that we are not before a request for recognition of the right to compensatory interest that is found in connection with a request for a declaration of illegality of any of the acts referred to in paragraphs a) and b) of n.º 1 of article 2 of the RJAT, since it proceeds from the principle that the assessment act subject to this case is not arguable because it had been removed from the legal order.

But as it was verified the exception raised did not have merit, so this argument cannot support the lack of competence of the TAS, as invoked, to appreciate the right to compensatory interest, as an integral part of the review request that was not satisfied.

The Respondent states that because "… the Tribunal Arbitral will not render any declaration of illegality of the assessment act", concludes: "… it results that, the appreciation of the autonomous request for recognition of the right to payment of compensatory interest, formulated in the claim of the present arbitral action, does not fall within the scope of the competencies of the Arbitral Tribunal".

But that is not what occurs in this case. The procedural dispute, the procedural relationship was correctly established with the filing of the request for pronouncement on 03.06.2016 and crystallized with the constitution of the TAS on 26.08.2016.

The fact that the AT, in the course of the arbitral case, adopted the decision it should have adopted previously within the legal period of 4 months (article 57-1 of the LGT), in this case, implicitly recognizing the defect of illegality from which the impugned act suffered, only leads to the futility of the dispute and, only for that reason, the TAS cannot pronounce on the legality of the impugned act. But the illegality of the assessment is a fact implicitly recognized by the AT in the case.

Naturally, if the AT, in the annulment act of the assessment, giving rise to the subsequent futility of the dispute, did not appreciate the right to compensatory interest or did not accede to the request for compensatory interest advanced by the taxpayer, it is incumbent on the case (in this case, in this case) to appreciate that objective, if the interested party raises it. It was the case.

In this circumstance, the TAS is not appreciating an "autonomous request for interest", but rather appreciating a component of a request made, legally, before a judicial body, which has not yet been fully satisfied, at the level of the pleading.

Lastly the AT raises yet another ground of incompetence of the TAS. It states: "should the Arbitral Tribunal decide against the exceptions invoked, … determining the continuation of the action for consideration of the question regarding the request for compensatory interest, it is recalled that the Applicants identify as the object of the request for arbitral pronouncement the act of tacit rejection of the ex officio review request presented on the day 04-01-2016, under the terms of article 78 of the LGT", "… the payment of compensatory interest would be classifiable under n.º 3, paragraph c) of article 43 of the LGT, which determines that in situations of revision of the tax act by initiative of the taxpayer compensatory interest is owed only as of one year after the presentation of the review request, a period that has not yet elapsed".

In truth, it will not be as the AT mentions, taking into account that, rather than appreciating the ex officio review request of 04.01.2016, which, as was verified, had the duty to decide, it actually appreciated the one of 20.03.2015, the one which, given paragraph a) of n.º 2 of article 56 of the LGT, did not have the duty to decide, but only a duty of pronouncement.

In any case, one situation is the immediate object of the request for pronouncement (the silent act of tacit rejection of the ex officio review presented on 04.01.2016) whose appreciation is rendered moot by the TAS in light of the subsequent futility of the dispute; and another situation will be the mediate object of this case: the annulment of the IRS assessment, in light of the illegality from which it may suffer.

Now, the illegality of the assessment was recognized by the AT, since if it were not so it would not have annulled it, so the TAS must proceed from this presupposition: there is an illegal assessment, annulled in the manner it was annulled (based on an ex officio review request filed on 20.03.2015) not having been attributed to the Applicants compensatory interest, which they moreover petitioned.

That is, the illegality of the assessment is proven in the case file, by the very action of the AT in annulling it. The TAS cannot appreciate the illegality (because it would be futile) but it has the duty to appreciate the possible remaining right: the right to compensatory interest.

Hence, the exception of incompetence of the TAS for the appreciation of the right to compensatory interest petitioned by the Applicants fails.

Procedural costs

This case discusses the responsibility for procedural costs, in light of the annulment of the IRS assessment by the AT in the course of the arbitral case, with only the conflict regarding compensatory interest remaining.

The Code of Civil Procedure is applicable subsidiarily to the arbitral tax case, by force of paragraph e) of article 2 of the CPPT and n.º 1 of article 29 of the RJAT.

Under paragraph e) of article 277 of the CPC it is a cause of extinction of the instance "the subsequent impossibility or futility of the dispute".

"The Code of Civil Procedure maintained, in the matter of costs, the principle of causality: the party that gave cause to them pays the costs" … (Supreme Court of Justice Decision of 18.11.76 BMJ 261-153). This principle continues to be expressed in the various norms of the current CPC that deal with this subject matter.

N.ºs 3 and 4 of article 536 of the current CPC (which reproduces article 450 of the 1961 CPC) state that: "3 - In the remaining cases of extinction of the instance by subsequent impossibility or futility of the dispute, the responsibility for the costs remains with the plaintiff or applicant, unless such impossibility or futility is attributable to the defendant or respondent, in which case the latter is responsible for all the costs".
"4 - It is considered, in particular, that it is attributable to the defendant or respondent the subsequent futility of the dispute when this results from the voluntary satisfaction, on the part of the latter, of the claim of the plaintiff or applicant, …".

Now, in this case, the Respondent proceeded to the "voluntary satisfaction" of the claim of the Applicants, annulling the impugned assessment, hence the responsibility for procedural costs is attributed to it.

Request for compensatory interest

It was proven that the Applicants paid in December 2013 the value of the IRS assessment in the amount of 27,058.21 euros (item 6) of the settled matter).

It was further proven that the AT annulled the assessment subject to this arbitral case recognizing its illegality in light of n.º 3 and 4 of article 43 of the IRS Code (item 10) of the proven facts).

Furthermore it was proven that the AT appreciated the ex officio review request of the assessment filed with it on 20.03.2015, only in June 2016 (of which it notified the Applicants on 08.09.2016), having paid the Applicants the amount in question on 30.08.2016 (see item 11) of the settled matter).

Article 43, n.º 1, of the LGT establishes that "compensatory interest is owed when it is determined, in administrative review or judicial impugnation, that there was an error attributable to the services resulting in payment of the tax debt in an amount higher than that legally due".

N.º 3 of article 43 of the LGT refers in its paragraph c) that "compensatory interest is also owed … when the revision of the tax act by initiative of the taxpayer occurs more than one year after the request therefor, unless the delay is not attributable to the tax administration".

As results from the literal tenor of these norms, the right to compensatory interest depends on "payment of the tax debt in an amount higher than that legally due".

In this case, the Applicants paid the tax assessed, so the annulment of the assessment, beyond the duty of reimbursement, can give rise to the payment of compensatory interest, should a delay by the AT of more than 1 year in the appreciation of the request for ex officio review have occurred. It was the case.

Consequently, the Applicants have the right to compensatory interest, under the terms of article 43, n.º 3 paragraph c) of the LGT and 61 of the CPPT, counted from the date on which they presented the ex officio review request (20.03.2015) until the date on which the AT effectuated to them the reimbursement of the wrongfully paid tax (on 30.08.2016).

V. OPERATIVE PART

Under the terms and with the grounds set forth above:

- The exceptions of unarguability of the act of tacit rejection of the ex officio review request presented on 04.01.2016; of the IRS assessment n.º 2013 …; and of material incompetence of the TAS regarding the request for recognition of the right to compensatory interest are judged to lack merit.

- The instance is judged to be extinct, with the AT being absolved of the instance by subsequent futility of the dispute, as to the part relating to the request for annulment of the IRS assessment for the year 2012: 2013… and regarding the part relating to the request for reimbursement of the tax paid, subject to this case, with costs to be borne by the Respondent (paragraph e) of article 277 of the CPC and n.ºs 3 and 4 of article 536 of the CPC).

- The request for condemnation of the AT to payment of compensatory interest is judged to have merit, under the terms of article 43, n.º 3 paragraph c) of the LGT and 61 of the CPPT, counted from the date on which the Applicants presented the ex officio review request (20.03.2015) until the date on which the AT effectuated to them the reimbursement of the wrongfully paid tax (27,058.21 euros on 30.08.2016).

Value of the case: in accordance with the provisions of article 3, n.º 2, of the Regulations for Costs in Arbitral Tax Cases (and paragraph a) of n.º 1 of article 97A of the CPPT), the case is assigned the value of 27,058.21 euros (value annulled and reimbursed to the Applicants).

Costs: under the terms provided for in article 22, n.º 4, of the RJAT, the amount of costs is fixed at 1,530.00 € according to Table I attached to the Regulations for Costs in Arbitral Tax Cases, to be borne by the Respondent.

Notify.

Lisbon, 26 December 2016

Singular Arbitral Tribunal (TAS),

Document drawn up by computer under the terms of article 131, n.º 5, of the CPC, applicable by referral of article 29 of the RJAT.

The wording of this decision is governed by the orthography prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

What is the 50% capital gains exclusion under Article 43(3) of the Portuguese IRS Code for micro and small enterprises?
Article 43(3) of the Portuguese IRS Code provides that capital gains from the onerous alienation of shares in micro or small enterprises not listed on securities markets are taxed at only 50% of the gain amount, rather than 100%. To qualify, the company must meet the classification criteria established in the annex to Decree-Law 372/2007 of 6 November, which includes thresholds for number of employees, annual turnover, and balance sheet totals. This preferential regime aims to encourage investment in smaller Portuguese businesses by reducing the tax burden on gains from their share sales.
Can a taxpayer challenge a tacit denial of an ex officio review request (revisão oficiosa) through tax arbitration in Portugal?
Yes, taxpayers can challenge a tacit denial of an ex officio review request through tax arbitration in Portugal. Under Article 57(1) of the General Tax Law (LGT), when the tax authority fails to issue a decision within four months of an ex officio review request filed under Article 78 LGT, this silence constitutes a tacit denial (indeferimento tácito). This tacit denial can be challenged through CAAD arbitration under Article 10(1)(a) of the RJAT, provided the request is filed within the prescribed time limits. However, the AT may raise exceptions regarding the challengeability (inimpugnabilidade) of such tacit acts, which the arbitral tribunal must evaluate on a case-by-case basis.
How does IAPMEI certification affect the classification of a company as a micro, small, or medium enterprise for IRS capital gains purposes?
IAPMEI certification formally classifies Portuguese companies as micro, small, medium, or large enterprises. However, for IRS capital gains purposes under Article 43(3), CAAD precedents have established that the material requirements specified in the annex to Decree-Law 372/2007 should take precedence over formal IAPMEI classifications. This means that even if IAPMEI certifies a company as medium-sized, if the company actually meets the quantitative thresholds (employees, turnover, balance sheet) for micro or small enterprise status in DL 372/2007, it may still qualify for the 50% capital gains exclusion. This approach, endorsed by AT's own Circular 7/2014, prioritizes substance over form in enterprise classification.
What are the procedural requirements for filing a tax arbitration claim after an ex officio review under Article 78 of the LGT?
To file tax arbitration after an ex officio review under Article 78 of the LGT, taxpayers must follow these procedural steps: (1) Submit a formal ex officio review request to the competent tax office identifying the allegedly illegal assessment; (2) Wait for either an express decision or four months to elapse, after which silence constitutes tacit denial under Article 57(1) LGT; (3) File the arbitration request with CAAD within the time limit prescribed in Article 10(1)(a) of RJAT, calculated from the date of tacit or express denial; (4) Demonstrate legitimacy, legal capacity, and proper representation; (5) Pay the required arbitration fee. The arbitration request must clearly identify the impugned act and the legal grounds for challenging it.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when the tax authority partially annuls an IRS assessment?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when the Tax Authority partially annuls an IRS assessment and reimburses wrongfully collected amounts. This right derives from the principle that the State must compensate taxpayers for the unlawful deprivation of their funds. The interest accrues from the date of payment until actual reimbursement. However, disputes may arise regarding: (1) whether the arbitral tribunal has competence to rule on compensatory interest claims when the underlying assessment has already been annulled by the AT; (2) the calculation period and applicable rates; and (3) whether the AT's delay in materializing the reimbursement justifies continuation of arbitration proceedings solely for interest recognition.