Process: 319/2014-T

Date: May 21, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 319/2014-T addressed the controversial IRS taxation of dividends in a corporate demerger (cisão) under Portuguese tax law. The case involved Imobiliária A, SA, as successor to B..., SA, which underwent a simple split operation under Article 118(1)(a) of the Commercial Companies Code. The split reduced the original company's capital from €165,000 to €150,000, while establishing a new company with €50,000 in capital—€15,000 from the capital reduction and €35,000 from free reserves. The Tax Authority assessed that the €35,000 derived from free reserves constituted taxable dividends under Article 5(2)(a) of the IRS Code, issuing a tax assessment for 2013. The claimant contested this, arguing that the operation qualified for the tax-neutral regime under Articles 67 et seq. of the Corporate Income Tax Code, which the Tax Authority never disputed. Key arguments included: (1) shareholder proportions remained identical before and after the split, making the exchange ratio calculation irrelevant; (2) the Tax Authority failed to adequately justify treating capital establishment through reserves as dividend distribution within a tax-neutral merger operation; (3) violation of the duty to provide reasons and the equality principle under Article 55 of the General Tax Code; and (4) compliance with EU Directive 90/234/EEC, which protects shareholders from taxation on share exchanges in cross-border restructurings. The claimant emphasized that incorporating reserves into capital during a qualifying corporate restructuring differs fundamentally from ordinary dividend distributions. This arbitral proceeding exemplifies the complex intersection between corporate restructuring law and personal income taxation, highlighting tensions between form and substance in tax-neutral transactions.

Full Decision

ARBITRAL DECISION

I – REPORT

Imobiliária A…, SA, legal entity no. …, with registered office at Av. …, in its capacity as incorporating company of B…, S.A., legal entity no. …, with registered office at Rua …, hereinafter referred to as the Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral determination, pursuant to articles 2.º no. 1 a) and 10.º no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter designated as RJAT), requesting the declaration of illegality of the income tax assessment no. 2013.....

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 08-04-2014.

Pursuant to the provisions of articles 5.º, no. 2, al. a), 6.º, no. 1 and 11.º no. 1, al. a) of RJAT, the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline.

On 26-05-2014, the parties were duly notified of this appointment and did not manifest the intention to reject the arbitrator's appointment, in accordance with the combined provisions of article 11.º no. 1 sub-paragraphs a) and b) of RJAT and articles 6.° and 7.º of the Code of Ethics.

Thus, in accordance with the provisions of sub-paragraph c) of no. 1 of article 11.º of RJAT, the singular arbitral tribunal was constituted on 16-06-2014.

On 06/01/2015, the meeting provided for in article 18.º of RJAT took place.

The witnesses listed by the Claimant C… and D… were questioned by the parties on 20 January 2015, after which the representatives of the Claimant and the Respondent presented their respective oral arguments.

The arbitral tribunal was properly constituted and is materially competent, in light of the provisions of articles 2.º, no. 1, sub-paragraph a), and 30.º, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are entitled to sue and be sued, and are properly represented (articles 4.º and 10.º, no. 2, of the same diploma and article 1.º of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any defects and no exceptions were raised.

The allegations sustaining the Claimant's request for arbitral determination are, in summary, as follows:

Claimant's Arguments

11.1 As a preliminary matter, the Claimant clarifies that, by virtue of a merger process, it assumed, on 30/12/2011, the position of incorporating company of B..., SA, tax number …, as evidenced by the permanent certificate attached as document no. 1.

11.2 B..., SA was a joint stock company, incorporated on 17/01/1995, whose purpose consisted of "provision of accounting services, data processing, consulting and management, tax assistance, preparation of economic studies, investment projects, commissions and commercial representations."

11.3 In light of the increase in the real estate activity of the company, the current Claimant decided to amend its corporate purpose to include real estate activity, as evidenced by the commercial registration of amendment to the bylaws of 23/11/2009.

11.4 For reasons of business management and development, the company's administration considered it more appropriate to transfer the branch of activity relating to provision of services to companies in order to establish a new company.

11.5 Thus, part of the assets of the current Claimant was separated in order to establish a new company to which the company name B... – Management Services, S.A. was assigned.

11.6 From a legal and corporate perspective, the operation in question constitutes a simple split, in accordance with the modality provided in sub-paragraph a) of no. 1 of article 118.º of the Commercial Companies Code, as evidenced by the split plan attached.

11.7 Simultaneously with the separation of assets, there was also a reduction of the capital of the split company from the amount of € 165,000.00 to the amount of € 150,000.00.

11.8 Given the value of the assets and liabilities to be transferred, the new company was incorporated with capital of € 50,000.00.

11.9 The split plan provides, pursuant to the terms and for the purposes of sub-paragraph f) of article 119.º of the CCC, that "the exchange ratio of corporate shares was based on weighing the shareholdings of the current shareholders of the company to be split in its capital, maintaining exactly the same proportion in the company to be established as a result of the split".

11.10 In tax terms, the operation was carried out under the special tax-neutral regime provided in articles 67.º et seq. of the Corporate Income Tax Code (in force at the time).

11.11 The company was the subject of a tax inspection carried out by the Tax Inspection Division II of the Finance Directorate of ... which concluded that "In this split operation, there was a reduction of the capital of the split company from € 165,000.00 to € 150,000.00, a reduction that was offset by the establishment of part of the capital of the beneficiary company. The remaining capital of the beneficiary company, € 35,000.00, was established through the use of free reserves of the split company."

11.12 The Tax Authority concludes that this differential of € 35,000.00 resulting from the use of free reserves should be considered a dividend, pursuant to sub-paragraph a) of no. 2 of article 5.º of the Personal Income Tax Code.

11.13 Such conclusion is, in the opinion of the Claimant, contrary to the tax-neutral regime, a classification never disputed by the Tax Authority.

11.14 In accordance with the provisions of article 73.º of the CCC, the shareholders of the company were assigned capital shares of the new company in the exact proportion of their shareholdings.

11.15 Given that the shareholding structure was maintained in exactly the same initial proportion, the quantification of the weight of the share exchange ratio becomes irrelevant.

11.17 Without conceding, it may nevertheless be said that the inspection report does not adequately justify the corrections made since it considers the use of reserves to establish capital as a dividend distribution without indicating what legal basis supports this.

11.18 The Tax Authority treats as dividend distribution an operation to increase capital through incorporation of reserves within a merger process, without attempting to explain the difference between an increase in capital through incorporation of reserves (article 91.º of the CCC) and the same operation carried out within a simple split subject to the tax-neutral regime.

11.19 In other words, the Tax Authority violated not only the duty to provide reasons but also the principle of equality provided in article 55.º of the General Tax Code.

11.20 Finally, the Claimant invokes Directive 90/234/CEE relating to the common tax regime applicable to mergers, splits, contributions of assets and exchanges of shares between companies of different Member States which, regarding shareholders, provides: "the assignment of titles representing the capital of the beneficiary or acquiring company to a shareholder of the contributing or acquired company, in exchange for titles representing the capital of the latter, shall not, in itself, give rise to any taxation of income, profits or gains of the said shareholder" (no. 1 of article 8.º).

11.21 The Claimant cites in this regard the Court Decision of 23/04/2013, Proc. 180/13, available at www.dgsi.pt: "(…) as regards shareholders of merged or split companies, there shall be no determination of gains or losses for tax purposes as a result of the merger, provided that, in their accounting, the value at which the old corporate shares were recorded is maintained for the new corporate shares. This does not, of course, prevent taxation of amounts which may be assigned to them as a result of the merger or split."

Response of the Respondent

12.1 In its Response, the Tax Authority sets out the accounting entries for the separation of assets of the Respondent to the beneficiary company:

a) The determination of assets and liabilities to be transferred to the beneficiary company was based on the interim balance sheet as of September 2009;

b) The value of assets transferred amounts to € 72,523.44 and the net value of liabilities transferred amounts to € 41,865.35, so the equity of the beneficiary amounts to € 30,688.09;

c) To establish the capital of B... – Management Services, SA in the amount of € 50,000.00, there was a reduction of capital of € 15,000.00 and the use of free reserves, account 574, in the amount of € 35,000.00;

d) The shareholders who, before the split, held corporate shares in the amount of € 165,000.00, became, as a result of the operation, holders of amounts totalling € 200,000.00 [(165,000.00-15,000.00) + 50,000.00]

12.2 In light of the foregoing, in the split operation, there was a separation of part of the assets of the split company to establish part of the new company, such that the shareholdings which the shareholders individually held in the split company were increased (enriched) by the value of the capital established through the use of free reserves of the split company.

12.3 Thus, as stated in the inspection report, "the differential amount of € 35,000.00, which concerns the use of free reserves to establish the capital with it, on behalf of the shareholders, should be considered dividend distribution…".

12.4 As for the lack or insufficiency of reasoning, "both the facts determined and the analysis and legal characterization of the same in the Inspection Report – which constitute the essential core of the reasoning – enable a taxpayer exercising ordinary diligence (bonus pater familiae) to choose between acceptance of the legality of the act and recourse to administrative and/or judicial procedures."

12.5 In this case, the Claimant opted for the contentious path, thereby demonstrating that it fully understood all the grounds of law and fact that led to the issuance of the assessment now disputed.

12.6 Moreover, it should be noted that the inspection report, in addition to describing with accuracy the factual circumstances resulting from the split operation, clearly and unequivocally highlights the factual elements and their legal characterization.

12.7 The Respondent also contests that the assessment violated the tax-neutral regime provided in articles 67.º to 72.º of the Corporate Income Tax Code (as amended at the time).

12.8 Indeed, in this case there was not merely an exchange of shareholdings since, once the operation was completed, the shareholders came to hold in the aggregate of the two companies nominal shareholdings of € 200,000.00, instead of the € 165,000.00 existing before the operation.

12.9 That is, as a result of the operation, the patrimony of the shareholders was increased by € 35,000.00, a differential that must be subject to taxation.

12.10 It further adds that there is no similarity whatsoever between the situation under analysis and the increase in capital by incorporation of free reserves provided in article 91.º of the CCC, given that this legal provision relates to increases in capital of already existing companies, which is not the case here.

12.11 It finally rejects the violation of the principles of equality and fiscal capacity because what is at issue is a patrimonial increase in the sphere of the shareholders of the current Respondent.

All being considered, a final decision must be rendered.

A. FACTUAL MATTER

A.1. Facts Established as Proven

  1. B..., SA was a joint stock company, incorporated on 17/01/1995, whose purpose consisted of "provision of accounting services, data processing, consulting and management, tax assistance, preparation of economic studies, investment projects, commissions and commercial representations."

  2. On 23/11/2009, B..., SA decided to amend its corporate purpose to include real estate activity.

  3. On 28 November 2009, the merger plan was registered by filing with the Commercial Registry of ….

  4. According to the merger plan, the operation in question constituted a simple split, in accordance with the modality provided in sub-paragraph a) of no. 1 of article 118.º of the Commercial Companies Code, by means of the separation of part of the assets of the split company (B..., SA) for the establishment of a new company (B... – Management Services, SA).

  5. The aggregate value of assets and liabilities incorporated in the new company were € 98,131.41 and € 50,466.02, respectively.

  6. Simultaneously with the separation of assets, there was also a reduction of the capital of the split company from the amount of € 165,000.00 to the amount of € 150,000.00.

  7. The new company was incorporated with capital of € 50,000.00, resulting from the exchange of shareholdings of € 15,000.00 and the use of free reserves of the split company in the amount of € 35,000.00.

  8. The company was subject to a tax inspection carried out by the Tax Inspection Division II of the Finance Directorate of ... for the tax year 2009, commencing on 21/10/2013 and concluding on 25/10/2013.

  9. As a result of the inspection report, an additional income tax assessment no. 2013...., now disputed, was issued in the amount of € 7,000.00, relating to the application of the 20% withholding tax rate on the free reserves used to establish the capital of the beneficiary company.

A.2. Reasoning

With regard to the factual matter, the Tribunal need not pronounce on all that was alleged by the parties; rather, it has the duty to select the facts that are material to the decision and distinguish between proven and unproven matters (cf. article 123.º, no. 2, of the Code of Tax and Customs Procedure and article 659.º, no. 2 of the Code of Civil Procedure, applicable by virtue of article 29.º, no. 1, sub-paragraphs a) and e), of RJAT).

In this manner, the facts relevant to the adjudication of the case are selected and determined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) at issue (cf. article 511.º, no. 1, of the Code of Civil Procedure, applicable by virtue of article 29.º, no. 1, sub-paragraph e), of RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence, and the file joined to the proceedings, the facts listed above were established as proven, given their relevance to the decision; moreover, these facts were consensually recognized and accepted by the parties.

B. ON THE LAW

In light of the positions of the Parties assumed in the arguments presented, the central issue is whether the use of free reserves in the simple split process and separation of part of the assets and establishment of the capital of the beneficiary company constitutes or does not constitute a dividend distribution subject to taxation.

B.2. Split in Commercial Law

In order to properly understand the tax effects of a split, we must first consider its commercial characterization (article 118.º et seq. of the Commercial Companies Code).

Article 118.º no. 1 of the CCC provides that "A company is permitted to: a) Separate part of its assets in order to establish another company with them; b) Dissolve and divide its assets, with each part resulting being intended to establish a new company; c) Separate part of its assets or dissolve, dividing its assets into two or more parts, to merge them with already existing companies or with parts of the assets of other companies, separated by identical processes and with equal purpose."

As emphasized by doctrine, "a split is a process of corporate restructuring characterized by the separation of parts of the patrimonial element of the companies involved intended for their autonomy in legal entities, already existing (in the case of split-merger) or established in the process itself, with the consequent assignment to the shareholders of the split companies of corporate shares in the beneficiary companies." (Commercial Companies Code Annotated, Coordination by António Menezes Cordeiro, 2009, p. 410).

The CCC adopted the terminology of simple split (sub-paragraph a) of article 118.º), split-dissolution (sub-paragraph b)) and split-merger (sub-paragraph c)).

In the present case, it is a simple split consisting of the separation of part of the assets of one company in order to establish another company with them. The shareholders of the split company receive, as a result of the split, corporate shares in the beneficiary company.

Simple split is also a partial split because the split company continues to exist and to pursue its activity.

As for the implementation of the separation of assets of the split company, the CCC establishes a set of rules and limits that the split company must observe. First, a split is not permitted if: (i) the value of the assets of the split company becomes less than the sum of the amounts of capital and legal reserve, and there is no reduction of capital before the split or in conjunction with it; (ii) the capital of the company to be split is not fully paid in (article 123.º no. 1 sub-paragraphs a) and b) of the CCC).

These provisions are intended, first and foremost, to preserve the capital of the split company, as this modality of split always presupposes the departure of assets without any counterpart, since the shares of the new company are assigned directly to the shareholders of the split company.

On the other hand, partial split, from a corporate perspective, does not necessarily imply a reduction of the capital of the split company. This often results solely from the need to comply with the provision of sub-paragraph a) of no. 1 of article 123.º of the CCC mentioned above.

With respect to the new corporate shares, as a rule, the shareholders of the split company receive corporate shares in the new company in the same proportion as they participated in the split company. Moreover, no. 2 of article 129.º of the CCC provides that the participation of the new shareholders in the new company cannot exceed the value of the separated assets, net of the liabilities likewise transferred. Otherwise, it would be permissible for shareholders to be assigned corporate shares with a nominal value exceeding the value of the patrimony transferred.

From the foregoing, and relevant to the issue before us, it appears that the legislator does not establish – nor would it make sense to do so – a legal requirement to reduce the capital of the split company in order to exchange corporate shares with the beneficiary company. On the contrary, the establishment of capital can result exclusively from the separated patrimony, namely from the value of equity[1], in compliance with the limit in article 129.º no. 2.

Next, we must assess the tax characterization of this operation. As determined by no. 2 of article 11.º of the General Tax Code, even though terms and concepts from other areas of law are applied, we must first assess whether their meaning and scope does not derive from tax law itself.

B.3. Tax Effects of Split

As a general rule, we can state that Tax Law, attending to its purposes, reduces a merger or split to a transfer of assets. This results, in any event, from nos. 1 and sub-paragraph d) of no. 3 of article 43.º of the Corporate Income Tax Code (in force at the time, current article 46.º) which taxes gains or losses resulting from the paid transfer of elements of fixed assets, whatever the title of transfer. For this purpose, the market value of the elements of fixed assets transferred as a result of such merger or split acts is considered as the realization value.

By way of derogation from this general rule, articles 67.º to 72.º of the Corporate Income Tax Code (current 73.º to 78.º) provide for a special regime applicable to mergers, splits, contributions of assets and exchanges of corporate shares of resident companies. The objective of this regime, which results from the transposition of Directive no. 90/934/CEE, is to ensure the neutrality of these corporate reorganization operations, subject to the fulfillment of certain conditions.

This objective is expressly pointed out by the legislator both in the preamble to the Corporate Income Tax Code and in Directive no. 90/034/CEE itself.

First, in the preamble to the Decree approving the CIRC, Decree-Law no. 442-B/88, it is stated:

"Another area where the need for fiscal policy to adopt a posture of neutrality is felt is that related to mergers and splits of companies. The reorganization and strengthening of the business fabric should not be hindered but rather encouraged; therefore, reflecting, in general terms, the consensus that has been gaining ground at the level of the EEC in this area, conditions are created so that such operations encounter no fiscal obstacle to their implementation as long as, by the manner in which they take place, it is guaranteed that they aim solely at an appropriate resizing of economic units."

Directive 90/434/CEE is also clear in its recitals when stating "mergers, splits, contributions of assets and exchanges of shares between companies of different Member States may be necessary to create in the Community conditions similar to those of an internal market and thus ensure the achievement and proper functioning of the common market; such operations should not be hindered by restrictions, disadvantages or special distortions resulting from the tax provisions of the Member States; it is therefore necessary to establish for these operations tax rules that are neutral as regards competition, in order to allow enterprises to adapt to the requirements of the common market, increase their productivity and strengthen their competitive position at international level".

To this end, no. 1 of article 68.º of the Corporate Income Tax Code (in force at the time) provides that "in the determination of taxable income of merged or split companies or of the contributing company, in the case of a contribution of assets, no result is considered derived from the transfer of patrimonial elements as a consequence of the merger, split or contribution of assets, nor are provisions constituted and accepted for tax purposes with respect to receivables, inventory and obligations and charges which are the object of transfer considered as income or gains, pursuant to no. 2 of article 34.º."

In no. 2 of article 67.º, the legislator provides us with the notion of split for purposes of application of this regime. Split is deemed to be:

a) A company (split company) separates one or more branches of its activity, maintaining at least one branch of activity, in order to establish other companies with them (beneficiary companies) or to merge them with already existing companies, by means of the assignment to its shareholders of parts representing the capital of such latter companies and, if applicable, of a cash amount not exceeding 10% of the nominal value or, in the absence of nominal value, of the book value equivalent to the nominal of the shares assigned to them;

b) A company (split company) is dissolved and its patrimony is divided into two or more parts, each intended to establish a new company (beneficiary company) or to be merged with already existing companies or with parts of the patrimony of other companies, separated by identical processes and with equal purpose, by means of the assignment to its shareholders of parts representing the capital of such latter companies and, if applicable, of a cash amount not exceeding 10% of the nominal value or, in the absence of nominal value, of the book value equivalent to the nominal of the shares assigned to them.

In the present case, the split process fell within sub-paragraph a) of no. 2 of article 67.º, as it involved the separation by a company of a branch of activity in order to establish a new company with it.

In order to benefit from this regime, the incorporating company must observe the following conditions (nos. 3 and 4 of article 68.º in force at the time): (i) The patrimonial elements which are the subject of transfer are recorded in the respective accounting with the same values as they had in the accounting of the merged, split companies or of the contributing company; (ii) The determination of results with respect to the transferred patrimonial elements is made as if there had been no merger, split or contribution of assets; (iii) Reintegrations or depreciation on the elements of fixed assets transferred are made in accordance with the regime that was being followed in the merged, split companies or in the contributing company.

That is, there will be no taxation under corporate income tax on the transferred assets if the incorporating or new company maintains the same tax registration of the value and depreciation policy of the assets.

From the foregoing, the neutrality regime has a special and extraordinary nature, therefore it is only applicable in the terms and conditions expressly provided in the Corporate Income Tax Code. In other circumstances or if the respective requirements are not met, the patrimonial transfers carried out and other associated operations – because this is the fiscal sense of the concepts of merger or split – shall be taxed.

Accordingly, given that the tax-neutral regime was not questioned by the Tax Authority, it must be determined whether, within the scope of this regime, the exclusion of taxation on shareholders of any gains or losses with the assignment of corporate shares was expressly provided.

Under corporate income tax, nos. 1 and 3 of article 70.º (in force at the time) determine that in cases of merger [or split, by force of no. 3] of companies to which the special regime established in article 68.º is applicable, there is no determination, with respect to shareholders of the merged companies, of gains or losses for tax purposes as a result of the merger, provided that, in their accounting, the value at which the old shares were recorded is maintained for the new corporate shares.

Similarly, nos. 8 and 9 of article 10.º of the Personal Income Tax Code (in force at the time) also expressly exclude any taxation resulting from the assignment of new corporate shares to shareholders of the split company, without prejudice to any possible taxation of cash amounts assigned to them.

The exclusion of any taxation is also a requirement of Directive 90/234/CEE, as amended by Directive 2005/19/CE, which in its article 8.º no. 2 provides that "In the case of a partial split, the assignment of titles representing the capital of the beneficiary company to a shareholder of the contributing company shall not, in itself, give rise to any taxation on the income, profits or gains of the said shareholder."

In conclusion, the effects resulting from the assignment to shareholders of the new corporate shares are, as a rule, excluded from taxation if the special tax-neutral regime provided in articles 67.º to 72.º of the Corporate Income Tax Code (in force at the time) is applicable.

B.4 Taxation of Dividends

Without prejudice, we also do not perceive in the split operation at issue any distribution to shareholders of reserves (profits) that could be characterized under sub-paragraph h) of no. 2 of article 5.º of the Personal Income Tax Code by virtue of the absence of any economic advantage and the fact that they have not been placed at the disposal of their holders.

Indeed, the operation consisted of a separation of a branch of activity (set of assets and liabilities) of the split company for the establishment of a new company. The establishment of the capital of the beneficiary company did not result from the use of free reserves of the split company but from the transferred patrimony, namely its equity (difference between assets and liabilities). The accounting entry for the elimination of free reserves results from the need, with the separation of assets, to reduce the equity of the split company in exact proportion. It not resulting from commercial law or tax law that this must result from a reduction in capital (all the more so because in many cases this may not even be possible), the recognition of the transfer of patrimony should be made through offset against other components of equity.

From this it follows that there is, in the present case, no economic advantage to be attributed to the shareholders, as the recognition of the equity of the beneficiary company's equity corresponded to the concurrent reduction in the equity of the split company. The economic value of the combined shareholdings did not suffer any alteration, and if this had happened, we would be in that case before a gain or loss resulting from the transfer of capital shares.

Second, even if it is admitted that there exists a gain (sum of the nominal value of shareholdings), it is a merely potential gain excluded from taxation, similarly to what occurs with capital increases through incorporation of reserves from which likewise no taxation results.

In conclusion, the necessary conditions are met for the grant of the request for annulment of the assessments on grounds of illegality and error in the premises.

C. Compensatory Interest

The Claimant proceeded to pay in full the aforementioned assessment, whereby it requests reimbursement of such undue amounts, plus compensatory interest at the legal rate, pursuant to article 43.º of the General Tax Code and article 61.º of the Code of Tax and Customs Procedure.

In the case at hand, it is manifest that, as a consequence of the illegality of the assessment, there is occasion for reimbursement of the tax, by virtue of the aforementioned articles 24.º, no. 1, sub-paragraph b), of RJAT and 100.º of the General Tax Code, since this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been performed".

Consequently, the claimant also has the right to compensatory interest, pursuant to article 43.º, no. 1, of the General Tax Code and article 61.º of the Code of Tax and Customs Procedure, calculated on the amount it paid unduly, from the date of payment until the full reimbursement of the same amount.

D. DECISION

Therefore, this Arbitral Tribunal decides as follows:

  1. It is determined that the request for declaration of illegality of the income tax assessment no. 2013..... is granted;

a) The Tax and Customs Authority is ordered to reimburse to the Claimant the amounts paid, with compensatory interest from the date of payment until the full reimbursement of the undue tax;

b) The Tax and Customs Authority is ordered to pay the costs of the proceedings in the amount of € 612.00.

E. Case Value

The case value is set at € 7,000.00, pursuant to article 97.º-A, no. 1, a), of the Code of Tax and Customs Procedure, applicable by virtue of sub-paragraphs a) and b) of no. 1 of article 29.º of RJAT and no. 2 of article 3.º of the Regulation of Costs in Tax Arbitration Proceedings.

F. Costs

The arbitration fee is set at € 612.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was fully granted, pursuant to articles 12.º, no. 2, and 22.º, no. 4, both of RJAT, and article 4.º, no. 4, of the aforementioned Regulation.

Notify the parties.

Lisbon

21 May 2015

The Arbitrator

(Amândio Silva)

[1] Understood as the "residual interest in the company's assets after deducting its liabilities" (assets-liabilities) - Cf. paragraph 49 of the Conceptual Framework, Notice no. 15652/2009 in DR no. 173 – II Series, of 7 September.

Frequently Asked Questions

Automatically Created

How are dividends taxed under IRS in a corporate demerger (cisão) in Portugal?
Under Portuguese IRS law, dividends in a corporate demerger (cisão) are generally taxable under Article 5(2)(a) of the IRS Code when profits or reserves are distributed to shareholders. However, when a demerger qualifies for the tax-neutral regime under Articles 67 et seq. of the Corporate Income Tax Code (CIRC), shareholders should not be taxed on the mere exchange of shares if their proportional holdings remain unchanged. The controversy in Process 319/2014-T centered on whether using free reserves (€35,000) to establish capital in the new company constituted a taxable dividend distribution. The Tax Authority treated this as income distribution subject to IRS, while the claimant argued that within a tax-neutral split where shareholder proportions remain identical, no taxable event occurs. The distinction is critical: ordinary dividend distributions trigger IRS liability, but capital restructurings under the tax-neutral regime—aligned with EU Directive 90/434/EEC (formerly 90/234/EEC)—should not generate immediate tax consequences for shareholders when no actual economic benefit is realized and ownership proportions remain constant.
What is the CAAD arbitral procedure for challenging IRS tax assessments on dividend income?
The CAAD (Centro de Arbitragem Administrativa) arbitral procedure for challenging IRS tax assessments on dividend income follows the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). A taxpayer files a request for constitution of an arbitral tribunal and a request for arbitral determination under Articles 2(1)(a) and 10(1)(a) of RJAT. The President of CAAD accepts the request and notifies the Tax and Customs Authority. The Deontological Council appoints an arbitrator (singular tribunal) or panel (collective tribunal) under Articles 5(2)(a), 6(1), and 11(1)(a) of RJAT. Parties have the right to reject the arbitrator appointment per Article 11(1)(b) and Articles 6-7 of the Code of Ethics. Once constituted, the tribunal holds meetings under Article 18 of RJAT, where parties present evidence (including witness testimony) and oral arguments. The tribunal must decide on its competence, party standing, and representation (Articles 2, 4, 10, and 30 of RJAT, and Ordinance 112-A/2011). In Process 319/2014-T, the tribunal was constituted on 16-06-2014, witnesses were questioned on 20-01-2015, and parties presented oral arguments, demonstrating the structured, quasi-judicial nature of tax arbitration in Portugal.
Can a successor company challenge a prior IRS tax assessment after a merger or incorporation?
Yes, a successor company can challenge a prior IRS tax assessment after a merger or incorporation under Portuguese law. In Process 319/2014-T, Imobiliária A, SA successfully brought an arbitral claim in its capacity as the incorporating company of B..., SA following a merger completed on 30/12/2011. The legal basis for successor standing is found in Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance 112-A/2011, which recognize legal personality, capacity to sue and be sued, and proper representation. Universal succession in mergers (Articles 112-116 of the Commercial Companies Code) transfers all rights and obligations, including tax litigation rights, to the incorporating entity. The successor must demonstrate: (1) valid merger documentation (permanent certificate); (2) assumption of all predecessor's legal positions; (3) proper legal representation; and (4) timely filing within statutory deadlines. This principle ensures continuity of legal protection and prevents tax authorities from escaping judicial review simply because corporate restructurings occurred after assessment but before litigation. The tribunal confirmed the claimant's legal standing without controversy, establishing clear precedent for successor liability and successor rights in Portuguese tax arbitration.
What legal grounds exist to contest the taxation of dividends following a corporate restructuring under Portuguese tax law?
Several legal grounds exist to contest taxation of dividends following corporate restructuring under Portuguese tax law. First, the tax-neutral regime (Articles 67-73 of the CIRC) applies when statutory conditions are met, preventing immediate taxation of shareholders provided their accounting basis remains unchanged and proportional ownership is maintained. Second, taxpayers can invoke violation of the duty to provide adequate justification (dever de fundamentação) under Article 77 of the General Tax Code (LGT), arguing the Tax Authority failed to explain why incorporating reserves into capital during a split constitutes dividend distribution rather than a neutral capital operation. Third, the principle of equality (Article 55 LGT and Article 13 of the Portuguese Constitution) prohibits discriminatory treatment between economically identical situations—treating reserve incorporation in a split differently from reserve incorporation in a simple capital increase violates this principle. Fourth, EU Directive 90/434/EEC (Common Tax System for Mergers) requires Member States not to tax shareholders on share exchanges in qualifying restructurings, providing a supranational legal shield. Fifth, Article 8(1) of the Directive explicitly states that assigning shares in a beneficiary company to shareholders of a split company shall not itself trigger income taxation. Portuguese courts, including CAAD precedents like Process 180/13, recognize that tax-neutral mergers and splits should not generate shareholder taxation absent actual distribution of economic value beyond proportional share exchanges.
What was the outcome of CAAD Process 319/2014-T regarding IRS and the tax treatment of dividends in a demerger?
The text excerpt from CAAD Process 319/2014-T does not include the final arbitral decision, providing only the Report section (Part I) which outlines the procedural history and parties' arguments. Therefore, the ultimate outcome—whether the tribunal found in favor of the claimant (Imobiliária A, SA) or upheld the Tax Authority's assessment treating €35,000 as taxable dividends—is not disclosed in the available material. However, the case framework reveals the central legal dispute: whether using free reserves to capitalize a new company in a tax-neutral split triggers IRS taxation under Article 5(2)(a) of the IRS Code. The claimant presented strong arguments based on: (1) applicability of the undisputed tax-neutral regime; (2) maintenance of shareholder proportions; (3) inadequate reasoning by the Tax Authority; (4) violation of the equality principle; and (5) protection under EU Directive 90/434/EEC. The tribunal's decision would necessarily analyze whether the reserve incorporation constituted an actual economic distribution or merely a neutral capital restructuring, examining the substance over form doctrine and the boundaries of tax-neutral treatment. To obtain the complete decision including the tribunal's reasoning, legal analysis, and dispositional ruling, one would need to access the full arbitral award through CAAD's public database or official case repositories.