Process: 33/2015-T

Date: July 6, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral tax decision addresses the subsidiary liability of an individual for IRC (Corporate Income Tax) owed by a Gibraltar-based company on capital gains from Portuguese real estate. The taxpayer challenged an additional assessment of EUR 105,403.98 from 2004 on multiple grounds. First, he argued violation of his right to prior hearing (audição prévia) before being held jointly liable, breaching constitutional and procedural guarantees under Articles 267(5) CRP, 100 CPA, and 60 LGT. Second, he contested the competence of the Lisbon Financial Directorate to inspect the non-resident entity under Article 16(3) CIRC. Third, he claimed the assessment notice was issued outside the statute of limitations under Article 45(1) LGT. Fourth, he argued the Tax Authority improperly denied the 50% capital gains exclusion provided in Article 43(2) CIRS to the non-resident Gibraltar company, violating EU free movement of capital principles under Article 63 TFEU. Finally, he challenged the quantification methodology for not considering acquisition and disposal expenses. The case involved a property sold for EUR 450,000 that was originally acquired for EUR 25,342.92, generating a substantial capital gain of EUR 421,615.93. The Gibraltar company failed to file the mandatory IRC return (Model 22) for 2004. Notification attempts to both the company and its tax representative were returned, raising procedural issues. The tribunal had to balance the Tax Authority's right to assess non-resident entities on Portuguese-source income against fundamental procedural rights, EU law principles of non-discrimination, and strict compliance with limitation periods and jurisdictional rules governing international tax enforcement.

Full Decision

ARBITRAL DECISION

I – STATEMENT OF FACTS

On 21 January 2015, A…, taxpayer no. …, with tax domicile in …, post office box …-…, …-… …, filed a petition for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012 of 31 December (hereinafter abbreviated as RJAT), seeking a declaration of illegality of the additional assessment notice for Corporate Income Tax (IRC) no. 2007 …, of 26 February 2007, relating to the year 2004, in the amount of EUR 105,403.98, for which he was held jointly and severally liable.

To substantiate his petition, the Petitioner alleges, in summary:

i.) Disregard of the right to prior hearing of the Petitioner in his alleged capacity as jointly and severally liable, to exercise his right of participation in the tax assessment act in question, in violation of Article 267, no. 5, of the Constitution of the Portuguese Republic (CRP) and also Articles 100 of the Code of Administrative Procedure (CPA) and 60 of the General Tax Law (LGT);

ii.) Illegality of the inspection action that gave rise to the tax assessment act in question due to lack of competence of the Financial Directorate of … to carry it out, in violation of Article 16, no. 3, of the Corporate Income Tax Code (CIRC);

iii.) Lack of notification to the Petitioner of the said assessment notice within the respective statute of limitations period – and likewise, lack of notification of the same act to B… itself – in violation of Article 45, no. 1, of the LGT;

iv.) Illegality of the quantification of the capital gain subject to taxation due to non-application of the regime for limitation of taxable matter provided for in Article 43, no. 2, of the Personal Income Tax Code (CIRS) in view of B…'s status as a non-resident, in violation of Article 63 of the Treaty on the Functioning of the European Union (TFEU);

v.) Illegality of the quantification of the capital gain subject to taxation due to non-consideration of expenses incurred by B… in the acquisition and disposal of the real property that generated it.

On 23 January 2015, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Petitioner did not appoint an arbitrator, so, pursuant to the provisions of Article 6, no. 2, subsection a) and Article 11, no. 1, subsection a) of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who accepted the assignment within the applicable time period.

On 16 March 2015, the parties were notified of these appointments and did not express any intention to challenge any of them.

In accordance with Article 11, no. 1, subsection c) of the RJAT, the collective Arbitral Tribunal was constituted on 31 March 2015.

On 6 May 2015, the Respondent, duly notified to that effect, filed its reply defending itself by way of exception and counterclaim.

On 18 May 2015, the Petitioner, following notification to that effect, submitted observations on the matters of exception contained in the Respondent's reply.

On 20 May 2015, the Arbitral Tribunal issued a ruling in which, considering that none of the purposes legally assigned to it were present in the case, and taking into account the position adopted by the parties, pursuant to Articles 16(c) and 19 of the RJAT and the principles of procedural economy and prohibition of useless acts, it dispensed with holding the meeting referred to in Article 18 of the RJAT and allowed the parties the opportunity to, if they wished, submit written pleadings successively within a period of 10 days.

Both parties submitted their pleadings, reaffirming and developing their respective positions on matters of fact and law.

The Arbitral Tribunal is materially competent and is regularly constituted in accordance with Articles 2, no. 1, subsection a), 5 and 6, no. 1, of the RJAT.

The parties have legal capacity and standing, are duly entitled and are legally represented in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order no. 112-A/2011 of 22 March.

The proceedings do not suffer from any nullities.

Having considered everything, we now render:

II. DECISION

A. MATTERS OF FACT

A.1. Facts established as proven

  1. The assessment that is the subject of these proceedings is based on a capital gain generated by the Gibraltar law company B… (hereinafter B…), with taxpayer identification number (NIPC) …., relating to the onerous disposal of real property, of which the now Petitioner was notified, in the context of the subsequent tax enforcement proceedings, in his capacity as jointly and severally liable, pursuant to Article 27 of the LGT.

  2. Pursuant to Internal Inspection Order (OI) 2006 …, of 17 November 2006, of the Financial Directorate of …, an internal inspection was conducted on B…, with NIPC …, a Gibraltar law company, a non-resident entity without permanent establishment in national territory, relating to Corporate Income Tax (IRC) for 2004.

  3. In the said inspection, it was found that by public deed of purchase and sale executed at the 2nd Notarial Office of …, on 10 December 2004, B… sold the urban real property, registered in the property register of the parish of …, municipality of …, under article …, for the price of €450,000.00, which property had previously been acquired, for consideration, for the total value of €25,342.92, with one part on 29 March 2000 (8/9 undivided) in the amount of €22,527.04 and another part on 18 May 2000 (1/9 undivided) in the amount of €2,815.88.

  4. With reference to Corporate Income Tax for 2004, B… did not file the income tax return, model 22, in accordance with Article 109 and subsection b) of Article 112, no. 5, of the CIRC, relating to the capital gain obtained from the onerous disposal of real property.

  5. The tax inspection proposed a merely arithmetic correction to the taxable matter relating to the capital gain obtained from the onerous disposal of the said real property, calculated in the amount of €421,615.93, as detailed below:

  6. [Details of calculation]

  7. From the inspection correction proposal, the following notifications were made to exercise the right to prior hearing:

a. Official letter no. … of 5 January 2007, to B…, at B…'s registered address, at that date, in the taxpayer register, in …, by registered mail no. RM … PT, which was returned together with a letter from attorney Dr. C…, in which he informed that "he has not represented the said company for a long time, so this notification is being returned";

b. Official letter no. … of 5 January 2007, to B…'s tax representative, D…, at his tax residence in …, registered mail no. RM … PT, which was returned with the indication "moved".

  1. At the date of these notifications, the taxpayer registry system showed D…, with tax identification number (NIF) …, in the capacity of tax representative of B…, following the declaration of changes appearing in pages 117 and 120 of the case file.

  2. The final report of the tax inspection, approved by order of 6 February 2007, was subject to the following notifications:

a. By official letter no. … of 7 February 2007 to B…, at its registered address, at that date, in the taxpayer register, in …, by registered mail RM … PT, which was accepted;

b. By official letter no. … of 8 February 2007, to B…'s tax representative D…, at his tax residence in …, by registered mail RM … PT, which was returned with the indication "not claimed", followed by a 2nd notification by official letter no. … of 20 March 2007, RM … PT, with the indication "moved".

  1. At the date of these notifications, the taxpayer registry system showed D…, with NIF …, in the capacity of tax representative of B….

  2. Following that correction, the self-assessment notice for Corporate Income Tax relating to 2004 was issued, no. 2007 …, of 26 February 2007, in the amount of €105,403.98, which was dispatched on 3 December 2007 by the Central Services of the Tax Authority under postal registration no. RY … PT of 3 December 2007, distributed by postal services and addressed to B…, through its tax representative D…, at its tax domicile.

  3. At the date of this notification, the "Taxpayer Registry and Management System" showed D…, with NIF …, in the capacity of tax representative of B….

  4. From the assessment, certification of debt no. 2008/… was extracted with the consequent institution of the Tax Enforcement Proceeding (PEF) …., on 2 May 2008.

  5. In the context of that Tax Enforcement Proceeding, the Petitioner was summoned on 10 February 2012, in his capacity as manager of assets and rights of the non-resident company as jointly and severally liable for the debt in enforcement proceedings, following the order of 6 February 2012.

  6. The Petitioner objected to the disputed Corporate Income Tax assessment by filing a administrative reclamation, filed on 27 April 2012, with no. … 2012 ….

  7. In the context of that reclamation, a draft rejection was issued by order of 20 July 2012 by the Deputy Financial Director acting in substitution of the Financial Directorate of Lisbon, notified to the Petitioner to exercise the right to prior hearing by official letters no. … and … of 24 July 2012.

  8. The Petitioner exercised his right to prior hearing, and ultimately a rejection decision was issued by order of 6 September 2012, notified by registered mail of 7 September 2012.

  9. Not accepting the decision rendered in the administrative reclamation proceeding, the Petitioner filed a Hierarchical Appeal addressed to the Minister of State and Finance, filed on 9 October 2012, with no. … 2012 ….

  10. In the context of that hierarchical appeal, a rejection order was issued dated 18 September 2014 by the Director of Corporate Income Tax Services, by subdelegation of powers, notified to the Petitioner by registered mail of 23 October 2014 through official letters no. … and … of 22 October 2012.

  11. The Petitioner filed an Opposition to the Tax Enforcement Proceeding, based on subsections b), e) and i) of Article 204, no. 1 of the Code of Tax Procedure and Process (CPPT), which is pending before the Administrative Court of First Instance (TAF) of Sintra under no. …/12…., and the Public Finance Representation was notified to file a defense, in accordance with Article 210 of the CPPT, by 27 November 2012.

  12. The Petitioner is an attorney at law, holder of professional license no. …-F, with an office in …, no. …, …, …-… ....

  13. At no time, before being summoned for enforcement proceedings, was the now Petitioner notified by the Tax Authority in the context of the inspection proceeding that preceded the Corporate Income Tax assessment giving rise to the tax enforcement proceeding no. … 2008 …, nor was he directly notified of the respective tax assessment, nor was he given a period to pay it voluntarily.

  14. At no time prior to the summons in the context of the tax enforcement proceeding no. … 2008 …, did the Tax Authority notify the Petitioner of its position to which it considered him jointly and severally liable in his capacity as manager of assets and rights of B…, nor did it proceed with notification to enable the Petitioner to participate in the administrative decision imposing this status on him or to gather evidence to confirm or refute such a possibility.

  15. The notice of summons of the Petitioner, notwithstanding that it includes a copy of the final inspection report and the demonstration of the consequent Corporate Income Tax assessment, is silent as to whether the said assessment was notified to B…, whether as to the date of its occurrence, or whether as to the means used by the Tax Authority for that purpose.

  16. Upon acquisition of the real property referred to in item 3 above, B… paid Transfer Tax (SISA) and incurred Stamp Duty (IS) in the amount of €202.74.

  17. In the context of the hierarchical appeal, the Tax Authority came to acknowledge, however, that the amount relating to the Transfer Tax (SISA) borne by B… had not been properly taken into account in the calculation of the capital gain, concluding the need for correction of the assessment in that respect.

A.2. Facts established as not proven

  1. Upon execution of the public deeds of 29 March 2000 and 25 September 2000, B… incurred the corresponding notarial costs.

  2. B… incurred Stamp Duty (IS), upon disposal of the real property, in the amount of one thousand six hundred and twenty-five euros.

  3. Upon execution of the public deed of 10 December 2004, B… incurred the corresponding costs.

A.3. Reasoning for established and unproven facts

With respect to matters of fact, the Tribunal need not pronounce on everything alleged by the parties, but rather has the duty to select the facts relevant to the decision and distinguish between proven and unproven facts (see Article 123, no. 2, of the CPPT and Article 607, no. 3 of the Code of Civil Procedure (CPC), applicable pursuant to Article 29, no. 1, subsections a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former Article 511, no. 1, of the CPC, corresponding to the current Article 596, applicable pursuant to Article 29, no. 1, subsection e), of the RJAT).

Accordingly, taking into account the positions adopted by the parties, the documentary evidence and the case file attached to the proceedings, the facts listed above were considered proven as relevant to the decision.

In particular, the fact established in item 25 stems from the application of a standard of normality to the available evidentiary elements (public deeds of disposal), further presumed by the tax act itself that is the subject of these proceedings, in light of Article 74, no. 2 of the LGT, and it follows from the common experience of things that the acquirer bears the tax charges mentioned there, that the notarial act in question would not have been executed without them being properly proven, and that, if that were not the case, the Tax Authority would easily have detected this situation and made the corresponding demonstration in the proceedings.

The facts established as not proven result from the absence or insufficiency of evidence concerning them.

In particular, the fact listed under item 2 stems from the circumstance that, although payment of Stamp Duty in the amount indicated appears in the public deed, it does not follow from the deed itself, nor from a standard of normality, that B… incurred them.

B. ON THE LAW

Before proceeding to the examination of the merits of the case, it is necessary to pronounce on the request formulated in Articles 176 and 182 of his Initial Petition, in which the Petitioner requests that "pursuant to Article 99, no. 1, of the CPPT, applicable by virtue of Article 29, no. 1, subsection a), of the RJAT, the 1st Notarial Office of … be officially requested for information and documents proving" costs that he considers relevant.

Article 29, no. 1 of the RJAT provides that "The Code of Civil Procedure shall apply subsidiarily to tax arbitration proceedings, according to the nature of the omitted cases: (…) e) The Code of Civil Procedure."

For there to be subsidiary application of a rule of the Code of Civil Procedure to tax arbitration proceedings, it is necessary, among other things, that the nature of the omitted case permit it.

The rule whose application the Petitioner seeks is based on the public powers of authority that state courts have, and it is manifest that arbitral tribunals, including tax tribunals, do not enjoy such prerogatives.

Indeed, the powers of arbitral tribunals are limited to the parties that voluntarily adhere to them.

Accordingly, since the rule of the Code of Civil Procedure invoked by the Petitioner is not applicable by the nature of the case, nor is there another that might replace it, this Tribunal denies the requested relief in points 176 and 182 of the initial petition.

Prior to examination of the merits, the Tax Authority begins by questioning the "statute of limitations of the assessment as a ground for opposition to tax enforcement proceedings".

In this regard, the Tax Authority states that it "considers that the statute of limitations of the assessment, as presented in these proceedings, appears susceptible only to affect the efficacy of the act of assessment and not its validity, consisting, therefore, in a ground of opposition to tax enforcement proceedings and not in a ground for challenging the validity of the assessment act".

The Tax Authority continues, stating that "in the situation under review, the disputed assessment was made within the statute of limitations period, with the question being discussed in the proceedings whether valid notification of it to B… also occurred within the same period and, with respect to the Petitioner, whether he was subject to the time period of Article 45 of the LGT."

However, contrary to the framework adopted by the Tax Authority, it is understood that this issue does not constitute a matter of exception (jurisdiction), but of merit. The Tribunal is presented with – and has jurisdiction to decide – questions relating to the legality of the assessment act. This is what the petitions sought. Whether the facts in question (assessment made within the statute of limitations period and notification thereafter) generate or do not generate illegality of the assessment act is a question that falls within the examination of the merits of the petitioner's claim (the illegality of the assessment act), and not within the scope of the jurisdiction of the Tribunal, which undoubtedly exists, to review the legality or illegality of that act.

This preliminary issue raised by the Tax Authority is therefore without merit.

The Tax Authority also raises, as a preliminary issue, the relevance to the present action of the proceeding no. …/12….BESNT[1], of the Administrative Court of First Instance of Sintra, inasmuch as the same has "as its object the enforceability of the assessment now disputed, based on both the non-existence of the alleged joint and several liability (Article 204, no. 1, subsection b) of the CPPT) and the failure to notify the Petitioner of the assessment within the statute of limitations period (Article 204, no. 1, subsection e) of the CPPT)."

The only relevance that such proceeding could have in relation to the present proceedings would be on the grounds of lis pendens, which only exists where there is "identity of parties, petition, and cause of action", and it is evident that in the opposition to enforcement proceedings the petition is not, as is the case in the present proceedings, the illegality of the assessment, but rather the unenforceability of the debt in execution and the consequent dismissal of the enforcement proceeding.

Accordingly, in the absence of identity of petition, this issue should likewise be dismissed.

Having established that, the Petitioner raises the illegality of the assessment that is the subject of these proceedings based on the following grounds:

i.) Disregard of the right to prior hearing of the Petitioner in his alleged capacity as jointly and severally liable, to exercise his right of participation in the tax assessment act in question, in violation of Article 267, no. 5, of the CRP and also Articles 100 of the CPA and 60 of the LGT;

ii.) Illegality of the inspection action that gave rise to the tax assessment act in question due to lack of competence of the Financial Directorate of … to carry it out, in violation of Article 16, no. 3, of the CIRC;

iii.) Lack of notification to the Petitioner of the said assessment notice within the respective statute of limitations period – and likewise, lack of notification of the same act to B… itself – in violation of Articles 45, no. 1, of the LGT and 2, 13, no. 1 and 268, all of the CRP;

iv.) Illegality of the quantification of the capital gain subject to taxation due to non-application of the regime for limitation of taxable matter provided for in Article 43, no. 2, of the CIRS in view of B…'s status as a non-resident, in violation of Article 63 of the TFEU and 8, no. 4 of the CRP;

v.) Illegality of the quantification of the capital gain subject to taxation due to non-consideration of expenses incurred by B… in the acquisition and disposal of the real property that generated it.

Let us examine each of them.

The Petitioner contends that "considering, on the one hand, the alleged joint and several liability imputed to the now Petitioner, and, on the other hand, the regime applicable to the guarantees and means of defense of the jointly and severally liable party resulting from the framework above, it seems clear that the Tax Authority would have been obliged to notify the now Petitioner in the same terms as it was obliged to notify the principal debtor – i.e., to notify him to exercise his right of participation in the decision within the tax inspection of which B… was the subject."

The Petitioner also alleges that "by intending the Tax Authority to impute joint and several liability to the now Petitioner, attributing him the status of manager of assets and rights of B…, there is no doubt that the Petitioner would also have to be heard before such a decision was taken – i.e., by notifying him to exercise his right of participation in that decision."

The Petitioner finally states that "neither was the Petitioner notified by the Tax Authority of any draft decision imputing the status of jointly and severally liable for B…'s debts or of the continuation of enforcement proceeding no. … 2008 … against him."

With all due respect, it is understood that the Petitioner's claim is based on two misconceptions.

The first is equating the position of the jointly and severally liable party with that of the original taxpayer or subject, positions that are distinct, as is evident from Article 22, no. 1 of the LGT.

This distinction, among other things and for what matters here, is evident in the regime of Article 9, no. 2 of the CPPT, which provides that:

"The standing of jointly and severally liable parties results from the requirement, imposed on them, to perform the tax obligation or any tax duties, even if jointly with the principal debtor."

Accordingly, and contrary to what the Petitioner asserts, during the assessment proceeding against the original taxpayer, the jointly and severally liable party (here the Petitioner) lacked standing for that tax proceeding, since at that time there had not yet occurred, in relation to him, the requirement to perform the tax obligation or any tax duties. Thus, only after the "requirement, imposed on them, to perform the tax obligation or any tax duties, even if jointly with the principal debtor" will tax liable parties be legitimate parties in pending proceedings.

Accordingly, and since at the time of the proceeding that culminated in the assessment in question in these proceedings, as stated above, the Petitioner had not been required to perform the "tax obligation or any tax duties, even if jointly with the principal debtor", the jointly and severally liable party lacked standing – not only by force of the specific normative provision, but also insofar as the respective final act was not, as to him, injurious – to intervene in the assessment proceeding sub iudice, and the Tax Authority did not correspondingly have the obligation to "notify him to exercise his right of participation in the decision within the tax inspection of which B… was the subject," nor to exercise any other faculty or for the knowledge of any act in the assessment proceeding as to that company.

On the other hand, having it as undeniable that, as an injurious act, the tax-administrative act that determines the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor" should be preceded by prior hearing of the latter, it is equally undeniable that, and here lies the second misconception, such act is a distinct and autonomous act from the assessment act for tax on the original taxpayer (subject of the present action), and, as such, that the invalidity of that act (of determining the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor"), especially that resulting from the disregard of the duty of prior hearing, does not affect the assessment act, particularly because it is a subsequent (not prior) act to that one[2].

Accordingly, the invalidity inherent in the act of determining the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor" should be raised and examined in an autonomous proceeding that has it as its object, and not in the context of challenging the assessment act for the tax obligation whose performance is required of the jointly and severally liable party.

That is, and in summary: one thing is the act of determining the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor", another is the assessment act for the tax obligation whose performance is required of the jointly and severally liable party, with the vices inherent in each of those acts being raised and addressed in proceedings that have them, respectively, as their object.

The object of the present tax arbitration proceeding is, undoubtedly, the Corporate Income Tax assessment act no. 2007 …, of 26 February 2007, relating to the year 2004, of company B…, in the amount of EUR 105,403.98, and not the act of determining the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor"[3].

Accordingly, and for all that has been stated above, it is understood that there was no violation, with respect to the Corporate Income Tax assessment act no. 2007 …, of 26 February 2007, relating to the tax year 2004, of company B…, in the amount of EUR 105,403.98, which is the object of these proceedings, of the Petitioner's right of participation, in contravention, in particular, of Article 267, no. 5, of the CRP and also Articles 100 of the CPA and 60 of the LGT, and it is certain that the requirement of participation imposed by that constitutional rule is sufficiently satisfied by the participation, as it was legally ensured, of the jointly and severally liable party in the context of the practice of the act of determining the requirement on the joint obligor of the "performance of the tax obligation or any tax duties, even if jointly with the principal debtor", with no ground being apparent for sustaining that before being called to account, the jointly and severally liable party should intervene in an assessment proceeding that is not, at that time, and may never be, in any way injurious.

Further on this matter, the Petitioner alleges that "considering that (…) notification of the original taxpayer – B… – suffices to permit the exercise of the right to prior hearing, it is all the more true, as stated above, that the Tax Authority does not demonstrate that such notification was carried out."

With all due respect, here too it must be understood that he is not correct.

Indeed, as appears in the case file and results from the facts established above, two notifications were made in the context of the prior hearing of B…, namely:

i. One, directed to B…, by Official Letter no. … of 5 January 2007, to the address, at that time, on file in the taxpayer register, in …, by registered mail no. RM … PT, which was returned;

ii. Another, by Official Letter no. … of 5 January 2007, to the care of B…'s tax representative, D…, at his tax residence in …, by registered mail no. RM … PT, which was also returned.

Given these facts and the provisions of Articles 38, no. 3 and 39, no. 1 of the CPPT, the duty of prior hearing in question should be deemed satisfied, and this allegation is therefore without merit.

The Petitioner further alleges that, B… being a non-resident company without permanent establishment in Portuguese territory, "in accordance with the second part of no. 3 of Article 16 of the CIRC, competence to determine the taxable matter would lie with the Director of the Tax Prevention and Inspection Services and not with the Financial Directorate of …."

Here too, with all due respect, the petitioner is in error in interpreting the law.

Indeed, Article 16, no. 3 of the CIRC provided, in the wording relevant to the case, that:

"The determination of taxable matter in the context of direct assessment, when carried out or subject to correction by the services of the Directorate-General of Taxes, is within the competence of the financial director of the area of the registered office, actual management, or permanent establishment of the taxpayer, or of the director of the Tax Prevention and Inspection Services in cases subject to corrections made by it in the exercise of its functions, or by an official to whom competence has been delegated by either of them."

The Petitioner seeks to read in the legal text an alternative construction, in which there would be a distribution of competence between the Financial Director and the Tax Prevention and Inspection Services, in disjunctive terms, meaning that the competence of one body would exclude that of the other.

However, in light of the hermeneutic criteria of Article 9 of the Civil Code, it is understood that this is not the correct reading of the norm in question.

Indeed, that norm must be read in conjunction with Article 16 of the Regulation of Procedures for Tax Inspection (RCPIT), which provided that:

"The following services of the Directorate-General of Taxes are competent to perform acts of tax inspection, in accordance with the law:

a) The Tax Prevention and Inspection Services (DSPIT), in relation to taxpayers and other tax obligors to be inspected by the central services of the Directorate-General of Taxes, in accordance with the selection criteria provided in the National Plan of Tax Inspection Activities or set by the director-general of Taxes in accordance with this Regulation;

b) The regional services, in relation to taxpayers and other tax obligors domiciled or with their tax seat in their territorial area;

c) The local services, in relation to taxpayers and other tax obligors domiciled or with their tax seat in their territorial area."

In this framework, it appears that the competence conferred by law on the Tax Prevention and Inspection Services is not a residual competence, defined negatively by the competence attributed to the regional and local services, but a complementary competence that, depending on the content of the National Plans of Tax Inspection Activities, overlapped with that of those services.

It is thus understood that there was no legal vacuum of competence for inspection and corrections of non-resident taxpayers without permanent establishment, but rather a situation of lex minus dixit quam voluit. That is, the express reference to non-resident taxpayers without permanent establishment should not be interpreted, as the Petitioner intends, as excluding them from inspection and correction actions outside the scope of the National Plans of Tax Inspection Activities, but rather as a case in which the legislator said less than it intended, and it should be understood that such taxpayers, in addition to being subject to the investigative power of the Tax Prevention and Inspection Services in accordance with the content of the National Plans of Tax Inspection Activities that encompass them, are also subject to the inspection and correction authority of the peripheral regional and local bodies, with no apparent ground appearing – nor the Petitioner indicating any – for this not to be the case.

Accordingly, in light of the above, this allegation of the Petitioner is likewise without merit.

Subsequently, the Petitioner alleges that "If the now Petitioner is considered jointly and severally liable for payment of assessment no. 2007 …, the Tax Authority's claim for collection, made for the first time by summons in tax enforcement proceedings, would in any case be illegal, by virtue of not having notified the Petitioner of the tax assessment before the statute of limitations period expired, from which can only follow its unenforceability."

The Petitioner understands that by "interpretation of Article 45, no. 1 of the LGT, only an inclusion of the 'jointly and severally liable party' in the concept of 'taxpayer', on a par with the 'original taxpayer', would correspond to an interpretation of the norm in accordance with Article 13 of the CRP, for otherwise, the legislator would be depriving him of the guarantee of legal certainty and security assured by the statute of limitations institute, without seeing what difference in the situation of both before the Public Treasury would justify such different treatment."

It concludes, therefore, that the "failure to notify the tax assessment within the respective four-year statute of limitations period (…) determines its unenforceability and constitutes grounds for annulment."

In this matter, however, the doctrine of the distinguished Councillor Jorge Lopes de Sousa[4] is followed, according to which:

"Facts that do not affect the validity of acts but only relate to their efficacy, such as the failure or irregularity of their notification, cannot, as a rule, be used as grounds for judicial challenge.

Notification of an assessment is an act subsequent to and external from it, and therefore, as a rule, the defects affecting the notification act do not affect the notified act.

Questions relating to the efficacy or inefficacy of the act, as questions arising subsequent to the performance of the act and relating to the possibility of the act producing effects in relation to the recipient, are questions that may be addressed in opposition to tax enforcement proceedings, but not but cannot be the autonomous subject of examination in judicial challenge proceedings.

This is not the case, however, in all instances of statute of limitations for the right to assess.

Indeed, pursuant to Article 45 of the LGT, the right to assess taxes expires if the assessment is not validly notified to the taxpayer within the legal time period, which varies depending on the circumstances.

There are cases in which the assessment itself is made after the expiry of the applicable legal period and cases in which the assessment itself is made in violation of law.

In such cases, the failure to notify within the time period assumes no autonomous relevance because the act itself is illegal, having been performed intemperately.

However, it may occur that the assessment is made within the legal time period and notification only occurs after its expiry or is effected within the period but deficiently.

In these latter cases, it was understood that the legality of the assessment was affected by the failure or irregularity of notification, which was a requirement for the validity of the assessment itself understood not in the strict sense, as the act establishing the tax, but in the broad sense as the assessment process, comprised of a set of acts connected with such establishment and its imposition on the recipient. In this context, notification of the assessment act was a necessary requirement to prevent the statute of limitations for the right to assess from expiring, and therefore its failure affected the legality of the assessment process, globally considered.

Before the Code of Tax Procedure and Process, absent express provision for the failure to notify the tax assessment within the statute of limitations period as a ground for opposition to tax enforcement proceedings, it was understood that these issues should be reviewed in judicial challenge as questions relating to the legality of the assessment in the broad sense referred to.

In this Code, however, a new ground for opposition to tax enforcement proceedings was introduced in subsection e) of Article 204, no. 1, which is precisely the failure to notify the tax assessment within the statute of limitations period.

Therefore, it now seems clear that the failure to notify (or the existence of irregularities affecting its validity, resulting in the failure of a valid notification) affects the efficacy of the assessment act and not its validity, so that opposition is the procedure in which such failure of notification should, in principle, be invoked, and as grounds for opposition, this failure of valid notification may be invoked therein even if the assessment was not challenged.

However, if such failure of notification is invoked in judicial challenge proceedings and the statute of limitations period has already expired, it will constitute a definitive obstacle to the practice of a valid assessment act, so that the possibility should be considered of examining it as a ground of subsequent futility of the action, as it would serve no purpose to examine whether an act is valid if it cannot later have effect."

Continuing with the same author[5]:

"However, the deficiencies that affect the validity of notification do not affect the validity of the notified act.

Indeed, the notification of an act is an act external to it, and therefore the defects affecting notification, though they may determine the invalidity of the notification and the consequent inefficacy of the notified act, do not affect the validity of this act."

That is, and in summary: it is understood that the failure to notify an assessment act, made within the statute of limitations period, as is the case, but (possibly) notified beyond that period, does not contend with the validity of that act but only with its efficacy. Moreover, the Petitioner himself seems, in some way, to have that understanding when he refers to the said failure generating the "unenforceability of the debt", which is evidently different from the illegality of the assessment.

Accordingly, since the alleged necessity of notification of the assessment to the jointly and severally liable party does not contend with the legality of that act, to which the questions cognizable in these proceedings must be related, it is not necessary to ascertain whether, as the Petitioner alleges, such necessity stems or not from an interpretation of Article 45, no. 3 of the LGT in accordance with the CRP (particularly with Articles 2, 13, no. 1 and 268 thereof), nor even to ascertain the utility of the action.

Indeed, and from the outset, in the present case, we would never be faced with a subsequent futility of the action, but with an original futility, since the situation in question preexisted the institution of the action. Second, because it is understood that the action, regardless of how the said question were resolved, would always maintain its interest. Thus, if it were concluded that notification to the jointly and severally liable party was unnecessary, the remaining questions raised by the Petitioner would still need to be examined. If, conversely, it were concluded that such notification was necessary, it would not, for the reasons set forth above, be concluded that the assessment is invalid, and the utility would likewise be maintained for the Petitioner of the examination of the remaining questions raised by him, particularly insofar as the res judicata that would result from a decision of futility of the action, as a decision on mere form that would determine the absolution of the Tax Authority from the suit, would not prevent the continuation of enforcement proceedings.

Accordingly, since the eventual necessity of notification of the assessment to the Petitioner does not affect the validity of the assessment being challenged, this allegation of his is also without merit.

The Petitioner subsequently alleges that "the Tax Authority proceeded with the assessment in question considering B… as a non-resident company without permanent establishment in Portuguese territory, determining the taxable income of B… in accordance with the norms for determining taxable income provided for in Articles 22 et seq. of the CIRS" and "that, within the CIRS, in the context of capital gains, there is a significant difference in treatment between resident and non-resident taxpayers, enshrined in Article 43, no. 2, of the CIRS, where a limitation of taxation to 50% of capital gains realized by residents is provided but not capital gains realized by non-residents."

The Petitioner then concludes that "B… was subject to discriminatory tax treatment by reason of its residence by the Tax Authority" and that "understanding that there are no arguments that could justify the discriminatory treatment effected by the regime of Article 43, no. 2, of the CIRS, it is concluded that the reduction provided therein as applicable only to residents constitutes a discriminatory restriction on the free movement of capital, contrary to Articles 63 and 65 of the TFEU and also to Article 8, no. 4 of the CRP, which determines, in light of Article 135 of the CPA, the annulment of assessment no. 2007 …."

Once more, with all due respect, it is understood that the Petitioner is in error in his analysis of the situation sub iudice.

Indeed, if it is true that, contrary to what the Tax Authority contends, it is not considered that there are doubts that the tax act that is the subject of these tax arbitration proceedings applied Article 43 of the CIRS[6], and that no. 2 of this norm was already considered inconsistent with Community Law[7], to the extent that it would unjustifiably discriminate between residents and non-residents, it will not be possible to make the same judgment with respect to the analogy of the situation in these proceedings and those in which such judgment of inconsistency with Community Law was formulated.

Indeed, contrary to what the Petitioner contends, it is understood that the judgment of discrimination should be made, not with respect to the situation of a non-resident corporate income tax subject compared with that of a resident personal income tax subject, but rather with respect to the situation of a non-resident corporate income tax subject compared with that of a resident corporate income tax subject.

That is: the Petitioner cannot claim that B… is a victim of unjustified discrimination given the treatment that Portuguese law grants to a resident personal income tax subject, because, if B… were resident, it would be taxed not as a subject of that tax (personal income tax) but rather as a subject of corporate income tax (IRC), so that, even if it were resident (or had a permanent establishment) in national territory, B… would never benefit from the clause of Article 43, no. 2 of the CIRS.

Accordingly, what would be incumbent to demonstrate in the proceedings, in order to sustain the existence of a treatment unjustifiably discriminatory of B…, violating the Community Law norms invoked and, concurrently, Article 8 of the CRP, would be that, if B… were a taxpayer resident in national territory (or with a permanent establishment located therein), it would, in corporate income tax, receive treatment unjustifiably more favorable.

Nothing having been determined in this respect – nor been alleged in this regard, for that matter – cannot be stated that there is the alleged violation of Community Law. In fact, not being established that, if it were resident, B… would benefit from the clause of no. 2 of Article 43 of the CIRS, cannot be stated that its non-application to the case, as operated in the tax act sub iudice, results in unjustified discrimination of B…, stemming from its status as non-resident without permanent establishment.

Accordingly, and for all the foregoing, this allegation of a vice should also be considered without merit.

Finally, the Petitioner alleges that "the capital gain assessed by B… as a result of the sale of the plot for construction, designated Lot …, located in the Urbanization …, in …, will amount to a maximum of only EUR 418,853.89 and not EUR 421,615.93, the value taken into account by the Tax Authority."

The Petitioner alleges that to the "acquisition value – properly increased by the monetary adjustment coefficient provided for in Article 50 of the CIRS and specified in the "Table of updating monetary devaluation coefficients referred to in Articles 44 of the CIRC and 50 of the CIRS" attached to Order no. 376/2004 of 14 April, in the amount, therefore, of EUR 34,082.34 (EUR 30,430.66 x 1.12) – the following values must necessarily be added":

i. B… incurred Stamp Duty in the amount of EUR 202.74 [(PTE 4,516,267 x 0.08% = PTE 36,130) + (PTE 564,533 x 0.08% = PTE 4,516)];

ii. B… also incurred the notarial costs corresponding to the execution of the public deeds of 29 March 2000 and 25 September 2000;

iii. B… incurred the Stamp Duty referred to in the deed of 10 December 2004 and incurred the corresponding notarial costs.

Having examined the established and unproven facts, it is verified that, indeed, B… incurred the charges discriminated above, in item i., in the total amount of €202.74, which should be considered, as a deduction, in the amount of realization to be taxed.

The arbitral petition should therefore succeed in this respect.

C. DECISION

Having considered everything, this Arbitral Tribunal decides to render judgment partially granting the arbitral petition filed and, in consequence,

a) Partially annul the Corporate Income Tax assessment that is the subject of these proceedings, and the corresponding compensatory interest, to the extent that it did not account for the value of the Stamp Duty borne by B…, in the amount of €202.74;

b) Render judgment dismissing the present arbitral action in its remaining part;

c) Condemn the parties to payment of the costs of the proceeding in proportion to their respective failure to succeed, which is fixed at €1.50 for the part charged to the Tax Authority, and €3,058.50 for the part charged to the Petitioner, taking into account amounts already paid.

D. Value of the Proceeding

The value of the proceeding is fixed at €105,403.98, in accordance with Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subsections a) and b) of Article 29, no. 1 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective failure to succeed, as fixed above, in accordance with Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the said Regulation.

Let notice be given.

Lisbon

6 July 2015

The Arbitrator President

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Member

(Paulo Lourenço)

The Arbitrator Member

(Luís Menezes Leitão)

[1] And not …/12….BESNT, as certainly by error appears in the Tax Authority's reply.

[2] As Carlos Alberto da Mota Pinto explains ("General Theory of Civil Law", 3rd Edition, Coimbra Editora, p. 605), "In invalidity, the absence of production of contractual effects results from vices or deficiencies of the contract contemporary with its formation."

[3] Which, it will always be said, is incorporated in the order of 6 February 2012, appearing on pages 49 et seq. of the case file.

[4] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 706 et seq..

[5] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 327.

[6] See p. 3 of the Report on the Facts, where it states: "Thus, the capital gain obtained in the fiscal year 2004, determined on the basis of the provisions of Articles 43, 44, 46 and 50, all of the CIRS, was €421,615.93."

[7] See, for example, Decisions of the Supreme Administrative Court of 16 January 2008 and 30 April 2013, rendered respectively in proceedings 0439/06 and 01374/12, available at www.dgsi.pt.

Frequently Asked Questions

Automatically Created

What is subsidiary and joint tax liability (responsabilidade subsidiária) under Portuguese IRC law?
Subsidiary and joint tax liability (responsabilidade subsidiária) under Portuguese IRC law, governed by Article 27 of the LGT (General Tax Law), allows the Tax Authority to hold certain individuals or entities liable for unpaid corporate taxes. This applies to company directors, managers, and other responsible parties who, through willful misconduct or negligence, contributed to non-payment. The liability is subsidiary, meaning the Tax Authority must first attempt collection from the primary debtor (the company) before pursuing subsidiarily liable parties. Joint liability means multiple parties can be held responsible for the full debt amount. To establish subsidiary liability, the Tax Authority must demonstrate: (1) the existence of a tax debt, (2) the individual's legal position giving rise to potential liability, (3) conduct demonstrating fault or negligence in fulfilling tax obligations, and (4) proper notification allowing the exercise of defense rights including prior hearing. Subsidiarily liable parties have independent procedural rights and can challenge both the underlying assessment and their designation as liable parties.
Can a non-resident entity benefit from the 50% capital gains exclusion under Article 43(2) of the CIRS?
Under traditional Portuguese tax law interpretation, non-resident entities were historically denied the 50% capital gains exclusion available to residents under Article 43(2) CIRS (Personal Income Tax Code), which reduces taxable capital gains from real estate held for more than 24 months. However, this discriminatory treatment conflicts with EU law, specifically Article 63 TFEU (Treaty on the Functioning of the European Union), which guarantees free movement of capital. The European Court of Justice has consistently ruled that Member States cannot discriminate against non-residents regarding taxation of capital gains from immovable property. Following EU jurisprudence, Portuguese Tax Authorities should apply Article 43(2) CIRS benefits equally to non-resident entities from EU/EEA countries. Denying this exclusion solely based on residence status constitutes unlawful restriction on capital movements. In this case, the Gibraltar company (pre-Brexit) could potentially invoke EU law principles to claim equal treatment. However, practical application depends on demonstrating the discriminatory nature of the treatment and whether Gibraltar entities qualify for EU treaty protections, which involves complex questions about Gibraltar's special EU status.
What are the requirements for prior hearing (audição prévia) before issuing an additional IRC tax assessment?
Prior hearing (audição prévia) before issuing an additional IRC assessment is a fundamental procedural guarantee under Portuguese law, enshrined in Article 60 LGT, Article 100 CPA (Administrative Procedure Code), and constitutionally protected under Article 267(5) CRP. Requirements include: (1) Notification to all interested parties, including both the primary taxpayer and any subsidiarily liable parties, of the proposed correction before finalizing the assessment, (2) Opportunity to review the full inspection report and supporting documentation, (3) Reasonable time period (minimum 15 days under general rules) to submit written observations, evidence, and legal arguments, (4) Proper notification at the correct address registered in the taxpayer registry, (5) Consideration of submitted observations before issuing the final assessment decision, and (6) Explicit reasoning in the final decision addressing arguments raised during prior hearing. Failure to provide prior hearing to subsidiarily liable parties constitutes a substantive procedural violation that can invalidate the assessment. The right applies even when the taxpayer failed to file returns, as procedural guarantees are independent of substantive tax obligations. Defective notification (returned mail, wrong address) does not satisfy legal requirements.
Does the Lisbon Tax Office have jurisdiction to inspect transactions involving non-resident companies under Article 16(3) CIRC?
Article 16(3) CIRC governs jurisdictional competence for IRC inspections. The general rule establishes that inspection jurisdiction belongs to the Tax Office corresponding to the taxpayer's registered tax domicile. For non-resident entities without permanent establishment in Portugal, special rules apply. If the non-resident entity derives Portuguese-source income (such as capital gains from Portuguese real estate), jurisdiction typically falls to: (1) the Tax Office where the income source is located (for real property, where the property is situated), or (2) the Tax Office where the tax representative is domiciled, or (3) Lisboa 7 Tax Office (Serviço de Finanças de Lisboa 7), which traditionally handles certain international and non-resident taxpayer matters. The Lisbon Financial Directorate's competence to inspect depends on whether proper jurisdictional protocols were followed. If the Gibraltar company's tax representative was registered in Lisbon or if the property generating capital gains was in Lisbon's jurisdiction, the inspection would be valid. However, if neither condition applied and another regional Tax Office had proper jurisdiction, the inspection could be challenged for lack of competence, potentially invalidating all subsequent acts including the assessment and subsidiary liability designation.
What is the statute of limitations for notifying a taxpayer of an IRC additional assessment under Article 45(1) LGT?
The statute of limitations for notifying taxpayers of IRC additional assessments under Article 45(1) LGT is generally four years from the moment the right to assess becomes exercisable. For IRC, this period begins January 1st of the year following the tax year in question. For the 2004 tax year, the limitation period began January 1, 2005, and would expire December 31, 2008. The notification must be complete and effective—merely sending notice is insufficient; the taxpayer must actually receive valid notification within the limitation period. Returned mail or defective notifications do not suspend or extend the limitation period. Critical timing considerations include: (1) notification must reach both the primary taxpayer and subsidiarily liable parties within the limitation period, (2) if notification to the tax representative fails, alternative notification methods must be attempted before the deadline, (3) the limitation period is suspended during inspection procedures but only for maximum periods specified in law, (4) once expired, the Tax Authority definitively loses the right to assess, and any assessment issued or notified after expiration is void. In this case, if neither the Gibraltar company nor its subsidiarily liable party received valid notification before December 31, 2008, the assessment would be time-barred regardless of its substantive merits.