IRS Capital Gains Taxation Under Article 43 CIRS – Timeliness of Arbitration Request (CAAD 338/2014-T)

ARBITRAL DECISION

A – REPORT

1. A, taxpayer no. ... and B, taxpayer no. ..., residents in ...Parede, hereby apply pursuant to articles 10, numbers 1 and 2 of the Legal Framework for Tax Arbitration (RJAT), approved by Decree-Law no. 10/2011, of 20 January, and articles 1 and 2 of Order no. 112-A/2011, of 22 March, to REQUEST THE CONSTITUTION OF AN ARBITRAL TRIBUNAL, with a view to annulment of the Personal Income Tax (IRS) assessment act no. 2013 ..., in the amount of € 42,873.78, of which € 1,489.78 refers to compensatory interest, which amount was subject to offset in the amount of € 18,622.14.

2. The Applicants chose not to appoint an arbitrator, whereby the Ethics Council of CAAD proceeded to appoint arbitrator Dr. José Rodrigo de Castro, which was accepted by the parties – Applicants and the Tax and Customs Authority.

3. The Arbitral Tribunal was duly constituted at CAAD, on 25-06-2014, to hear and decide the subject matter of the present arbitral proceeding, as recorded in the respective minutes.

4. The parties have legal personality and capacity and are duly authorized to sue.

5. The claim is admissible, the Tribunal is competent as to subject matter and was presented on 16 April 2014 and accepted by the Tribunal on 17.

6. At the Meeting provided for in article 18 of RJAT, held at CAAD on 16-04-2014, the parties were heard on procedural matters and on any preliminary objections, which were raised, indeed contained in the pleadings of both procedural documents, respectively, Initial Petition and Response, in the following terms and which, therefore, must be decided previously, albeit within the scope of this Report.

7. Thus, by the Representative of the Respondent it was stated:

a. That she maintains the ground regarding the preliminary objection raised concerning the untimeliness of the appeal petition, since she understands that the retroactivity which the Applicants invoke in the assessment of 12-12-2013, with no. 2013 ..., should have been invoked in the first assessment made on 19-07-2011, with no. 2011 ....

1. For their part, by the Attorney for the Applicants it was stated that:

a. With regard to the preliminary objection raised in his Initial Petition concerning the illegal revocation of the first complaint that grants the request for application of 50% taxation of the capital gains determined, he states that being a subsidiary request and the question having been raised, the same preliminary objection loses its practical effect.

1. Given the above, the knowledge of the facts contained in the petition is important. Thus,

I – FROM THE ARBITRAL PETITION

I.1 - FROM THE FACTS

1. The Applicants, hereinabove identified, presented on 16-04-2014 to the Arbitral Tribunal, a request for arbitral determination, with a view to annulment of the Personal Income Tax (IRS) assessment act no. 2013 ... (see Doc. no. 1 attached to the Initial Petition), in the amount of € 42,873.78, of which € 1,489.78 refers to compensatory interest (see Doc. no. 2 attached to the Initial Petition), which amount was subject to offset in the amount of € 18,622.14 (see Doc. no. 3 attached to the Initial Petition), documents whose contents are detailed:

Doc. no. 1

a. DOCUMENT ID. 2013 ... OFFSET NO. 2013 ...

b. FISCAL ID. ...

c. STATEMENT OF ACCOUNT SETTLEMENT – OFFSET DATE 2013-12-11

d. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2013-12-11 – VALUE DATE 2013-12-11 – Reversal of Assessment 2010 – Assessment 2012 ... – Amount +18,622.14 and Total D/C +€ 18,622.14

e. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2013-12-11 – VALUE DATE 2013-12-11 – Settlement of Assessment 2010 – Assessment 2013 ... – Amount - € 41,384.58

f. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2013-12-11 – VALUE DATE 2013-12-11 – Compensatory Interest – Assessment 2013 ... – Amount – € 601.16.

g. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2013-12-11 – VALUE DATE 2013-12-11 – Compensatory Interest for Improper Receipt – Assessment 2013 ... – Amount – € 888.04 and Total D/C – € 42,873.78.

h. FINAL PAYMENT DATE: 20-01-2014 – BALANCE DETERMINED: € 24,251.64

i. NOTICE/NOTIFICATION OF COLLECTION

j. Amount to pay: € 24,251.64

k. Final Payment Date: 20-01-2014

l. DOCUMENT IDENTIFICATION – 2013 ...

Doc. no. 2

a. DOCUMENT ID. 2012 ... - OFFSET NO. 2012 ...

b. FISCAL ID. ...

c. STATEMENT OF ACCOUNT SETTLEMENT – OFFSET DATE 2012-11-16

d. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2012-11-16 – VALUE DATE 2012-11-16 – Reversal of Assessment 2010 – Assessment 2012 ... – Amount +42,088.38 and Total D/C +€ 42,088.38.

e. IRS – PERIOD 2010-01-01 to 2010-12-31 – TRANSACTION DATE 2012-11-16 – VALUE DATE 2012-11-16 – Settlement of Assessment 2010 – Assessment 2012 ... – Amount – € 18,622.14

f. AMOUNT TO BE REIMBURSED: € 23,466.00.

g. TRANSFER MADE ON 21-11-2013, TO NIB ...

Doc. no. 3

a. STATEMENT OF INTEREST ASSESSMENT

b. OFFSET NO.: 2013 ...

c. OFFSET DATE: 2013-12-11

d. COMPENSATORY INTEREST FOR IMPROPER RECEIPT:

e. TAX PERIOD - 2010-01-01 to 2010-12-31

f. ASSESSMENT NO. 2013 ..., IRS – INTEREST ASSESSMENT: 2013 ...

g. BASE VALUE: € 22,762.44 – CALCULATION PERIOD: 2012-11-12 to 2013-11-11

h. VALUE: € 888.04. TOTAL: € 888.04.

i. COMPENSATORY INTEREST FOR IMPROPER RECEIPT:

j. TAX PERIOD - 2010-01-01 to 2010-12-31

k. ASSESSMENT NO. 2013 ..., IRS – INTEREST ASSESSMENT: 2013 ...

l. BASE VALUE: € 22,762.44 – CALCULATION PERIOD: 2012-06-04 to 2012-01-30

m. VALUE: € 601.16. TOTAL: € 601.16.

1. The Applicants proceed to describe the facts which they consider relevant to the record, namely the sale of 60 shares held by Applicant B in C, SA, in the amount of € 240,000.00.

2. That amount of € 240,000.00 was the portion that belonged to B in the overall sale of shares of C, where she was a shareholder, for the total of € 2,000,000.00, by purchase and sale agreement dated 27-04-2010 to acquiring company D, see Doc. no. 4.

3. That the said 60 shares had been acquired for € 6,000.00, having occurred at two distinct moments, namely:

a. a first quota in the amount of € 3,000.00, assigned to Applicant B by E and spouse F, according to Deed of 26-02-2004, executed at the 12th Notarial Office in Lisbon, see Doc. no. 5;

b. and the other quota, also for the price of € 3,000.00 assigned by E, by Deed of 20-9-2007, see Doc. no. 6.

1. Subsequently, on 3-3-2010, the company was transformed into a joint-stock company, whereby 60 shares were assigned to Applicant B, in substitution of her quotas, in the amount of € 6,000.00, received in exchange for the quotas she held and which had been consolidated, see Doc. no. 7.

2. Faced with the disposition of the 60 shares on 27-4-2010, for € 240,000.00, the Applicants, in their Form 3 Declaration and respective Annex G (see Annex 8), declared this transfer, mentioning the alienation and acquisition values and the expenses and charges incurred with it, as well as a commission paid, and mentioning in Schedule 8-A that it was disposition of shares of micro and small enterprises, the emitting company C having been identified with Tax ID ..., the gain of capital gains of which would be taxed only at 50%, pursuant to article 43, no. 3 of the Income Tax Code (CIRS).

3. The said declaration, concerning the year 2010, submitted on 30-05-2011, which also included other dependent employment income, was subject to assessment by the Tax Administration – the 1st assessment -, and the Applicants were notified on 19-07-2011 of the result of the IRS assessment, with no. 2011 ..., with IRS relating to autonomous taxation in the amount of € 22,862.45 and IRS to pay in the amount of € 18,622.14, see doc. no. 9, which was paid on 27-09-2011, see doc. no. 10.

4. The Applicants were, meanwhile, notified to prove that it was disposition of shares of micro and small enterprises – which they did – but the Tax Administration Services not having accepted the evidence provided, on the ground of a discrepancy regarding the number of employees of the company at the end of 2010, which, according to the Tax Authority, made the application of the "benefit" of reduction of taxation of capital gains at 50% impossible.

5. The Applicants were duly notified of this fact, resulting in an additional IRS assessment, in the amount of € 23,466.24, see Doc. no. 12, (Assessment No. 2012 ..., in the amount of € 41,484.58, plus compensatory interest of € 603.80, in the total of € 42,088.38), which deducted from the value of assessment no. 2011 ..., in the amount of € 18,622.14, resulted in the amount to pay of € 23,466.24, of which the Applicants were notified and paid, see doc. no. 13.

6. The Applicants reacted against this 2nd corrective and additional assessment by submitting a Complaint for Administrative Relief, alleging that the disposed shares related to a micro or small enterprise, whereby the capital gains should be taxed at 50% and requesting annulment of the assessment, which they paid, and reimbursement of the IRS, plus indemnification interest, see Doc 14.

7. The Complaint, bearing no. ..., was granted by dispatch of 23-10-2012 (see Doc. no. 15) and the overpaid IRS, in the amount of € 23,466.24 was reimbursed on 2012-03-15, without payment of indemnification interest, see Doc. no. 16.

8. This led the now Applicants to submit a new Complaint for Administrative Relief, see doc. no. 17, for demand of indemnification interest, which was denied, see Doc. no. 18.

9. Not accepting this, the now Applicants submitted on 26-3-2014, an Administrative Appeal, see Doc. no. 19., the response to which was denial of the same and furthermore that the decision of approval of the 1st Complaint for Administrative Relief would be entirely revoked, which came to pass by dispatch of 11-11-2014, see Doc. no. 21.

10. In fact, this Administrative Appeal was subject to dispatch of denial by the Director of IRS Services, of 24-06-2013, grounded in Information no. ... from the Legal Affairs and Litigation Services, which understood that for lack of declaration from IAPMEI, (which the Tax Authority itself failed to obtain from that entity), the Applicants could not benefit from the regulation provided in article 43, 3 of CIRS.

11. It was further proposed in said Information that, as one year was running, see art. 58 of Law 15/2001, of 22/02 (Administrative Procedure Court Code), should be revoked the dispatch of approval issued on 23-10-2012, see doc. no. 14, by the Head of Division (by subdelegation of authority) which had been issued on the 1st administrative complaint no. ....

12. The dispatch of REVOCATION was issued on 11-11-2013, notified to the now Appellants by Office no. ..., of 13-11-2013, from the Finance Department of Lisbon.

13. In consequence, the Tax Authority issued a 4th corrective assessment with no. 2013 ..., of 11-12-2013, with IRS to pay in the amount of € 42,872.78, of which € 1,489.78 refers to compensatory interest, without granting any reduction in autonomous taxation of capital gains from disposition of the shares in question.

14. This new IRS assessment, see Docs 1, 2 and 3, relating to the year 2010, of which the Applicants were notified for payment, until 20-01-2014, of the amount of € 24,251.64, corresponding to the difference between the total IRS assessment value, deducted from the total initially of € 18,622.14, paid in the meantime by the Applicants.

15. And the Applicants clarify that it is this new, 4th and last corrective IRS assessment, with no. 2013 ..., of 11-12-2013 which they come to challenge in these proceedings, with a view to annulment thereof, notified to the Appellants by Notice of Collection, with Statement of Account Settlement relating to the 3rd and 4th assessments, with amount to pay of € 24,251.64 and with final payment date on 20-01-2014 - request for arbitral determination which was accepted by CAAD on 17-04-2014.

I.2 - FROM THE GROUNDS OF LAW

1. The Appellants submitted on 16-04-2014 a request to constitute an arbitral tribunal with a view to annulment of the said 4th corrective assessment no. 2013 ..., of 11-12-2013, as they understand that at the time the disposition of the shares they held in the Company occurred, on 27-4-2010, they were not, at that date, subject to taxation, this because, they allege, that at that date, the shares had been held for more than 12 months, notwithstanding the fact that the company, initially by quotas, was only transformed into a joint-stock company in March 2010, since the seniority dates back to the date of acquisition of the quotas which gave rise to the shares in question.

2. According to the Applicants, "such results, unequivocally, from the wording of article 43, no. 4, subsection b) of CIRS...", since Applicant B had acquired the quotas which gave rise to the disposed shares on 26-2-2004 and on 20-09-2007.

3. Finding themselves, in this manner, conclude the Applicants, the capital gains obtained excluded from taxation and not accepting the argument that, having the cited article 10, no. 2 of CIRS been repealed by Law 15/2010, of 26 July, any capital gains obtained in the fiscal year 2010 became subject to taxation, as this would represent an unacceptable, as manifestly and clearly unconstitutional and illegal, retroactive application of tax law and, consequently, retroactive taxation of a certain income.

4. And they cite it based on the best Case Law and Doctrine which recognizes that in the disposition of a social participation, the tax event occurs and is exhausted at the moment of disposition of such participation.

5. And they argue that this is so because "it is not a complex tax act, of continuous and successive formation over a certain tax period, but rather an instantaneous act, which ends at the exact moment of realization of the capital gain, or, in other words, at the moment of disposition of the social participation".

6. And the Applicants cite the Case Law of the Constitutional Court reflected in its Decisions no. 128/2009, 85/2010 and 399/2010, which has considered that "this prohibition of retroactivity refers only to cases of authentic retroactivity, that is, only to those in which the tax event which the new law comes to regulate, has already produced all its effects during the validity of the old law".

7. Remaining, therefore, outside "its application the situations of improper retroactivity, that is, those situations in which the law is applied to facts already past but whose effects still endure under the new law".

8. And they also refer to what is provided in art. 12 of the General Tax Law which they transcribe.

9. Faced with the above, the Applicants emphasize that it is essential to analyze whether, "in the factual situation described, the provision resulting from the alteration introduced by Law 15/2010 should be applied, or whether, on the contrary, the previously applicable provision should still be applied and which was repealed by this Law".

10. For such purpose, they state, it is "essential to analyze, on one hand the nature of the Personal Income Tax (IRS) and, on the other and in concrete, that of taxation of securities capital gains".

11. And it being the expressed understanding of the Constitutional Court that "IRS is a direct tax, which is based on tax events of successive formation, in which the tax event subject to tax, with certain exceptions, is only complete on the last day of the fiscal year".

12. They state, however, the Applicants that "nevertheless, in the case of capital gains, since the tax event generator of the tax is the onerous disposition of assets – movable or immovable – one is not dealing with a tax event of successive formation, but rather with an instantaneous tax event, which is exhausted at the precise moment of its realization…and effectively, in capital gains resulting from disposition of social participations, the tax is assessed on operations which are produced and exhausted instantaneously, corresponding to an isolated tax event in time, in which the determined and decisive moment for application of the law is that of disposition of these participations".

13. Indeed, they emphasize, "in an operation altogether similar, for example, to that of autonomous taxation".

14. And the Applicants further cite this same understanding contained in the Decision of the Supreme Administrative Court, delivered on 4-12-2013, in the scope of Process no. 01582/13, "where it is provided, in the case of capital gains obtained with the disposition of social participations, that '…we are dealing with a single obligation tax affecting operations that are produced and exhausted instantaneously, without prejudice to the taxable matter being determined annually' ".

15. And they also refer to another passage of said Decision, where this position is clearly assumed and reinforced in providing that "The tax event which gives rise to the tax is exhausted in the realization of the capital gain".

16. And hence the question of retroactive or non-retroactive application of Law no. 15/2010, published on 26 July, entering into force the following day, which came to repeal the provision of article 10, no. 2 of CIRS, which excluded from taxation gains obtained from disposition of shares held for more than 12 months, having further proceeded to alter the special rate to which taxation of these capital gains was subject, changing it from 10% to 20%.

17. And this because dealing with securities capital gains, the tax event occurred before the entry into force of said Law, more specifically, in the case under examination, on the day of 27 April 2010 and, therefore, dealing with facts of instantaneous nature and faced with the Decision, a retroactive application of the law, involving, in concrete, authentic retroactivity.

18. And the Applicants further cite a passage of the understanding of the Constitutional Court (see Decision no. 310/2010), in referring: "…what is relevant, in light of the constitutional principles stated, is not the moment of assessment of a tax, but rather the moment in which occurs the act that determines payment of that tax".

19. And they cite also what is provided in article 12 of the General Tax Law which provides clearly that "if the tax event is of successive formation, the new law only applies to the period elapsed from its entry into force".

20. The Applicants also cite that "it was already the understanding of CAAD, in the decision delivered in the scope of Process 25/2011-T, that the new law (meaning, as such, Law 15/2010) is not applicable to capital gains which have been realized before its entry into force, since if such taxation existed, it would be manifestly violating what is provided in article 12, no. 2 of the General Tax Law".

21. And for its relevance, the Applicants transcribe from said Decision of CAAD the following passages: "18. A different question is whether, despite no such violations occurring, the assessment respected the rules for application of tax law in time, set out in art. 12, no. 2 of the General Tax Law. The General Tax Law is not a law of reinforced value, so its rules yield to later law in contrary sense. Any later tax law may establish regime of application of law in time which departs from the regime of said art. 12 of this law".

22. And further: "…The question is whether such occurred in the case in question. And if the answer is negative, what is the regime of application of law in time to apply".

23. And they continue citing passages from the same Decision, which also refers to what Sérgio Vasques wrote: "The principal scope of the distinction between periodic taxes and single obligation taxes lies in application of law in time and in the rules of expiry and prescription…"

24. And further "…Now the application with immediate effects of the law which creates or aggravates a tax has different relevance depending on whether it is of periodic nature or single obligation (…) an aggravation with immediate effects of IRS or IRC, produced mid-year, shows itself in a certain measure retroactive, since the tax is assessed on income which forms between 1 January and 31 December, the tax event being of successive formation. Article 12, no. 2 of the General Tax Law provides therefore that (…) suggesting thus that an aggravation of IRS or IRC produced mid-year can only apply to the portion of income which has not yet been generated."

25. And said Decision also cites António Lima Guerreiro when referring that "The tax event, when enduring, is only completed at the end of the tax period. But this nature of the tax event does not prevent it from being able to be fragmented or decomposed, for purposes of application in time, of tax norms, as it develops. There is thus place here for a true taxation 'pro rata temporis´…".

26. "…Thus in case of tax events of successive formation such as income, the old law applies to income generated until entry into force of the new law and the new law to subsequent income (Annotated General Tax Law, King of Books, 2000, p. 91) ".

27. And he cites also Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa (Annotated and Commented General Tax Law, Writing Encounters Publisher, 2012, p. 130), where they refer that "No. 2 seems to follow A. Xavier's position regarding retroactivity of 3rd degree (…)".

28. And further cites the objections of Manuel Faustino, when he writes, in this regard, that (…) the application of legislative alterations to IRS pro rata temporis, possibly defensible in light of no. 2 of article 12 of the General Tax Law is, for us, a question which does not even arise, not only for impracticability – which would already be sufficient – but substantively, because the solution in question is not contemplated, legislatively, with the modality of safeguard of the principle, which we consider relevant, of annual progressivity of the tax, as a consequence of what is provided in art. 104, no. 1, of the Constitution (Journal of Public Finance and Tax Law, Year III, no. 3, Autumn, p. 208) ".

29. He also cites Manuel Henriques de Freitas Pereira, who also refers to problems of practicability of the pro rata temporis solution, and in the same line as Américo Brás Carlos.

30. Finally, said Decision cites António Carlos Santos, who is in favor of a pro rata temporis solution, finding it has administrative, informatics and legal practicability, see Journal of Public Finance and Tax Law, Year III, no. 4, Winter, p. 300. And ends up referring that "Having the new law entered into force on 27 July the same will only be able to have application, by force of art. 12, no. 2 of the General Tax Law, as to capital gains obtained from such date, and not before. It is reiterated that, if the new law determined its validity from the beginning of the year, would cease to have application art. 12, no. 2, but the law provided nothing in that sense".

31. And the Applicants emphasize that in the sequel and as a consequence of such clear and decisive argument, the Judges conclude, in said Decision, that "Thus the new law is not applicable to capital gains in the case in question".

32. And the Applicants further cite the decision delivered by CAAD, in the scope of Process 235/2013-T, which also refers to art. 12, no. 2, which they understand gives the solution: "If the tax event is of successive formation, the new law only applies to the period elapsed from its entry into force".

33. And, furthermore, the Decision further refers that "The thesis that the tax event generator of tax, in periodic taxes, only occurs on the last day of the year, has as implicit consequence the acceptance of a certain degree of retroactivity of tax law (the so-called improper retroactivity or 3rd degree)".

34. And further refers the Decision that "we know that such degree of retroactivity is considered constitutionally admissible by our case law. But for such retroactive application to exist it is necessary that there be a legislative dictum that requires it".

35. And continues stating that "Now, such does not happen in the present case, since the rule contained in art. 12, no. 2, of the General Tax Law is aimed, precisely, at avoiding situations of retroactivity of tax law (even though 'moderated') whenever the legislator does not determine, especially to the contrary".

36. And the Decision referring to the doctrine which questions the practicability of art. 12, no. 2 of the General Tax Law, states that "we can accept that the norm may, eventually, be set aside for violation of the principle of practicability, which, in our view has constitutional dimension".

37. And further refers that "However, such objections do not occur in the concrete case:..."

38. "…- despite the taxable matter (securities capital gains) to be taxed in IRS corresponding to the balance of the gains and losses realized by the taxable person throughout the year, the fact is that, in the concrete case (of the Decision cited) there was only one single disposition in 2010; that is, the tax event, although in the abstract of successive formation, was exhausted in a single transaction".

39. "…- being the capital gains obtained from disposition of social participations subject to autonomous taxation (…), no difficulties arise regarding the remaining operations which the assessment (understood in the broad sense) of the tax implies, when carried out in compliance with what is provided in art. 12, no. 2, of the General Tax Law…."

40. And the Applicants come then to emphasize that also in the situation being judged, "only one tax event potentially generating tax existed – disposition, with gain, of a social participation – and having that event occurred on 27 April 2010, indisputably, therefore, before entry into force of Law no. 15/2010 (27 July), the position of the Tax Authority lacks any legal support whatsoever, no tax being due on the gain obtained by the Applicants".

41. Whereby, say the Applicants that, "similar to the cited Decisions, the challenged assessment should be entirely annulled and the amounts paid by the Applicants refunded, plus indemnification interest, … that is, the Tax Authority should refund the amount of € 18,622.14 assessed on 27.09.2011, plus indemnification interest, counted from that date…"

42. "…And further the amount of € 648.45 corresponding to the interest which should have been paid to the Applicants for improper payment of the amount of €23,466.24 (paid on 15.03.2012), subsequently refunded in 2012, and calculated from the date of payment and the date of refund, plus interest counted from that latter date and the date of the decision".

I.3 - As to the SUBSIDIARY CLAIM – FOR PARTIAL ANNULMENT OF THE ADDITIONAL IRS ASSESSMENT, the Applicants refer the following:

1. Even if, and without conceding, there are no grounds for annulment of the assessment in question, by full application of the rules contained in Law no. 15/2010, it would nonetheless be verified, in the case in question, the possibility of the Applicants benefiting from the 50% reduction in taxation of capital gains, under article 43, nos. 3 and 4 of CIRS.

2. That is, they can always demonstrate that regarding the Company at the date of disposition of their shares, the requirements were met for it to be qualified as a micro or small enterprise.

3. And this because the said nos. 3 and 4 of said article 43, which they transcribe, expressly refer to the Annex to D.L. no. 372/2007, more specifically to its article 2, the qualification of enterprises as micro or small enterprises.

4. And transcribing it, they refer, thus, how are enterprises qualified:

a. "The category of micro, small and medium-sized enterprises (SMEs) is constituted by enterprises employing fewer than 250 persons and whose annual turnover does not exceed 50 million euros or whose total annual balance sheet does not exceed 43 million euros.

b. In the SME category, a small enterprise is defined as an enterprise employing fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros.

c. In the SME category, a small enterprise is defined as an enterprise employing fewer than 10 persons and whose annual turnover or total annual balance sheet does not exceed 2 million euros".

1. And the Applicants recall that in the appraisal of the 1st Complaint submitted, the Tax Authority itself considered that the Company met the requirements to be considered a small enterprise, having thus approved it.

2. And that, subsequently, when deciding the Administrative Appeal, they are notified by the office of the Finance Department of Lisbon no. ..., of 31-07-2103, by registered letter with acknowledgment of receipt, that the Appeal was denied (see doc. no. 20 attached by the Applicants), the deciding entity – the Director of IRS Services – having delivered the following Dispatch:

"I agree, whereby based on the grounds expressed will proceed as proposed in item 18. 2013-06-24, By Subdelegation, the Director of IRS Services, G".

1. To note that Item 18 of the aforementioned Information, on which the decision to deny the Administrative Appeal was grounded, expressly refers that:

"In these terms, the administrative appeal should be returned to the Finance Department of Lisbon, in order for the dispatch issued by the Head of Division (by delegation of authority), dated 2012-10-23, to be revoked in the administrative complaint no. ..., relating to IRS/2010, under art. 79 of the General Tax Law, by subsidiary application of arts. 135 and 141 of the Administrative Procedure Code (see art. 2 of the General Tax Law), and as one year was running, see art. 58 of Law no. 15/202, of 22/02 (Administrative Procedure Court Code)".

1. Further they refer that the ground for denial of the Appeal and the decision to revoke the decision granting the Complaint have to do with the alleged lack of proof that the Company had, at the moment of disposition of the shares, fewer than 50 employees.

2. To note that the Information supporting the aforementioned decision, further refers the following:

"Item 11. This is because the certification of this type of enterprises occurs through a specific procedure with specific requirements, which is entirely controlled by IAPMEI. Hence the competence for certification of SME status has been assigned solely to IAPMEI, as provided in art. 4 of Decree-Law no. 372/2007, of 6 November".
(…)

1. Now, the Applicants contest this understanding of the Tax Authority that the "tax benefit of art. 43 of CIRS depends, necessarily, on the exhibition of a certificate issued by IAPMEI, that is, depended on prior certification by this Institute".

2. And contest it on the ground that it "has no support in the applicable legal framework, more specifically the cited article 43, nos. 3 and 4 of CIRS…which, as we have seen, and this fact is essential, refers, exclusively and only, to the Annex to Decree-Law no. 372/2007".

3. Hence they consider the Applicants that "the tax legislator did not intend, for application of the said regime, to require any formal requirement for the assignment of said tax benefits, but only the verification of the substantial requirements contained in the Annex to DL 372/2007".

4. And further they refer that "and because it would be strange, to say the least, that, as is considered in the decision delivered in the scope of Process no. 43/2013-T of CAAD, … 'it be required of taxable persons the obtaining of a document that is not within their ability to obtain'…"

5. And because this requirement would be contrary to the rule of admissibility of all means of evidence, both in the administrative procedure and in judicial process in arts. 50 and 115 of the Tax Procedure Code, cannot, refer the Applicants, the evidence produced by them cease to be considered for purposes of fulfilling the legal requirements necessary to be able to benefit from the 50% reduction of gain obtained from disposition of the shares.

6. And the Applicants recall the grounds which led the Tax Authority itself to grant the administrative complaint, in light of the elements requested from the District Social Security Center of Lisbon, which refer to the existence of 22 employees in March and 20 in April and to the consultation of the Annual Declaration IES, whence appears a volume of sales less than 10 million euros in 2009 and the same being verified in relation to 2010.

7. Thus, the Tax Authority itself having verified and confirmed that the requirements for assignment of "the tax benefit provided in art. 43 of CIRS were met and not being, as was seen, required the presentation of the IAPMEI certificate, the Applicants should be able to benefit from that reduction of their taxable matter".

8. And in conclusion, the Applicants understand that should the total annulment of the assessment not be considered, the assessment should, subsidiarily, be reduced by 50% of the gain obtained from disposition of the shares in question.

9. And, in consequence, "the amount of € 648.45 be paid to the Applicants, corresponding to the interest due to the Applicants for improper payment of the amount of € 23,466.24, paid on 15-03-2012, subsequently refunded on 21-11-2012, interest calculated between the date of payment and the date of refund thereof, plus interest counted from that latter date and the date of the decision in the present process".

I.4 - OF THE NULLITY OF THE ACT OF REVOCATION

1. The Applicants consider that should be raised, also as a subsidiary matter, the nullity of the act of revocation of approval of the administrative complaint initially submitted.

2. And this because the "dispatch of approval of the 1st administrative complaint in question was dated 23 October 2012, see article 14 of this petition and doc. no. 13 referred to therein"...

3. And the "dispatch of revocation of this approval, see art. 17 of this petition and doc. no. 16, which came to consider that approval as illegal, was dated 11 November 2013, that is, more than one year after the first act of approval".

4. And they emphasize that "more specifically, elapsed one year and 20 days".

5. And the Applicants transcribe what is provided in article 58 of the Administrative Procedure Court Code:

"Except as otherwise provided, impugnation of voidable acts takes place within the period of:

i. One year, if promoted by the Public Prosecutor;

ii. Three months, in remaining cases".

1. And further refer what is provided in article 141 of the Administrative Procedure Code, which provides:

"1 – Administrative acts which are invalid may only be revoked on the ground of their invalidity and within the period of the respective judicial appeal or until the response of the appealed entity".

1. And they conclude that, from the combination of these two provisions results clear that the act of revocation of an act considered invalid should be produced or issued within the period of one year counted from the production of that act – which in the case did not occur.

2. And that, in consequence, the act of assessment of the act of revocation of approval of the administrative complaint submitted by the Claimants is equally null and, therefore, cannot produce any effects.

3. And the Applicants end by requesting the following:

"1st - That the request for constitution of the Arbitral Tribunal be granted;

2nd - That the IRS assessment act no. 2013 ..., in the amount of € 42,873.78, of which € 1,489.78 refers to compensatory interest, which amount was subject to offset in the amount of € 18,622.14 be entirely annulled and this amount be refunded to the Applicants, plus the corresponding indemnification interest in the manner petitioned in articles 71 and 72 of this impugnation;

3rd - Subsidiarily and by mere professional duty, that the assessment act referred to in the preceding request be partially annulled, in the terms referred to in articles 73 to 96 of this petition and the amount of € 648.45 be paid to the Applicants corresponding to the interest which should have been paid to the Applicants for improper payment of the amount of € 23,466.24 (paid on 15-03-2012), subsequently refunded on 21-11-2012, and calculated from the date of payment and the date of refund, plus interest counted from that latter date and the date of the decision;

4th - Subsidiarily to the preceding requests and also by mere professional duty, that be declared null the act of revocation of approval of the first administrative complaint submitted by the Applicants, in the terms referred to in articles 97 to 107 of this petition and annulled all acts subsequently practiced by the Tax Authority and refunded to the Applicants the amount of € 648.45 corresponding to the interest which should have been paid to the Applicants for improper payment of the amount of € 23,466.24 (paid on 15-03-2012), subsequently refunded on 21-11-2012, and calculated from the date of payment and the date of refund, plus interest counted from that latter date and the date of the decision.

5th - The Tax Authority should further be condemned to indemnify the Applicants for charges incurred from the bank guarantee provided to suspend the fiscal execution proceeding no. ... (see document attached numbered 22) and which is being processed at the Finance Service of Cascais-2 and further from payment of procedural costs".

II – FROM THE RESPONDENT'S RESPONSE

The Respondent Tax Authority submitted its RESPONSE, which is summarized as follows:

1. The Tax Authority states that the Applicants come to bring the present arbitral action, requesting that the illegality of assessment no. 2013 ..., of 11-12-2013, relating to the year 2010 (the 4th corrective assessment) be declared, invoking the following grounds:

i. "Non-taxation of capital gains from disposition of social participations, since at the date of sale (27/4/2010) such capital gains were not subject to taxation under IRS, under the provision of article 10, no. 2, subsection a) of CIRS, or if not thus understood,

ii. Taxation of capital gains at 50%, since, and as stipulated in article 43, nos. 3 and 4 of CIRS, the social participations in question respect to small and micro enterprises,

iii. With the consequent nullity of the act of revocation of the act of approval of the administrative complaint no. ..., for having elapsed more than one year after the first act of approval".

1. Say the Applicants, according to the Tax Authority, that "in question is taxation of capital gains resulting from disposition of 60 shares of which Applicant B was the holder in the share capital of the company "C, S.A.".

2. Next, the Tax Authority again refers that the Applicants describe the most relevant facts until arriving at the 4th corrective assessment which is the subject of the present arbitral action, with no. 2013 ..., of 11-12-2013, relating to the year 2010, to which corresponded – according to the Applicants – "the tax relating to autonomous taxation of € 45,624.98".

3. These most relevant facts coincide with those already described in Part II by the Applicants.

II.1 – OF THE PARTIAL REVOCATION OF THE ASSESSMENT ACT NO. 2013 ...

1. The Tax Authority emphasizes, regarding the partial revocation of assessment act no. 2013 ..., that "within the period referred to in no. 1 of art. 13 of RJAT, in a procedural and not procedural phase, the respondent proceeded to revoke the mentioned assessment, as to taxation of 'tax relating to autonomous taxation', for having understood that the revocation of the dispatch of approval that fell upon the administrative complaint no. ..., operated in the sequence of the administrative appeal filed by the Claimants, was illegal, which, in practice translates into a decision of taxation of capital gains at 50% - in accordance, indeed, with the Form 3 Declaration of IRS voluntarily presented, and in time, by the Claimants".

2. And further refers that "thus being, loses the useful effect the request for arbitral determination in the segments indicated in (ii) and (iii) or that is, as to the request for taxation of capital gains at 50%, by application of the regime provided in art. 43, nos. 3 and 4 of CIRS (see arts. 63 to 107 of the initial petition)".

II.2 – OF THE UNTIMELINESS OF THE REQUEST FOR ARBITRAL DETERMINATION

1. As to "untimeliness of the request for arbitral determination" the Tax Authority states that "in the sequence of the partial revocation of assessment act no. 2013 ..., the request for arbitral determination is thus circumscribed to the request for non-taxation of capital gains, under art. 10, no. 2 of CIRS".

2. And further state that "this segment of arbitral determination was never placed in an administrative complaint, that is, the contested question now raised was not contained in assessment no. 2013 ..., nor in any of the assessments upstream of these".

3. The Tax Authority clarifies that "the challenged assessment act, purged of the revoked part and, by a fortiori, the consequent assessment, confirms, in all else, what resulted from the first assessment act. Assessment no. 2013 ... and the assessments upstream of this, do not constitute innovative tax acts".

4. And conclude that "if the appellants intend to submit to the appraisal of the arbitral tribunal capital gains resulting from disposition of the shares not being subject to taxation, they should do so by referring to the first assessment act, resulting from the income declaration submitted on 30-05-2011, that is, to assessment act no. 2011 ...".

5. And in support of their thesis, the Tax Authority refers to the decision of the Supreme Administrative Court of 18-02-2010, delivered in Proc. no. 01195/09 (JusNet728/2010), which states: "What in this [judgment of 1st Instance] is said, citing even case law in that sense, is that 'the partial revocation of the assessment operated by the Tax Authority in the scope of article 130 of the Tax Procedure Code, in the process of judicial impugnation, does not determine the execution of a new assessment act susceptible of another independent judicial impugnation. The assessment act is by nature divisible, being able to be annulled only in the part affected by error or illegality. Hence that, being equally admissible the partial revocation of an assessment and the substitution of the amount thereof by the new amount does not translate in the revocation of the assessment and its substitution by another: the assessment continues to be the same, albeit corrected or purged of the revoked part…'"

6. And the Tax Authority proceeds with the citation of the same Decision:

"…that is, what is extracted from the juridical discourse of the appealed judgment is not that the assessment made in 2001, in result of the annulment of the partial annulment of the first initial assessment made in 1999 by virtue of the partial grant of the administrative complaint, does not produce any innovative tax-juridical effects, but only that this second assessment does not have autonomy in relation to the initial assessment, being rather a corrective assessment which translates in the partial annulment of the first, purging it of the vices which affected it. In fact, the corrective assessment operates the healing by reformation of the initial assessment, its effects retroacting to the date of the reformed act (article 137, no. 4 of the Administrative Procedure Code (JusNet 100/1991). As refer Mário Esteves de Oliveira, Pedro Costa Gonçalves and Pacheco de Amorim, in their Commented Administrative Procedure Code, at p. 663 'instead of revoking the act which is affected by illegality, it is purged of its initial imperfections and maintained (totally or partially) in the legal order, technique which should be considered as manifestation of the principle of administrative act utilization' (underlines ours)".

1. And the Tax Authority makes the synthesis of its argument in the following terms:

i. As read in the grounds of the act of partial revocation of assessment no. 2013 ..., "if the tax act incorporates matter which was not appraised in the complaint because not contested when the 1st assessment, also in the corrective assessment cannot be subject to correction".

1. Further refers the Tax Authority that "The assessment act no. 2013 ... and, indeed, the assessment which will succeed it, by partial revocation of that, does not have the virtue of incorporating the matter in controversy in these proceedings, because the same was never raised by the Claimants. And the same happens with the assessments upstream of that assessment".

2. And that "the impugnation on the ground of non-taxation of capital gains, by application of the discipline prevented in art. 10, no. 2 of CIRS, has therefore to be reported to the first assessment no. 2011 ...".

3. And concludes the Tax Authority that, thus being, and considering that "pursuant to subsection a) of no. 1 of art. 10 of RJAT, the request to constitute the arbitral tribunal is presented within "the 90-day period, counted from the facts provided in nos. 1 and 2 of article 102 of the Tax Procedure Code, as to acts susceptible of independent impugnation and, as well, of the notification of the decision or the end of the legal period for decision of the administrative appeal"…".

4. And …"Resulting from the combination of what is provided in subsection a) of no. 1 of art. 10 of RJAT with what is provided in subsection a) of no. 1 of art. 102 of the Tax Procedure Code, that in the case at hand, that 90-day period is counted from …a) End of the period for voluntary payment of tax obligations legally notified to the taxpayer"

5. And further concludes that "the voluntary payment of assessment no. 2011 ... expired on 30/09/2011…whereby the right to request arbitral determination expired long ago".

II.3 – DILATORY EXCEPTION

1. And the Tax Authority further refers that "untimeliness, translated in the expiry of the right to request arbitral determination, constitutes a dilatory exception, which implies the absolution of the instance of the Tax and Customs Authority and the extinction of the instance [article 278, no. 1, subsection e), of the Code of Civil Procedure], which is requested".

II.4 – IMPUGNING

1. And concluding and without conceding, the Tax Authority further states that:

2. "As a preliminary matter, and for reasons relating to the lack of subject matter, operated by the partial revocation, notified to CAAD, before the constitution of this Tribunal, will not be subject to impugnation the matter contained in arts. 73 to 107 of the initial petition."

3. "The Appellants sustain the request for exclusion of taxation of capital gains on the regime enshrined in art. 10, no. 2 of CIRS, repealed by Law no. 15/2010, of 26/7, defending that the same applies to them because it was still in force at the date of disposition of the social participations (27/4/2010)".

4. "What matters, therefore, to ascertain is which law should regulate the disposition of the said actions and, therefore, what the consequent regime of taxation is applicable to the gains, since Law no. 15/2010 does not integrate any transitional provision".

5. And the Tax Authority proceeds to make the following grounds for its defense:

6. "The new legal regime, created by Law no. 15/2010, proceeded to the repeal of the former exclusion of taxation applicable to capital gains from disposition of shares held for more than 12 months (as well as bonds and other debt securities), establishing their taxation, by application of a 20% rate, of the positive balance between the said gains and losses, provided that the same proved to exceed 500 €".

7. "It happens [that] the new law, despite entering into force in July 2010, will have effects throughout the tax period, that is, throughout the year 2010, since the taxation will be assessed on the balance between the capital gains and losses generated in the tax period, and that balance is reported to the last day of the tax period (that is, 31/12/2010)".

8. "Indeed, the tax event generator of the taxation does not occur at the moment of disposition of the shares, since at that moment it is still not possible to assess whether the eventual immediate gain will be subject to taxation, since the fact of the disposition proves, after all, potential and becomes conditioned to the existence of positive balance between all the capital gains and losses generated in the taxation period".

9. "The reality subject to taxation at the end of the fiscal year 2010 is not only the capital gain individually realized in the singular operation here in question, but the positive balance verified, at the end of the fiscal year, between the capital gains and losses generated throughout that year, that is, supported on the nature of successive formation of the tax event, which only at the end of the year is completed".

10. And the Tax Authority ends by referring to the Case Law contained in Decision no. 399/2010 of the Constitutional Court, "according to which there will not occur retroactivity of tax law, in determining taxation of autonomous alienation of shares held for more than 12 months realized between 1 January 2010 and 26 July 2010, nor any violation of the principle of legal certainty".

11. And, for this reason, the Tax Authority impugns, in particular, what is alleged in art. 59 and following of the initial petition, alleging that:

i. The challenged act does not thus suffer, from any vice which puts into question its legality;

ii. And, therefore, there being no invalidating vice, there is no ground for payment of indemnification interest,

1. In these terms:

i. The Respondent should be absolved of the instance, as verified the dilatory exception of untimeliness of the request for arbitral determination, or if not thus understood, and without conceding,

ii. Be declared the total unfoundedness of the request, for lack of legal support.

III – FROM THE APPLICANTS' ALLEGATIONS

1. The Applicants allege that faced with the revocation of the dispatch of denial of the administrative complaint no. ..., which resulted in a new assessment, the central question which falls to the Tribunal to appraise, faced with the exception invoked by the Tax Authority, is whether the assessment challenged by the Applicants, is or is not, a new assessment.

2. The Applicants understand that yes, that they are dealing with a new assessment, with a new number 2013 ..., with a new ground, which is that of non-application to the Applicants of any tax benefit, more specifically that of reduction of the taxable matter, provided in article 43, no. 3 of CIRS, with a new value of € 42,873.78, which "so as to avoid duplication of collection, an error even more serious than that which the Respondent comes to sustain in its response and with a new number, considered the tax already paid by the Applicants (€ 18,622.14)".

3. Further the Applicants refer that "the production and notification of a new assessment, is, therefore, an innovative tax act and, consequently, confers on the Applicants the right, inalienable and essential, to question its grounds, that is, to challenge for violation of law".

4. The Applicants allege that "because it raises questions which have never been subject to appraisal in any of the preceding procedures and listed, both in the request initially presented, and in the Response of the Tax Authority to this initial request, such as, for example, the unconstitutionality of the retroactive application of a tax provision".

5. And the Applicants clarify that it is "the question of taxation of a gain by a provision which was not in force at the date of occurrence of the facts".

6. And further understand that "this question raised by the new assessment issued by the Tax Authority can and should be appraised by the Tribunal, under penalty of being denied, to the Applicants taxable persons the most elementary rights of defense and to consolidate, in the legal order, an act manifestly illegal and violating the principle of non-retroactivity of tax laws".

7. And they emphasize that "if we look at the facts, we verify that the tax assessment act subject to impugnation, is born of a new and distinct appraisal of the tax facts by the Tax Authority".

8. And the Applicants take pains to emphasize that it was in the sequence of the appraisal of an Administrative Appeal – RH, which they presented, claiming the right to payment of indemnification interest that the Tax Authority comes to raise "ex-novo" the question of being due tax for the totality of the gain of capital gains obtained, already after the same Tax Authority had pronounced itself on that matter of the "benefit" of art. 43 of CIRS.

9. The Applicants emphasize that if the Tax Authority had limited itself, as it should, its response to the request then formulated in the RH, then this question would certainly not be raised.

10. And further refer that this is not how it happened and that "the Tax Authority chose to re-appraise the entire factual situation to conclude that tax was due on the totality of the gain".

11. And that, in consequence, "the Tax Authority created a new tax event which gave rise to the tax assessment act of IRS, subject to impugnation".

12. And that, therefore, in a manner "indisputable and unquestionable it is a new assessment act, distinct from the various acts already practiced by the Tax Authority in the course of all the tax procedure which precedes it".

13. And it clarifies that the Tax Authority "in raising a question which was not subject to appraisal…is creating new tax events which lead, indisputable and inexorably to a new tax act, embodied in the IRS assessment subject to the present impugnation".

14. And the Applicants come to rebut the arguments of the Respondent contained in the response to the request to constitute the Arbitral Tribunal, when it refers that assessment act no. 2013 ... was subject to partial revocation and that, in result of that revocation, only one question came to be subject to analysis.

15. And the Applicants allege that this is not what happened.

16. And they clarify that the question of payment was not at issue, and precisely because the Applicants did not challenge the IRS assessment on 50% of the gain obtained, having limited themselves to requesting payment of compensatory interest for improper payment of IRS.

17. And further refer the Applicants that the Tax Authority "in modifying, voluntarily and autonomously, the matter in dispute and, revoking the act of approval of an administrative complaint which was already decided and was not, it is repeated, the subject of administrative appeal, the Tax Authority itself comes, with this procedure, to create, in a clear manner, a new assessment act, autonomous from all the others of this tax procedure, opening, thereby, a new avenue of discussion and challenge to the Applicants".

18. And further refer that "now, in contradiction with this understanding, comes then the Tax Authority to say that the only matter which was left to be decided from an assessment act, cannot be subject to discussion by this Tribunal, in that the question should have been raised earlier".

19. And further refer the Applicants that "this is the principal question and on it cannot the Tribunal accept the understanding upheld by the Tax Authority in the exception invoked in its response that the assessment act challenged is not an autonomous act and susceptible of impugnation because it was not the subject of administrative complaint initially submitted by the Applicants".

20. And further refer that as to this question, which they emphasize is not the one which should center the Tribunal, "it has been settled understanding of Case Law and Doctrine that the subject matter and the grounds for impugnation of an assessment, or of any other tax act, susceptible of being challenged, can go beyond the subject matter of the administrative complaint procedure of that same tax act".

21. And they conclude that "the subject matter of judicial impugnation cannot be circumscribed to the questions raised, in administrative complaint, even if they refer to the same tax act".

22. Although, clarify the Applicants that "in the case under analysis, this is not a matter of the same tax act, but rather of an innovative and wholly autonomous tax act from all the other assessment acts (different and all different) practiced by the Tax Authority in the scope of all the administrative procedure".

23. Whereby, conclude the Applicants that "cannot thus, be accepted the argument on which the Respondent sustains its defense by exception that the impugnation submitted by the Applicants is untimely".

24. And, therefore, allege the Applicants that "the Tribunal should appraise the contested question which is submitted to it, more specifically whether the gains obtained by the Applicants in the disposition of shares, in which the act of disposition occurred before the entry into force of Law no. 15/2010, of 26 July, are or are not subject to tax (Category G of IRS)".

25. And in conclusion refer the Applicants, in this particular, to the arguments deduced in the request for constitution of the Arbitral Tribunal, maintaining all that is there stated, ending with a synthesis of conclusions of all that is set out in their Allegations.

IV – FROM THE PRELIMINARY RULING

1. The Arbitral Tribunal was duly constituted at CAAD, on 25-06-2014, to hear and decide the subject matter of the present process, as recorded in the respective minutes.

2. The parties have legal personality and capacity and are duly authorized to sue.

3. The claim is admissible, the Tribunal is competent as to subject matter and was presented on 16 April 2014 and accepted by the Tribunal on 17.

4. Preliminary questions or objections have been raised by the parties which will be subject to appraisal and prior decision by the Tribunal.

V – FROM THE ESSENTIAL FACTS FOUND PROVEN

1. The Applicants proceeded to the sale of 60 shares held by Applicant B in C, SA, for € 240,000.00, by agreement dated 27-04-2010, this being the value corresponding to the portion which belonged to her in the price of sale of all shares for the value of € 2,000,000.00, to acquiring company D.

2. That the said 60 shares had been acquired for € 6,000.00, having occurred at two distinct moments, namely:

a. a first quota in the amount of € 3,000.00, assigned to Applicant B by E and spouse F, according to Deed of 26-02-2004, executed at the .... Notarial Office in Lisbon.

b. and the other quota, also for the price of € 3,000.00 assigned by E, by Deed of 20-9-2007.

1. Subsequently, on 3-3-2010, the company was transformed into a joint-stock company, whereby 60 shares were assigned to Applicant B in the amount of € 6,000.00, in exchange for the quotas she held and which had been consolidated.

2. Faced with the disposition of the 60 shares, on the said date of 27-4-2010, for € 240,000.00, the Applicants, in their Form 3 Declaration and respective Annex G (Schedule 8), mentioned this transfer, as well as the values of disposition and acquisition and the expenses and charges incurred with it, as well as a commission paid, and in Schedule 8-A, that it was disposition of shares of micro and small enterprises, the emitting company having been identified as having Tax ID ..., the gain of capital gains of which was taxed only at 50%, pursuant to article 43, no. 3 of the Income Tax Code (CIRS).

3. The said declaration, relating to the year 2010, submitted on 30-05-2011, which also included other dependent employment income, was subject to assessment by the Tax Authority – the 1st assessment -, and the Applicants were notified on 19-07-2011 of the result of IRS assessment no. 2011 ..., with tax relating to autonomous taxation in the amount of € 22,862.45 and IRS to pay in the amount of € 18,622.14, see doc. no. 9, which was paid on 27-09-2011, see doc. no. 10.

4. The Applicants were notified to prove that it was disposition of shares of micro and small enterprises – which they did – but the Tax Authority Services not having accepted the evidence provided, on the ground of a discrepancy regarding the number of employees of the company at the end of 2010, which made the application of the benefit of reduction of capital gains at 50% impossible.

5. They were duly notified of this fact, resulting in an additional IRS assessment, in the amount of € 23,466.24, see Doc. no. 12, (Assessment No. 2012 ..., in the amount of € € 41,484.58, plus compensatory interest of € 603.80, in the total of € 42,088.38), which deducted from the value of assessment no. 2011 ..., in the amount of € 18,622.14, resulted in the amount to pay of € 23,466.24, of which the Applicants were notified and paid on 21-11-2012, see doc. no. 13.

6. The Applicants reacted against this 2nd corrective and additional assessment by submitting an Administrative Complaint, alleging that the disposed shares related to a micro or small enterprise, whereby the capital gains should be taxed at 50% and requesting annulment of the assessment, which they paid, and reimbursement of the IRS, plus indemnification interest, see Doc. 14.

7. The Complaint, bearing no. ..., was granted by dispatch of 23-10-2012 (see Doc. no. 15) and the overpaid IRS, in the amount of € 23,466.24 was reimbursed on 2012-03-15, without payment of indemnification interest, see Doc. no. 16.

8. The Applicants then submitted a new Administrative Complaint, see doc. no. 17, for demand of indemnification interest, which was denied, see Doc. no. 18.

9. Not accepting this, the now Applicants submitted on 26-3-2014 an Administrative Appeal, see Doc. no. 19., the response to which they obtained was denial of the same and furthermore that the decision of approval of the 1st Administrative Complaint would be entirely revoked, which came to pass by dispatch of 11-11-2014, see Doc. no. 21.

10. This Administrative Appeal was subject to dispatch of denial by the Director of IRS Services, of 24-06-2013, grounded in Information no. ... from the Legal Affairs and Litigation Services, which understood that for lack of declaration from IAPMEI, (which the Tax Authority itself failed to obtain), the Applicants could not benefit from the regulation provided in article 43, no. 3 of CIRS.

11. It appears from the said Information that, as one year was running, see art. 58 of Law 15/2001, of 22/02 (Administrative Procedure Court Code), should be revoked the dispatch of approval issued on 23-10-2012, see doc. no. 14, by the Head of Division (by subdelegation of authority) on the 1st administrative complaint no. ....

12. The dispatch of REVOCATION was issued on 11-11-2013, notified to the now Appellants by Office no. ..., of 13-11-2013, from the Finance Department of Lisbon.

13. In consequence, the Tax Authority issued a 4th corrective assessment with no. 2013 ..., of 11-12-2013, with IRS to pay in the amount of € 42,873.78, of which € 1,489.78 refers to compensatory interest, without granting any reduction in taxation of capital gain from disposition of the shares in question.

14. This new IRS assessment, see Docs 1, 2 and 3, relating to the year 2010, of which the Applicants were notified for payment until 20-01-2014, of the amount of € 24,251.64, corresponding to the difference between the total IRS assessment value, deducted from the total initially of € 18,622.14, paid in the meantime by the Applicants.

15. In consequence, the Tax Authority issued a 4th corrective assessment with no. 2013 ..., of 11-12-2013, with IRS to pay in the amount of € 42,873.78, of which € 1,489.78 refers to compensatory interest, without granting any reduction in taxation of capital gain from disposition of the shares in question.

16. And it is this new, 4th and last corrective IRS assessment, with no. 2013 ..., of 11-12-2013 which is the subject of impugnation.

17. The Tax Authority recognized, already in the course of the arbitral process, but within the period referred to in no. 1 of article 13 of RJAT that the DISPATCH OF REVOCATION of approval of the 1st Administrative Complaint occurred beyond the one-year period, in violation of what is provided in article 55 of Law no. 15/2012, of 22 February (Administrative Procedure Court Code) and that, therefore, it should not have issued the 4th corrective assessment no. 2013 ..., of 11-12-2013, and should instead have subsisted in the legal sphere of the Applicants the 3rd assessment no. 2012 ..., made in consequence of the approval of the 1st Administrative Complaint of the now Applicants.

18. That the Tax Authority proceeded to the revocation of the mentioned IRS assessment no. 2013 ..., in consequence of the illegal revocation of the dispatch of denial of the Administrative Complaint.

19. That from this revocation only was requested of CAAD that the Applicants be given notice after their submission of the arbitral petition, although within the period referred to in no. 1 of article 13 of RJAT, see article 15 of the Response of the Tax Authority.

V.1 – FROM THE GROUNDS OF FACTS FOUND PROVEN

The facts found proven are based on the documents indicated relative to each one of them and on all elements brought to the process by the Parties, not contested.

In these terms, the Tribunal founded its conviction on all that is contained in the process.

V.2 – FACTS NOT PROVEN

It was not proven by the Tax Authority, in an initial phase, that the company emitting the shares was not a micro or small one, on the ground of the existence of a discrepancy regarding the number of employees of the company at the end of 2010, which made the application of the benefit of reduction of capital gains at 50% impossible and to the issuance of a 2nd corrective and additional assessment. However, when the administrative complaint was appraised, that question came to fall in favor of the Applicants.

The Tax Authority also failed to obtain IAPMEI certificate to attempt to prove what the qualification of the company in question was.

VI – FROM PRELIMINARY QUESTIONS OR DILATORY EXCEPTIONS

The preliminary questions or dilatory exceptions invoked by the parties are the following:

VI.1 – BY THE APPLICANTS

FROM THE NULLITY OF THE ACT OF REVOCATION OF APPROVAL OF THE ADMINISTRATIVE COMPLAINT

Such as was recognized by the Tax Authority in articles 15 and 16 of its Response, "the Respondent proceeded to revoke the 4th IRS assessment no. 2013 ..., as to taxation of the tax relating to autonomous taxation, for having understood that the revocation of the dispatch of approval which fell upon the administrative complaint no. ..., operated in the sequence of the administrative appeal filed by the Claimants, was illegal".

In these terms, this exception invoked has legal ground, which determined the annulment of the 4th assessment, challenged arbitrally, already in the course of the present process, but within the period referred to in no. 1 of article 13 of RJAT.

The Applicants were only on 4 June 2014 notified by CAAD, that the Tax Authority would proceed to the revocation of said 4th assessment and that, for this fact, the request for arbitral determination would be without useful effect, but the Applicants maintained it, as its subject matter goes beyond taxation of only 50% of the gains of capital gains from disposition of the shares in question.

VI.2 – BY THE RESPONDENT

1. OF THE UNTIMELINESS OF THE REQUEST FOR ARBITRAL DETERMINATION
2. OF THE DILATORY EXCEPTION CONSEQUENT TO THE UNTIMELINESS OF THE ARBITRAL PETITION

As to the first of the exceptions invoked by the Respondent, this understands that having the Tax Authority proceeded to the revocation of the (4th) IRS assessment no. 2013 ..., the arbitral petition became circumscribed only to the request for non-taxation of capital gains, under article 10, no. 2 of CIRS, since with the revocation of said assessment and with the annulment of the dispatch of revocation of approval of the administrative complaint, all was reduced to the 1st assessment, which contemplated taxation of only 50% of the gain resulting from disposition of capital gains from the shares in question.

Only that, faced with what is referred by the Tax Authority, and to be the subject of the arbitral petition the non-total taxation of said gain, then the arbitral petition, says the Tax Authority, is untimely, as it should be reported to the 1st IRS assessment no. 2011 ..., made in consequence of the elements contained in the periodic income declaration form 3, of the year 2010, and notified to the Applicants on 19-07-2011, with final payment date on 30-09-2011, which the Applicants paid on 27-09-2011.

And that thus being, understands the Tax Authority that the arbitral petition is untimely, as submitted beyond the 90-day period provided in subsection a) of no. 1 of article 10 of RJAT, conjugated with what is provided in subsection a) of no. 1 of art. 102 of the Tax Procedure Code.

And in the understanding of the Tax Authority the period for submission of the request for arbitral determination expired on 30-09-2011.

And the Tax Authority grounds its conclusion on the fact that Case Law, which it cited, understands that the assessment act is one and that all those that follow it are merely corrective.

Without putting into question, in the abstract, this understanding, fact is that with the denial of the Administrative Appeal of the Applicants, in which only the payment of indemnification interest was requested and which led, next, to the revocation of the dispatch of approval of the Administrative Complaint of the Applicants, was born a new assessment, as if everything having begun anew, so much so that the Tax Authority already could not do it, as shown to be surpassed the legal period for revocation of approval of the complaint.

As, indeed, even if it could do it, would be prevented from doing so, if the expiry of the assessment had already occurred, faced with article 45 of the General Tax Law.

Relatively, therefore, to the 4th IRS assessment, born in consequence of the revocation of approval of the administrative complaint, extends this Tribunal, that it is a new tax act.

Thus, appraising, understands this Tribunal that the Applicants did not effectively react against the 1st IRS assessment no. 2011 ..., made in consequence of the elements contained in the periodic income declaration form 3, of the year 2010, and notified to the Applicants on 19-07-2011, for payment until 30-09-2011, in which the 50% non-taxation was granted to them of the gain resulting from disposition of the shares in question, under article 43, no. 3 of CIRS.

They did not react, as they could have done, if they so understood, for purposes of non-taxation in the totality of the gain of capital gains resulting from disposition of the shares occurred on 27-04-2010, date on which the exclusion regulation of art. 10, no. 2 and subsection a) of CIRS was still in force, as the Applicant possessed the shares for more than 12 months.

Indeed, the Applicants could have even submitted, inclusive, Annex G1 to the Income Declaration of the year 2010, instead of the submission of Annex G, as they did, which would produce, in that case of Annex G1, the effect of total non-taxation of said capital gains, as they now intend with the request for arbitral determination.

The Applicants understood, however, to submit the form 3 declaration with Annex G, where they mentioned in Schedule 8-A, that the disposed shares related to a micro or small company to, in this manner and under article 43, no. 3 of CIRS, to be taxed only at 50% of the capital gains already referred to.

Perhaps all would thus have been definitively resolved, from a tax perspective, since the Applicants understood not to react by any means, gracious or judicial against this 1st assessment.

And if this thus did not happen can only blame the Tax Authority for having proceeded the way it proceeded, proceeding to successive assessments, illegally revoking decisions on complaints and administrative appeals, etc.

And thus it was that on 30-01-2012 was issued to the Claimants a 2nd IRS assessment with no. 2012 ..., as the Tax Authority services had disregarded the qualification of the company emitting the disposed shares as a micro or small enterprise and, therefore, with taxation of the capital gain at 100%, without application, therefore, of what is provided in article 43, no. 3 of CIRS.

To this assessment the Claimants reacted by means of Administrative Complaint, having as object, exclusively, to complain of the taxation of the gain in question at only 50%. Complaint which obtained full approval.

Then followed it an Administrative Appeal, having as object the payment of indemnification interest, which was denied and which also led to the revocation of approval of the Administrative Complaint.

And, in consequence of all that sequence of actions and successive assessments, already duly detailed in the record and which culminated with a 4th IRS assessment with no. 2013 ..., which taxes anew the gain of capital gains of the disposed shares at 100%, in terms identical to the 2nd assessment hereinabove referred to.

Now the Claimants, who did not react initially against the non-total taxation of the gain resulting from disposition of capital gains in question, because they thus understood or because possibly they did not intend to do so or even would not have known that they could have done so, come, then, to submit the present arbitral appeal, but now having as main object the non-total taxation of the gain of capital gains in question.

Hence the conclusion hereinabove that if there had not been the 2nd and 4th assessments, by the part of the Tax Authority, by disregard of the qualification of the company emitting the disposed shares, as a micro or small enterprise, all would have been definitively resolved, because by the date of the 2nd assessment already all the periods were barred for the Claimants to react with the object contained in the arbitral petition.

Indeed, to be denied them the right of arbitral impugnation against the 4th IRS assessment, would be at stake what is provided in article 95 of the General Tax Law, since this assessment cannot cease to be considered a lesive act of rights and legally protected interests.

The question, therefore, consists only in knowing whether by the fact of there having been no reaction against the 1st IRS assessment, and still the fact that prior to the arbitral petition the object of the dispute had always been that of the question of taxation of 50% or 100% of the gain of capital gains of the disposed shares, by application or not of what is provided in art. 43, no. 3 of CIRS, will remain forbidden to the Claimants to invoke, now, in arbitral proceedings, the non-total taxation of the said capital gains, faced with what is provided in art. 10, no. 2, subsection a) of CIRS, still in force at the date of disposition of the said shares.

And the Tribunal states that the question of whether it is a single assessment or more than one, autonomous, was already previously appraised by the Tribunal, in the sense that the 4th assessment is a new assessment, indeed an assessment consequent from the previous ones and which annuls them, given the circumstances in which it occurred and which to be as the Tax Authority defends, reiterates itself, would remain curtailed the legitimate rights of the Claimants to react against an act lesive of rights and legally protected interests, with violation of the already referred article 95 of the General Tax Law.

Retaking, then, the question of whether the request for arbitral determination can go beyond the object of the administrative complaint, begins by emphasizing that the shares in question were disposed on 27-04-2010 and the regulation of article 10, no. 2 of CIRS was only repealed by Law no. 15/2010, of 26/6, with entry into force on 27/6, without it containing any transitional provision.

By all that is set out, understands this Tribunal, that there is no untimeliness of the Arbitral Appeal, quite simply because the Claimants had necessarily to react now against the last assessment notified to them – the 4th IRS assessment no. 2013 ... -, the only one which was in question to contest or not and, they did so, in arbitral form, within the period provided in nos. 1 and 2 of article 10 of RJAT, conjugated with what is provided in subsection a) of no. 1 of art. 102 of the Tax Procedure Code and, therefore, with timeliness.

And nor can here and now be invoked the fact that this 4th IRS assessment was revoked after submission of the arbitral petition, although within the period referred to in no. 1 of article 13 of RJAT, because if the Applicants had not submitted the Arbitral Appeal on 16-04-2014, they would leave to expire the period of Appeal, since only on 4-06-2014 were notified by CAAD that the Tax Authority would proceed to the revocation of said 4th assessment.

Thus, in this part, cannot have legal acceptance this first exception invoked by the Tax Authority, being therefore unfounded, as there is no untimeliness in the submission of the Arbitral Appeal on 16-04-2014 and accepted by CAAD on 17-04-2014, against the 4th IRS assessment, of which the Applicants were notified for payment of the IRS due, until 20-01-2014 and, therefore, within the 3-month period counted from the end of the period for voluntary payment, pursuant to the conjugated provisions of article 10, no. 1, subsection a) of RJAT, with no. 1, subsection a) of article 102 of the Tax Procedure Code.

The second preliminary question or dilatory exception invoked is consequent from the alleged untimeliness, which must now be appraised.

The ground invoked by the Tax Authority, which intends, in the final analysis, to encompass both exceptions, since the second is a consequence of the first, has to do with the fact that the Claimants, prior to the arbitral petition, did not put into question the assessments made on the ground of no tax being due on any taxation of the gain of capital gains of the disposed shares, having always placed the question of taxation in only 50% of the gain of capital gains obtained from disposition of the shares, under article 43, no. 3 of CIRS.

The non-total taxation of such gain only came, therefore, to be placed in arbitral proceedings.

The question, therefore, has to do with the possibility or not, legal, of the object of the arbitral petition having to be, on one hand, coincident with that of the administrative complaints previously submitted on taxation of the gain in question, since in these gracious means used such object was never invoked and, on the other, because to challenge the assessment in question – the 4th – on the ground of the non-total taxation of the gain, then the Claimants would have had the obligation to do it on the 1st assessment which was made to them.

Situation which, faced with the successive facts occurred, would be iniquitous and violating the legitimate rights of the Claimants.

Recall that the Arbitral Appeal presented against the result of the 4th IRS assessment no. 2013 ..., made by the Tax Authority, which disregarded the application of what is provided in article 43, no. 3 of CIRS, for understanding that the shares disposed of in question were not issued by a micro or small enterprise, went beyond this question and was more radical in its object, in requesting the non-total taxation of the gain of capital gains obtained from disposition of the said shares.

Can the Applicants proceed thus?

To note, from the outset, that the Claimants were notified of the said 4th IRS assessment no. 2013 ... for payment of the additionally due IRS.

On the other hand, pursuant to article 95 of the General Tax Law, "the interested party has the right to challenge or appeal from any act lesive of his rights and legally protected interests, according to the forms of procedure prescribed in law".

And in no. 2, subsection a) it is further referred that:

"2. May be lesive, in particular:

a) The assessment of taxes, considering itself also as such for purposes of this law, the acts of self-assessment, withholding at source and payments on account;

b) …

c) ....

d) The denial, express or tacit and total or partial, of a complaint;

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