Process: 340/2014-T

Date: November 3, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 340/2014-T addressed a fundamental dispute regarding the temporal application of tax law to capital gains from securities sales under Portuguese IRS rules. Two taxpayers (A and B) sold shares in C, S.A. on March 9, 2010, which they had held for more than 12 months. During a tax inspection of their 2010 IRS returns, the Tax Authority (AT) made arithmetic corrections, adding previously undeclared capital gains of €1,028,875 to each taxpayer's taxable income (Category G). The AT applied a 20% tax rate pursuant to Article 72(4) of the CIRS as amended by Law 15/2010 of July 26, 2010, resulting in assessments totaling approximately €228,408 and €228,327 respectively, including compensatory interest. The core legal issue centered on whether Law 15/2010, which entered into force on July 27, 2010, could be applied to capital gains realized on March 9, 2010—nearly five months before the law's enactment. The taxpayers argued that applying the new legislation to transactions completed before its effective date violated Article 12 of the General Tax Law (LGT) regarding temporal application of tax norms and Article 103(3) of the Portuguese Constitution, which prohibits retroactive tax legislation. The taxpayers sought annulment of the 2010 IRS assessments on these grounds. The AT maintained that Law 15/2010 applied to the entire 2010 fiscal year, including gains realized before July 27, 2010, and that no constitutional violation of non-retroactivity occurred. The case raised critical questions about the proper interpretation of fiscal year-based taxation versus transaction-date-based application of tax law, particularly concerning the repeal of Article 10(2) of CIRS and amendments to capital gains tax rates. This arbitration illustrates taxpayer rights to challenge reassessments through CAAD when fundamental principles of tax law temporal application are disputed.

Full Decision

ARBITRAL DECISION

Claimants: A and B

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

ARBITRAL DECISION

I. REPORT

  1. A and B, (hereinafter referred to as Claimants) taxpayers, respectively … and …, and residents, the first at the address indicated in Avenue … Coimbra and the second at Street … Coimbra, submitted, on 17 April 2014, and in joint action, pursuant to the provisions of Article 104º of the Code of Tax Procedure and Process by virtue of Article 29º no. 1, paragraph a) of the Legal Framework for Tax Arbitration (hereinafter referred to as RJAT) a petition for constitution of an arbitral opinion, pursuant to the provisions of paragraph a) of no. 1 of Article 2º of the RJAT, in which the Tax and Customs Authority is requested (hereinafter referred to as AT or Respondent) with a view to the annulment of the Personal Income Tax (IRS) assessments, respectively numbered 2014 … and 2014 … relating to the year 2010.

  2. The petition for constitution of the Arbitral Tribunal was accepted by His Excellency the President of the CAAD and immediately notified to the Respondent in accordance with legal procedures.

  3. Pursuant to the provisions of paragraph a) of no. 2 of Article 6º of the RJAT by decision of His Excellency the President of the Ethics Council, duly communicated to the parties within the prescribed timeframes, the following were appointed as arbitrators: Counsellor Jorge Lino Ribeiro Alves de Sousa, as president and Dr. Júlio Tormenta and Dr. José Coutinho Pires, as members, who communicated to the Ethics Council and to the Centre for Administrative Arbitration their acceptance of the assignment within the timeframe stipulated in Article 4º of the Code of Ethics of the Centre for Administrative Arbitration.

  4. The Collective Arbitral Tribunal was constituted on 30 June 2014, in accordance with the requirement of paragraph c) of no. 1 of Article 11º of the RJAT.

  5. By order issued on 17 September 2014, by the president of the Collective Arbitral Tribunal duly notified to the parties, the holding of the meeting referred to in Article 18º of the RJAT was waived.

Counsellor Jorge Lino Ribeiro Alves de Sousa being temporarily prevented, due to health reasons, from performing his duties, by order of 03-11-2014, issued by the President of the Ethics Council, it was determined that his duties would be assumed, in replacement, by Counsellor Jorge Lopes de Sousa.

  1. To support their petition, the Claimants alleged, in summary and with relevance:

i. That within the scope of an inspection action, having as its object the IRS of the year 2010 of both Claimants, the AT made arithmetic corrections to their IRS. (see Articles 1º, 2º and 3º of the arbitral opinion petition);

ii. The claim of the AT was based on the omission of declaration of income from capital gains subject to taxation resulting from the onerous disposal of shares by the Claimants occurring on 9 March 2010. (see Articles 2º and 3º of the arbitral opinion petition);

iii. It being that such disposal had as its object the equity interests that each of the Claimants held in the company "C, S.A.". (see attached administrative file);

iv. The corrected tax amounted to 205,775.00€, by reference to an increase in the taxable income of each of the Claimants (Category G) of 1,028,875.00 €. (see Article 5º of the arbitral opinion petition and documents nos. 2 and 4 attached therewith);

v. "The Claimants were notified of the definitive assessments of their respective taxes increased by compensatory interest, which resulted in the following total amounts due:

. 228,408.12 €, relating to Dr. A

. 228,326.52 €, relating to Dr. B"

(see Article 7º of the arbitral opinion petition and documents nos. 5 and 6 attached therewith);

vi. The Claimants do not challenge the disposal of the equity interests referred to in iii. (see Article 10º of the arbitral opinion petition);

vii. The question of divergence with the position assumed by the AT is located with respect to the legal norms applicable to the factual situation described. (see Article 11º of the arbitral opinion petition)

viii. The Claimants further make various considerations regarding capital increments subject to IRS, invoking the pertinent provisions of the CIRS, Law no. 15/2010, of 26 July, bringing to the discussion questions related to the retroactive application of tax law, Articles 12º of the LGT and Article 103º no. 3 of the Constitution of the Portuguese Republic[1];

ix. Culminating with the "request for annulment of the IRS assessments for the year 2010, for violation of the requirement for application of law in time referred to in Article 12º of the LGT, as well as for violation of the prohibition of tax retroactivity inherent in Article 103º, no. 3 of the CRP".

  1. The AT, in its response, sustained a position contrary to that presented by the Claimants regarding the application of Law no. 15/2010 of 26 July and regarding the interpretation of Article 12º of the LGT, in consonance with the position already assumed in the scope of a discretionary objection, reducing its point of view, in very brief summary, to the application of the normative in question to the entire fiscal year 2010, further sustaining that there is no violation of the constitutional principle of non-retroactivity of tax law and of Article 12º of the General Tax Law.

  2. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2º no. 1 paragraph a), 5º and 6º no. 1 of the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented, pursuant to Articles 4º and 10º of the RJAT and Article 1º of Regulation no. 112-A/2011 of 22 March, there being no obstacle to joint action, in accordance with the applicable Article 104º of the Code of Tax Procedure and Process.

Thus, there is no obstacle to the consideration of the merits of the case.

All considered, it is necessary to decide

II - DECISION

A - FACTUAL MATTER

A.1. Facts established as proven

  1. The impugned assessments originate from a purely arithmetic correction to the income subject to IRS in 2010, due to the omission from the declaration of income from capital gains obtained from the disposal of shares on 9 March 2010, which had been held by the Claimants for more than 12 months.

  2. The AT determined an increase to the taxable income in the amount of 1,028,875.00€ with respect to Claimant A, upon which it applied the tax rate of 20%, provided for in no. 4 of Article 72º of the CIRS (in the wording in force on 31 December 2010).

  3. With respect to Claimant B, the AT determined an increase to the taxable income of 1,028,875.00 € upon which it applied the tax rate of 20%, provided for in no. 4 of Article 72º of the CIRS (in the wording in force on 31 December 2010)

  4. As the basis for this position, the AT considered that the amendment to the Personal Income Tax Code, carried out by Law no. 15/2010, of 26 July, is applicable to capital gains from the sale of shares obtained before its entry into force – 27 July 2010 – namely regarding the repeal of no. 2 of Article 10º of the CIRS, and regarding the amendment of the tax rate provided for in no. 4 of Article 72º of the same act.

  5. With respect to Claimant A, the underlying assessment was issued on the basis of the Tax Inspection Report, carried out pursuant to Service Order 0I…, notified to him through the letter …, dated 2014-03-11. (see attached administrative file)

  6. With respect to Claimant B, the assessment in question was issued on the basis of the Tax Inspection Report, carried out pursuant to Service Order 0I…, notified to him by the letter …, dated 2014-03-11 (see attached administrative file)

  7. The assessment in question gave rise to the statement of account reconciliation no. 2014 …, with a voluntary payment deadline of 2014-05-05, with respect to Claimant A.

  8. With respect to Claimant B, the assessment under discussion gave rise to the statement of account reconciliation no. 2014 …, with a voluntary payment deadline of 2014-05-05. (see attached administrative file and documents nos. 5 and 6, attached with the arbitral opinion petition)

  9. Claimant A, at the beginning of the year 2010, held 68,625 shares of the company called "C, S.G.P.S., S.A.", with the NIPC …, representing 34.31% of its share capital.

  10. On 9 March 2010, Claimant A disposed of these shares to the company called "C S.G.P.S., S.A." with the NIPC … for 1,372,500.00 €. (see attached administrative file).

  11. Claimant B, at the beginning of the year 2010, held 68,625 shares of the aforementioned company "C S.G.P.S., S.A." corresponding to 34.31% of its share capital.

    1. On 9 March 2010, Claimant B disposed of these shares to the company called " C S.G.P.S., S.A." with the NIPC … for 1,372,500.00 € (see attached administrative file).

  13. The unit acquisition value of such shares – applying to both Claimants – determined pursuant to the provisions of paragraph b) of Article 48º of the CIRS is five euros, corresponding to its nominal value.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning of the factual matter established as proven and not proven

With respect to the factual matter, the Tribunal does not need to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven matter from the not proven [(see Art. 123º no. 2 of the CPPT and Article 607º of the CPC[2], applicable by virtue of Article 29º, no. 1, paragraphs a) and e) of the RJAT)].

Thus, the facts relevant to the judgment of the case are selected and determined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of law (see Article 596º of the CPC, applicable by virtue of Article 29º, no. 1, paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties, the documentary evidence attached to the file, and the PA attached, the facts listed above are considered proven, with relevance to the decision, recognized and accepted by the parties.

B. ON THE LAW

The thema decidendum raised in the present case (since the parties do not challenge the factuality underlying the present case) comes down to determining whether capital gains obtained in the year 2010, but prior to the date of 27 July 2010 (the date of entry into force of Law no. 15/2010, of 26 July), contribute or not to the balance referred to in Article 43º of the CIRS.

It shall be necessary, before entering into the substantive question, to make some considerations against the backdrop of the taxation of capital gains under IRS and their comparison with the normative in question.

Prior to the publication of Law no. 15/2010, of 26 July, the following was the wording of no. 2 of Article 10º of the CIRS, introduced by Decree-Law no. 228/2002, of 31 October; "the following are excluded from the provision in the preceding number capital gains from the disposal of: b) shares held by their holder for more than 12 months".

This condition excluding the taxation of gains under IRS, not "considered business and professional income, capital or real estate income […]"[3], was repealed by Law no. 15/2010, of 26 July, which furthermore proceeded to amend the wording of no. 4 of Article 72º of the CIRS in the following sense: "The positive balance between capital gains and capital losses, resulting from the operations provided for in paragraphs b), e) f) and g) of no. 1 of Article 10º, is taxed at the rate of 20%.

Law no. 15/2010, of 26 July, unlike previous normatives with similar objective (regulation of capital gains taxation), does not provide for any transitional law provisions, offering any solution regarding its temporal application, having limited itself in its Article 5º to dictate its entry into force on the day following its publication, that is, on 27 July 2010.

The Claimants sustain a negative response to the central question raised in the present case, arguing that the taxation of capital gains originating from the disposal on 9 March 2010 of shares which they had held for more than twelve months, is outside the scope of Law no. 15/2010, of 26 July, subscribing, in theory, that its applicability would constitute a violation of the constitutional principle of prohibition of tax retroactivity, (Article 103º no. 3 of the CRP) as well as of Article 12º of the LGT.

Further basing their position on the arbitral jurisprudence extracted from cases 25/2011-T, and 135/2013-T, to which they add that which derives from the Judgment of the Supreme Administrative Court, of 4 December 2013.

For its part, the AT, in opposition to the thesis of the Claimants, sustains that the alleged retroactivity of Law no. 15/2010, of 26 July (which formed the basis of the underlying assessment) is improper or inauthentic, and thus does not fall within the prohibition of tax retroactivity provided for in no. 3 of Article 103º of the CRP, arguing moreover and fundamentally that the taxable event of the capital gains occurs only on 31 December 2010, so as to exclude any interpretation other than that of the applicability to the present case of the normativity imposed by Law no. 15/2010, of 26 July.

Given the question in the terms indicated, it shall be necessary to conclude from the essentiality in determining whether the tax fact inherent in the taxation of capital gains originating from the onerous disposal of securities, in the present case shares of a stock company, constitutes an instantaneous fact or a continuous fact.

The recent jurisprudence of the Supreme Administrative Court, namely that which derives from the Judgment of 04 December 2013, in the scope of case 01582/13, seconded by the judgment of the same court of 08 January 2014 (case no. 01078/12), concludes, similarly to what is extracted from arbitral case no. 135/2013 -T of the CAAD, that the tax fact in question is of an instantaneous nature, and would have been "exhausted" on the date of the operation of disposal of the shares – 9 March 2010 – and consequently outside the scope of Law no. 15/2010, of 26 July, which would only be applicable to capital gains whose occurrence takes place after 27 July 2010, the date of its entry into force.

With all due respect, we disagree with such interpretation, subscribing to the opinion that the tax fact that underlies the taxation of capital gains is a complex fact of successive formation. [4]

By virtue of the circumstance that the disposal of the shares in question occurred at a particular temporal moment, in the present case on 9 March 2010, this does not justify, nor does it prefigure by itself, that the tax fact occurred and was exhausted at that precise moment (instantaneous fact).

It is recalled that the discipline of no. 1 of Article 43º of the CIRS goes in the unequivocal sense that the eventual existence of capital gains is conditioned upon the verification of a positive balance between these and the possible capital losses occurring in the period of the same year.

The tax fact does not translate into the capital gain generated and considered in an isolated and singular manner, through the act of disposal, but as a fact of successive formation, not finding in the disposal of the shares in question any fact that gives rise to any possible incidence of tax, since, as stated, this will result from a balance ascertained in a given taxation period, in accordance with the characteristic of annuality of the tax, which is obviously present in the scope of the tax on income of individuals.

Similarly, by effect of the rule of annuality of the tax on the income of individuals, it shall be understood that the taxable event occurred on 31 December 2010, given the complex incidence of the tax in question, and the requirement that it carries in terms of a unitary and global vision, not conforming such characteristics with any autonomization or division by temporal periods within the same fiscal year.[5]

With respect to the characteristics of IRS, we draw from, as synthesizing and conclusive and with due respect, what is stated in the Judgment of the Constitutional Court no. 399/10, of 27/10/2010, with which we identify ourselves, in this precise segment:

"IRS is characterized, in the first place, as a direct tax, in which the income of individuals is taxed. This tax is based on tax facts of successive formation, the tax fact subject to tax being complete only on the last day of the taxation period. The tax fact that gives rise to the tax is therefore complex.

The configuration of the temporal element of the tax fact in IRS is lasting, such that it is a periodic tax. That is, the legal relationship at the source of the obligation has at its base stable situations that extend over time".

[…] "with respect to capital gains, these constitute unexpected increases of an income – product, as they do not constitute the counterpart of participation in activity".

The consideration that the tax fact underlying the taxation of capital gains resulting from the onerous disposal of shares as a continuous fact would lead, in the present case, although apparently as will be seen, to the application of no. 2 of Article 12º of the LGT.[6]

There it is provided that: "if the tax fact is of successive formation, the new law only applies to the period elapsed since its entry into force", that is, the taxation period is divided, applying the old law to the tax facts occurring before the legislative amendment and the new law (Law no. 15/2010, of 26 July 2010) to the subsequent ones.

The literal and decontextualized interpretation of such provision would thus lead to the inapplicability in the case underlying the present of the regime provided by the repealing provision in question, since it would only apply to situations occurring after its entry into force (27 July 2010) and not to facts prior thereto.

One would be facing what the doctrine designates as a "pro rata temporis" taxation, it not being within the scope of the present analysis, either of its regime, or of its goodness and executability/practicability, leaving only a brief note that the "continuative" character of the income generated in IRS would determine the need to "proceed to its division pro rata temporis, understanding as facts verified under the old law the income generated from the beginning of the tax period to the date of entry into force of the new law; and, symmetrically, as facts verified under the new law the income generated from its entry into force".[7]

Referring, as stated, to the dissenting opinion in case 135/2013-T, with which we identify ourselves, it was concluded that correctly and duly interpreted according to the rules of legal hermeneutics and in light of the intent of the legislator (to whose analysis and dissection was undertaken there laboriously and exhaustively), the legal regime of capital gains taxation, as a result of the amendments made by Law no. 15/2010 of 26 July, has intrinsic the aim of taxing the balance resulting from all capital gains and losses realized in the taxation period in force on the date of its entry into force.

Drawing from the dissenting opinion in question: "The text of the bill proposal corresponds, in this part, entirely to the approved text that became Law no. 15/2010. It is necessary to conclude that the objective of the legislator was to subject all capital gains earned from the disposal of equity interests in the year 2010 to the new regime (tax and exemption)".

Furthermore, it should be noted that the intention, objective, reasons, and purpose of the legislator in the sense indicated, stands out moreover in coherence, harmony and contextualization, with Law 11/2010, of 15 June, therefore contemporaneous with the one we are concerned with, and which created an additional IRS bracket, subjecting annual income exceeding 150,000.00 € to a rate of 45%.

The eventual unconstitutionality of such act having been raised (as well as of Law no. 12-A/2010 of 30 June), the Constitutional Court, through its Judgment no. 399/10, of 27 October 2010, proceeded to pronounce itself in the sense of not declaring unconstitutional the norm of the CIRS that was at issue (Article 68º) in the wording conferred upon it by the aforementioned legal acts, acts with the same degree of "retrospectivity" as emerges from Law no. 15/2010, of 26 July, since they are applicable to the entire fiscal year 2010, although having been published on 15 and 30 June of that same year.

Further questions are raised, which it is important to analyze:

(i) of the normative conflict between the provision in no. 2 of Article 12º of the LGT and Articles 43º no. 1 and no. 3 of Article 10º of the CIRS; and

(ii) of the unconstitutionality of Law no. 15/2010, of 26 July.

As signaled, the consideration as a continuous fact and of complex formation relative to capital gains taxation (as well as to the income tax of individuals in general) collides, apparently with the provision in no. 2 of Article 12º of the LGT: "if the tax fact is of successive formation, the new law only applies to the period elapsed since its entry into force",

Again relying on the aforementioned dissenting opinion[8], and in the circumstance that the criterion of hierarchy and chronology would not respond to this apparent antinomy since neither of the acts in question, CIRS and LGT, have reinforced value, we also lean toward the solution founded on the criterion of speciality, to state that "the Personal Income Tax Code, or, at least, the generality of the normative enunciations contained therein, constitutes special regulation for purposes of fixing the criterion of temporal application of the relevant law in the field of IRS taxation, by which it prevails with respect to the provision in art. 12, no. 2 of the LGT, by force of the principle lex specialis derogat legi generali".

Having thus set aside the norm of the general tax law that apparently could lead to a "pro rata temporis" taxation, the regime inherent in no. 1 of Article 43º of the CIRS prevails: "The value of income qualified as capital gains is that corresponding to the balance ascertained between capital gains and capital losses realized in the same year, determined in accordance with the following articles", determining "the consideration of the taxation period from its beginning and in its entirety".

As to this particular but not insignificant question, it was thus concluded that there is no normative conflict between the provision in no. 2 of Article 12º of the LGT and the rule of annuality provided for in Articles 43º no. 1 and 143º of the CIRS.

Likewise no conflict exists before the provision of Article 10º no. 3 of the CIRS: "gains are considered obtained at the time of the performance of the acts provided for in no. 1".

As already stated [9] and shared here: "This norm, however, should be understood as having only the aim of fixing the taxation period to which the gain should be imputed, and not taking a position as to the nature of the tax fact subject, being, for example, analogous to art. 24º/4 of the CIRS, which has a similar relation to that Article 10º/3, but in relation to which it will certainly not be questioned that it refers to tax facts of the same nature as the rest subject to IRS, and not instantaneous facts"

The unconstitutionality of Law no. 15/2010, of 26 July, is also raised before the application that the AT made of it by taxing the capital gains occurring on 3 March 2010.

The Claimants allege for this purpose, in very brief summary, that there is a violation of the principle of non-retroactivity provided for under no. 3 of Article 103º of the CRP, and Article 12º of the LGT, arguing that it is an authentic retroactivity (which the doctrine also classifies as "perfect" or "proper"), to which the Respondent counters, stating that the application of Law no. 15/2010, of 26 July to the entire period of that same year, did not entail any type of retroactivity, but at most, one would be facing a "retrospectivity"[10], which some doctrine also designates as retroactivity of 3rd degree or improper, permitted by the Constitutional Court.

It can be held as established and uncontested that the principle of prohibition of non-retroactivity of tax law, provided for in no. 3 of Article 103º of the CRP (after the 1997 constitutional revision), only aims to contemplate retroactivity of 1st degree, that is, what some doctrine also designates as "perfect" or "proper", here falling the situations arising from the tax fact having "occurred entirely under the old law, having already produced all its effects within the ambit of that same law".[11]

"Here retroactivity is frontal and patent, raising no questions of qualification"

Different from this degree of retroactivity, the doctrine further explores the possibility of the existence of other degrees of retroactivity. "In retroactivity of 2nd degree (which some designate as retroactivity "imperfect" or "improper"), the fact also occurred entirely under the old law, approximating itself, therefore, to retroactivity of 1st degree. But it is distinguished from this because its effects did not exhaust entirely in the domain of the shadow of the old law, but continue to be produced in the temporal domain of the application of the new law."

Finally, retroactivity of 3rd degree and "which is distinguished from the preceding ones by the fact not having occurred entirely in the shadow of the old law, but extending in its concrete production in the temporal domain of the new law".

This is what "happens in periodic taxes when a law is published in the middle of the period, raising then the question of whether there is retroactivity in the application of that law to the entire period in force at the date of its entry into force".[12]

Well:

The judgment made regarding the taxation of capital gains, constituting a lasting fact of complex formation, and in the circumstance of having been "initiated" on 09 March 2010, "concluded" on 31 December of that same year, and Law 15/2010, of 26 July having entered into force on the day following that, leads us to consider only, and still synoptically, the last of the mentioned degrees of retroactivity that has been designated in a non-convergent manner by doctrine as "inauthentic" of "third degree" or "retrospectivity".

The Constitutional Court, as already referred to above, called upon to pronounce itself on the unconstitutionality of two acts contemporary with Law no. 15/2010, of 26 July, specifically Law no. 11/2010, of 15 June and Law no. 12-A/2010, of 30 June, proceeded in Judgment no. 399/10 of 27 October, starting by stating that the meaning of retroactivity of tax law is not univocal, consented, for brevity's sake, that the prohibition of retroactivity of tax law only addresses the said proper or authentic.[13]

Position which reproduces earlier understanding as to this matter[14] and reiterated, more recently in the scope of Judgment no. 310/2012 of 20/06/2012, from which is extracted:

"The Constitutional Court has been following the understanding that this prohibition of retroactivity, in the field of tax law, only addresses authentic retroactivity, encompassing only those cases in which the tax fact that the new law intends to regulate has already produced all its effects under the old law, excluding from its scope of application situations of retrospectivity or of improper retroactivity, that is, those situations in which the law is applied to past facts but whose effects still persist in the present, as happens when tax norms that produced an aggravation of the tax position of taxpayers in relation to tax facts that did not occur entirely in the domain of the old law and continue to form, still in the course of the same fiscal year, in the force of the new law".

"In essence, the practical scope of this thesis is to admit that in cases of retroaction limited to the fiscal period in which the law entered into force, which would be, as we have seen, the case of the present case – it is possible, with respect to periodic taxes, the approval of laws in the course of a taxation period that are intended to produce effects with respect to the entire period, being, however, such laws subject to the test resulting from the principles of the Rule of Law, such as the test of protection of confidence."

Not constituting the normative of Law no. 15/2010, of 26 July, any violation of the principle contained in no. 3 of Article 103º of the CRP, could in theory be the same subject to a judgment of unconstitutionality for violation of other constitutional principles, namely, the principle of protection of confidence, inherent in Article 2º of the CRP.

Posed in this manner, the doctrine appears adequate, which remains valid, and which emerges from the Judgments of the Constitutional Court nos. 287/90, of 30 October and 399/10, of 27 October 2010 and the position of the Ombudsman (case R-3767/10) regarding the taxation applicable by force of Law no. 15/2010, of 26 July, to capital gains with the same realized, effected between 1 January and 26 July 2010, with respect to shares until then held by the disposer for more than one year:

"It is clear from Judgment no. 399/2010 that, in these situations, the Constitutional Court considers that there is no authentic or proper retroactivity, the only one, in accordance with the same doctrine of the Court, which is prohibited by art. 103º, no. 3 of the Fundamental Law.

As to the question of protection of confidence, the level of frustration of expectations of those affected by the amendments made by Law no. 15/2010 is here manifestly more serious than that verified in the situation involving the mere purchase of securities in the ambit of the old law.

However, having the Constitutional Court understood, in the scope of Judgment no. 399/2010, that the establishment, in June of that year, of a new IRS bracket, and the increase, in that same date, of the IRS rate in all the brackets of the tax, with effects reported in both situations to the beginning of the year, does not collide intolerably with life decisions that taxpayers may have taken, will it scarcely consider it differently as regards the amendments to the regime of taxation of capital gains.

Even if the Constitutional Court did not consider it thus, it would always be invokable the circumstance that, also in this case, similarly to the situation of Judgment no. 399/2010, there occur reasons of public interest, associated with the economic-financial situation of the country, which justify, after weighing the conflicting elements present, the non-continuity of the behavior of the State that originated the situation of expectation of private parties". Indeed, as is referred to in the aforementioned Judgment, at the time of the validity of Law no. 15/2010, the economic-financial situation was characterized by the existence of a budgetary imbalance and by an accumulation of public debt, widely reported in public discourse, which required measures both on the side of public expenditure (reduction) and on the side of public revenue (increase), to combat the existing imbalances. One of the instruments of budgetary policy is fiscal policy, which due to reasons of public interest, implied the adoption of measures aimed at increasing tax revenue, with Law no. 15/2010 fitting within that objective. The principal source of financing of Portuguese public expenditure was at the time of the disputed facts, tax revenue. Thus, as is referred to in the mentioned Judgment no. 399/2010, in order to ascertain the existence of a situation of violation or not of the principle of protection of confidence, the degree of tolerance of the legislative measure of repeal of the exclusion of taxation of mobile capital gains provided for in Law no. 15/2010 in face of the principle of confidence should be directly corresponding to the degree of relevance of the public interest that justifies Law no. 15/2010. Now, the public interest existing at the date of the disputed facts derived from the budgetary imbalance and accumulated public debt appealed to measures of budgetary policy, being Laws no. 11/2010, 12/2010 and 15/2010, a reflection of that need[15].

It results then, also here, that it will not be unconstitutional the application of the regime resulting from the repeal of no. 2 of Article 10º of the CIRS, in the course of the year 2010, to capital gains earned in the course of that year, as well as the amendment of the rate to which the normative in question proceeded.

It is concluded, [16] and there is no reason why it should not be so, that the legal regime of taxation under personal income tax, of capital gains as a result of the amendments to the CIRS introduced by Law no. 15/2010, of 26 July, had in view the subjection to the new regime (repeal of the exclusion of taxation of mobile capital gains and creation of new rate) of all capital gains earned in the fiscal year 2010, and that such normative does not suffer from any unconstitutionality, nor is its regime set aside by any other legal norm with which it is in a relationship of antinomy, there shall be confirmation of the tax acts that are the object of the present case, rendering the arbitral petitions unsuccessful as a consequence.

C. DECISION

On these terms, this Arbitral Tribunal decides:

a. To render the arbitral petitions formulated totally unsuccessful;

b. To condemn the Claimants in the costs of the proceedings.

D. VALUE OF THE CASE

In harmony with the provision in Article 306º of the Code of Civil Procedure, approved by Law no. 41/2013, of 26 June, 97º A) no. 1 paragraph a) of the Code of Tax Procedure and Process, and Article 3º no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is fixed at the value of 456,734.64 €.

E. COSTS

At the charge of the Claimants, pursuant to Articles 2º and 4º of the Regulation of Costs in Tax Arbitration Proceedings and 12, no. 2 and 22º, no. 4 of the RJAT.

NOTIFY

Text prepared by computer, pursuant to the provision in Article 131º of the Code of Civil Procedure, applicable by referral of Article 29º no. 1 of the Legal Framework for Tax Arbitration, with blank verses and reviewed by the arbitrators.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Lisbon, three November of two thousand and fourteen

The Arbitrator President

(Jorge Lopes de Sousa, in substitution

of Counsellor Jorge Lino Ribeiro Alves de Sousa)

The Arbitrator Member

(Júlio Tormenta)

The Arbitrator Member

(José Coutinho Pires)

[1] Hereinafter referred to as CRP.

[2] In the wording given by Law no. 4172013, of 26 June.

[3] Article 10º no. 1 of the CIRS.

[4] Follows closely the position defended in the dissenting opinion, produced by His Excellency Dr. João Menezes Leitão, in the scope of case no. 135/2013- T, of the CAAD, available at www.caad.org.pt., as well as the basis and sense of the decision issued in case no. 107/2014-T, also of the CAAD, not yet available at the present date.

[5] Article 143º of the CIRS: For purposes of IRS, the fiscal year coincides with the calendar year.

[6] Position defended in the scope of case no. 25/2011- T of the CAAD, cited by the claimants, available at www.caad.org.pt, which notwithstanding having considered that there is no offense to the constitutional principles of non-retroactivity of tax law and protection of confidence, considering IRS as a periodic tax of successive formation, argues for the application of the provision in no. 2 of Article 12º of the LGT, to the situation similar to that which derives from the present case.

[7] Alberto Xavier, Manual de Direito Fiscal I Lisbon, 1974, page 201.

[8] Dissenting opinion, produced by His Excellency Dr. João Menezes Leitão, in the scope of case no. 135/2013- T, of the CAAD, available at www.caad.org.pt.

[9] Case no. 107/2014- T of the CAAD, not yet available at the present date.

[10] According to Sérgio Vasques in Manual de Direito Fiscal 2013 - 2nd Reprint page 298 "The phenomenon of retrospectivity of tax law, for its part, occurs when the new law, while disposing of future facts, injures expectations founded in the past".

[11] Alberto Xavier, Manual de Direito Fiscal I, Lisbon, 1974, pages 197 et seq.

[12] Manuel Henrique de Freitas Pereira, Fiscalidade, Almedina, 2011, 4th edition, pages 213 et seq.

[13] It should be noted that the Judgment in question, in a brief excursus which it makes on the tax on the income of individuals characterizes it as "a direct tax, in which the income of individuals is taxed. This tax is based on tax facts of successive formation, the fact that gives rise to the tax being therefore complex"

[14] Judgments no. 128/2009 and 85/2010 where in the first Judgment cited it is reiterated "The retroactivity prohibited in no. 3 of Article 103º of the Constitution is authentic or proper retroactivity. That is, it prohibits retroactivity that translates into the application of new law to old facts (in the case, tax facts) (prior, therefore, to the entry into force of the new law)."

[15] Reflection of the public interest in the adoption of budgetary measures due to the economic-financial situation are those set forth in Laws no. 11/2010 of 15/6, Law no. 12-A/2010 of 30/6 and Law no. 15/2010 of 26/7 whose entry into force between them does not reach two months.

[16] Converging with the decision direction of case no. 107/2014 - T of the CAAD, not yet available

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of shares taxed under Portuguese IRS rules?
Under Portuguese IRS rules, capital gains from the sale of shares are taxed as Category G income (capital increments). The taxation depends on the holding period and applicable law at the time of realization. According to the CIRS framework in effect for 2010, gains from shares held for more than 12 months were subject to specific treatment. Law 15/2010 of July 26, 2010 amended Article 72(4) of the CIRS, establishing a 20% tax rate for certain capital gains. The taxable amount is calculated as the difference between the sale price and acquisition cost. Taxpayers must declare these gains in their annual IRS return, and failure to do so can result in arithmetic corrections by the Tax Authority during inspection procedures, with additional compensatory interest charges.
What is the legal principle of temporal application of tax law in Portuguese capital gains taxation?
The legal principle of temporal application of tax law in Portuguese capital gains taxation is governed by Article 12 of the General Tax Law (LGT) and Article 103(3) of the Portuguese Constitution, which establishes the prohibition of retroactive tax legislation. The fundamental question in Process 340/2014-T was whether tax law amendments should apply to the entire fiscal year in which they are enacted or only to transactions occurring after the law's entry into force. The taxpayers argued that Law 15/2010, effective July 27, 2010, could not be applied to share sales completed on March 9, 2010, as this would constitute prohibited retroactivity. The Tax Authority contended that amendments apply to the entire fiscal year 2010. This dispute highlights the tension between fiscal year-based tax systems and the constitutional protection against retroactive taxation.
Can the Tax Authority correct IRS assessments for undeclared securities capital gains?
Yes, the Tax Authority can correct IRS assessments for undeclared securities capital gains through inspection procedures. In Process 340/2014-T, the AT conducted inspection actions under specific Service Orders and issued Tax Inspection Reports that identified omitted capital gains from share sales. These corrections are classified as 'purely arithmetic corrections' when taxpayers fail to declare income that should have been included in their tax returns. The AT can add the undeclared amounts to taxable income, apply the appropriate tax rate, and issue corrective assessments with compensatory interest for the period of non-payment. These corrections were formalized through assessment notices (numbered 2014...) and generated statement of account reconciliations with specified voluntary payment deadlines. Taxpayers who omit capital gains declarations are subject to these administrative corrections regardless of whether the omission was intentional or inadvertent.
What are the taxpayer rights when challenging IRS capital gains reassessments at CAAD arbitration?
Taxpayers challenging IRS capital gains reassessments at CAAD arbitration have several fundamental rights under the Legal Framework for Tax Arbitration (RJAT). They can submit arbitration petitions jointly when sharing common interests (Article 104 of the Tax Procedure Code). The petition must be filed pursuant to Article 2(1)(a) and Article 29(1)(a) of RJAT. Taxpayers have the right to a properly constituted arbitral tribunal with appointed arbitrators who must accept their assignments within statutory timeframes. They can present legal arguments challenging not only the factual basis of assessments but also the legal interpretation applied by the Tax Authority, including constitutional principles such as non-retroactivity of tax law (Article 103(3) CRP) and proper temporal application of tax norms (Article 12 LGT). The arbitration process includes formal notification procedures, the right to respond to the Tax Authority's position, and the ability to request annulment of assessments based on legal violations. The proceedings follow established procedural rules with opportunities for both parties to present their cases.
What was the outcome of CAAD process 340/2014-T regarding omitted capital gains from share sales in 2010?
The document excerpt from CAAD Process 340/2014-T does not include the final decision, as the text terminates at the factual findings section. However, the established facts show that two taxpayers sold shares on March 9, 2010, and the Tax Authority applied Law 15/2010 (effective July 27, 2010) to tax those gains at 20% under Article 72(4) CIRS, adding €1,028,875 to each taxpayer's 2010 taxable income. The taxpayers challenged this on grounds that retroactive application violated Article 12 of the General Tax Law and Article 103(3) of the Constitution. The Arbitral Tribunal found itself materially competent, confirmed the parties had legal capacity and standing, and determined there were no obstacles to considering the merits. The key legal question presented was whether tax law amendments enacted mid-year apply to transactions completed before their entry into force—a critical issue for temporal application of tax law in Portugal.