Process: 389/2017-T

Date: February 21, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses a critical issue in Portuguese IRS taxation regarding the proper classification and taxation of capital gains from securities disposal. The case involves married taxpayers who filed their 2015 IRS return (Modelo 3) with a significant error in Anexo J, leading to drastically inflated tax liability. The taxpayers sold securities worth €549,250.20, which had been acquired for €532,854.10 plus transaction costs of €1,601.52, resulting in actual capital gains of €14,794.58. However, due to an accounting error, they incorrectly classified this income as capital income in field 806 of table 8 of Anexo J, rather than properly declaring it in table 9.2 as capital gains from onerous disposal of securities. This misclassification had severe consequences: instead of being taxed on the €14,794.58 capital gain at 28% (correct tax: €4,142.48), they were assessed on the entire €549,250.20 realization value, resulting in a tax liability of €153,790.05—approximately 37 times the correct amount. The taxpayers promptly filed an amended return and contacted the Tax Authority to rectify the error, but the assessment was not corrected before the payment deadline. After paying what they believed was the correct amount, tax enforcement proceedings were initiated for the alleged outstanding balance. To suspend enforcement and prevent asset attachment, they were forced to provide a bank guarantee of €189,132.25, incurring costs of €6,812.61 plus ongoing quarterly commissions. The taxpayers sought arbitration at CAAD under Decree-Law 10/2011, requesting partial annulment of the IRS assessment and compensation for the undue bank guarantee costs. The case highlights the distinction between capital gains and capital income for IRS purposes, the correct completion of Anexo J for securities transactions, and taxpayers' rights to compensation when forced to provide guarantees due to erroneous assessments.

Full Decision

ARBITRAL DECISION

The arbitrators, Councillor Maria Fernanda dos Santos Maçãs (President), Dr. Olívio Mota Amador (Member) and Professor Doctor Paulo Jorge Nogueira da Costa (Member) appointed by the Deontological Council of the Center for Administrative Arbitration (CAAD) to constitute the Arbitral Tribunal, hereby agree as follows:

REPORT

  1. A…, with tax identification number…, and B…[1], with tax identification number…, married, with tax domicile at Rua …, no. …, …, …-… Lisbon (hereinafter referred to as "Claimants"), submitted on 26-06-2017, pursuant to article 2, no. 1, paragraph a) and articles 10 et seq. of the Legal Framework for Tax Arbitration, as provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LFTA"), a request for arbitral ruling seeking the partial annulment of the Personal Income Tax [IRS] assessment no. 2016… and the recognition of the right to compensation for the provision of undue bank guarantee.

  2. The Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

  3. The request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority on 27-06-2017.

  4. The Claimants did not appoint an arbitrator; accordingly, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LFTA, the President of the Deontological Council designated the undersigned as arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the appointment within the prescribed period. On 11-08-2017, the parties were notified of the appointment of the arbitrators and raised no objection.

  5. In accordance with the provisions of paragraph c) of no. 11 of the LFTA, the Collective Arbitral Tribunal was constituted on 29-08-2017. Accordingly, the Arbitral Tribunal is duly constituted to hear and decide on the subject matter of the proceedings.

  6. In support of their request for arbitral ruling, the Claimants argue, in summary, as follows:

6.1. On 30-05-2016, the Claimants submitted the Form 3 Declaration for IRS relating to the year 2015, to which the number … – 2015 –…– … was assigned. As a result of the submission of this IRS declaration, assessment note no. 2016… was issued, with a tax amount payable of €185,357.69, whose voluntary payment deadline ended on 26-09-2016.

6.2. Being greatly surprised by the excessive amount of tax assessed in view of the income obtained during 2015, the Claimants verified that the IRS declaration, identified in the preceding number, contained a manifest error in completing the respective Annex J relating to income from foreign sources. This error was at the origin of the mistake in calculating the tax payable by the Claimants for the year 2015.

6.3. Specifically, the Claimants proceeded, in the year 2015, to the disposal of securities in the total amount of €549,250.20, which were acquired for the total value of €532,854.10, with expenses and costs associated with their acquisition and disposal amounting to €1,601.52. From this it follows that the capital gains realized from the disposal of the aforementioned securities amounted to €14,794.58 in the year 2015.

6.4. A careful analysis of the submitted IRS declaration makes it evident that only the value of realization (i.e., €549,250.20) was included in that declaration, since the income in question was classified, by error, as capital income in field 806 of table 8 of Annex J. Thus, the balance of the capital gains obtained in 2015 (€14,794.58) was not declared, but the realization value thereof (€549,250.20), which resulted in a tax amount payable far greater than what was actually due.

6.5. The Claimants paid a tax amount of €153,790.05 corresponding to 28% of the realization value (€549,250.20) instead of the correct amount of €4,142.48 corresponding to 28% of the balance of the capital gains resulting from the relevant sales of securities (€14,794.58). Specifically, the amount that the Claimants were called upon to pay is approximately 37 times greater than the amount that would have been due, in accordance with legal provisions, since the Claimants are not being subjected to taxation on the capital gains obtained (i.e., the difference between the realization value and the acquisition value and other costs), but on the entire realization value.

6.6. The Claimants submitted, on 07-09-2016, the amended declaration no. …-… -… . In the said amended declaration (prepared by the official accounting technician who provides services to the Claimants and to whom the error in the first Form 3 IRS Declaration is attributable), Annex J was correctly completed by adding all those operations to the correct table (i.e., to table 9.2 - Onerous disposal of shareholdings and other securities) and by deleting the amounts of €31,676.95, €510,319.78 and €7,253.47 from table 8).

6.7. On 08-09-2016, the Official Accounting Technician, Dr. E…, sent an email to the IRS Services Directorate, with a copy to the Lisbon Finance Service …, explaining the entire situation and requesting the immediate annulment of assessment note no. 2016…, in view of the manifest error evidenced in the first Declaration, and proceeding with the issuance of a new IRS assessment note with the correct amount of tax payable.

6.8. On 19-09-2016, the representative of the Claimants sent a further email to the Lisbon Finance Service …, with a copy to the IRS Services Directorate, in which the said finance service was provided with all the supporting documentation for the amended declaration. The said documentation already included the declaration issued by Bank F…, in which all the disposals of securities that occurred in the year 2015 are listed.

6.9. It happened that the Tax Authority did not take steps to rectify the IRS assessment (whose annulment was repeatedly requested by the Claimants) prior to the expiration of the voluntary payment deadline for the IRS assessment, which occurred on 26-09-2017.

6.10. Accordingly, the Claimants proceeded to payment of the amount of IRS that they believed was due (€36,150.38) instead of the value contained in the assessment (€185,357.69), remaining outstanding, according to the Tax Authority, the amount of €149,207.31.

6.11. On 27-10-2017 the Claimants were served with the tax enforcement proceedings initiated due to non-payment of the IRS assessment for the year 2015, the amount allegedly in debt (including interest, at the date of enforcement) amounting to €149,850.47.

6.12. Following the service in the tax enforcement proceedings referred to above and within the time available to them for this purpose, the Claimants provided a bank guarantee, identified with the number … issued by G… in the amount of €189,132.25, in order to obtain the suspension of the tax enforcement proceedings no. …2016… and to prevent the initiation of attachment procedures.

6.13. Due to the provision of the above-identified bank guarantee, the Claimants incurred costs in the aggregate value of €6,812.61, to which are added the values of the quarterly commissions that may become due pending these arbitral proceedings until the lifting of the bank guarantee (if applicable).

6.14. The Claimants received in person the information that the amended declaration would not be accepted by the Tax Authority, the assessment that is now being contested having never been revised. It was in this context that the Claimants submitted, on 28-11-2017, an administrative review against such assessment.

6.15. Furthermore, the Claimants were confronted, in early December 2016, with several attachments of bank balances (from their accounts opened at Bank H… and at G…). Such attachments (which prevented the Claimants from meeting their current expenses during the month of December, causing irreparable damage to their sphere) were issued in order to secure payment of a debt that not only is not shown to be due but was already guaranteed through the bank guarantee presented in the tax enforcement proceedings no. …2016… . This situation was only resolved later, still during the month of December 2016.

6.16. To the present date, the Claimants have only been notified to exercise, if they so wish, their right of prior hearing on the draft decision to dismiss the administrative review submitted.

6.17. The Claimants exercised their right of prior hearing on 06-03-2017, to which they attached all the documentation requested by the Tax Authority including that of the document from Bank F….

6.18. In the face of the Tax Authority's inaction, a tacit dismissal of the administrative review was formed on 28-03-2017.

6.19. Article 75, no. 1, of the General Tax Code establishes that the declarations presented by taxpayers under the terms provided for by law are presumed to be true and in good faith. From this presumption of truth follows inescapably the binding of the Tax Authority to issue tax assessments on the basis of the declarations of taxpayers (first declarations or amended declarations presented by taxpayers), except in the cases expressly provided for by law for departure from that presumption. Furthermore, legal presumptions (e.g., the presumption of truth inherent in article 75, no. 1 of the General Tax Code) are assigned full probative force, in accordance with article 350, no. 2, of the Civil Code. For full proof to be set aside, by application of article 74, no. 1, of the General Tax Code in conjunction with article 350, no. 2, of the Civil Code, it shall be incumbent upon the Tax Authority to prove the facts that constitute the constitutive prerequisites of its right.

6.20. Amended declarations benefit from the presumption of truth provided for in article 75, no. 1, of the General Tax Code, without prejudice to the Tax Authority's right to carry out a posteriori verification of the elements declared by taxpayers. In the case in question, the Claimants, having detected a manifest error in completing the Form 3 IRS Declaration, which resulted in excessive tax payable, submitted, in accordance with and for the purposes provided for in article 59 of the Tax Procedure Code, an amended Form 3 IRS Declaration, having also submitted all the supporting documentation for such Declaration.

6.21. In light of the foregoing, it must be concluded that the Respondent is not empowered (either under articles 5 and 10 of the IRS Code) to tax income that the Claimants never came to obtain, induly taking advantage of an error made by the Claimants in the first Form 3 IRS Declaration submitted (promptly rectified by them and unduly disregarded by the Tax Authority) to impose upon the Claimants payment of a tax amount manifestly superior (approximately 37 times superior) to that which would have been due in accordance with and for the purposes provided for in article 10 of the IRS Code.

6.22. It is evident from the record that the contested assessment is manifestly illegal by virtue of violation of articles 5 and 10, no. 1, paragraph b) and no. 4, paragraph a), of the IRS Code, and should, in consequence, be partially annulled, with all legal consequences.

6.23. The conduct of the Tax Authority is, moreover, grossly violative of the principle of taxable capacity or taxation based on actual income, which is one of the structural constitutional principles of the Portuguese tax system and to which the Tax Authority is formally bound.

6.24. The Claimants provided the above-identified bank guarantee in order to obtain the suspension of the tax enforcement proceedings no. …2016… initiated by the Lisbon Finance Service -…, following non-payment of the alleged IRS debt. Given that the errors determining the illegality of the additional IRS assessment for the year 2015 exist, the Claimants have the right to be compensated for the prejudice resulting from the undue provision of such guarantee, in accordance with and for the purposes provided for in article 53 of the General Tax Code.

6.25. In light of the foregoing, the merits of the present request for arbitral ruling should determine the payment of compensation to the Claimants corresponding to the totality of costs incurred to date with the constitution and provision of the bank guarantee and all costs of maintaining the bank guarantee that may be borne by the Claimants pending the arbitral proceedings until the moment of lifting of the guarantee.

  1. On 09-10-2017, the Respondent submitted its Reply and attached the Administrative File. In the said pleading it invoked, in summary, the following:

7.1. After analyzing the documents attached to the administrative review, the Tax Authority considers that they do not constitute proof that the amount of €549,250.20 relates to the sale of movable assets, since they do not contain any identifying element of the issuing entity or the identity of the beneficiary of the income, being incapable of consideration as an appropriate means of proof to establish inequivocally the alleged acquisition, at the date and for the value claimed.

7.2. The Tax Authority took steps to determine whether the documents presented by the now Claimants constituted proof of what was alleged and were capable of leading to a decision different from that contained in the draft decision. In response to the request made, the International Relations Services Directorate of the Tax Authority stated the following:

"IV – CONCLUSION

  1. In light of the foregoing, we conclude that the documents attached to the record do not prove the totality of the applicant's income, insofar as they relate only to capital income that the applicant obtained from bank F….

  2. For which reason, that document, by itself, is not sufficient to ascertain the totality of the applicant's income, neither in Luxembourg, nor abroad.

  3. However, from that it is possible to extract sufficient proof of the tax borne in the amount of €2.48, inasmuch as the nature of the income taxed (dividends) is usually subject to withholding at source on a final basis.

  4. Still regarding the probative value of that document, it is possible to conclude that the applicant received income in the amount of €18,651.03.

  5. Of which, €0.04 relates to dividends obtained in Ireland and over which competence is assessed cumulatively between the two states in accordance with article 10 of the Ireland-Portugal Income and Capital Tax Treaty.

  6. €16.52 refers to dividends obtained in the United States of America, over which competence is also cumulative between the two states, as stated in article 10 of the US-Portugal Income and Capital Tax Treaty.

  7. And it was with respect to these income that the applicant demonstrates having borne tax abroad in the amount of €2.48, to be considered in accordance with no. 3 of article 25 of the US-Portugal Income and Capital Tax Treaty.

  8. Being that, €380 are to be taxed as article 10 of the Luxembourg-Portugal Tax Treaty provides, that is, cumulatively between the two states, insofar as they are to be considered dividends paid by funds established in Luxembourg.

  9. In turn, €76 refers to interest on securities of entities with residence in Luxembourg and should be taxed, as specified in article 11 of the Luxembourg-Portugal Tax Treaty.

And, finally, €18,178.47 are capital gains, over which competence is exclusive to the state of residence, as results from no. 4 of article 13 of the Luxembourg-Portugal Tax Treaty."

7.3. The now Claimants, notified of the draft decision to dismiss the administrative review, came forth, in the exercise of the right of hearing, to acknowledge that they had not produced sufficient proof to challenge the assessment of which they complained – fact which is here expressly accepted for all legal purposes – and limited themselves to attaching a document, the document at pages 72 to 84 of the Administrative File, and attached to the request for arbitral ruling as doc. 15.

7.4. For evidentiary purposes, with that document, the Claimants are only able to demonstrate all income obtained through bank F… (Europe) Luxembourg. However, that means of proof does not attest to the totality of income obtained in Luxembourg or abroad.

7.5. The Claimants must comply with the burden of proof that rests upon them, namely by means of a declaration from the tax authorities of the states of origin of their income, in which the totality of their income can be ascertained.

7.6. Furthermore, from examining the declarations of the applicant it appears that only from their last declaration for the year 2015 did they declare the accounts held by them abroad, where, in fact, the account of bank F… is listed.

7.7. However, two other accounts abroad were also identified, with respect to which the income is not known.

7.8. Nor were those accounts likewise identified in the year 2014, a date when the now Claimants were already acquiring securities through bank F….

7.9. In the exercise of the right of hearing, the now Respondents acknowledged that the document presented with the administrative review did not prove what was alleged – a confession which is here expressly accepted, and this notwithstanding the fact that in no. 34 of the Petition they now say that with the amended declaration they submitted all supporting documentation.

7.10. The now Claimants attached (with the exercise of the right of hearing) another document, the one that in this request for arbitral ruling is attached as doc. 15 to the petition. It happens, however, that that document only proves that with respect to the dividend income obtained in the amount of €16.52, they bore tax in the amount of €2.48, by means of withholding at source, an amount that is not contested here, especially since the request aims only at the partial annulment of the declaration, not encompassing this part thereof.

7.11. As for the other income, the above-mentioned document proves nothing that can challenge the decision set out in the draft decision and thus that could render the assessment suspect of any illegality.

7.12. Accordingly, it does not result from the record that the values recorded relate to "onerous disposal of shareholdings and other securities," because: (i) the documents attached to the administrative review do not contain any identifying element of the issuing entity or the identity of the beneficiary of the income; (ii) from the document attached when exercising the right of hearing, it only results that with respect to the dividend income obtained in the amount of €16.52, they bore tax in the amount of €2.48, by means of withholding at source.

7.13. It remains to be proven that the amount of €549,250.20 relates to the sale of movable assets, since doc. 15, attached to the request for arbitral ruling, only demonstrates the income obtained by the now Claimants through bank F… (Europe) Luxembourg. From it one cannot derive the totality of income obtained in Luxembourg or abroad, nor the identifying element of the issuing entity or the identity of the beneficiary of the allegedly sold income, and therefore does not prove the alleged acquisition, at the date and for the value claimed.

7.14. Under these circumstances, the now Claimants should have presented a declaration from the tax authorities of the states of origin of their income.

7.15. From this it follows that the Claimants failed to provide documentation relating to the analysis of the veracity of the amended declaration, nor did they provide the Tax Authority with elements capable of the tax administration confirming them, as required by article 75 of the General Tax Code.

7.16. The alleged illegality cannot succeed because what results from the record is that the now Claimants obtained capital income, and they failed to prove that it was the disposal of securities.

7.17. The Tax Administration adhered strictly to the complete fulfillment of the legal norms applicable to the facts whose proof it was able to establish, with no resulting violation of articles 5 and 10 of the IRS Code, nor of articles 103 and 104 of the Constitution of the Portuguese Republic.

7.18. As for the request for compensation for the provision of a bank guarantee, it should be judged completely unmerited because the guarantee that the Claimants allege to have provided is not shown to be undue.

7.19. Without conceding, regarding liability for costs, should the Tribunal judge the request merited, the Respondent entity should still not be condemned to pay costs because it was not the one who gave rise to the action.

7.20. In truth, as appears from the record, the Claimants had the opportunity to provide detailed clarifications and to produce proof of what was alleged, but they did not do so in the course of the administrative review, where the proof is clearly insufficient.

7.21. Indeed, the Claimants acknowledge that the proof is insufficient and presented, in the exercise of the right of hearing, a document equally not suitable.

7.22. For this reason, should the request be considered merited, wholly or partially, which is not believed to be possible, but which by reason of the obligation of counsel is admitted, the principle of condemnation of the losing party to pay costs should not prevail, with instead the winning party being condemned to pay them.

  1. The Arbitral Tribunal, by order of 09-10-2017, notified the Claimants to indicate, within ten days, the facts on which they request the examination of witnesses.

  2. On 23-10-2017, the Claimants informed the Arbitral Tribunal that the testimony of the witness called would relate to the factual matters set forth in articles 1 through 14 and 21 through 25 of the request for arbitral ruling and requested the production of final arguments, with the Tax Authority's intention to dispense with such arguments being rejected.

  3. By order of 04-11-2017, the Arbitral Tribunal rejected the request for the production of testimonial evidence given the circumstance that the articles that the Claimants indicated for testimony correspond to matters of law, matters of fact lacking documentary proof, or matters irrelevant to the decision of the case. The Arbitral Tribunal dispensed with the holding of the meeting provided for in article 18 of the LFTA, as no matters of exception were invoked and there was no occasion for the production of original evidence, which it did pursuant to the principles of autonomy of the Tribunal in the conduct of proceedings, and in order to promote the celerity, simplification and informality thereof (see articles 19, no. 2 and 29, no. 2, of the LFTA). Finally, the Tribunal set 28-02-2018 as the deadline for the delivery of the arbitral decision.

  4. The Claimants, on 21-11-2017, request that the procedural position of B… be replaced, due to death, by the qualifying heirs C… and D…, reiterate their intention to produce final arguments and manifest their preference for the production of written arguments. The following documents are also requested to be attached:

Doc. no. 1: Death Certificate no. … of the year 2017 issued by the Civil Registry Office of the …;

Doc. no. 2: Certification of Heirship by J… Notarial Office of Lisbon, on 15-11-2017;

Doc. no. 3: Two powers of attorney granted by C… and by D…;

Doc. no. 4: Letter from Dr. E…, Official Accounting Technician no. …, undated;

Doc. no. 5: Copy of claim of loss filed with the Board of Official Accounting Technicians, on 22-11-2010.

  1. The Arbitral Tribunal, by order of 26-11-2017, granted the Respondent ten days to pronounce itself, if it so wishes, on the attachment of the documents presented by the Claimants on 21-11-2017. Finally, the Arbitral Tribunal suspended the deadline for arguments fixed in the order of 04-11-2017.

  2. The Respondent, on 07-12-2017, pronounced itself on the attachment of the documents requested by the Claimants on 21-11-2017, arguing that those designated as docs 4 and 5 cannot be valued by the tribunal as acceptable documentary evidence.

  3. The Arbitral Tribunal, by order of 26-11-2017, granted the request to attach to the record the documentary evidence annexed to the Claimants' application of 21-11-2017, relegating to the moment of appraisal of the evidence the analysis and consequences to be drawn therefrom. The parties were notified to produce written arguments.

  4. The Claimants presented, on 16-01-2018, written arguments reiterating the arguments presented in the request for arbitral ruling and in the application of 21-11-2017, the summary of which is contained in nos. 6, 12 and 13 of the present arbitral decision.

  5. On 31-01-2018, the Respondent presented written arguments reiterating the arguments presented in the reply and in the application of 07-12-2017, the summary of which is contained in nos. 7 and 16 of the present arbitral decision.

PROCEDURAL MATTERS

  1. As stated, the Claimants requested, on 21-11-2017, that the procedural position of B… be replaced, due to death, by the qualifying heirs C… and D…, attaching for this purpose: i) Death Certificate no. … of the year 2017 issued by the Civil Registry Office of the … (doc no. 1); ii) Certification of Heirship by J… Notarial Office of Lisbon, on 15-11-2017 (doc 2); iii) Two powers of attorney granted by C… and by D… (doc 3).

On these terms, due to the death of the second Claimant, their procedural position should be considered replaced by their respective heirs C… and D… in their capacity as sole heirs, in accordance with and for the purposes provided for in articles 130 of the Code of Tax Procedure and Process and articles 151 and 353 of the Code of Civil Procedure applicable subsidiarily by virtue of the provisions of article 29, paragraphs a) and e) of the LFTA.

The parties have legal personality and capacity, show themselves to be entitled and are duly represented (articles 4 and 10, no. 2, of the LFTA and article 1 of Ordinance no. 112-A/2011, of 22 March).

The tribunal is competent and duly constituted.

The proceedings do not suffer from any nullities.

No exceptions were raised.

There are no other circumstances preventing the tribunal from examining the merits of the case.

MERITS

§1. Question for Decision

  1. The immediate subject matter of the present proceedings is the decision to tacitly dismiss the administrative review that the Claimants pursued against the ex officio Personal Income Tax [IRS] assessment for the year 2015, in which they contend that the assessment was based on an error in completing the form 3 declaration, which they subsequently rectified by submitting an amended Declaration.

  2. The Claimants contend that they did not receive capital income in the amount of €549,250.20, contrary to what, by error, appears in the first declaration submitted, which caused the value of realization of the capital gains resulting from the alleged sale of securities, as described in the amended declaration, to be wrongly considered as capital income, and therefore, according to them, the IRS assessment in question is illegal due to violation of articles 5 and 10 of the IRS Code and should, in consequence, be partially annulled.

  3. It is therefore necessary to determine whether the amount in question (€549,250.20) should be taxed as capital income, as the Respondent contends, or whether, differently, it should be accepted as realization value from the disposal of movable assets, as recorded in the amended Declaration, thereby resulting in the taxation of the calculated capital gain.

  4. In the event that the arbitral request is upheld, this tribunal will also have to decide on the request, formulated by the Claimants, for recognition of the right to compensation for the provision of an undue guarantee.

§2. Application of the Law to the Case at Hand

  1. The delimitation of the question for decision points to the decisive relevance of evidence in the case at hand.

  2. No. 1 of article 75 of the General Tax Code (General Tax Code) provides as follows:

"Declarations presented by taxpayers under the terms provided for by law are presumed to be true and in good faith, as well as the data and calculations recorded in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends."

  1. The presumption of veracity of declarations presented under the terms provided for by law applies equally to amended declarations.

  2. The said presumption does not, however, prevent the taxpayer from providing clarifications regarding their tax situation that may be requested of them by the Tax Authority's services, as generally results from no. 4 of article 59 of the General Tax Code.

  3. Unjustified failure to comply with duties of information and clarification ceases the presumption provided for in no. 1 of article 75 of the General Tax Code, by virtue of the provisions of paragraph b) of no. 2 of the same article, applying consequently the general rule on burden of proof, provided for in no. 1 of article 74, according to which "[t]he burden of proof of facts constituting the rights of the tax administration or of taxpayers rests on whoever invokes them."

  4. In the case at hand, the Claimants submitted an amended declaration, with respect to which the presumption of veracity applies.

  5. The Claimants did not limit themselves to presenting an amended Declaration, having also presented the documentation supporting such Declaration and having provided the necessary clarifications for the issuance of IRS assessment on the basis of the elements declared in the amended Declaration.

  6. The document issued by Bank F… on 21 February 2017 proves the nature and amount of the income recorded in the amended declaration, wherefore the Tax Authority should have issued the IRS assessment for 2015 on the basis of the amended Declaration presented by the Claimants.

  7. The Tax Authority subsequently, in the context of the present proceedings, in its Reply, invoked the insufficiency of the document issued by Bank F… on 21 February 2017, arguing, in line with the substance of the opinion of the International Relations Services Directorate, that it only demonstrates all income obtained by the Claimants through the said bank, not allowing one to know the totality of income obtained by the Claimants in Luxembourg or abroad, which should have been done through presentation by them of a "declaration from the tax authorities of the states of origin of their income."

  8. This requirement for negative proof of income is a new element, which did not appear in the draft decision of the administrative review, and regarding which the Claimants did not have the opportunity to pronounce themselves in the course of the prior hearing, only becoming aware of it in the course of the present proceedings.

  9. Now, as has been stated in the jurisprudence of the Supreme Administrative Court, the reasoning "must be contained in the act itself and be contemporaneous with it, therefore no relevance shall be given to a posteriori reasoning..." (Judgment of the Supreme Administrative Court of 09-09-2015, delivered in the context of proceedings no. 01173/14), wherefore this reasoning should be disregarded by the tribunal.

  10. The Tax Authority erred in disregarding the amended declaration, on the basis of which the balance of mobile capital gains recorded therein should have been taxed, by application of article 10 of the IRS Code, and in issuing the IRS assessment which resulted in the taxation as capital income, on the basis of article 5 of the IRS Code, of the amount of €549,250.20.

  11. It is thus concluded that the contested assessment suffers from illegality due to violation of articles 5 and 10 of the IRS Code and should, for this reason, be partially annulled, in accordance with article 163, no. 1, of the Code of Administrative Procedure applicable by virtue of article 29, paragraph d), of the LFTA.

  12. Pursuant to the provisions of article 53, no. 2, of the General Tax Code, the debtor who to suspend enforcement offers a bank guarantee or equivalent shall be wholly or partially compensated for the prejudice resulting from its provision, when it is verified, in judicial impugnation, that there was error attributable to the services in the assessment of the tax.

  13. In the present proceedings, there was, as stated above, error of the services in the IRS assessment of the Claimants for 2015, wherefore they have the right to be compensated for the prejudice resulting from the undue provision of such guarantee, in accordance with and for the purposes provided for in article 53 of the General Tax Code.

  14. The upholding of the arbitral request thus determines the payment of compensation to the Claimants corresponding to the totality of costs incurred to date with the constitution and provision of the bank guarantee and all costs of maintaining the bank guarantee that may be borne by the Claimants pending the arbitral proceedings until the moment of lifting of the guarantee.

DECISION

Accordingly, this Tribunal agrees to:

  • Find the request for annulment of the tacit dismissal decision to be merited and, as a consequence,

  • Partially annul, with all legal consequences, the IRS assessment no. 2016… and the respective compensatory interest assessments;

  • Recognize the right of the Claimants to compensation for the provision of an undue guarantee, in an amount corresponding to the totality of costs incurred to date with the constitution and provision of the bank guarantee and all costs of maintaining the bank guarantee borne by the Claimants pending the arbitral proceedings until the moment of lifting of the guarantee.

VALUE OF THE CASE

In accordance with the provisions of articles 306, no. 2, and 297, no. 2, of the Code of Civil Procedure, article 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process, and article 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €149,207.31 (one hundred forty-nine thousand two hundred seven euros and thirty-one cents).

COSTS

In accordance with the provisions of articles 22, no. 4, and 12, no. 2, of the Legal Framework for Arbitration, article 2, no. 1 of article 3 and nos. 1 to 4 of article 4 of the Regulations of Costs in Tax Arbitration Proceedings, as well as in Table I attached to this enactment, the total value of costs is fixed at €3,060.00 (three thousand sixty euros), to be borne by the Respondent.

Notify.

Lisbon, 21 February 2018

The Arbitrator-President

Fernanda Maçãs

The Arbitrator Member

Olívio Mota Amador

The Arbitrator Member

Paulo Nogueira da Costa

Text prepared by computer, in accordance with the provisions of article 131, no. 5, of the Code of Civil Procedure, applicable by reference from article 29, no. 1, paragraph e), of the LFTA.

[1] Replaced in their procedural position by the heirs C… and D…, as will be better analyzed in the procedural matters section.

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How are capital gains on securities (mais-valias de valores mobiliários) taxed under Portuguese IRS?
Capital gains from the disposal of securities in Portugal are taxed at a flat rate of 28% under IRS rules. The taxable amount is the actual capital gain—the difference between the realization value (sale price) and the acquisition value, minus associated costs and expenses. These gains must be declared in Anexo J of the Modelo 3 IRS return, specifically in table 9.2 for onerous disposal of shareholdings and securities. It is crucial to distinguish capital gains from capital income (dividends, interest), as capital income is reported differently and may be subject to different taxation rules. Taxpayers must report only the net gain, not the gross realization value.
Can a taxpayer request partial annulment of an IRS assessment due to a filing error in Anexo J?
Yes, taxpayers can request partial annulment of an IRS assessment when errors in Anexo J result in incorrect tax calculations. In this case, the taxpayers filed an amended return to correct the misclassification of securities gains and requested annulment of the original assessment. When the Tax Authority fails to process the correction administratively, taxpayers can challenge the assessment through administrative review or, as in this case, through CAAD arbitration under Decree-Law 10/2011. The key is demonstrating that the original declaration contained a manifest error that led to excessive taxation, and that the amended return was filed in good faith to correct the mistake.
What is the CAAD arbitration procedure for disputing an IRS capital gains tax assessment in Portugal?
CAAD (Centro de Arbitragem Administrativa) arbitration is governed by Decree-Law 10/2011. Taxpayers can file an arbitration request under article 2(1)(a) and articles 10 et seq. of the Legal Framework for Tax Arbitration (RJAT). The process begins with submission of the arbitration request, which is automatically notified to the Tax Authority. An arbitral tribunal is constituted—either a single arbitrator or a collective tribunal of three arbitrators appointed by the Deontological Council if parties don't appoint their own. The tribunal must be constituted within specific timeframes, and once formed, it has jurisdiction to hear and decide the dispute, including ruling on assessment annulments and compensation claims.
Are taxpayers entitled to compensation for an undue bank guarantee provided during a tax dispute?
Yes, Portuguese law recognizes the right to compensation for costs incurred from providing bank guarantees when tax assessments are later annulled or deemed unlawful. In this case, the taxpayers specifically requested recognition of the right to compensation for the provision of undue bank guarantee, claiming costs of €6,812.61 plus ongoing quarterly commissions. When taxpayers are forced to provide guarantees to suspend tax enforcement proceedings based on erroneous assessments, and those assessments are subsequently overturned through arbitration or court proceedings, they can claim reimbursement of guarantee costs, interest charges, and related expenses as damages resulting from the Tax Authority's unlawful action.
How should foreign-source capital gains from securities be declared on the Portuguese IRS Modelo 3 return?
Foreign-source capital gains from securities must be declared in Anexo J of the Modelo 3 IRS return. The specific error in this case involved misclassifying gains in table 8 when they should have been declared in table 9.2 (onerous disposal of shareholdings and other securities). Taxpayers must carefully identify: (1) the realization value from the sale; (2) the acquisition value and date; (3) costs and expenses associated with acquisition and disposal; and (4) the resulting capital gain. Foreign-source gains may require additional documentation from foreign banks or financial institutions detailing all transactions, and taxpayers must apply the correct Portuguese tax rate (typically 28%) to the net gain, not the gross realization value.