Process: 402/2014-T

Date: January 28, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 402/2014-T addresses whether the Portuguese Tax Authority can retroactively apply Law 15/2010 to capital gains on shares. The taxpayer challenged an additional IRS assessment of €1,288.59 for fiscal year 2010, arguing the shares were acquired in 2009 under a settlement agreement, making the 2010 assessment time-barred. The central legal dispute concerns the nature of the capital gains taxable event: the taxpayer contends it is instantaneous (occurring at the moment of alienation), while the Tax Authority argues it is a complex successive event that materializes on December 31 of each year. The taxpayer asserted that Law 15/2010, which repealed the exemption for shares held over 12 months and entered into force on July 27, 2010, was retroactively applied to gains realized before its effective date, violating Article 12 of the General Tax Law. Under the previous regime, the taxpayer would have been exempt from taxation. The Tax Authority countered that IRS is an annual periodic tax, with the taxable event being the positive balance of capital gains and losses for the entire year, not individual transactions. Since no transitional rules were established, the Authority argued that all capital gains realized in 2010 should be subject to the new regime. Alternatively, the taxpayer argued that even if Law 15/2010 applies, the rate should be 10% (for micro and small enterprises) rather than 20%, criticizing the Tax Authority's requirement for IAPMEI certification. This case highlights fundamental questions about temporal application of tax law and the characterization of capital gains taxation in Portuguese tax jurisprudence.

Full Decision

ARBITRATION DECISION

The Arbitrator, Henrique Nogueira Nunes, appointed by the Ethical Council of the Administrative Arbitration Centre ("CAAD") to form the Single Arbitrator Tribunal, renders the following decision:

  1. REPORT

1.1. A, with tax identification number … (hereinafter abbreviated as "Claimant"), requested the establishment of an Arbitration Tribunal under article 2, no. 1, subsection a) of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

1.2. The request for arbitration concerns the declaration of illegality of the additional personal income tax assessment no. 2014…, for the fiscal year 2010, which resulted in tax and default interest payable in the amount of € 1,288.59.

1.3. The request for establishment of the Arbitration Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "TCA") on 29 May 2014, and the Arbitrator mentioned above was appointed to the Single Arbitrator Tribunal, who accepted the appointment.

1.4. On 15 July 2014, the parties were duly notified of this appointment, and neither expressed any intention to refuse the appointment of the Arbitrators, in accordance with the combined provisions of article 11, no. 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

1.5. The Arbitration Tribunal was constituted on 30 July 2014.

1.6. To support its request, the Claimant alleges, in summary, the following:

(i) That it was established that possession of the shares occurred on 13.3.2009, based on clause 3 of the settlement agreement attached to the proceedings, and therefore the transfer should not be considered with reference to the fiscal year 2010, but rather to the fiscal year 2009, and that, considering that the assessment occurred in the fiscal year 2010, this results in the expiration of the right to assess.

(ii) It holds that, in this case, retroactive application occurred by the Respondent of the amendments to the Personal Income Tax Code introduced by Law no. 15/2010, of 26 July.

(iii) And that in the case of capital gains from equity participations, where the tax event is their onerous alienation, one is not faced with a complex tax event, of successive formation over a year, but rather with an instantaneous tax event.

(iv) It argues that the tax event that gave rise to the tax in question in the proceedings is exhausted in the realization of the capital gain.

(v) And that to this understanding, which it supports, the circumstance that the "balance struck between capital gains and losses realized in the same year" is taxed does not present an obstacle, since what is at issue in article 43, no. 1 of the Personal Income Tax Code is, alongside the rules governing the determination of the gain subject to tax, the determination of taxable income as it relates to income resulting from capital gains.

(vi) It holds that in the case of the taxation of capital gains, one is faced with a tax obligation with a single component, affecting operations that occur and are exhausted instantaneously, without prejudice to the taxable income being determined annually.

(vii) And that Law no. 15/2010, of 26 July, which entered into force on the day following its publication, and which resulted in the repeal of article 10, no. 2 of the Personal Income Tax Code, did not establish any specific rule intended to govern its application over time, and therefore states that attention must be paid to the general rules provided for in article 12 of the General Tax Law, since Law no. 15/2010, of 26 July was not intended to apply retroactively.

(viii) It considers that the tax event occurs on the date of realization of the capital gain, that is, at the moment of its alienation, by application of the provisions of article 12, no. 1 of the General Tax Law, and the capital gains whose taxation is sought in the proceedings are illegal, as it argues that the application of the new law to tax events of an instantaneous nature, already fully formed, prior to its date of entry into force, constitutes a retroactive application of the law, in this case, authentic retroactivity.

(ix) It therefore alleges that the additional assessment of tax and default interest in question in the proceedings is illegal by retroactive application of Law no. 15/2010, of 26 July, and that under the previous law, it was exempt from taxation by virtue of the holding of the shares for more than 12 months.

(x) It notes that even if the application of Law no. 15/2010 is considered legal, which it admits only for academic purposes, the applicable Personal Income Tax rate would not be 20% but rather 10%.

(xi) And that the Respondent excluded the application of that 10% rate, with the following reasoning: "In the context of verification of the conditions for the application of the provisions of no. 3 of article 43 of the Personal Income Tax Code, micro and small enterprises are understood to be the entities defined in accordance with the annex to Decree-Law 372/2007 of 6/11 and certified as such by IAPMEI, IP. Consulting the certification of this entity on the IAPMEI website, it was found that there is no registered certification…".

(xii) Arguing that to benefit from the tax exclusion provided for in that rule, the holder of capital gains obtained from the alienation of equity participations in micro and small enterprises does not need to produce the certification issued in accordance with Decree-Law 372/2007, and that it is not incumbent upon him to demonstrate and prove the status of a micro or small enterprise, as tax disputes are disputes of mere annulment and not constitutive of tax effects, and it therefore falls to the taxpayer only to demonstrate the error in the factual or legal assumptions considered by the administration that the act may suffer.

(xiii) On these grounds, it requests that its petition be upheld, and the tax and default interest paid be reimbursed plus the respective indemnity interest.

1.7. The TCA replied, arguing that the request should be judged unfounded, alleging, in summary, as follows:

(i) That neither the promise contract nor the settlement agreement constitute sufficient proof that the said shares came to be at the disposal of the promised buyer with the signing of the promise contract.

(ii) And that the transfer of the shares occurred in 2010 with the execution of the definitive contract.

(iii) Therefore, it argues, the alleged defect of expiration of the right to assess does not proceed.

(iv) With regard to the retroactive application of tax legislation, it states that Law no. 15/2010, of 26 July, which repealed the previous regime of exemption from taxation relating to shares held for more than 12 months, did not create any transitional rules that would safeguard possible tax events still in formation.

(v) And that the legislator, in not establishing any transitional rules that would safeguard the taxation of tax events in formation, expressly intended that situations of realization of capital gains during the year 2010, from which a positive balance resulted, be subject to effective taxation, regardless of the date of their realization.

(vi) As the income in question in the proceedings constitutes one of the categories of income that comprise the real or objective scope of the personal income tax (PIT), this being a direct and periodic annual tax.

(vii) And as defended by the generality of doctrine, the tax event occurs on 31 December of each year, and only thus is understood the unitary and global character of income taxation, although there is an analytical breakdown of the various categories of income according to their source.

(viii) It alleges that the tax event is not the gain resulting from the alienation, but the positive balance struck in a given taxation period between capital gains and losses realized.

(ix) It does not agree that the tax event, in the case of the present proceedings, is the alienation of the shares that gave rise to the taxed capital gains, as it argues that such distorts the annual character of the tax and violates its unitary character, a basic and structuring principle of the Income Taxation Reform carried out by the legislator in 1989.

(x) Accordingly, it holds that the disputed assessment does not violate no. 2 of article 12 of the General Tax Law, as it did not apply Law 15/2010, of 26 July, to a fact occurring before its entry into force, but rather to a tax event – the positive balance struck for that year 2010 – an event that occurs after its entry into force.

(xi) It concludes by stating that the value of the income subject to capital gains is that corresponding to the balance struck between capital gains and losses realized in the same year, as provided for in article 43 of the Personal Income Tax Code, and the tax event subject to tax is only complete on the last day of the taxation period.

(xii) With regard to the alleged lack of certification as a micro and small enterprise issued by IAPMEI, it states that it would have been incumbent upon the Claimant to prove compliance with the material requirements set out in the Annex to Decree-Law 372/2007, of 06/11 – requirements relating to the number of employees and financial thresholds, proof which, in accordance with no. 1 of article 74 of the General Tax Law, it understands is incumbent upon the Claimant.

(xiii) And that the Claimant refrains from presenting any document or even making any reference to the number of employees and the annual volume of business.

(xiv) It concludes, requesting the complete rejection of the arbitration petition.

1.8. The Tribunal waived the holding of the first meeting of the Arbitration Tribunal by Arbitration Order entered into the procedural system on 12/11/2014, considering that the proceedings already contain the facts necessary and sufficient to decide on the law, which was not opposed by the parties. No exceptions were identified, and the presentation of arguments was likewise waived, considering that both parties had substantiated their positions. The rendering of the arbitration decision was set until the end of the 6-month period.

1.9. The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2 of the RJAT.

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

2.1. No procedural nullities were identified, nor exceptions, and there is no obstacle to appreciation of the merits of the case.

  1. ISSUES FOR DECISION

In the arbitration petition, the Claimant submits the following issues:

  1. Did the tax event – alienation of shares – occur or not in the year 2009, with the execution of the promise contract for the purchase and sale of shares dated 13/03/2009, thus operating the expiration of the right to assess?

  2. Will the application of Law no. 15/2010, of 26/07, to the case sub judice constitute a situation of retroactivity of the tax law, generating the voidability of the assessment in question in the proceedings?

  3. Did the commercial company whose equity participations were alienated meet the legal requirements to be considered a micro and small enterprise, thereby resulting in the application in this case of a Personal Income Tax rate of 10% instead of the applied rate of 20%?

  4. MATERIAL FACTS

With relevance for the appreciation and decision on the merits, the following facts are established as proven:

A) The Claimant, jointly with other persons, held the shares representing the share capital of company B SA, with registered office in Rua …Vila Real de Santo António, with fully paid-up share capital of €55,100.00 (fifty-five thousand one hundred euros), divided into 5,510,000 (five million five hundred and ten thousand) shares with a nominal value of €0.01 (one cent) each, Legal Person …, registered in the Commercial Register Office of Vila Real de Santo António under number … (cf. Share Purchase and Sale Agreement attached to the proceedings).

B) The Respondent, following an internal inspection procedure of the Claimant, with Service Order no. OI2014…, of partial scope in the Personal Income Tax sphere, dated 18/02/2014, made an arithmetic correction in the Personal Income Tax sphere, with reference to the fiscal year 2010, in the amount of €3,320.15, corresponding to a capital gain generated by the alienation of shares, resulting from the difference between the realization value of € 3,920.15, and the acquisition value of €100.00 (after applying the reduction of €500.00, provided for in article 72 of the Tax Benefits Statute) – cf. Proceedings attached.

C) Company C E.M. S.A., holder of NIPC …, acquired on 12/03/2010 from the Claimant 10,000 shares of company B, SA for the amount of € 3,920.15. (cf. Proceedings attached).

D) Company C E.M. S.A, purchaser of the shares in question in the proceedings, made electronic delivery of a Model 4 Declaration on 26/03/2010, confirming the acquisition of 10,000 shares from the Claimant on 12/03/2010. (cf. Proceedings attached).

E) The Claimant was notified of the Tax Inspection Report by letter dated 17/03/2014, and exercised the Right to be Heard (cf. Proceedings attached).

F) The Claimant was notified of the Final Tax Inspection Report on 16/04/2014.

G) The Claimant filed a court action in the Judicial Court of Vila Real de Santo António, which, within the scope of Judicial Case no. 445/11.0TBVRS, resulted in a Settlement Agreement, serving as an amendment to the Definitive Share Purchase and Sale Agreement, as regards the payment of the purchase price of the shares in that contract (cf. Proceedings attached).

H) The transfer of the shares occurred on 12/03/2010, with the execution of the definitive contract attached to the proceedings (cf. Proceedings attached).

I) The acquisition value of the shares in question in the proceedings was set at € 0.01 per share and the alienation cost of the same was set at € 3,920.15 (cf. Proceedings and definitive contract for the purchase and sale of shares attached).

J) The Claimant did not declare in the Annual Model 3 Declaration, in annex G, for the year 2010, the alienation of the shares in question in the proceedings (cf. Proceedings attached).

  1. UNPROVEN FACTS

It was not conclusively proven that possession of the shares in question occurred on the date of signing of a promise contract dated 13/03/2009, which, moreover, neither party attached to the proceedings, as the settlement agreement attached to the proceedings, which serves as an amendment to the definitive share purchase and sale agreement executed on 12/03/2010, merely alters, in strict terms, the method of payment of the price of the shares acquired and titled in that contract, and, on the other hand, clause 3 of the definitive share purchase and sale agreement attached to the proceedings attests that: "With the execution of this contract the transfer of the shares is effected" – having the same been signed by all parties involved in that contract, and the Claimant not having produced any evidence in the proceedings capable of forming the conviction of the Tribunal that possession of the shares by the acquiring company, with all the rights inherent therein, occurred effectively in the fiscal year 2009.

Moreover, it must be noted that the Claimant did not attach any type of document with its arbitration petition.

Therefore, in light of the evidence produced in the proceedings, it is the conviction of this Tribunal that the transfer and possession of the shares occurred on 12/03/2010 with the execution of the definitive share purchase and sale agreement.

In effect, the Tribunal holds that the settlement agreement attached to the proceedings does not constitute sufficient proof that the shares in question came to be at the disposal of the purchaser – company C E.M. S.A., from the date of signing of the aforementioned promise contract, which, as stated, does not appear in the proceedings, considering that this type of document constitutes, in its essence, a mere declaration by the parties and, on the other hand, considering the fact established as proven that the acquiring company C E.M. S.A. itself only declared for tax purposes the acquisition of those same shares in the fiscal year 2010.

There are no other unproven facts with relevance to the decision of the case.

  1. GROUNDS FOR DECISION ON THE MATERIAL FACTS

As regards the essential facts, the settled matters are conformed in identical form by both parties and the Tribunal's conviction was formed on the basis of the documentary evidence attached to the proceedings and discriminated above, whose authenticity and veracity was not questioned by any of the parties.

  1. ON THE LAW

In accordance with the issues enunciated, which appear in point no. 2 of this Decision, and taking into account the material facts established in point no. 3, it is now important to determine the applicable law.

As the Claimant did not establish any priority (other than of an argumentative nature) among those issues it submitted for judgment, it will be necessary to address first the defect whose establishment would, according to the sound discretion of the judge, provide more stable or effective protection of the violated interests, as prescribed in no. 2 of article 124 of the Code of Tax Procedure.

Accordingly, one will begin by analyzing the first of the issues put before the Tribunal, as, if it is upheld, the Claimant will immediately obtain more effective and stable protection of its interests.

Considering that it was not established as proven by the Tribunal that possession of the shares occurred in the year 2009, the request for declaration of the expiration of the additional assessment in question in the proceedings is dismissed, without need for further considerations.

It is to be noted that the additional Personal Income Tax assessment in question in the proceedings was not attached by any of the parties, and the Tribunal did not succeed in determining whether the same would have actually occurred in the year 2014, but, considering that neither party raised such question, it is considered that the same would have been effectively notified to the Claimant in the year 2014.

Entering into the appreciation of the second of the issues put before this Tribunal, it is important to note that the issue in question here has already been subject to judicial treatment, both in administrative and tax courts and in arbitration tribunals, and in this regard, reference may be made to the Decisions of the Supreme Administrative Court rendered in cases no. 01582/13, of 04/12/2013 and 01078/12, of 08/01/2014, available at www.dgsi.pt, which exhaustively appreciated the issue of the application of the amendments introduced to the tax regime for movable capital gains by Law no. 15/2010, of 26 July, as well as, at the arbitration level, already on this same issue the decision in case 25/2011-T available at http://www.caad.org.pt/jurisprudencia/jurisprudencia-tributaria

It would be tedious and pointless to reproduce here verbatim the arguments set out in the judicial and arbitration decisions indicated, which decided an issue entirely analogous to that which occupies us in the present proceedings.

In effect, the Supreme Administrative Court pronounced itself as to the taxation of movable capital gains, in the scope of Personal Income Tax, resulting from the amendments that occurred through Law no. 15/2010, of 26 July, in the sense, which we subscribe to, that the legislative amendments that occurred in the middle of that year 2010 only apply to capital gains realized after the entry into force of Law no. 15/2010, of 26 July.

The Supreme Administrative Court held in the decisions identified above, in which we concur, that the relevant moment in the taxation of movable capital gains for the determination of the applicable law is that of alienation, of the transaction individually considered, even though the tax is only calculated at the end of each taxation year.

Accordingly, and because Law no. 15/2010, of 26 July, did not provide any rules regarding its application over time, this could only apply to future facts, that is, to alienations of movable assets occurring at a moment after its entry into force, that is, from 27 July 2010 onwards.

In this manner, the Tribunal cannot endorse the understanding that the Respondent makes in the proceedings of applying the new legislation to capital gains realized during the course of the year 2010, regardless of the date of alienation of the assets, by understanding that the (tax) event subject to tax is the positive balance, verified at the end of the year, between capital gains and losses, and not the concrete operations occurring on the date of alienation.

This Tribunal understands, in line with the decisions identified above, that the application that the TCA makes of Law no. 15/2010, of 26 July, is illegal, due to the erroneous interpretation it made of the rules, in particular article 12 of the General Tax Law, and the principles governing the application of tax law over time.

In this case, it was established as proven that the alienation of the shares would have occurred on 12/03/2010 with the execution of the definitive share purchase and sale agreement, on a date, therefore, prior to the entry into force of Law no. 15/2010, of 26 July, and therefore it is concluded that, as the Claimant obtained the taxable capital gain resulting from the alienation of shares on a date prior to the entry into force of this Law, such gains cannot be taxed in the Personal Income Tax sphere, by virtue of the exclusion of the incidence of Personal Income Tax on capital gains from the alienation of shares held for a period exceeding 12 months provided for in subsection a) of no. 2 of article 10 of the Personal Income Tax Code, applicable, therefore, to the case sub judice.

In these terms, to the extent that the TCA makes a non-compliant application of the amendments to the Personal Income Tax Code produced by Law no. 15/2010, of 26 July, to the case sub judice, the disputed assessment must be annulled, and thus the petition proceeds.

The upholding of the invalidity in question, conferring safe and effective protection of the interests of the Claimant, prejudices the addressing of the third issue raised, mentioned above, for which reason the addressing of the same will not proceed.

It is to be noted that the Claimant does not attach to the proceedings proof of payment of the tax and default interest officially assessed, and therefore the reimbursement of these amounts is conditioned upon the presentation by the Claimant to the Respondent of the respective proof of payment.

7 – DECISION

In accordance with the above, it is decided:

· To uphold the petition of the Claimant, declaring the illegality of the official assessment of Personal Income Tax no. 2014 …, for the fiscal year 2010, which resulted in tax and default interest payable in the amount of € 1,288.59, for the defect of breach of law;

· To condemn the Respondent to the reimbursement of the amount of € 1,288.59, conditioned upon the presentation by the Claimant of the respective proof of payment;

· To condemn the Respondent to the payment of indemnity interest, at the legal rate, counted from the date of payment of the tax by the Claimant until the date of full reimbursement thereof;

· To further condemn the Respondent to pay the costs of this proceeding.

The value of the case is set at € 1,288.59 (one thousand two hundred and eighty-eight euros and fifty-nine cents) in accordance with the provisions of article 97-A, no. 1, subsection a), of the Code of Tax Procedure, applicable by virtue of subsections a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The arbitration fee is set at € 306.00 (three hundred and six euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), to be paid in full by the Respondent, in accordance with article 22, no. 4, of the RJAT.

Notify.

Lisbon, Administrative Arbitration Centre, 28 January 2015

The Arbitrator

Henrique Nogueira Nunes

Document prepared by computer in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, subsection e) of Decree-Law no. 10/2011, of 20 January. The composition of this arbitration decision is governed by the spelling prior to the 1990 Orthographic Agreement.

Frequently Asked Questions

Automatically Created

Can the Portuguese Tax Authority retroactively apply Law 15/2010 to tax capital gains on shares realized before its entry into force?
The retroactive application of Law 15/2010 to capital gains depends on whether the taxable event is characterized as instantaneous or complex. The taxpayer argued that applying Law 15/2010 (effective July 27, 2010) to shares alienated before this date constitutes authentic retroactivity prohibited under Article 12 of the General Tax Law, as capital gains represent instantaneous tax events occurring at alienation. The Tax Authority contended that no retroactivity exists because IRS is an annual tax with the taxable event materializing on December 31, and Law 15/2010 established no transitional rules, indicating legislative intent to tax all 2010 capital gains under the new regime regardless of realization date.
When does the taxable event occur for capital gains on the sale of shares under the Portuguese IRS Code?
The timing of the taxable event for capital gains on shares is contested in Portuguese tax law. The taxpayer's position treats capital gains as instantaneous taxable events occurring at the moment of onerous alienation under Article 10 of the IRS Code, with annual determination of taxable income being merely a measurement rule. The Tax Authority maintains that IRS, as a direct periodic annual tax, has its taxable event occur on December 31 of each year, representing the positive balance of capital gains and losses realized during the entire fiscal period. This latter view emphasizes the unitary and global character of income taxation, despite analytical breakdown by income categories.
What is the statute of limitations for IRS tax assessments on capital gains from securities in Portugal?
The statute of limitations for IRS assessments on capital gains depends on when possession and transfer of shares occurred. Under Portuguese law, the Tax Authority generally has four years from the end of the fiscal year to assess additional tax. The taxpayer argued that shares came into possession on March 13, 2009 based on a settlement agreement, meaning any gains should relate to fiscal year 2009, making a 2010 assessment time-barred. The Tax Authority countered that actual transfer occurred in 2010 with execution of the definitive contract, not the preliminary agreement, meaning the assessment was timely. The distinction between promise contracts and definitive transfers is critical for determining when the limitation period begins.
How does CAAD arbitration handle disputes over additional IRS tax assessments on share capital gains?
CAAD arbitration tribunals handle IRS capital gains disputes through single arbitrator panels appointed under Decree-Law 10/2011. The arbitration process involves: (1) taxpayer filing a request challenging the tax assessment; (2) automatic notification to the Tax Authority; (3) appointment of an arbitrator by CAAD's Ethical Council; (4) opportunity for parties to refuse the appointment; (5) constitution of the tribunal; (6) written submissions from both parties; and (7) issuance of a binding decision. In capital gains cases, typical issues include retroactive application of tax law changes, characterization of taxable events, applicable rates, and exemptions. Taxpayers in annulment disputes must demonstrate errors in factual or legal assumptions underlying the Tax Authority's assessment.
Is the capital gain on shares an instantaneous taxable event or a complex successive tax fact under Portuguese tax law?
Portuguese tax law treats capital gains taxation differently depending on perspective. The taxpayer position views capital gains as instantaneous taxable events that occur and are exhausted at the moment of onerous alienation, with annual determination of taxable income being merely a quantification rule under Article 43(1) of the IRS Code. The Tax Authority position characterizes capital gains as part of a complex successive tax event, given that IRS is a direct periodic annual tax where the taxable event materializes on December 31, representing the net balance of all gains and losses during the year. This debate has significant implications for temporal application of tax law, as instantaneous events completed before new legislation takes effect would be protected from retroactive taxation under Article 12 of the General Tax Law, while complex successive events forming throughout the year would be subject to the law in force at year-end.