Process: 415/2018-T

Date: March 8, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 415/2018-T) addresses IRC corrections following the sale of real property below its patrimonial tax value (Valor Patrimonial Tributário - VPT). The Tax Authority (AT) issued an IRC assessment of €406,953.52 after detecting a €1,667,795.38 divergence between the VPT and the contractually declared sale price of €2,100,000.00. The taxpayer challenged the assessment, arguing it had submitted evidence proving the actual transaction price during the inspection procedure and that AT violated good faith principles by requesting additional information 18 months later without previously indicating insufficiency of evidence. AT contended the taxpayer confused two distinct procedures: the external confirmation procedure under Article 31-B CIRC and the internal inspection procedure. Critically, AT argued the challenge was inadmissible because the taxpayer failed to initiate the formal price-proof procedure required under Article 139(3) CIRC during January following the transfer, making this a mandatory prerequisite for challengeability under Article 139(7). The arbitration court focused on whether the taxpayer's failure to follow the specific statutory price-proof mechanism constituted a fatal procedural defect. This case highlights the importance of strict compliance with Article 139 CIRC procedures when property sales occur below VPT, emphasizing that informal evidence submission during inspection does not substitute the formal price-proof request that must be filed with the Finance Director within the specified timeframe. The decision clarifies that Article 139(7) establishes a genuine admissibility requirement, not merely a procedural formality.

Full Decision

ARBITRATION DECISION

The arbitrators Fernanda Maçãs (President-arbitrator), Arlindo José Francisco and Miguel Patrício (Member-arbitrators), designated by the Ethics Council of CAAD to form the Arbitration Court, hereby agree as follows:

I. Report

  1. A... Ltd., with Tax Identification Number ..., headquartered in ..., ..., ..., ..., within the jurisdiction of the Finance Service of ..., filed a request for arbitration pronouncement, pursuant to the provisions of paragraph a) of paragraph 1 of article 2, paragraph 1 of article 3, and paragraph a) of paragraph 1 of article 10, all of the RJAT, with ATA as the Respondent, against the Corporate Income Tax (IRC) assessment no. 2018..., in the amount of € 406,953.52, which amount includes € 12,702.44 in compensatory interest, relating to the correction made by the inspection services of the Respondent, as a consequence of the sale of real property below the MV, whose annulment the Claimant seeks, considering it to be in violation of law, for errors in factual and legal assumptions, embodied in the violation of principles set forth in article 6 of RCPITA, articles 55 and 58 of the LGT, paragraph a) of article 69 of CPPT, article 104 of CPA, and article 266 of the Constitution of the Portuguese Republic.

  2. The request was filed without exercing the option of designating an arbitrator, and was accepted by the Honorable President of CAAD on 31/08/2018 and notified to ATA on the same date.

  3. Pursuant to the provisions of paragraph 2, paragraph a) of article 6 of the RJAT, by decision of the Honorable President of the Ethics Council, duly communicated to the parties, within the legally applicable periods, on 18/10/2018, arbitrators of the collective court were designated, with Counselor Maria Fernanda dos Santos Maçãs as President and Professor Doctor Miguel Patrício and graduate Arlindo José Francisco as auxiliary arbitrators, who communicated acceptance of the appointment within the legally established period.

  4. The court was constituted on 08/11/2018 in accordance with the provisions contained in paragraph c) of paragraph 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of December 31.

  5. With its request, the Claimant seeks the annulment of the assessment already identified, considering it illegal, for the reasons already mentioned.

5.1. In summary, it supports its point of view by asserting that the contractually established value of the real property transferred was lower than its MV, thus the correction made by ATA does not apply.

5.2. Article 139 of CIRC gives the taxpayer the possibility to provide such proof to ATA during January of the year following the transfer, which may be done by any means, including evidence of bank transfers, photocopies of checks, with all statements made being presumed true, as well as the data and findings of its accounting.

5.3. In the various requests and communications it made in due time, it demonstrated that the sale price of the real property was € 2,100,000.00, with the SIT having knowledge of such evidence and communications without ever pronouncing themselves on its insufficiency.

5.4. Coming a year and a half after the taxpayer's last request, requesting additional information and clarifications and considering that the possibility of providing such proof was not exercised, is, in its view, a manifest violation of the principle of good faith, discovery of material truth and the inquisitorial principle within the scope of the inspection procedure.

5.5. Finally, the Claimant considers that ATA cannot assert that it had no knowledge of the transaction and the evidence, and before proceeding with corrections, could have requested further information from the Taxpayer to dispel any doubts about the price practiced being lower than the MV, concluding for the annulment of the assessment in question, for violation of law in the terms already set forth.

  1. In turn, ATA considers that the Claimant confuses two procedures: the external procedure for, pursuant to article 31-B of CIRC, confirming the physical withdrawal, dismantling, abandonment, or unusability of movable assets that were part of the alienated real property, with the internal inspection procedure that detected a positive divergence between the definitive MV and the value contained in the property transfer contract in question.

6.1. What is at issue here is the internal procedure that detected this divergence and notified the Claimant to, pursuant to article 59 of the LGT and articles 28 and 29 of RCPITA, explain the reason for the non-increase in box 07 of form 22 of 2016 of the difference detected between the MV and the value of the property transfer contract, which is € 1,667,795.38, with the Claimant having replied outside the deadline, which did not prevent ATA from having considered the arguments presented in its final decision.

6.2. Also, the Claimant neither requested nor proved to have requested from the Director of Finance of ..., the procedure for proving the price effectively practiced in the property transfer, as provided in article 139 of CIRC, nor attached documents that would authorize access to its bank information and that of its managers or administrators.

6.3. This price proof procedure that the Claimant should have initiated in January 2017 is a condition of challengeability of the assessment resulting from the corrections, as provided in paragraph 7 of article 139 of CIRC, therefore the present challenge is inadmissible, since it lacks an essential prerequisite, the request for initiation of the price proof procedure.

6.4. The documents attached had a different purpose from that which the Claimant should have pursued pursuant to article 139 of CIRC to which it was obligated, therefore the additional IRC correction at issue here should be maintained, and the Respondent should be absolved from the request.

II. Preliminary Ruling

The court was regularly constituted, the parties have legal personality and capacity, demonstrate themselves to be legitimate and are regularly represented in accordance with articles 4 and 10, paragraph 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of March 22.

Upon receipt of the Respondent's reply, the Court issued, on 10/12/2018, the following order:

"Notify the Taxpayer to, within 10 days, specify the articles referring to factual aspects regarding which it intends to produce testimonial evidence that are not susceptible to documentary proof.

Notify both parties of this order."

After the deadline expired, nothing was stated by the parties.

In the Respondent's reply, the inadmissibility of the present challenge is alleged, given that the Claimant did not use the procedure provided for in paragraph 3 of article 139 of CIRC, which is a condition of challengeability pursuant to paragraph 7 of the aforementioned article.

The proceedings being free of voidness, it remains to decide.

III. Legal Reasoning

III.1. The questions to be resolved, with interest for the case, are as follows:

a) To assess the question of inadmissibility of challenge raised by the Respondent in its reply.

b) In the event of rejection of this question, to declare whether the IRC assessment 2018... suffers from defects of violation of law, for errors in factual and legal assumptions, embodied in the violation of principles set forth in article 6 of RCPITA, articles 55 and 58 of the LGT, paragraph a) of article 69 of CPPT, article 104 of CPA and article 266 of the Constitution of the Portuguese Republic, from the perspective of the Claimant, with the consequent annulment, or if, on the contrary, as the Respondent contends, it should be maintained in the legal system.

III.2. Factual Findings

The following facts are considered proven:

A. The claimant seeks the annulment of the IRC assessment 2018..., in the amount of € 406,953.52, which includes € 12,702.44 in compensatory interest.

B. The claimant engages in the activity of manufacturing other electrical and electronic wires and cables, CAE 027320, and in 2016 is the owner of real property used for warehousing and industrial activity, registered in the property register under article ... of the parish of ..., municipality of ... .

C. By deed of purchase and sale dated 03/10/2016, it alienated the aforementioned real property for the value of € 2,100,000.00, value that was paid as follows:

  • On 09/03/2016, as a down payment € 420,000.00, by check from B....
  • On the date of the deed, on 03/10/2016, the remaining € 1,680,000.00 by check from the same bank.

D. The Claimant proceeded with the respective bank and accounting movements.

E. The MV of the real property in 2016, the year of alienation, was € 3,767,795.38.

F. The now-Respondent had proceeded with the abandonment of the facilities – a fact that it communicated to the Finance Directorate of ... on 17 May 2016, with the competent certificate having been issued on 29 July of the same year, signed by the financial director of the Claimant and the tax inspector in charge of verification.

G. As part of this procedure, the Claimant kept informing the tax inspection services of the various measures undertaken concerning the abandonment and sale of the real property, coming on 06/10/2016 to attach the respective copy of the deed of purchase and sale.

H. By order dated 5 January 2018, from the Finance Directorate of ..., the tax inspection services informed the Claimant of the initiation of a partial internal inspection of IRC for 2016, as per OI2017....

I. In the aforementioned order, the Claimant was asked to justify, within 10 days, the reason for the non-increase in the difference between the MV of the real property and the value of the alienation contained in the deed of purchase and sale, in the amount of € 1,667,795.38, in box 745 of the respective IRC form 22, given that it also did not use the mechanism legally provided for in paragraph 3 of article 139 of CIRC, under penalty of committing the infractions provided in article 117 of RGITA.

J. The Claimant responded to the request with a reply in which it sustains that ATA came to be informed of all facts related to the abandonment and alienation of the real property in question and is available for ATA to access all of its bank information.

L. ATA did not accept the Claimant's point of view and sustains that it did not demonstrate having initiated, during January 2017, the procedure for demonstrating proof that the alienation price was lower than the MV, as article 139 of CIRC allows it, proceeding with the assessment at issue here.

III.2. Unproven Facts and Reasoning for the Establishment of Factual Findings

The facts given as proven are the facts that the Court considers relevant and that are supported by documentary evidence joined to the proceedings as well as by administrative procedures that the parties do not dispute, not considering as unproven any factuality of interest for the decision.

III.3. Legal Reasoning

The Respondent argues, in its reply, that "the present challenge of the assessment is inadmissible insofar as it lacks an essential prerequisite, that is, [the] request for initiation of the procedure for proof of the effective price of the real property to which the provisions of articles 91 and 92 of the LGT would be applicable."

Since this is a question that, if considered well-founded, makes it impossible to assess the additional IRC assessment 2018... on the grounds that were alleged by the Claimant, it is necessary to assess it as a priority.

Let us examine this.

The Respondent argues, in its Reply, that the demonstration of the effective price requires the performance of a prior procedure with its services, following the procedure set forth in article 139, paragraph 1, of CIRC (see points 10 and 15 of the Reply), and that, as the law attributes that competence to it, the arbitration court does not have the power to decide on the determination or proof of the effective price (point 30). It adds that the procedure in question is the appropriate means to overcome the presumption established in article 64, paragraph 2, of CIRC (point 28) and that it is regulated in article 91 of the LGT (point 30), further adding that "[the Claimant] was obligated to have presented the aforementioned request addressed to the Director of Finance with the documentation necessary for the AT to access the bank accounts of the [Claimant], its respective administrators or managers in the tax period in which the transfer occurred and in the prior tax period, which it did not do" (point 36), therefore "[these being] two cumulative conditions/prerequisites sine qua non and not having been verified, the [Claimant's] request cannot be granted" (point 37).

In accordance with the principles governing all taxation, tax law is prevented from creating irrebuttable presumptions, establishing that it is always possible to provide evidence to the contrary (see article 73 LGT). The admission of rebuttal in any situation is the way that the law establishes to guarantee the taxpayer that their taxation is based on the real value of income, ruling out values that have been presumed. It is, after all, the way to harmonize the existence of presumptions that tax law establishes with the aforementioned principles, which have, moreover, constitutional source.

Let us examine the situation in the present proceedings more closely. For onerous transfers of real rights over real property, the law establishes a presumption for cases in which the value contained in the contract is lower than the definitive MV of the real property, in the norm of article 31-A, paragraph 1, of CIRS. More specifically, this provision establishes that, in situations where the value contained in the contract is lower than the MV, this – the higher value – should be considered in the determination of taxable profit.

As already stated, this presumption is rebuttable, i.e., admits evidence to the contrary, although such evidence is not free, and must follow a certain procedure.

Indeed, the law has designed a specific regime for rebuttal of that presumption in CIRC and mandated its application by express disposition of the aforementioned article 31-A, of CIRS, albeit subject to "necessary adaptations" (see paragraph 6 of the aforementioned article 31-A). This regime is regulated in article 139, paragraphs 3 to 6, of CIRC, with these norms and, additionally, the regulations contained in articles 86, paragraph 4, 91, and 92, all of the LGT, setting forth the respective discipline. It seems, thus, clear that the law is not satisfied with general means of proof for the taxpayer to demonstrate that the effective price was lower than the MV. More than that, the law opted to create a regulated procedure to overcome the presumption, whose procedure is properly structured in the LGT and which includes the request for its opening, designation of an expert by the taxpayer, designation of an expert by ATA, the appointment of an independent expert, meeting of experts, contradictory debate between experts and decision by agreement or by the competent body (see articles 91 and 92 of the LGT).

It is well-established (and demonstrated by the factual findings proven in these proceedings) that the Claimant did not initiate such procedure – and the law is not satisfied, contrary to what the Claimant understands, with the submission of documents to ATA, nor with the expression of willingness to permit access to bank information; the law instead requires that a formal procedure be initiated, by filing a request addressed to the competent Director of Finance (art. 139, par. 3, of CIRC) and following the procedure established in articles 91, 92, and 84, paragraph 3, of the LGT, with necessary adaptations (see article 139, paragraph 6, of CIRC).

In harmony with the establishment of a specific procedure for rebutting the presumption, the law also fixed the impossibility of challenging assessments made based on the presumption of price, whenever the taxpayer has not resorted to the established procedure. This is how article 139, paragraph 7, of CIRC, subordinates the possibility of challenging the tax assessment made based on the presumption established in article 64, paragraph 2, of CIRC, or in article 31-A, paragraph 1, to the prior performance of the procedure. In other words: the taxpayer may only challenge corrective assessments made based on the presumption established in the aforementioned article 31-A, paragraph 1, of CIRS, if it has previously completed the proof procedure established in article 91 of the LGT.

The price proof procedure thus constitutes a condition of challengeability of the assessment made on the basis of the presumption of article 31-A, paragraph 1, of CIRS. Without its existence, the challenge cannot be assessed.

In the same sense, see the Supreme Administrative Court Decision rendered on 6/12/2013, in case 0989/12: "the law created a procedure in order to allow the IRC taxpayer to demonstrate that the price effectively practiced was lower than the MV [...]. That procedure 'is governed by the provisions of articles 91 and 92 of the General Tax Law, with necessary adaptations, with the provisions of paragraph 4 of article 86 of the same law equally applicable', as prescribed in paragraph 5 of the cited art. 129 [now article 139] of CIRC. [...]. Moreover, this procedure constitutes a necessary condition for opening the judicial avenue, as expressly results from paragraph 7 of art. 129 [now article 139] of CIRC, which provides: 'The judicial challenge of the tax assessment resulting from corrections made by application of the provisions of paragraph 2 of article 58-A [currently, paragraph 2 of art. 64], or, if there is no assessment, of corrections to taxable profit under the same provision, depends on prior submission of the request provided for in paragraph 3, with no reclamation being available' [...]. That is, the procedure provided for in paragraph 3 of art. 129 [now article 139] of CIRC, which aims at the demonstration by the taxpayer that the price effectively practiced was lower than the MV, constitutes a condition of procedibility of the challenge when the latter intends to discuss the price effectively practiced in transfers of real rights over real property."

In the same sense, see, also, for example, the following decision: "Since irrebuttable presumptions are not admitted in tax incidence norms – art. 73 of the LGT – the legislator established in CIRC in its article 139 a procedure for proof that the price effectively practiced in transfers of real rights over real property was lower than the taxable patrimonial value allowing rebuttal of such presumption to take place there. Such procedure is activated by the taxpayer 'by request addressed to the competent Director of Finance and submitted in January of the year following that in which the transfers occurred, if the taxable patrimonial value is already definitively fixed, or within 30 days after the date on which the appraisal became definitive, in the remaining cases'. As indicated in paragraph 5 of article 139 of CIRC, this procedure 'is governed by the provisions of articles 91 and 92 of the General Tax Law, with necessary adaptations, with the provisions of paragraph 4 of article 86 of the same law equally applicable', constituting a true legal equivalence with the procedure of the request for review of the taxable matter fixed by indirect methods, thus allowing that in the process of challenging the assessment act (or the correction act of taxable profit from which no assessment results) both the illegalities of that act and all illegalities verified throughout the procedure may be discussed, save in the case of having reached a value by agreement between experts.

Pursuant to the provisions of paragraph 7 of art. 130 of CIRC the existence of this procedure constitutes a necessary condition for opening the judicial avenue, that is, it is a condition of procedibility of the challenge when the latter intends to discuss the price effectively practiced in transfers of real rights over real property." (Supreme Administrative Court Decision rendered on 9/3/2016, in proc. 0820/15).

See, also, with relevance for the present case, the following excerpt from the Collective Arbitration Decision rendered on 25/10/2018 (case no. 89/2018-T): "the institution of the procedure provided for in art. 139 of CPC is the legal form of rebutting the presumption enshrined in art. 64/2 of the same Code. Such procedure is a guarantee of the conformity of this presumption with the provisions of art. 73 of the LGT, insofar as it provides those interested parties with an appropriate and sufficient means to, feeling harmed by the presumption in question, demonstrate, without the need for a specific procedure, the lack of adherence to reality of the fact presumed by it. The aforementioned procedure, provided for in art. 139 of CPC, is a potestative right of the taxpayer that, within the established deadline, may submit their request for it to be carried out, imposing itself, the performance of the same, under the legal terms, on the AT. From this finding, it is immediately derived that, contrary to what the Claimant appears to understand, the AT does not have to provide the taxpayer with the possibility of presenting proof of the effective price. Rather, the AT is a passive party to the obligation corresponding to the aforementioned potestative right of the taxpayer, being obligated to perform, under the legal terms, the aforementioned procedure, as soon as it is urged to do so, within deadline, by the taxpayer. In this way, within the applicable legal framework, no notification or interpellation of the AT is legally necessary or required, for the taxpayer to effect proof of the effective price. Rather, it is the taxpayer that, in view of the presumption of art. 64/2 of CIRC – which it should know (cf. art. 6 of the Civil Code) – is burdened with the onus of urging the AT to perform the aforementioned procedure, by submitting the corresponding request." (italics ours).

It shall thus be necessary to absolve the AT from the instance (see art. 278, paragraph 1, paragraph e), of CPC, per force of art. 29, paragraph 1, paragraph e), of RJAT) from the request for annulment of the additional IRC assessment with the aforementioned ground, relating to the erroneous value attributed to income (resulting from the alienation of the property in question). And the assessment of the respective compensatory interest assessment is also prejudiced, given the dependency that this has on the assessment of that tax.

IV. DECISION

In view of the above, it is decided:

a) To absolve the AT from the instance as to the request for annulment of the additional IRC assessment on the grounds of the alleged erroneous value attributed to income.

b) To declare the request for annulment of the compensatory interest assessment to be prejudiced, in view of the preceding decision.

V. Case Value

The case value is set at €406,953.52 (four hundred and six thousand nine hundred and fifty-three euros and fifty-two cents), pursuant to the provisions of article 32 of CPTA and article 97-A of CPPT, applicable by force of the provisions in article 29, paragraph 1, paragraphs a) and b), of RJAT, and article 3, paragraph 2, of the Regulations for Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

Pursuant to Table I attached to RCPAT, costs are in the amount of €6,732.00 (six thousand seven hundred and thirty-two euros), to be paid by the Claimant, in accordance with articles 12, paragraph 2, and 22, paragraph 4, of RJAT, and article 4, paragraph 5, of RCPAT.

Notify.

Lisbon, 8 March 2019.

The President-Arbitrator

(Fernanda Maçãs)

The Member-Arbitrator

(Arlindo José Francisco)

The Member-Arbitrator

(Miguel Patrício)

Frequently Asked Questions

Automatically Created

What happens when a property is sold below its VPT (Valor Patrimonial Tributário) for IRC purposes in Portugal?
When property is sold below its VPT (Valor Patrimonial Tributário) for IRC purposes in Portugal, Article 64(2) CIRC creates a rebuttable presumption that the actual sale price equals the VPT. The Tax Authority can correct the taxpayer's declared income by adding the difference between VPT and the declared contractual price. However, taxpayers can overcome this presumption by following the formal price-proof procedure established in Article 139 CIRC, which must be initiated during January of the year following the transfer by submitting a request to the Director of Finance with supporting documentation including bank transfers, checks, and authorizations to access financial records of the company and its managers.
How can a taxpayer prove the actual sale price of a property under Article 139 of the Portuguese IRC Code?
Under Article 139 of the Portuguese IRC Code, taxpayers must initiate a formal price-proof procedure by submitting a request to the Director of Finance (Diretor de Finanças) during January of the year following the property transfer. The proof can include any legally admissible evidence such as bank transfer records, photocopies of checks, payment receipts, and declarations under commitment of honor. Critically, taxpayers must also provide authorizations allowing AT to access bank account information of both the company and its managers/administrators. This is a specific statutory procedure distinct from general evidence submission during tax inspections. Failure to initiate this procedure within the January deadline constitutes a condition of inadmissibility for challenging subsequent tax corrections under Article 139(7) CIRC.
What are the legal grounds for challenging an ATA tax correction on property sale value in Portugal?
Legal grounds for challenging ATA tax corrections on property sale values include violations of the principle of legality (Article 266 CRP), good faith and material truth discovery principles (Article 6 RCPITA), inquiry duties (Articles 55 and 58 LGT), and procedural fairness requirements (Article 69(a) CPPT and Article 104 CPA). However, when challenging corrections based on VPT divergence, taxpayers must first comply with Article 139(7) CIRC, which establishes that prior initiation of the formal price-proof procedure is a mandatory prerequisite for admissibility. Arguments based solely on informal evidence submission during inspections or alleged procedural irregularities cannot overcome the failure to meet this specific statutory condition, as the price-proof mechanism represents a special regime that supersedes general procedural protections.
Does the Portuguese Tax Authority (ATA) have to consider evidence submitted by taxpayers before issuing IRC corrections on property transactions?
While the Portuguese Tax Authority has general obligations under Articles 55 and 58 LGT to conduct inquiries and consider taxpayer evidence during inspections, these duties are qualified by specific statutory regimes. In property sale corrections under Article 64(2) and Article 139 CIRC, AT is not required to treat informal evidence submissions as equivalent to the formal price-proof procedure. The taxpayer bears the burden of initiating the Article 139 procedure within the specified January deadline. AT's duty to request clarifications during inspections under Article 28-29 RCPITA relates to understanding declared facts, not to substituting for the taxpayer's obligation to follow specific statutory proof mechanisms. Delays in AT responses during inspection do not excuse non-compliance with independent statutory deadlines for price-proof procedures, as these constitute parallel obligations with distinct legal purposes and timeframes.
What procedural obligations under RCPITA Article 6 and LGT Articles 55 and 58 apply to tax inspections involving real estate sales in Portugal?
Under RCPITA Article 6 and LGT Articles 55 and 58, tax inspections involving real estate sales must respect principles of good faith, proportionality, and material truth discovery. AT must notify taxpayers of detected divergences (Article 28-29 RCPITA), allow opportunities for clarification, and consider evidence presented. However, these general procedural obligations do not override specific substantive requirements in special regimes like Article 139 CIRC. Taxpayers must distinguish between: (1) external administrative procedures for specific confirmations (e.g., Article 31-B CIRC for asset disposal); (2) inspection procedures for detecting and correcting tax irregularities; and (3) special statutory proof mechanisms like Article 139 price-proof procedures. Each has distinct triggers, deadlines, competent authorities, and legal effects. Compliance with general inspection cooperation duties does not satisfy specific statutory prerequisites for challenging resulting assessments when special proof regimes apply.