Process: 420/2014-T

Date: December 31, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Decision 420/2014-T addresses the application of Portugal's general anti-abuse clause (Article 38 of the General Tax Law) to capital gains taxation under IRS. The case involves taxpayers A and B who transformed their company 'C' from a limited liability company (sociedade por quotas) to a joint-stock company (sociedade anónima) in November 2008, subsequently selling shares in 2009. The Portuguese Tax Authority invoked the anti-abuse clause, arguing the transformation was executed solely for tax avoidance purposes—specifically to benefit from the capital gains exemption applicable to shares held for more than 12 months, rather than paying tax on quota sales. The Tax Authority disregarded the corporate transformation and issued an IRS assessment of €280,404.56, treating the transaction as a sale of quotas rather than shares. The taxpayers challenged this assessment on multiple grounds: (1) expiration of the statute of limitations for tax assessment (caducidade); (2) misinterpretation of Article 38 LGT's anti-abuse provisions; (3) errors in calculating the taxable amount; and (4) violation of the inquisitorial principle requiring the Tax Authority to thoroughly investigate facts. The arbitral tribunal was constituted in August 2014, with the Tax Authority defending its position that the transformation constituted abusive tax planning. Procedurally, the tribunal ruled that witness testimony sought by the taxpayers was inadmissible as it related to conclusive matters and the taxpayers' subjective intentions, which must be inferred from objective facts. This decision highlights the Portuguese Tax Authority's broad powers to recharacterize transactions under the general anti-abuse clause and the importance of demonstrating valid business purposes beyond tax savings when restructuring corporate entities before asset disposals.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Suzana Costa and Carla Castelo Trindade, appointed by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION

I – REPORT

On 11-06-2014, A, taxpayer no. …, and B, taxpayer no. …, both resident at Rua … Estoril, submitted to the Administrative Arbitration Center (CAAD) a request for constitution of an arbitral tribunal with a view to the declaration of illegality and consequent annulment of the assessment of Personal Income Tax (IRS) and compensatory interest no. 2013 …, dated 22 November 2013, relating to the year 2009, in the amount of €280,404.56.

The Applicants request the declaration of illegality and consequent annulment of the IRS assessment, as well as the condemnation of the Tax Authority to pay indemnification for undue guarantee, on the grounds:

  • The lapse of the right to assess;
  • Erroneous interpretation of the provisions of article 38 of the General Tax Law (LGT);
  • Error in the quantification of the taxable fact;
  • Violation of the inquisitorial principle.

On 11 June, the request for constitution of the arbitral tribunal was accepted and notified to the Tax Authority.

The Applicant did not proceed to appoint an arbitrator, so, pursuant to article 6(2)(a) and article 11(1)(b) of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of appointment within the prescribed period.

On 29 July 2014, the parties were notified of the appointment of the arbitrators, and no objection was raised.

In accordance with the provisions of article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 29 August 2014.

On 29 September 2014, the Respondent presented its response, defending itself by means of contestation and sustaining, in summary, that there is no lapse of the right to assess, "that the transformation carried out and identified above was abusive, even in light of the various jurisprudential considerations that have addressed the application of the general anti-abuse clause," and that the non-examination of the witness cited by the Applicants, in the context of the administrative procedure, was justified.

Notified to that effect, the Applicants, who had cited testimonial evidence, came to indicate the specific points of their initial Request, and it was understood by the Tribunal that "the points on which the Applicants wish to focus the testimonial evidence they cited are incapable of proof, as both involve strictly conclusive matters and relate to the internal/psychological forum of the applicants, so these are conclusions that must be drawn from other facts that, possibly, are proven. Therefore, being useless and, as such, prohibited pursuant to article 130 of the Civil Procedure Code, the examination of the testimonial evidence cited by the Applicants shall not proceed." As a consequence, considering it "useless and, as such, prohibited pursuant to article 130 of the Civil Procedure Code," "the examination of the testimonial evidence cited by the Applicants" did not proceed.

Subsequently, notified to that effect, both parties came before the tribunal to communicate that they dispensed with the presentation of arguments, so the first meeting of the Arbitral Tribunal, in the terms and for the purposes set forth in article 18 of the RJAT, was dispensed with, considering that, in this case, none of the purposes legally assigned to it were present, and that the arbitral process is governed by the principles of procedural economy and prohibition of useless acts.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceeding does not suffer from any nullities.

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

Having considered everything, we proceed to decide.

II. DECISION

A. FACTS

A.1. Facts Established as Proven

  1. The Applicants lived, in the year 2009, in a de facto union, assuming the status of Personal Income Tax (IRS) taxpayers, as a household unit.

  2. In the year 2013, and in compliance with Service Order no. OI2013…, dated 23 April 2013, the Applicants were subject to an external audit action concerning IRS for the year 2009.

  3. The said audit procedure commenced on 20 May 2013 and ended on 18 July of the same year.

  4. In the course of that audit, the Tax Authority made a correction to the taxable matter of the Applicants in the amount of €2,493,600 Euros.

  5. To justify the said correction, the Tax Authority invokes the general anti-abuse clause provided for in article 38 of the General Tax Law, stating, in summary, that the Applicants, on 13 November 2008, carried out the transformation of the company "C" from a limited liability company into a joint-stock company, solely for reasons of a fiscal nature, namely, with a view to ensuring the sale of the company without taxation of capital gains.

  6. Consequently, the Tax Authority disregarded that transformation and proceeded to determine the tax as if the taxpayers had sold quotas and not shares, having, in January 2014, issued the tax assessment in question from which results a tax to pay of €247,351.14, plus €33,053.42 in compensatory interest.

  7. In the course of the audit procedure, the Applicants requested the examination of the sellers.

  8. The Tax Authority notified, through official letter no. … of 2013-09-11, the Applicants to present the said witnesses for examination on 20 November 2013, at 10.00 hours.

  9. On 20 September 2013, at 10.00 hours, the witnesses did not appear, and the corresponding diligence certificate was drawn up.

  10. The Applicants presented, on 22 July 2013, a model 3 substitute declaration, including annex G 1 - Non-Taxed Capital Gains, relating to shares held for more than 12 months.

  11. In the declaration referred to in the previous number, the Applicants, as the acquisition value considered by the Respondent (bearing in mind the percentage of its participation in the capital stock) in section 4 of the said annex, entered the amount of €498,720.00.

  12. The Applicants presented, on 21 January 2014, a Gracious Complaint against the said tax act.

  13. Since the Applicants did not proceed to pay the said assessment, the Tax Administration initiated executive proceedings no. …, with a view to the coercive collection of the amount assessed, plus default interest and procedural costs.

  14. With a view to stopping the said executive proceedings, the Applicant presented, on 17 March 2014, bank guarantee no. … issued by D AG – Branch in Portugal, in the amount of €358,988.10, in favor of the Tax Office of Cascais – 1.

  15. On 12 May 2014, the Applicants were notified of the final rejection decision in which the Tax Authority maintains the position assumed by the Tax Inspection Services.

  16. On 01 August 2003, the sole proprietor limited liability company "C, Lda," was established, Tax ID …, with share capital of €156,000.00, represented by a single quota of equal value belonging to partner E, Tax ID ….

  17. On 30 January 2004, the said E transferred her quota to the Applicant, and the price of €500,000.00 was declared in the respective public deed of quota transfer.

  18. In a credit line agreement concluded on 7 November 2003, by the Applicant, it is stated that the financing amount, in the value of €360,000.00, is intended "to be used by the Client for payment inherent to the down payment of the promise to purchase contract of a quota of the company C, Sole Proprietor, Lda."

  19. In another financing contract, concluded by the same parties on 30 January 2004, in the amount of €1,900,000.00 Euros, it is stated that this is intended for the acquisition of that company.

  20. The Applicant issued in favor of the seller of company C, E, the following checks:

a. Two checks, on 02 December 2003, in the amount of €175,000.00;

b. Five checks, on 31 January 2004, in the amounts of:
i. €175,000.00;
ii. €375,000.00;
iii. €200,000.00;
iv. €325,000.00; and
v. €350,000.00.

  1. Since 2007, the operational results of company C had been deteriorating, declining between 2007 and 2008 by almost 50%, turning into a negative result in 2009.

  2. On 13 November 2008, by means of a contract of division and transfer of quotas and transformation into a joint-stock company, the Applicant divided its quota, representative of the capital stock, into five quotas, the first being of a nominal value of €155,600.00 and the four remaining ones of a nominal value of €100.00 each, the company changing from a sole proprietor limited liability company to a limited liability company, with the capital stock thus distributed:

[Table structure maintained but content redacted in original - indicated by ellipsis]

  1. On the same date, the same company was transformed into a joint-stock company, with the capital stock remaining at €156,000.00, represented by 31,200 shares of a nominative nature and nominal value of €5.00, held by the following shareholders:

[Table structure maintained but content redacted in original - indicated by ellipsis]

  1. The now complainant, on 6 February 2009, sold 31,120 shares of which it was holder in company C, for the price of €2,992,320.00 to the company "I, Sole Proprietor Ltd."

A.2. Facts Established as Not Proven

  1. The transformation of company "C" from a limited liability company to a joint-stock company was undertaken solely with a view to facilitating a future entry of new partners into the capital of the company, with the Applicants having been informed by their accountant that the corporate structure that would best allow dispersal of capital and accommodation of new partners would be that of a joint-stock company.

  2. The sale of the company in 2009 thus appears as an unforeseeable event that only materialized because the Applicants considered the proposal received extremely generous given the market conditions at the time.

  3. The difference between the credit contracted in the amount of €1,900,000.00 and the amount of €1,775,000.00 was intended by the Applicants to cover cash flow needs in the initial period of activity.

  4. Company C remained as a joint-stock company until 31 March 2011, the date on which a capital increase occurred, in the amount of €100.00, and its transformation again into a limited liability company.

A.3. Justification of Proven and Unproven Facts

Regarding factual matters, the Tribunal is not required to rule on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven facts from unproven ones (see article 123(2) of the Tax Procedure Code and article 607(3) of the Civil Procedure Code, applicable by virtue of article 29(1)(a) and (e) of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and determined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see previous article 511(1) of the Civil Procedure Code, corresponding to current article 596, applicable by virtue of article 29(1)(e) of the RJAT).

Accordingly, having regard to the positions assumed by the parties, the documentary evidence and the administrative proceedings attached to the file, the facts listed above were considered proven, as relevant to the decision, being moreover not contested by the parties.

As to the facts not proven, these are essentially due to insufficient evidence regarding them. Indeed, the documents presented by the Applicants are not, in themselves, capable of establishing, beyond any reasonable doubt, proof of the facts to which items 1 to 3 refer, as alleged by them.

Also, the Tax Authority, in item 80 of the Response, alleges the fact listed under item 4 of the facts not proven, referring to the permanent certificate of the company in question, which, however, was not attached to the file.

B. THE LAW

The Applicants expressly place for consideration by this Tribunal the following issues:

  • The lapse of the right to assess;
  • Erroneous interpretation of the provisions of article 38 of the General Tax Law (LGT);
  • Error in the quantification of the taxable fact;
  • Violation of the inquisitorial principle.

Let us examine each of them.

a.

The Applicants allege, in the first place, that the procedure for application of the anti-abuse clause occurred beyond the term fixed in article 63(3) of the Tax Procedure Code, in the version in force until 31 December 2011.

The Applicants conclude that from this would follow the lapse of the right of the Tax Authority to assess.

With all due respect to contrary opinion, the allegation in question does not fall within the lapse of the right to assess, regulated in articles 45 et seq. of the General Tax Law. Being the term in question – fixed in the previous version of article 63(3) of the Tax Procedure Code – a term of lapse, it is not the right to assess the tax that lapses, but rather the right of the Tax Authority to carry out the specific procedure for application of the general anti-abuse clause.

Relevantly, it should be noted that, as the Tax Authority rightly points out in its Response, on 1 January 2012, the current version of the said article 63 of the Tax Procedure Code entered into force, introduced by Law no. 64-B/2011, of 30 December, which eliminated the lapse term in question.

The question that arises, then, is whether that legislative change, which removed the specific time limitation for the initiation of the procedure for application of the general anti-abuse clause by the Tax Authority, validates or not the initiation of such procedure on 20 May 2013.

The answer to this question, as the Tax Authority rightly points out, will depend on whether "article 63(3) was amended during the counting of the lapse term," as that Authority contends, or not.

To obtain this answer, it becomes necessary to establish the day on which the term in question begins, which will be obtained by application of the same norm of the previous version of article 63(3) of the Tax Procedure Code, which provided that "The procedure referred to in item 1 may be opened within three years counting from the beginning of the civil year following that of the performance of the legal transaction subject to the anti-abuse provisions."

Here, it becomes necessary to determine what the law refers to when it reports to the "legal transaction subject to the anti-abuse provisions."

The answer to this new question should be found, it is thought, in the text of the anti-abuse clause itself to be applied, which states that "Acts or legal transactions that are essentially or primarily aimed, by artificial or fraudulent means and by abuse of legal forms, at reducing, eliminating or temporally deferring taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at obtaining tax advantages that would not be achieved, wholly or partially, without use of these means, are ineffective for tax purposes, and taxation is then carried out according to the applicable rules in their absence and the tax advantages referred to are not produced."

As seen in the transcribed legal text, the general anti-abuse clause aims at the ineffectiveness, for tax purposes, of "acts or legal transactions." Accordingly, it is not seen that any other interpretation would be sustainable, given the presumption of reasonableness of the legislator and the imperatives of systematic coherence, other than to consider as the initial term of the period in question the beginning of the civil year following that of the performance of the last act or legal transaction whose ineffectiveness is aimed at with the application of the anti-abuse clause whose specific procedure is intended to be initiated.

Indeed, and in particular, unlike what appears to underlie the understanding sustained by the Tax Authority that the period in question would only commence on 1 January 2010, it is considered that if the legislator, maintaining itself in the terminology of article 38(2) of the General Tax Law, intended that the period in question should have as reference the consummation of the tax advantage sought with the act or legal transaction whose ineffectiveness is aimed at by the application of the anti-abuse clause, it would have said so. By referring to the legal transaction, and not to the tax advantage, it is clear, it is believed, that the legislator intended – rightly or wrongly – to refer to the former, and not to the latter, to determine the commencement of the term that it enshrined in article 63(3) of the Tax Procedure Code, through Law no. 64-A/2008, of 31 December.

This was, moreover, the motivation for the legislative change introduced in this matter by Law no. 64-B/2011, of 30 December, which has been criticized, for example, by Gustavo Lopes Courinha. Indeed, and as explained by João Paulo Simões:

"In fact, the previous wording referred the opening of the procedure to the "(...) three years counting from the beginning of the civil year following the performance of the legal transaction subject to the anti-abuse provisions," thus conditioning, in this way, the determination of that term in relation to the moment of performance of the legal transaction. Now, this reality, not infrequently, would have been sufficient reason for the commencement of the specific procedure itself to appear to be untimely, resulting in the invocation of the respective lapse by the taxpayers."

Examining the factual matter, it is found that the legal transaction of the transformation of company C from a limited liability company to a joint-stock company occurred on 13 November 2008.

Thus, the procedure for application of the general anti-abuse clause, with a view to its ineffectiveness for tax purposes, by force of what was provided at the time in article 63(3) of the Tax Procedure Code, should have necessarily been initiated within three years counted from the beginning of the following year, that is, in this case, from 1 January 2009.

In this way, the term in question ended on 31 December 2011, so that on 1 January 2012, when Law no. 64-B/2011, of 30 December, entered into force, there was already extinguished, by lapse, the right of the Tax Authority to open the procedure with a view to the ineffectiveness for tax purposes of the legal transaction concluded in 2008, through the application of the general anti-abuse clause.

The said illegality, cognizable pursuant to article 54 of the Tax Procedure Code, will render voidable the subsequent acts carried out on the basis of the illegal act, in particular, and for what now matters, the act of application of the anti-abuse clause to the legal transaction in question, as well as the act of assessment based on the ineffectiveness for tax purposes of that legal transaction.

b.

Next, the Applicants allege that the Tax Authority proceeded with an erroneous interpretation of the provisions of article 38 of the General Tax Law. Admitting that the procedure for application of the general anti-abuse clause had not, as was found, lapsed, it would then be necessary to ascertain whether or not, in concreto, the requirements for application of this general anti-abuse clause, as carried out by the Tax Authority, are met.

From the structural analysis of the norm of article 38(2) of the General Tax Law, already transcribed above, from whose application results the ineffectiveness, for tax purposes, of acts or legal transactions, it is found that, beyond the greater or lesser doctrinal treatment that may be directed at it, its application presupposes the occurrence of the following elements:

è that the acts or legal transactions are essentially or primarily aimed at reducing, eliminating or temporally deferring taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or at obtaining tax advantages;

è that the reduction, elimination or temporal deferral of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, results from artificial or fraudulent means and abuse of legal forms, or that the tax advantages would not be achieved, wholly or partially, without use of these means.

In the case before us, the legal transaction that the Tax Authority seeks to cover with the mantle of ineffectiveness is the transformation of the company (then a limited liability company) C into a joint-stock company. It is this, beyond any doubt, the transaction that, in a causally adequate manner, obstructs the taxation that the Tax Authority believes is due on the capital gains realized with the subsequent sale of the ownership interests held by the Applicants in the transformed company.

It appears clear from the outset that it is not proven that the legal transaction in question – transformation of the limited liability company into a joint-stock company – was undertaken, if not essentially, then at least primarily (which would be sufficient, given the applicable norm), with a view to obtaining tax advantages.

Indeed, the facts, as proven, do not demonstrate that the corporate transformation operation carried out was preordained to obtain the tax advantage subsequently obtained with the sale of the ownership interests in the transformed company.

In fact, the temporal proximity of approximately two and a half months, verified between the moment of the company's transformation and the sale by the applicants of the interests they held in it, the only relevant fact that in this matter was proven, is clearly insufficient for one to conclude, with the necessary certainty, that when the Applicant consented to that transformation, it already had in view the sale of its interest, and even less that the remaining partners did.

It is true that the Applicants maintain that the transformation of the limited liability companies carried out by them resulted, mainly, not from the tax advantage that it subsequently provided them, but from an attempt to facilitate a future entry of new partners into the company's capital, with the Applicants having been informed by their accountant that the corporate structure that would best allow dispersal of capital and accommodation of new partners would be that of a joint-stock company, which, however, was not proven.

However, the aforementioned temporal proximity, coupled with a void of proof, is considered insufficient for demonstrating the preordination intended by the Tax Authority, and nothing adds to this respect, the formulaic assertion that "the substitution of the specific case to the norm was carried out based on a critical and combined analysis, according to judgments of common experience and social normality of the facts and elements gathered that, with reasonable certainty, demonstrate the abusive nature of the taxpayer's tax planning."

Since it is not proven what the concrete motivations were that, in this case, determined the performance of the act whose ineffectiveness the Tax Authority seeks, naturally it cannot be understood that it was performed for motivations exclusively or mainly linked to a tax gain that subsequently materialized, since such demonstration was a burden that that authority, as the claimant for the application of article 38(2) of the General Tax Law, should have fulfilled, in accordance with article 74(1), also of the General Tax Law.

It would not hinder what has been said the circumstance, unproven and only alleged in the arbitral proceeding, that the creation of the joint-stock company remained a reality until 31 March 2011, the date on which a capital increase occurred in the amount of €100.00, and its transformation again into a limited liability company, not only because there is a considerable temporal gap – more than 2 years – between the date of alienation and the date of the new transformation, but also because nothing is alleged – much less demonstrated – that relates the Applicants to that (re)transformation of the company into a limited liability company, and it is certain that the occurrence of a fact that they do not control cannot be indicative, much less decisive, of the occurrence of an abuse perpetrated by them.

This always bearing in mind that the national tax system recognizes taxpayers' freedom of tax arrangement "expressed in their freedom to plan their economic life without regard for the financial needs of the respective state community and to act in such a way as to obtain the best tax planning (...) of their life, in particular by turning their economic action into legal acts or non-legal acts in accordance with their private autonomy, and even being guided by criteria for avoidance of taxes or tax savings, provided that, through such a course, they do not violate the tax law, nor abuse the legal configuration of the tax facts, causing tax evasion or tax flight through pure maneuvers or concealment of economic reality."

Moreover, "tax planning as a lawful and legally protected activity constitutes not only a subjective right of the subject of tax obligations, but also a necessary condition for legal certainty of tax relations."

In conclusion, the principle of private autonomy, constitutionally enshrined, and the subjective/potestative right to tax planning/savings necessarily must be taken into account in the application of the general anti-abuse clause.

It is considered, accordingly, that, given the facts established as proven, it is not possible to conclude beyond any reasonable doubt that the legal transaction in question – transformation of the limited liability company into a joint-stock company – was undertaken, if not essentially, then at least primarily, with a view to obtaining tax advantages in an artificial manner and in abuse of legal forms.

Even if this were not the case, and it had been concluded that the legal transaction in question was undertaken, if not essentially, then at least primarily, with a view to obtaining tax advantages, it would still be said that this would not be sufficient to justify the application of the anti-abuse clause.

The considerations of Professor Saldanha Sanches are thus subscribed to once more, according to which "even if the transformation of a limited liability company into a joint-stock company were motivated by exclusively fiscal reasons, one would not be faced with an act condemnable in light of the tax law, since the legislator itself expressly chose to tax, in the context of Personal Income Tax, gains resulting from the sale of quotas and to not tax, in the context of that tax, gains resulting from the sale of shares in that context."

Indeed, and this is made perfectly clear, it is understood that the mere performance of an act or legal transaction for strictly fiscal reasons, and even if it has no other material justification other than those, will not, by itself, authorize the Tax Authority to deprive it of efficacy.

For it to be legally possible to deprive the act or legal transaction performed essentially or primarily for fiscal reasons of efficacy, including the transformation of a limited liability company into a joint-stock company, it becomes further indispensable that there has been a causally relevant use of artificial or fraudulent means and abuse of legal forms.

The legal expression of the requirement for application of the general anti-abuse clause now in question is not particularly felicitous, being eminently conceptualist and, it is thought, redundant.

Whatever doctrinal construction one adheres to on the matter in question, one will in any case agree that the legal expression refers to an abnormal use of legal forms, in such terms as to involve a contradiction between the purpose of the normative protection granted through the rules or legal structures used, and the use that is made of them in concreto.

Now, this demonstration that the tax advantage that may have demonstrably motivated the performance of the act whose ineffectiveness the Tax Authority seeks, has occurred in the context of the use of fraudulent and abusive means, which is also a burden to be fulfilled by whoever invokes it (that is: the Tax Authority), was also not done, minimally, in the proceedings, and it appears meridianly evident that for this purpose it would not be sufficient:

è that the Tax Authority identified the legal transaction performed and what the alternative lawful legal transaction would be, as well as the applicable rules;

è that the transformation of a limited liability company into a joint-stock company was totally unnecessary for the achievement of the partners' objectives in terms of expansion of the company's activity at that moment, immediately prior to the sale of the shares;

since nothing more – except in a strictly conclusory manner – is alleged by the Tax Authority in the proceedings on this matter.

In this way, and in summary, considering that it was incumbent upon the Tax Authority, in order to ensure the legality of its action in the application of the general anti-abuse clause, to demonstrate that:

è the legal transaction relating to the transformation of the limited liability company into a joint-stock company was at least primarily aimed at obtaining tax advantages;

è that that transaction was carried out through the use of artificial or fraudulent means;

è that the tax advantages referred to would not be achievable without the use of those artificial or fraudulent means; and that

è the said advantages were, further, obtained with abuse of legal forms;

which, relative to any of those listed circumstances, did not occur, with the legal prerequisites for application of the anti-abuse clause not being found, as such, to be verified, the present arbitral action should consequently proceed, and also by this route.

c.

The Applicants also allege the occurrence of error in the quantification of the "taxable fact," understanding, in summary, that the acquisition value of the company whose subsequent sale generated the capital gains that the Tax Authority seeks to tax would have been €1,775,000.00 and not €500,000.00, as stated in the respective deed of transfer of quotas.

Regarding this matter, it should be said from the outset that the bluntness with which the Tax Authority shields itself in the alleged "full proof" of the said public deed, to irreducibly refuse to consider any other argument on this matter, is not deemed acceptable.

To this effect, article 371(1) of the Civil Procedure Code provides that:

"Authentic documents make full proof of the facts they refer to as performed by the respective authority or public official, as well as facts that are attested in them based on the perceptions of the documenting entity; mere personal judgments of the documenter count only as elements subject to the free assessment of the judge."

Thus, and regarding the public deed of transfer of quotas, the same would only make full proof "of the facts it refers to as performed by the respective authority or public official, as well as facts that are attested in it based on the perceptions of the documenting entity," and not of those that do not fall within such scope. Thus, the said deed only makes proof that statements were made to the public official (in this case, the notary) as embodied in the deed, and not that such statements correspond to reality, given that this was not performed or perceived by the registering entity. In other words, and for what now matters, the public deed makes full proof that before the notary the parties declared a certain price, but not that this was the real price they agreed between themselves.

Of interest on this matter is the Supreme Court of Justice Decision of 09-02-1999, in whose summary it is stated: "The authentic document makes full proof only as to the materiality (practice, performance) of the statements/attestations contained in it, but not as to their sincerity, their truthfulness or the lack of any other defect or anomaly."

Given this, it remains to be determined whether the proof produced is sufficient to conclude that the acquisition value of the ownership interests generating the capital gain that the Tax Authority seeks to tax is that indicated by the Applicants, being certain that, given the standard of proof provided by the public deed – which, while not making full proof, does not cease to be proof – that was a burden that fell upon them.

Given the tenor of the facts established as proven and not proven, it is understood that this does not occur. Indeed, although the presentation of the checks delivered to the seller is evidently relevant, the fact is that given the remaining available elements, that presentation is insufficient to overcome the threshold of reasonable doubt.

Indeed, besides the two financing contracts, which ultimately cancel each other out in practice, the fact is that still in July 2013, the Applicants themselves declared to the Tax Authority, as the relevant acquisition value, the amount of €500,000.00.

Thus, on this matter, it is understood that the Applicants are not right.

d.

Finally, the Applicants allege that they requested from the Tax Authority, both in the course of the audit procedure and in the gracious complaint proceeding, that it hear the seller of the quotas acquired by the Applicant, which was allegedly denied by the Tax Authority.

With all due respect, that is not what happened.

Indeed, the Tax Authority provided the Applicants with the possibility of presenting the witnesses it deemed appropriate to hear, in terms, moreover, analogous to what would be feasible in the context of tax arbitral proceedings.

Accordingly, the Tax Authority complied with the duties that fell to it in matters of participation in the decision-making and inquisitorial principle, and there is nothing to censure on this matter.

Given everything that has been set forth, considering that the right of the Tax Authority to initiate the procedure for application of the anti-abuse clause has lapsed and that, even if such procedure had not been initiated outside the lapse period, the legal prerequisites necessary for application of the anti-abuse clause are not demonstrated in the proceedings, the present arbitral request should proceed, annulling the tax act that is the subject of these proceedings.

The Applicants further make a request for indemnification for undue guarantee.

This matter was already subject to decision in the context, among others, of CAAD arbitral proceeding no. 1/2013T, as follows:

"In accordance with article 24(b) of the RJAT, the arbitral decision on the merits of the claim to which no appeal or contestation is available binds the tax administration from the end of the period provided for appeal or contestation, and the administration must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of judgments of tax judicial courts, 'restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed, by adopting the necessary acts and operations for such purpose'.

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124 of Law no. 3-B/2010, of 28 April, it is proclaimed, as a primordial guideline for the institution of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that 'the tax arbitral proceeding must constitute an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters'.

Although article 2(1)(a) and (b) of the RJAT uses the expression 'declaration of illegality' to define the competence of arbitral tribunals operating in the CAAD and does not refer to constitutive (annulatory) and condemnatory decisions, it should be understood, in harmony with the said legislative authorization, that its competencies include the powers that in judicial challenge proceedings are attributed to tax courts in relation to acts whose appraisal of legality falls within their competencies.

Although the judicial challenge proceeding is essentially a proceeding of mere annulment (articles 99 and 124 of the Tax Procedure Code), judgment may be rendered in it condemning the tax administration to pay compensatory interest and indemnification for undue guarantee.

In fact, although there is no express provision to this effect, it has been peacefully understood in tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a request for condemnation to pay compensatory interest may be combined in a judicial challenge proceeding with the request for annulment or declaration of nullity or non-existence of the act, as in those codes it is stated that the right to compensatory interest arises when, in gracious complaint or judicial proceeding, the administration is convinced that there was error of fact attributable to the services. This regime was subsequently generalized in the Tax Procedure Code, which established in article 24(1) that 'there shall be a right to compensatory interest in favor of the taxpayer when, in gracious complaint or judicial proceeding, it is determined that there was error attributable to the services,' later in the General Tax Law, in whose article 43(1) it is established that 'compensatory interest is due when, in gracious complaint or judicial challenge, it is determined that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due,' and finally in the Tax Procedure Code in which it was established, in article 61(2) (to which corresponds item 4 in the wording given by Law no. 55-A/2010, of 31 December), that 'if the decision recognizing the right to compensatory interest is judicial, the period for payment counts from the beginning of the period of its voluntary execution'.

Regarding the request for condemnation to pay indemnification for undue bank guarantee, article 171 of the Tax Procedure Code establishes that 'indemnification in the case of bank guarantee or equivalent wrongly provided shall be requested in the proceeding in which the legality of the debt to be executed is disputed' and that 'indemnification must be requested in the complaint, challenge or appeal or if its basis is subsequent within 30 days after its occurrence'.

Accordingly, it is unequivocal that the judicial challenge proceeding encompasses the possibility of condemnation to pay indemnification for undue guarantee and is, in principle, the appropriate procedural means for formulating such a request, which is justified for obvious reasons of procedural economy, since the right to indemnification for undue guarantee depends on what is decided about the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal has as a corollary that it will be in the arbitral proceeding that will be discussed the "legality of the debt to be executed," so that, as results from the express tenor of article 171(1) of the Tax Procedure Code, the arbitral proceeding is also the appropriate means to consider the request for indemnification for undue guarantee.

Moreover, the combination of requests relating to the same tax act is implicitly presupposed in article 3 of the RJAT, in speaking of "combination of requests even if relating to different acts," which makes it clear that the combination of requests is also possible regarding the same tax act, and requests for indemnification for compensatory interest and condemnation for undue guarantee are capable of being encompassed by that formula, so that an interpretation in this sense has, at least, the minimum of verbal correspondence required by article 9(2) of the Civil Code.

The regime of the right to indemnification for undue guarantee is contained in article 52 of the General Tax Law, which establishes the following:

Article 53

Guarantee in case of undue performance

  1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified wholly or partially for the damage resulting from its provision, if they have maintained it for a period exceeding three years in proportion to the vesting in administrative appeal, challenge or opposition to execution that have as object the debt guaranteed.

  2. The term referred to in the previous item does not apply when it is verified, in gracious complaint or judicial challenge, that there was error attributable to the services in the assessment of the tax.

  3. The indemnification referred to in item 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in this law and may be requested in the proper process of complaint or judicial challenge, or autonomously.

  4. The indemnification for undue performance of a guarantee will be paid by offset against the revenue of the tax in the year in which payment was made."

In the case in question, it is manifest that the error of the assessment act embodied in the illegal application of the general anti-abuse clause – whether because the right to initiate the respective procedure had already lapsed, or whether because, even if this were not the case, the prerequisites of article 38 of the General Tax Law are not met – is attributable to the Tax and Customs Authority, since the tax inspection and the assessment were of its initiative and the Applicants in no way contributed to this error being committed.

Therefore, the Applicants are entitled to indemnification for the guarantee provided.

However, the costs that the Applicants incurred to provide the bank guarantee were not alleged and proven, so it is not feasible to determine here the indemnification to which the Applicants are entitled, which may only be done in execution of this judgment.

C. DECISION

Accordingly, this Arbitral Tribunal decides:

a) To grant the request for arbitral decision and, consequently, to annul the tax act challenged in these proceedings;

b) To condemn the Tax Authority to pay the Applicants indemnification for undue guarantee, in the amount to be determined in execution of sentence;

c) To condemn the Tax Authority in the costs of the proceeding, in the amount of €5,202.00.

D. Value of the Proceeding

The value of the proceeding is fixed at €280,404.56, pursuant to article 97-A(1)(a) of the Tax Procedure and Proceeding Code, applicable by virtue of article 29(1)(a) and (b) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €5,202.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, since the request was entirely successful, pursuant to articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the said Regulation.

Notify accordingly.

Lisbon

31 December 2014

The President Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Suzana Costa)

The Arbitrator Member

(Carla Castelo Trindade)

Frequently Asked Questions

Automatically Created

What are the capital gains (mais-valias) tax implications under Portuguese IRS in CAAD decision 420/2014-T?
Under Portuguese IRS law as applied in CAAD Decision 420/2014-T, capital gains (mais-valias) from the sale of shares held for more than 12 months can benefit from tax exemptions, whereas gains from quota sales may be fully taxable. In this case, the Tax Authority challenged a corporate transformation from a limited liability company to a joint-stock company, arguing it was designed solely to convert taxable quota gains into exempt share gains. The Authority applied Article 38 of the General Tax Law (anti-abuse clause) to disregard the transformation and assess €280,404.56 in IRS. The decision establishes that taxpayers must demonstrate legitimate business reasons beyond tax optimization when restructuring entities prior to asset sales, as the mere legal form of a transaction will not be respected if the Tax Authority proves it lacks economic substance.
How does the general anti-abuse clause (Article 38 of the LGT) apply to IRS capital gains transactions?
The general anti-abuse clause in Article 38 of the LGT allows the Portuguese Tax Authority to disregard legal forms and tax transactions according to their economic substance when structures are created primarily for tax avoidance. In CAAD 420/2014-T, the clause was invoked to recharacterize a company transformation from limited liability to joint-stock form as abusive tax planning. The Authority argued the transformation, completed in November 2008 shortly before a 2009 sale, served no business purpose except to convert taxable quota gains into potentially exempt share gains. The tribunal's analysis focused on whether the transformation had valid economic or commercial justifications beyond tax benefits. This decision demonstrates that Article 38 empowers tax authorities to look beyond legal formalities to the underlying economic reality, particularly in pre-sale restructurings, placing the burden on taxpayers to establish legitimate non-fiscal motivations for corporate reorganizations.
What is the statute of limitations (caducidade) for IRS tax liquidation by the Portuguese Tax Authority?
The statute of limitations (caducidade) for IRS tax assessments in Portugal is a critical procedural safeguard limiting the Tax Authority's assessment powers. In CAAD Decision 420/2014-T, taxpayers argued that the right to assess had lapsed, challenging the timeliness of the 2013 assessment for the 2009 tax year. Under Portuguese tax law, the general limitation period for tax assessments is four years from the end of the year when the taxable fact occurred. However, this period can be extended in cases involving inspections or when the anti-abuse clause is invoked. The case raises important questions about whether invoking Article 38 LGT's anti-abuse provisions affects normal limitation periods and whether the commencement of an external audit in May 2013 (relating to 2009) properly interrupted or extended the assessment deadline. The decision underscores that taxpayers can challenge assessments on procedural grounds even when substantive tax issues are disputed.
Can the Tax Authority invoke the anti-abuse clause to reclassify corporate transformations for IRS purposes?
Yes, the Portuguese Tax Authority can invoke the anti-abuse clause to reclassify corporate transformations for IRS purposes, as demonstrated in CAAD Decision 420/2014-T. When the Authority determines that a transformation from one corporate form to another (such as converting a limited liability company to a joint-stock company) was undertaken primarily or solely for tax avoidance purposes without valid business justification, Article 38 of the LGT authorizes disregarding the legal transformation. In this case, the Authority reclassified the 2009 sale of shares as a sale of quotas, eliminating the favorable tax treatment for share disposals. The key factor is whether the transformation had legitimate economic substance and business purposes beyond obtaining tax benefits. The Tax Authority bears the burden of proving the arrangement was abusive, but once established, it can reconstruct the transaction according to what would have occurred absent the tax-motivated restructuring. This power significantly impacts pre-sale planning and requires taxpayers to document comprehensive non-tax business reasons for corporate reorganizations.
What procedural rights do taxpayers have regarding the inquisitorial principle in Portuguese tax arbitration?
Under the inquisitorial principle in Portuguese tax law, the Tax Authority has a duty to thoroughly investigate and establish all relevant facts, not relying solely on taxpayer-provided information. In CAAD Decision 420/2014-T, taxpayers argued the Authority violated this principle by failing to properly examine requested witness testimony during the administrative procedure. The taxpayers sought to present witnesses (the sellers) to provide evidence regarding the business motivations for the corporate transformation, but the Authority scheduled an examination that the witnesses did not attend, and no follow-up occurred. Later, the arbitral tribunal ruled that the specific testimony sought was inadmissible because it concerned subjective intentions and conclusive legal matters that must be inferred from objective facts rather than direct testimony. This illustrates the tension between taxpayers' procedural rights to present evidence and the limitations on testimony about internal motivations. While the inquisitorial principle requires active investigation by authorities, taxpayers cannot compel acceptance of evidence deemed legally irrelevant or conclusive, and subjective intent must be proven through objective documentary and circumstantial evidence.