IRS Capital Gains on Securities: Expiry of Tax Assessment Right & SME Rules (CAAD 453/2014-T)

ARBITRAL DECISION

CAAD: Tax Arbitration

Case no. 453/2014 – T

Subject matter: Personal Income Tax – statute of limitations for the right to assess; capital gains; non-essential formality; micro and small enterprise

I – Report

1. The taxpayer "A", Tax Identification Number … (hereinafter "Claimant"), submitted, on 28 June 2014, a petition for the establishment of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "TA") is the Respondent.

2. The Claimant seeks an arbitral pronouncement on the illegality of Personal Income Tax and compensatory interest assessments relating to the year 2010, in the total amount of €155,588.20 and contained in document no. 2014…, and the decree of its respective annulment.

3. The petition for the establishment of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the Tax and Customs Authority on 1 July 2014.

4. Pursuant to the provision of Article 6, paragraph 2, letter a) and Article 11, paragraph 1, letter b) of Decree-Law no. 10/2011 of 20 January, with the wording introduced by Article 228 of Law no. 66-B/2012 of 31 December, the Deontological Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the assignment within the applicable time period, and notified the parties of such appointment on 14 August 2014.

5. The Collective Arbitral Tribunal was constituted on 1 September 2014; it was properly constituted and is materially competent, in light of the provisions of Articles 2, paragraph 1, letter a), 5, 6, paragraph 1, and 11, paragraph 1, of the RJAT (with the wording introduced by Article 228 of Law no. 66-B/2012 of 31 December).

6. Pursuant to paragraphs 1 and 2 of Article 17 of the RJAT, the TA was notified on 1 September 2014 to submit its response.

7. The TA submitted its response on 7 October 2014, accompanied by a copy of the administrative file, as had been requested.

8. In that response, the TA alleges, in summary, the total lack of merit of the Claimant's petition.

9. In that same response, the TA requests that the settlement agreement referred to in Article 20 of the initial petition be attached to the file, and this was likewise requested from the Claimant by Arbitral Order of 8 October 2014.

10. The Claimant attached that settlement agreement in a response it submitted on 10 October 2014, and the same was attached to the record by Arbitral Order of 14 October 2014.

11. Meanwhile, in a petition of 7 October 2014, the Claimant requested the attachment to the record of a response it had sent to the TA in reaction to Official Letter no. …, of 17 January 2014; such attachment was granted by Arbitral Orders of 9 and 13 October 2014.

12. In a petition submitted on 23 October 2014, the TA contests what is alleged by the Claimant in its petition of 7 October 2014, insisting that the documentation presented in the response to Official Letter no. …, of 17 January 2014, does not disprove the fact that the Claimant did not appoint judicial counsel during the pendency of the inspection procedure. The Arbitral Order of 24 October 2014 orders the attachment of such petition to the record.

13. In the same Arbitral Order of 24 October 2014, the parties were requested to pronounce themselves, both as to the necessity of the meeting referred to in Article 18 of the RJAT and as to the necessity of the presentation of oral or written arguments.

14. The Claimant, in a petition dated 27 October 2014, informed the Collective Arbitral Tribunal that it waived both the meeting referred to in Article 18 of the RJAT and the presentation of written arguments.

15. The Arbitral Order of 29 October 2014 orders the attachment of such petition to the record.

16. The TA, in a petition dated 28 October 2014, likewise informs the Collective Arbitral Tribunal that it waives both the meeting referred to in Article 18 of the RJAT and the presentation of written arguments. In that same petition it takes the opportunity to correct errors detected in its own response of 7 October 2014.

17. The Arbitral Order of 31 October 2014 orders the attachment of such petition to the record, while at the same time determining the waiver of both the meeting referred to in Article 18 of the RJAT and the presentation of written arguments by the parties; and fixes a period of 30 days for the pronouncement of the final decision in the case.

18. The case is not subject to nullities and no preliminary or subsequent issues, prejudicial or exceptional in nature, have been raised that would prevent the consideration of the merits of the case, the conditions being met for a final decision to be rendered.

19. The TA proceeded to appoint its representatives in the record and the Claimant attached a power of attorney, thus the Parties are duly represented.

20. The Parties have legal personality and capacity and have standing, pursuant to Articles 4 and 10, paragraph 2, of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

II – Substantiation: Matters of Fact

II.A. Facts Deemed Proven[1]

a) The Claimant received document no. 2014…, issued by the TA, which contains Personal Income Tax and compensatory interest assessments relating to the year 2010, in the total amount of €155,588.20.

b) Such assessments are based on grounds presented by the TA, whether in the Tax Inspection Report or in subsequent steps of the Administrative Procedure.

c) The Claimant was a joint holder of shares representing the capital stock of "B"…, S.A..

d) On 12 March 2010, a contract for the purchase and sale of shares was executed between the Claimant and "C", S.A., at a total price of €2,160,000.00, to be paid in installments, in various portions, until the deadline of 30 November 2010.

e) That contract stipulates that "all shares to be transferred by the SELLERS to the BUYER shall be transferred without any encumbrances or charges and without any restriction on their free disposition" (Clause 1, 2) and that "with the execution of this contract, the transfer of shares is effected" (Clause 3, 1).

f) On 27 October 2010, the buyer delivered a promissory note in the amount of €100,000.00, with maturity in April 2011; on 12 January 2011, the buyer paid €35,000.00; on 28 April 2011, the buyer reformed a bill of exchange, replacing it with another in the amount of €90,000.00, with maturity in 90 days and a check in the amount of €10,000.00; on 23 May 2011, the buyer delivered 2 promissory notes with a total value of €420,000.00, with maturity in August 2011, although payment of the notes only occurred at the end of 2013; on 23 May 2011, the buyer paid €12,500.00.

g) The non-performance by "C" resulted in the Claimant's initiation of a judicial action against it, concluded by a settlement agreement, dated 1 February 2012, in which staged and installment payment methods for the remainder of the price were established.

h) Of the amounts provided for in the settlement agreement, the buyer only paid €65,000.00.

i) The buyer "C" declared in its Form 4 – Acquisition and/or disposal of securities that the date of transfer of the shares is the date of the execution of the purchase and sale contract, that is, 12 March 2010; also in the Simplified Corporate Information Return of "C" it is mentioned that possession of the shares of "B" occurred only in 2010.

j) On the other hand, the Simplified Corporate Information Return of "B" indicates the existence, in 2009, of a mere advance payment on account of financial investments in the amount of €108,000.00.

k) By Official Letter no. …, dated 17 January 2014, issued pursuant to the principle of cooperation and the provisions of Articles 59 and 63 of the General Tax Law, and Article 29/4 of the Regulatory Code for Tax Inspection Procedure, the TA addressed to the Claimant a request for documentation with a view to obtaining various documents; in the response submitted on 3 February 2014 by the Claimant to that request for documentation formulated by the TA, a document was attached and a power of attorney was presented in favor of judicial counsel.

l) The notifications made in the inspection procedure were addressed to the Claimant and received by him.

m) With the inspection report drawn up, the right of prior hearing was exercised by the claimant himself, who signs in his own hand, and not by a third party, namely by judicial counsel.

II.B. Facts Deemed Not Proven

a) It is not proven that by virtue of the promise contract executed on 13 March 2009, a transfer of possession of the shares occurred on the date of its execution, from the Claimant to "C". Indeed, the promise contract executed was not made available or even indicated that it contained any clause relating to the transfer of the shares. On the other hand, the remaining documentary elements point to the fact that this only occurred at the time of the execution of the final contract (see points e), i) and j) of the facts deemed proven). Also, the circumstance that with the signing of the promise contract no advance payment of the price was made corroborates the finding of non-proof of this fact. Against this finding, only the settlement agreement executed on 1-2-2012, at a date much later than the occurrence of the facts, testifies; and such document only proves what was declared by the parties at that date, and not what actually occurred, such that it is manifestly insufficient to overcome the well-founded doubts that the elements pointing in the opposite direction raise.

b) It is likewise not proven that the inspection procedure began on 18 February 2014, since, notwithstanding the TA's allegation, no document was attached in that sense.

III – Substantiation: Matters of Law

III.A. Position of the Claimant

a) The Claimant contends that, having the transfer of possession of the shares to "C" occurred as an immediate consequence of the promise contract, as provided therein, that transfer to the ownership of the promissory buyer occurred, therefore, on the date of the promise contract, that is, on 13 March 2009, and not on the date of the final contract, on 12 March 2010.

b) If this were the case, the incidence of the tax should be reported to 2009 and not to 2010, in accordance with Article 10, paragraph 3, letter a) of the Personal Income Tax Code (hereinafter "CIRS").

c) But if it were to be reported to 2009, the statute of limitations for the right to assess the tax would have already run.

d) On the other hand, the Claimant argues that, even if the statute of limitations had not run, the wording of Article 10 of the CIRS prior to 27 July 2010 – the date of entry into force of Law no. 15/2010 of 26 July – would have determined a different solution from that which came into force thereafter, regarding the taxation of capital gains, namely the application of the regime of non-subjection to taxation of capital gains obtained from the disposal of equity interests held for more than 12 months: whereby the TA's position would constitute the adoption of a retroactive solution in the application of the law, in violation of legal principles (notably Article 12 of the General Tax Law) and constitutional principles (Article 103, 3 of the Portuguese Constitution).

e) And this because the taxation of capital gains follows the realization principle, that is, it applies to them when they have been realized within an onerous disposal – thus reporting to an instantaneous tax event and not to a protracted fact over time, successively formed over an annual period (although its assessment may be aggregated with that of lasting operations or successively formed).

f) Therefore, the Claimant's argument follows, a regime in force only from 27 July 2010 could not apply to capital gains instantaneously realized on 12 March 2010: specifically, seeking to anticipate the subjection to taxation of so-called "long-term" capital gains.

g) And if it could, adds the Claimant, it would not be at the rate of 20% but at the rate of 10%, in accordance with Article 43, 3 of the CIRS, since, "C" being a micro or small enterprise, its balance should be considered only at 50% of its value.

h) The Claimant further invokes that there was, on the part of the TA, a violation of procedural law applicable to the practice of final acts, namely the Regulatory Code for Tax Inspection Procedure and Article 40, 1 and 2, of the Code of Tax Procedure, by having disregarded a petition presented by its counsel, before the draft decision, resulting in the absence of proper notification to that counsel of the draft of the tax inspection report.

i) To underscore this allegation, the Claimant attached to the record, by petition of 7 October 2014, a response, of 3/2/2014, to Official Letter no. … of 17/1/2014, from the Finance Director of Coimbra, which mentions a legal power of attorney in favor of its current judicial counsel.

III.B. Position of the Respondent

a) In its response, the TA clarifies that the presumption contained in Article 10, paragraph 3, letter a) of the CIRS is a presumption established in favor of the active party to the tax relationship, and is intended solely to prevent the assessment of the tax from being indefinitely delayed by the expedient of postponing the date of execution of the (final) purchase and sale contract.

b) Thus, it would be incumbent upon the Claimant to rebut the presumption, if it wished to do so – and it is manifest that it does not wish to, since it seeks to report to the date of the promise contract the effects of transfer regarding the possession of the shares.

c) On the other hand, the TA dismisses the relevance of the date of the promise contract because the Claimant never attached it, whether in the context of the inspection procedure or in the present proceedings – the reference to that promise contract and its respective stipulations contained in the agreement reached in the judicial action brought by the Claimant against "C" not being valid as evidence, in its view (or even less so the attribution of retroactive effects to that judicial settlement).

d) The TA further emphasizes that no other means of proof comes to fill this gap, for purposes of confirming that "C" was, before 12 March 2010, the actual possessor of the shares, and that therefore there would have been a transfer thereof.

e) On the contrary, insists the TA, the reference to the date of 13 March 2009, as the date of transfer of possession of the securities, is entirely out of place in a judicial settlement that aimed solely to regulate payment methods of the final contract – whereby the bizarre assignment of the fact evidences a purely retroactive purpose.

f) Moreover, argues the TA, the purchase and sale contract would have had no need to expressly establish the transfer of shares, as it does in its Clause 3, if this had already occurred by virtue of the promise contract.

g) Furthermore, the TA was able to ascertain, through various means, that "C" reported only as of the date of execution of the final contract its entry into possession of the shares of "B".

h) Regarding the alleged retroactivity of the taxation of "long-term" capital gains to a date prior to 27 July 2010 (the date of entry into force of Law no. 15/2010 of 26 July), the TA contends that the new regime applied to all realizations of capital gains during 2010, regardless of the date of their realization during that year – there being elements of legislative intent that point to the moment relevant for the determination of such capital gains being always the end of the tax period, that is, the end of 2010 (even if such "fiscal retrospectivity" frustrated expectations as to the occurrence of tax subjection at the end of the year).

i) On the other hand, the TA refutes the idea of the autonomization of capital gains taxation, emphasizing that it is merely a category of income for Personal Income Tax purposes, and its analytical consideration should not result in prejudice to the unitary character of income taxation, the aggregation on which the determination of rates and brackets depends.

j) It invokes in that sense Article 43, 1 of the CIRS which, for the determination of taxable income, refers to the balance determined between capital gains and capital losses realized in the same year (in addition to Article 1, 1 of the CIRS which provides that the tax applies to the annual value of income from the various categories), thus making crucial the consideration of the annual balance.

k) It concludes there is, in this case, nothing more than weak, inauthentic, or improper retroactivity, or "retrospectivity" that does not violate Article 12, 1, of the General Tax Law, since it is translated into the application of the new law to all facts and situations occurring in the period in which it enters into force (excluding both the idea of "second-degree retroactivity" which would require, given paragraph 2 of Article 12 of the General Tax Law, a "pro rata temporis" taxation solution, moreover inapplicable and violative of the annuality of Personal Income Tax, as well as the idea of "first-degree retroactivity" which, that yes, would violate Article 103, 3 of the Portuguese Constitution).

l) Regarding the failure to notify the tax inspection report to the judicial counsel of the Claimant, the TA contends that proof has not been made that the counsel was appointed during the pendency of the inspection procedure; rather, it is proven that the right of prior hearing was exercised by the Claimant himself (which dispensed the TA from proceeding with further notifications).

m) Regarding the error as to the presuppositions and the alleged applicability of a rate of 10% and not 20%, the TA observes that, even if certification by IAPMEI as to the nature of micro or small enterprise of "B" were dispensable, at least some proof would have to be made regarding that nature (namely the fulfillment of the requirements provided for in the Annex to Decree-Law no. 372/2007 of 6 November, and which enable certification by IAPMEI), and it was not. The ability to prove by other means does not mean dispensing with proof, alleges the TA.

n) In a petition of 23 October 2014, the TA denies that the document attached to the record by the Claimant, through a petition of 7 October 2014, proves that a judicial counsel had been appointed during the pendency of the inspection procedure, particularly since it refers to situations prior to the beginning of that inspection procedure.

III.C. Questions to be Decided

III.C.1 Statute of Limitations for the Right to Assess

The Claimant alleged that the Personal Income Tax assessment to which it was subject is illegal by virtue of, among other reasons, the statute of limitations for the right to carry out such assessment having already run at the date thereof. It argues, in this regard, that the shares sold by it to the company "C" entered the possession of the latter on 13 March 2009, whereby, pursuant to Article 10/3-a) of the CIRS, the transfer of such securities occurred in the period of 2009 and not 2010.

Let us examine this.

Pursuant to the provision of Article 10/1-b) of the CIRS, "capital gains constitute gains obtained which, not being considered business and professional income, income from capital or real property, result from (…) onerous disposal of equity interests (…)", with paragraph 3-a) of that article adding that "gains are deemed obtained at the moment of the performance of the acts provided for in paragraph 1, without prejudice to the provisions of the following letters: a) In cases of promise of purchase and sale or exchange, it is presumed that the gain is obtained as soon as the transfer or possession of the goods or rights that are the subject of the contract is verified".

The presumption contained in Article 10/3-a) of the CIRS depends, therefore, on the cumulative verification of two circumstances: (a) the execution of a promise contract; and (b) the transfer or possession of the goods that are the subject of the contract.

Now, as referred to in Section II.B. of this Arbitral Award, it is not proven that by virtue of the promise contract executed on 13 March 2009, a transfer of possession of the shares occurred on the date of its execution, from the Claimant to "C". Indeed, the promise contract executed was not made available or even indicated that it contained any clause relating to the transfer of the shares. On the other hand, the remaining documentary elements point to the fact that this only occurred at the time of the execution of the final contract (see points e), i) and j) of the facts deemed proven). Also, the circumstance that with the signing of the promise contract no advance payment of the price was made corroborates the finding of non-proof of this fact. Against this finding, only the settlement agreement executed on 1 February 2012, at a date much later than the occurrence of the facts, testifies; and such document only proves what was declared by the parties at that date, and not what actually occurred, such that it is manifestly insufficient to overcome the well-founded doubts that the elements pointing in the opposite direction raise.

In the face of the lack of proof of the transfer of possession of the shares from the Claimant to "C" in 2009, and taking into account the execution of the purchase and sale contract of the securities on 12 March 2010, it is concluded that, pursuant to Article 10/3 of the CIRS, the capital gains are deemed obtained only on that date.

Therefore, at the date when the Personal Income Tax assessment to which the Claimant was subject was carried out, the statute of limitations for the right to carry out such assessment had not yet run.

III.C.2 Violation of the Principle of Non-Retroactivity of Tax Law

It is alleged by the Claimant that the assessment suffered violates the principle of the prohibition of retroactivity of tax law, provided for in Article 103 of the Portuguese Constitution, by virtue of the sale of the shares having occurred at a moment prior to the entry into force of the amendments introduced to the CIRS by Law 15/2010 of 26 July (which occurred on 27/07/2010).

Let us examine this.

Fundamentally, it will be necessary to determine whether the tax event underlying the taxation of capital gains resulting from the onerous disposal of equity interests is an instantaneous fact or, rather, whether it is a continuous fact.

The Superior Administrative Court, in its Award of 03/12/2013, rendered in case 1582/13, as well as in its Award of 08/01/2014, rendered in case 1078/12, concludes that the tax event in question is of an instantaneous nature, whereby the regime resulting from Law no. 15/2010 of 26 July would be applicable only to capital gains occurring after its entry into force.

With (all due) respect noted, it is, however, understood that the tax event sub iudice will not be of an instantaneous nature, contrary to what the jurisprudence in question understands, but rather a complex fact of successive formation, whereby, given the essentiality of this question, we are left with no choice but to diverge from that jurisprudence.

Indeed, it is understood that the situation at hand (taxation of capital gains) is similar to that judged by the Constitutional Court in Award 399/10 (alteration of the Personal Income Tax rate in the course of the same year to which the alteration relates) and distinct from that judged by the same Court in awards relating to autonomous taxation.

Each capital gain realized will thus be, for example, analogous to a salary, and not to an expense subject to autonomous taxation, which results, for example, from the circumstance that the balance of capital gains and losses is taxed, and not each of the capital gains individually realized and disconnected from the remaining variations of the same type.

See, for example, that in autonomous taxation, no balance for which the expenses subject to it contribute is taxed, but rather each of the expenses individually, in themselves, disconnected from the others. If the regime of capital gains and losses were of the same nature, each capital gain should be taxed separately, independently of the remaining capital gains and, above all, capital losses recorded in the same period.

That is, in summary, if the situation were in fact analogous to autonomous taxation, then each capital gain would always be taxed, regardless of any capital losses there might be, which is not the case.

What has just been said will be even more evident from the possibility of aggregation. Indeed, in that circumstance (of the taxpayer opting to aggregate the income from capital gains with the rest of its income subject to Personal Income Tax) it would not be understood how – for example – the income from salaries earned at the beginning of the year would be subject to the increased rate in the middle of the same year, while the capital gains aggregated with those would escape the "retrospectivity" of that rate and the delimitation of the tax base.

And, note, there is no reason to distinguish capital gains subject to aggregation from those that are not, since, besides, the option of aggregation only occurs at the end of the year/period, such that one would be "conditioning" the nature (instantaneous or continuous) of the tax event to an option subsequent to its occurrence.

It is concluded, thus, also and along the same line of reasoning, that the legislator's option to tax the capital gains of 2010, realized before the entry into force of the alteration of its regime, given the non-instantaneous nature of its tax event, will not be unconstitutional, fundamentally for the same reasons that the application of increased rates to the remaining income subject to Personal Income Tax, on the same terms, was not.

The reasoning that has just been expounded, however, is restricted to the constitutional level, which is that which, naturally, was the subject of pronouncement by the Constitutional Court. That is, it is concluded, in summary, by the same grounds that supported the Constitutional Court Award 399/10, that it will not be contrary to the Portuguese Constitution the application of the regime resulting from the revocation of paragraph 2 of Article 10 of the CIRS, in the course of 2010, to capital gains earned in the course of that same year[3].

Not being unconstitutional, it remains, then, to determine whether such application will be legal.

The first doubt that may arise will now derive from the provision of Article 10 of the CIRS, which states that: "Gains are deemed obtained at the moment of the performance of the acts provided for in paragraph 1".

This norm, however, should be understood as having only the purpose of fixing the tax period to which the gain should be attributed, and not of taking a position as to the nature of the tax event subject to taxation, being, for example, analogous to Article 24/4 of the CIRS, which has wording similar to that Article 10/3[4], but in relation to which it will surely not be questioned that it refers to tax events of the same nature as those remaining subject to Personal Income Tax, and not to instantaneous events.

Another doubt, more consistent, may emerge from Article 12/2 of the General Tax Law, which provides that "If the tax event is of successive formation, the new law applies only to the period elapsed from its entry into force".

Indeed, the alternative to consider that the income in question in the present case is an instantaneous tax event (as considered by the Superior Administrative Court in the terms addressed above) will be to consider it, then, a tax event analogous to the remaining income subject to Personal Income Tax, that is, a tax event of successive formation.

If that is the case, as there seem to be no reasonable doubts that it is, the normative provision of Article 12/2 of the General Tax Law will be met.

However, properly interpreted the legal regime for the taxation of capital gains resulting from the entry into force of the amendments to the CIRS introduced by Law no. 15/2010 of 2 July, as explained in the dissenting opinion rendered in case 135/2013T of CAAD[5], it is concluded that the intention of this regime is to subject the balance resulting from the totality of the capital gains and losses realized in the tax period in force on the date of entry into force of that law.

As was written, moreover, in that said dissenting opinion, "The text of the bill corresponds, in this part, entirely to the approved text that came to be included in Law no. 15/2010. It must be concluded, therefore, that the objective of the legislator was to subject all capital gains obtained from the disposal of equity interests in 2010 to the new regime (taxation and exemption)". Indeed, reinforcing all that was laboriously expounded in that same opinion, it should be said that it would not make sense, nor would it be coherent, for the legislator to intend, as was peacefully accepted since the publication of Award 399/10 of the Constitutional Court, that the Personal Income Tax rate introduced in the course of 2010 would have "retrospective" efficacy, and not treat in the same manner the matter at hand, produced, precisely, in the same context and with the same purposes.

It is thus concluded, here as there, that "that provision of paragraph 2 of Article 12 is in contradiction with the determination resulting from Article 43, paragraph 1 of the CIRS", in the sense emerging from the normative framework resulting from the entry into force of the amendments introduced to the CIRS by Law no. 15/2010 of 2 July, "as well as with the general principle of paragraph 1 of Article 1 of the CIRS.", that is, such norms "collide in their prescriptive meaning or in the legal consequences they produce", detecting, therefore, a normative antinomy.

Recognizing this, and taking into account the doctrinally established criteria of hierarchy, specialty, and chronology, it will be concluded, as, once again, is demonstrated in detail in the cited dissenting opinion, that only the criterion of specialty can resolve the antinomy detected, given that neither is there any relationship of hierarchy between the General Tax Law and the CIRS, nor is Article 12/2 of that General Law posterior to the legal regime for the taxation of capital gains in Personal Income Tax, resulting from the entry into force of Law no. 15/2010 of 2 July.

Now, faced with that referred criterion – specialty – there will be no doubt that the CIRS regime is special in relation to the General Tax Law regime, whereby the application of the norm of this law, invoked in the case, will have to be excluded.

In this manner – in conclusion – it is understood that the legal regime for taxation in Personal Income Tax of capital gains, resulting from the amendments to that Code introduced by Law no. 15/2010 of 2 July, was intended to subject to the new regime all capital gains earned in 2010, does not suffer from any unconstitutionality, nor is it excluded by any other legal norm with which it finds itself in an antinomous relationship.

III.C.3 Failure to Notify Counsel

The Claimant likewise alleges (Articles 53 to 73 of the initial petition) that "In the course of the administrative procedure, the Claimant executed a power of attorney in favor of counsel, who in turn proceeded to submit a petition before the draft decision," and that "in the case sub judice, the draft and the tax inspection report, notwithstanding that notifications were issued to the taxpayer at his tax residence, was not notified to the attorney appointed by the claimants in the administrative-tax procedure and had to be by virtue of Article 40, paragraph 1, of the Code of Tax Procedure".

With relevance to this matter, the following facts are proven:

i. By Official Letter no. …, dated 17 January 2014, issued pursuant to the principle of cooperation and the provisions of Articles 59 and 63 of the General Tax Law and Article 29/4 of the Regulatory Code for Tax Inspection Procedure, the TA addressed to the Claimant a request for documentation with a view to obtaining various documents; in the response submitted on 3 February 2014 by the Claimant to that request for documentation formulated by the TA, a document was attached and a power of attorney was presented in favor of judicial counsel;

ii. The notifications made in the inspection procedure were addressed to the Claimant and received by him;

iii. With the inspection report drawn up, the right of prior hearing was exercised by the claimant himself, who signs in his own hand, and not by a third party, namely by judicial counsel.

It was not proven that the tax inspection procedure began on 18 February 2014.

Article 40/1 of the Code of Tax Procedure provides that "Notifications to interested parties that have appointed counsel shall be made to such counsel and at his office." Such a norm, however, and the Claimant itself recognizes[6], is a procedural norm, specific to a concrete procedure.

That is: the norm of Article 40/1 of the Code of Tax Procedure cannot, under penalty, even, of absurdity, be understood as a norm that requires that, once a power of attorney is presented to the TA, all notifications thereafter, in all procedures, must be addressed to the counsel named therein. Rather, reasonableness demands that the norm in question should be understood as imposing only that, once a power of attorney is filed in the context of a given procedure, all notifications within the context of that same procedure should be addressed to the appointed counsel.

In this manner, it is understood that there would be an obligation on the TA to proceed with notifications relating to the tax inspection procedure, to the person of the counsel, only if the power of attorney had been filed in the context of such procedure.

Having this in mind, it is verified that it results from the list of facts given as proven that the filing of the power of attorney occurred as a consequence of a notification made, besides, in the context of Article 29/4 of the Regulatory Code for Tax Inspection Procedure, which evidences the course of an inspection procedure in progress, albeit possibly irregularly.

Nothing further being proven, namely through the communications referred to in Articles 49 and 51 of the Regulatory Code for Tax Inspection Procedure which, had they occurred, were not attached, it will be accepted that at the time of the notification dated 17/01/2014, the inspection procedure was already running, albeit, as has been said, irregularly.

In this manner, concluding that the TA had the duty to proceed with communications relating to the tax inspection procedure to the person of the counsel appointed by the Claimant, and that, in light of the facts given as proven, such duty was not fulfilled, namely, with respect to the hearing of the taxpayer prior to the final report, and the notification of the final report itself, it remains to determine the consequences of such non-compliance.

In this matter, it will be necessary, first of all, to bear in mind that "The tax inspection procedure has a merely preparatory or accessory character in relation to tax acts or matters relating to taxation" (Article 11 of the Regulatory Code for Tax Inspection Procedure), and it has been the understanding of the Superior Administrative Court (see Award rendered in case 0955/07, on 27-02-2008) that "The inspection and assessment procedures are distinct from one another, although the latter has a merely preparatory or accessory character, which does not mean that the illegalities committed therein are necessarily projected onto the assessment, invalidating it".

In the case, the incorrect performance of the rules relating to the notification of acts by the TA (which is, from the outset, different from the non-performance, in totum, of such norms), did not, in the concrete, manifestly, reflect, in any materially significant way, in the rights and legally protected interests of the Claimant.

Indeed, the same exercised, exhaustively and in large part coinciding, substantially, with its position in contentious proceedings, including the citation of norms, doctrine, and jurisprudence. Moreover, one of the main differences (if not the main) between the one and the other is the lack of allegation, in the context of the right of hearing, of the failure to notify the counsel.

It is further added that, in the matter of the right of hearing, the TA has a certain degree of discretion in the form – oral or written – of its exercise, and it is certain that in the former case – oral form – the right of hearing would always have to be exercised by the taxpayer himself, even with the assistance of an attorney.

As to the irregularity of notification of the final report, it is considered that "had the notification of the final report of the inspection been sent to the counsel (…), it would not have provided the latter with any possibility of presenting new elements nor of pronouncing itself on issues relevant to determining the content of the assessment act, on which the same appellant had not already had the opportunity to pronounce itself."[7]

Thus, "(i) considering that only technical corrections are at issue and that, for this reason, the taxpayer could not claim or directly impugn the content of such report (contrary to what would occur if there were a question of the determination of taxable profit by indirect methods, in which case it could file, pursuant to Article 91 of the General Tax Law, a request for revision of taxable income); (ii) considering that no period for claiming or impugning or reacting in any manner derives from the notification of the final report (such period only begins with the notification of the assessment and of the inspection report; (iii) and considering that the performance of the failed formality (notification of the report to the counsel, instead of the notification made to the taxpayer) would in no way alter the content of the tax act (assessment), which would always have the same content; (iv) it must be concluded that the failure to comply with such formality does not constitute a directly injurious act, there having been only failure to comply with a formality that became non-essential, that is, it must be concluded that we are faced with a mere irregularity."[8].

In this sense, although in a situation not entirely analogous, the Superior Administrative Court decided in Award of case 0841/11 of 08-05-2013[9], in whose summary the following can be read:

"III – Article 49 of the Regulatory Code for Tax Inspection Procedure applies, in the tax field, the principle of communication provided for in Article 55, paragraph 1 of the Code of Administrative Procedure.

IV – However, the non-performance of such formality does not give rise to the voidability of the procedural decision, such formality becoming a mere irregularity, without invalidating effects, if the interested party was given knowledge of the procedure and its purpose in time to participate therein and if the possibility to exercise its right of hearing during the inspection procedure was given to it."

By the foregoing, understanding that the formality incompletely performed, relating to notification to the person of the Claimant, instead of its counsel, of the acts involved in the tax inspection procedure, did not occur in terms of giving rise to the voidability of the subsequent assessment, becoming a mere irregularity, this defect attributed to the tax act that is the subject of the present proceedings is likewise without merit.

III.C.4 Error as to the Presuppositions Regarding the Applicable Rate

The Claimant alleges that, concluding the application of Law 15/2010 of 26 July to the case sub judice, a rate of 10% and not 20% would always be applicable, by virtue of the shares sold by it relating to a micro or small enterprise, pursuant to Decree-Law 372/2007 of 6 November, whereby the assessment would suffer from illegality.

Let us examine this, then.

Decree-Law no. 372/2007 creates and regulates a regime of electronic certification of micro, small and medium enterprises, under the responsibility of the Institute for Support of Small and Medium Enterprises and Innovation (IAPMEI). As is noted in its preamble, the purpose of certification is to allow "the reduction of red tape and dematerialization in the relationship of enterprises with public services responsible for the application of policies aimed at SMEs" (italics ours).

What the tax legislator intended, in paragraph 4 of Article 43 of the CIRS, was merely to import, for purposes of the application of paragraph 3, the concepts of micro and small enterprise and not to import a means of proof of the condition of SME. The legislator's purpose is that the reference be made specifically to the Annex, because it is in the annex that the definitions of micro-enterprise and small enterprise are contained. The law does not require any formal requirement consisting of the presentation of electronic certification.

It must be concluded, therefore, that, to benefit from the tax exclusion provided for in Article 43/3 of the CIRS, the holder of capital gains obtained from the disposal of equity interests of SMEs does not need to necessarily exhibit the certification issued pursuant to Decree-Law no. 372/2007.

But it does need, of course, to demonstrate that the enterprise in question is a micro enterprise or small enterprise, as defined in the annex to the said decree-law. This is what results from paragraph 4 of Article 43 of the CIRS.

That is, the Claimant does not need to present the certification provided for in Decree-Law no. 372/2007. It can prove the quality of SME by any other means suitable for that purpose, but it is not dispensed from that proof, since indeed the regime provided for in Article 43/3 of the CIRS is a regime of tax exclusion that excludes the default regime, which consists of the taxation of 100% of the balance of capital gains and losses obtained from the onerous disposal of equity interests.

In this manner, the quality of micro or small enterprise, for purposes of the application of Article 43/3 of the CIRS, needs to be proven with a view to obtaining the benefit contained in that legal provision.

Indeed, it was incumbent upon the Claimant to materially prove the quality of micro or small enterprise that it claims regarding the shares it sold.

It was therefore incumbent upon the Claimant to demonstrate that, on the date of the disposal of the shares, the enterprise in question met all the material requirements provided for in Decree-Law 372/2007 of 6 November.

Now, such demonstration was not made by the Claimant, when such burden weighed upon it in light of Article 74/1 of the General Tax Law.

In this regard, see, namely, the award of the Central Administrative Court of the South, rendered on 2014-02-27, in case no. 07088/13, where it is stated that «(…) the request and the cause of action – which identify and define the scope of the object of the case – depend on the initiative of the plaintiff, who has the burden of alleging all the facts whose proof would allow the conclusion of the existence of the right invoked, in accordance with the provision of Article 5, paragraph 1, of the Code of Civil Procedure, and by the principle of substantiation which requires the specified indication of the facts constitutive of that same right, not being sufficient therefore a generic indication of the right that is intended to be asserted. Limited by these two principles, the judge cannot exceed the jurisdictional claims asserted by the parties. It follows from the provision of Article 342, paragraph 1, of the Civil Code, that the proof of the facts constitutive of the right rests with the one who claims it; conversely, the proof of the facts preventing, modifying or extinguishing such right rests with the one against whom the invocation of the right has been made – paragraph 2 of the same article.»

It further states, that award, with respect to the demonstration of the nature of SME of the company, that «the assertion that the said enterprise has that nature depends on allegation and proof, because the judge – whether arbitral or judicial – does not have prophetic powers that allow it to know without necessity of demonstration whether a certain fact is true or not. And being that fact fundamental to sustain the claim of the challenging parties, it was on these that the respective burden of allegation and proof rested.»

However, the Claimant refrained from presenting any document or making any allegation and proof that demonstrates the nature of micro and small enterprise of "B".

Whereby, not having done so, necessarily it will not be able to enjoy the taxation of only 50% of the value of the capital gain, which is equivalent to the application of a Personal Income Tax rate of 10% and not 20%.

IV. Decision

In light of all the foregoing, it is decided:

a) To find the petition for an arbitral pronouncement to be without merit and, in consequence, to uphold the tax act challenged in this proceeding;

b) To condemn the Claimant to pay the costs of the proceeding, in the amount of €4,284.00, having regard to the amount already paid.

V. Value of the Proceeding

The value of the proceeding is fixed at €155,588.20, pursuant to the provision of Article 97-A of the Code of Tax Procedure, applicable by reference to Article 29, paragraph 1, letter a), of the RJAT and Article 3, paragraph 2, of the Regulations of Costs in Tax Arbitration Proceedings.

VI. Costs

Costs borne by the Claimant, given that the present petition was found to be entirely without merit, in the amount of €4,284.00, pursuant to Table I of the Regulations of Costs in Tax Arbitration Proceedings, and in compliance with the provisions of Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT.

Notify.

Lisbon, 20 November 2014

The Arbitrators

José Pedro Carvalho
(President)

Paula Rosado Pereira

Fernando Borges Araújo

Document drawn up by computer, pursuant to paragraph 5 of Article 131 of the Code of Civil Procedure, applicable by reference to letter e) of paragraph 1 of Article 29 of Decree-Law no. 10/2011 of 20/01.

The drafting of this decision follows the old orthography.

[1] Based on the documentary elements made available in the record, being, moreover, consensually accepted by the parties.

[2] Including the constitutional principle of protection of reliance, arising from the principle of Democratic Rule of Law, contained in Article 2 of the Portuguese Constitution.

[3] Identical conclusion had been formulated by the Ombudsman, in its summary R-3736/10, available for consultation at http://www.provedor-jus.pt/archive/doc/sumula__maisvalias_15122010.pdf.

[4] "The gains referred to in paragraph 7) of letter b) of paragraph 3 of Article 2 are deemed obtained, respectively:..."

[5] Available for consultation at www.caad.org.pt.

[6] In initiating its allegation by referring to "In the course of the administrative procedure".

[7] Award of the Superior Administrative Court of 19/02/2014, rendered in case 01094/12, available at www.dgsi.pt.

[8] Ibid.

[9] Also available at www.dgsi.pt.