Summary
Full Decision
ARBITRAL DECISION
The arbitrators Cons. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. José Nunes Barata and Mr. Dr. Victor Simões (arbitrator members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 08-04-2016, agree as follows:
1. Report
A…, NIF 189 446 072, and B…, NIF…, with domicile at Avenida …, Building …, no.…, …, …-……, hereinafter designated as "Claimants", submitted a request for arbitral decision pursuant to the Legal Regime for Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of January 20 (hereinafter designated only as RJAT).
The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.
The Claimants request the assessment of the legality of the tax acts relating to Personal Income Tax (IRS) assessment no. 2015…, in the amount of €187,107.50, and compensatory interest assessments nos. 2015… and 2015…, in the amounts of €48,774.89 and €840.64, respectively.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 12-02-2016.
Pursuant to the provisions of section a) of article 6, no. 2 and section b) of article 11, no. 1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of December 31, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.
On 29-03-2016 the parties were duly notified of such designation, having expressed no intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, no. 1, sections a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of section c) of article 11, no. 1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of December 31, the collective arbitral tribunal was constituted on 08-04-2016.
The Tax Authority and Customs Authority responded defending that the request should be judged as without merit.
By order of 18-05-2016 it was decided to dispense with a hearing and that the case would proceed with written submissions.
The Parties submitted their submissions.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, section a), and 10, no. 1, of Decree-Law no. 10/2011, of January 20.
The parties are duly represented, have legal standing and judicial capacity, are entitled to sue and are properly represented (articles 4 and 10, no. 2, of the same statute and article 1 of Order no. 112-A/2011, of March 22).
The case is not affected by nullities and no exceptions were raised, nor is there any obstacle to consideration of the merits of the case.
2. Factual Findings
2.1. Established Facts
Based on the elements contained in the case file and the administrative file attached to the records, the following facts are established:
a) The Tax Authority and Customs Authority conducted an inspection action on the Claimants relating to Personal Income Tax for the year 2008;
b) By order of 24-11-2015, issued by the Director-General of the Tax Authority and Customs Authority, authorization was granted for the application of the general anti-abuse clause;
c) The aforementioned order manifests agreement with the proposal made in the Tax Inspection Report, whose content is reproduced herein, which states, among other things, the following:
I - Conclusions of the Inspection Action
During the course of this inspection procedure, acts and legal transactions essentially or primarily directed through artificial means and with abuse of legal forms, to the reduction of taxes that would be due without the use of such means, were analyzed, which constitute grounds for proceeding with the application of the anti-abuse legal norm provided for in no. 2 of article 38 of the General Tax Law (LGT).
Thus, based on that norm of the LGT, we consider that the conditions are met to fiscally disregard the act of transformation of a limited liability company into a joint-stock company, subjecting, in consequence, the taxation, under Personal Income Tax (IRS), the gains obtained with the onerous disposition of the shares as limited liability interests.
As a result of the application of no. 2 of article 38 of the LGT, the following tax corrections result from the inspection action taken against A…, NIF - …and B…, NIF - …:
A - Corrections to the Personal Income Tax assessment of the family unit (A…and B…)
II - Objectives, Scope and Extent of the Inspection Action
11.1 Credentials and period during which the action was conducted
The inspection action was conducted in compliance with the requirements of Service Order no. OI2015….
11.2. Reason, Scope and Temporal Scope
Reason for the action: A proposal was made for issuance of a service order following the memorandum from DSIFAE of 2015/07/24, reporting its information no. DSIFAE/…/2015 dated 2015/06/23 relating to the proposal for application of the anti-abuse clause to the acts of transformation of the limited liability company C…, S.A., NIPC -…, into a joint-stock company, subjecting, in consequence of the application of the norm, to taxation, under Personal Income Tax (IRS), the gains obtained with the onerous disposition of shares as limited liability interests.
Scope of the action: Partial - IRS
Activity code: … - Monitoring of abusive tax planning schemes
Temporal scope of the action: 2008
II.3. Other Situations of Taxpayers
A…, NIF - … and B…. NIF -… (hereinafter designated only as A… and B…) married under the regime of community of property acquired with tax domicile at Avenida…, Building…, no. … -…, …-…….
The taxpayers constitute a family unit pursuant to article 13 of the Personal Income Tax Code (CIRS).
Regarding the filing situation
They do not have outstanding Personal Income Tax returns. As we shall see below, they did not file Schedule G of their Personal Income Tax return for the year 2008.
Regarding tax debts
They do not have debts in tax collection proceedings.
III - Facts
In the context of Criminal Process NUIPC …/10…. IFLSB, in which the facts under analysis were investigated regarding the possible commission of the crime of tax fraud, as provided for and punished under article 103 of the General Tax Infractions Regime (RGIT), by company C…, S.A., NIPC -…, (hereinafter designated only as C…), on 2014/12/19, a decision was issued to dismiss the preliminary investigation (Annex 1).
C…was established in May 2003, commencing operations on May 13, with its principal activity being retail trade in supermarkets and hypermarkets (CAE -…) and also having as ancillary activities those classified with CAE codes … and….
C… carries out its activity through the operation of a commercial unit under the brand "D…".
In the course of the investigation above, it was verified that the taxpayers A…and B…, married under the regime of community of property acquired and shareholders of C…, disposed of in August 2008 for the total amount of €2,000,000.00, shareholdings that they held in that company, having not, in the Personal Income Tax Return Form 3 for the year 2008, mentioned that disposition since, together with the same, neither Schedule G nor Schedule G1 was filed.
In fact, it was verified that:
In May 2003, C…was established in the form of a limited liability company, with share capital of €110,000.00, distributed as follows:
• €82,500.00 - A…, and
• €16,500 - B…, married under the regime of community of property acquired, holders of approximately 90% of its share capital.
• €11,000.00 - E…, S.A. -NIPC- ….
The management of this company belonged, from the beginning to A…. This party remained in the management of the company until August 8, 2008, at which date already as sole administrator, since the company had already been subject to transformation, as we shall see below.
On May 30, 2008, the shareholders of the company promoted the alteration of the legal nature of C…, through its transformation into a joint-stock company, with its capital divided into 22,000 shares, each with a unit nominal value of €5.00: distributed as follows:
• 16,500 shares, totaling €82,500.00 - A…;
• 3,260 shares, totaling €16,300.00 - B…;
• 2,200 shares, totaling €11,000.00 - E…, S.A., NIPC -…;
• 20 shares, totaling €100.00 - G…, NIF -…, son of A… and B… (shareholding resulting from the disposition of quota by B…);
• 20 shares, totaling €100.00 - H…, NIF - … (shareholding resulting from the disposition of quota by B…).
On the same date, A…was appointed sole administrator of the company.
(Annex 2 - Contract of waiver of usufruct, division, disposition of quotas and transformation of the company and the new articles of association thereof).
On August 1, 2008, a contract for the transfer of registered shares (Annex 3) was executed, pursuant to which the first contracting parties, A… and B…, transfer, free of liens and encumbrances, the shares they hold, corresponding to 90% of the share capital of company C…, to the second contracting party, company I…, Lda. (hereinafter designated only as I…), for the amount of €2,000,000.00. Pursuant to this contract, A…transfers 16,500 registered shares and B… transfers 3,260 registered shares to company I…, which totals 19,760 registered shares, with the latter holding a total of 19,800 shares since it acquires an additional 40 shares from third parties as stipulated in point two of clause one of that contract. In this manner, the share capital of C…remains at the value of €110,000, comprised of 22,000 shares belonging to:
• I… - 19,800 shares (19,760 mentioned above + 40 shares from G… and H…) corresponding to capital of €99,000.00;
• E…, S.A. - 2,200 shares corresponding to capital of €11,000.00.
Company I…was established on July 8, 2008, with the corporate purpose of managing shareholdings in other companies, as an indirect form of conducting economic activities, and with share capital of €200,000.00, corresponding to the sum of three quotas, one having a nominal value of €150,000.00 from shareholder J…, another with a nominal value of €30,000.00 from shareholder K…, and another with a nominal value of €20,000.00 from shareholder E…, S.A. (see Contract for limited liability company contained in Annex 4). It should be noted that I… acquired the aforementioned shares for the amount of €2,000,000.00, a sum ten times greater than the value of its share capital.
On May 5, 2014, C… was again transformed into a limited liability company, with one quota valued at €99,000.00 belonging to company I…, Lda. and one quota valued at €11,000.00 belonging to company E…, S.A., with administration of the company assigned to J…, who also serves as managing partner of I….
In schematic terms we have (permanent certificate of C… in Annex 4):
It is thus established that company C… was established on 2003/05/14 in the form of a limited liability company and remained as such until 2008/06/12, the date on which it was transformed into a joint-stock company, having on 2014/05/05 been transformed again into a limited liability company.
Despite the change in legal form, the capital of C…remained unchanged as did its management, A…transitioned from managing partner of the company to sole administrator, holding 75% of the share capital of the company in his possession.
There is no discernible economic reason for the alteration of the legal form of C…, since its capital, in terms of structure and amount, remained unchanged, the management of capital and the power to make decisions remained, equally, vested in A….
Having analyzed the minutes no. 10 of C… (Annex 5) relating to the Extraordinary General Meeting that occurred on 2008/05/21, in which the transformation of C… into a joint-stock company was discussed and unanimously approved, as well as having analyzed the Justification Report for this transformation (Annex 6), no justification for the intent of such transformation was presented in either of these documents, limiting itself to stating that the legal requirements provided for in the Commercial Companies Code for the transformation to occur were met.
Furthermore, five days after the holding of this Extraordinary General Meeting and four days before the transformation of the company, a preliminary contract for the disposition of shareholdings was executed between A… and B… as promissory transferors and the majority shareholders of I… as promissory acquirers, which evidences that this disposition of shares had already been negotiated before the actual transformation of the company.
It appears, thus, that the said transformation of the company was carried out solely for reasons of a fiscal nature, that is, to exclude from taxation under Personal Income Tax, in the sphere of A… and B…, the capital gain generated by the disposition of the shares of C…, having the same been concealed from the Tax Administration through the non-filing of Schedule G1 of the Personal Income Tax return relating to non-taxable capital gains, by A… and B….
In this manner, it is verified that the transformation of company C… into a joint-stock company constitutes, in an evident manner, an act and transaction that, with abuse of legal form, had as its sole objective the elimination of tax liabilities such as:
• The taxation of the capital gain generated with the disposition of the quotas that A… and B… held in C…, pursuant to section b) of no. 1 of article 10 of CIRS. Thereby achieving
The exclusion from taxation, under Personal Income Tax, of the capital gains generated with the disposition of shareholdings held by A… and B…, which, in accordance with the tax legislation at the time of the disposition of those shareholdings (no. 2, section a) of article 10 of the Personal Income Tax Code), were not taxed, since they were capital gains from the disposition of shares held by their holder for more than 12 months - pursuant to no. 4, section b) of article 43 of the same statutory provision, the acquisition date of shares resulting from the transformation of a limited liability company into a joint-stock company is the acquisition date of the quotas that gave rise to them.
Article 38, no. 2 of the General Tax Law provides:
"Acts or legal transactions essentially or primarily directed, through artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of acts, transactions or legal business of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, totally or partially, without the use of such means, shall be ineffective within the scope of taxation, and taxation shall then be carried out in accordance with the norms applicable in their absence and the aforementioned advantages shall not be produced."
The transcribed norm establishes, in the national tax legal system, a true general anti-abuse clause and provides for the ineffectiveness, before the Tax Administration, of acts and legal transactions practiced with evident abuse of legal forms which lead, to the detriment of the National Treasury, to the elimination, total or partial, or temporal deferment of the payment of taxes that would otherwise be due.
V - Assessment of the Concrete Case
Analyzing the norm and following closely the doctrine, it can be stated that its hypothesis contains four prerequisites for the applicator, in concrete terms, to avail itself of it, namely:
-
The form used - means element;
-
The tax advantage and economic equivalence obtained - result element;
-
The motivation of the T. P. [taxpayer] - intellectual element;
-
The regulatory - systematic disapproval of the advantage obtained - normative element;
Now, from the evaluation of all elements that were brought to the attention of the proceeding, it is possible, in conjunction with the elements or conditions mentioned, to identify:
a) Means Element:
"...acts or legal transactions essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of acts, transactions or legal business of identical economic purpose...."
The means element corresponds to the course chosen by the taxpayer to obtain the desired fiscal gain or advantage, i.e., the act(s) or transaction(s) whose structure is determined in function of a given fiscal result.
In the case at hand, as described in Chapter III (Facts) of this report, the taxpayers carried out a preordained succession of acts that, together, bent the act of disposition of the shareholdings of C…to the hypothesis of the norm provided for in no. 2 of article 10 of CIRS.
In fact, for the capital gains from the disposition to concretely fall within that "exclusion" provided for in the Personal Income Tax Code, it was sufficient that the taxpayer transform the limited liability company C… into a joint-stock company, an act that, given the objective revealed as final, and which was successfully demonstrated to have been, also, the first, was dispensable.
Evaluating the sequence of acts verified, we can at once advance, noting that no legal impediment existed that would prevent the sale of quotas to company I…, SGPS, Lda, inasmuch as this type of company - SGPS - manages both quotas and shares, as provided for in Decree-Law no. 495/88, of December 30. However, if one looks exclusively at the fiscal repercussion of the act of disposition of the shareholdings, it is readily perceived that fiscally the taxpayer cannot be indifferent as between transferring quotas or transferring shares, especially if the age of the shares exceeds 12 months, which occurred in the concrete case, by force of the provisions of section b) of no. 4 of article 43 of CIRS.
Thus, it is not perceived that any other motivation than the fiscal one (of preponderant relevance in the legal transaction at hand) motivated the option of transformation, made by the taxpayer, which is, moreover, the only one that appears capable of explaining the sequence of legal transactions that, temporally, culminated in the disposition of the shareholdings of the company (90% of the share capital) to I…, SGPS, Lda. In keeping with a normal economic rationale, it is reaffirmed that, given that SGPS companies have the legal power to manage quotas or shares, those shareholdings could have been disposed of in their capacity as quotas, without further ado and costs.
From this perspective, it is readily perceived that had A… and B… opted for the so-called "normal" course, they would have disposed of shareholdings denominated as quotas, and, in that measure, the capital gain generated by the disposition would be subject to taxation, as provided for in no. 1 of article 10 of CIRS. Had they opted for the normal transaction, they would have obtained the same economic result they obtained following the act of transformation, which is, moreover, only explicable by the avoidance of the taxation that such maneuver permitted.
b) Result Element
As referenced in no. 2 of article 38 of the LGT, the "anomalous" acts or legal transactions "shall be essential or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of acts, transactions or legal business of identical economic purpose, or to the obtaining of tax advantages that would not be achieved, totally or partially, without the use of such means…."
The result element consists of the tax advantage achieved through the activity of the taxpayer(s).
At this stage it is important to recall two norms of the CIRS, circumstantially crucial at the time of the facts, namely:
i. no. 2 of article 10 of CIRS, which provides: "2 - Excluded from the preceding number are capital gains from the disposition of: a) Shares held by their holder for more than 12 months:" and
ii. section b) of no. 4 of article 43 of CIRS, which reads: "The acquisition date of shares resulting from the transformation of a limited liability company into a joint-stock company is the acquisition date of the quotas that gave rise to them;".
Thus, by virtue of the age of the quotas transferring to the shares resulting from the transformation of the limited liability company into a joint-stock company (by shares), the taxpayers achieved, with the scheme described above, the subsumption of the disposition of their shareholdings to the provision of no. 2 of article 10 of the Personal Income Tax Code, thereby avoiding taxation of the capital gains obtained with the disposition of those securities.
On this point, it is emphasized that the equivalence of the economic result obtained - the result of the sale of the securities - does not correspond to equivalent fiscal burden, as will be demonstrated below, since that economic result, materialized by the sale of the shareholdings, would always be the same, whether or not the transformation of the limited liability companies into joint-stock companies occurred.
1) Result with transformation:
The transformation of the company, from limited liability company to joint-stock company, metamorphosed the capital shares from quotas to shares. Now, such a change permitted the exclusion of taxation of the capital gain obtained with the disposition of the shareholdings, by force of no. 2 of article 10 of CIRS.
In fact, with the transformation of the company, from limited liability company to joint-stock company, the taxpayers achieved a non-taxation that they would not have achieved had they opted to dispose of the same shareholdings in the form of quotas.
Thus, taking into account that A… disposed of 16,500 shares of company C…and B… 3,260 shares totaling 19,760 shares, corresponding to a percentage of the shareholding disposed of of 83.50% (=16500/19760) for A…and 16.50% (=3260/19760) for B….
We thus have the following fiscal result:
[Calculation table showing tax-free result]
It will be recalled that, had the taxpayers opted for a procedure that was economically less burdensome and, also for that reason, of greater economic-financial rationality, they would have disposed of shareholdings denominated as quotas, and, in that measure, the capital gain generated by such disposition would be subject to taxation at the rate of 10%, pursuant to the combined provisions of no. 1 of article 10 with no. 4 of article 72, both of CIRS.
2) Result without transformation:
Had the taxpayers, A… and B…, opted not to transform the shareholdings in the company (given that the transformation was dispensable given the objective that the succession of events objectively revealed as final), they would have disposed of, on August 1, 2008, shareholdings denominated - quotas. Such disposition - of quotas, would be subject to the incidence norm provided for in section b) of no. 1 of article 10 of CIRS, which reads:
• "1 - Capital gains are the gains obtained which, not being considered as business or professional income, income from capital or real property, result from: (...)
b) Onerous disposition of shareholdings (...)" not benefiting, concomitantly, from the provision of section a) of no. 2 of that tax norm, which reads:
"2 - Excluded from the preceding number are capital gains from the disposition of: a) Shares held by their holder for more than 12 months;".
Had the taxpayers disposed of the shareholdings without the prior transformation of the limited liability company into a joint-stock company, they would have obtained the same economic result (the disposition of the shareholdings), but, in this case, subject to taxation.
We would thus have the following fiscal result:
[Calculation table showing taxable result at 10%]
c) Intellectual Element
Pursuant to no. 2 of article 38 of the General Tax Law; "...essential or primarily directed..."
Pursuant to the transcribed norm, it is required that the choice and form adopted by the taxpayer be fiscally directed (tax driven) to the obtaining of the tax advantage.
In the case at hand, given all the circumstantial detail of fact previously described, it is immediately evident that the motivation of the taxpayers for the described succession of legal transactions (division of quota; disposition of quotas and transformation of company), can only be understood if it is fiscal. Note, as mentioned previously, that the economic result, materialized by the sale of the shareholdings, would always be the same, whether or not the transformation of the limited liability company into a joint-stock company occurred, which permits the conclusion that the transformation of the company was dispensable, given the objective that was successfully demonstrated to be final.
At this point, special relevance attaches to the preliminary contract for the disposition of shareholdings executed on May 26, 2008 (fact mentioned in point B of the contract for the disposition of registered shares - Annex 3) in which the taxpayers express, clearly and unequivocally, their intention to dispose of their quotas in company C…, prior to the transformation thereof into a joint-stock company. What is revealing and corroborative of the intention, ab initio, of the taxpayers targeted in this proceeding to dispose of the shareholdings they held in C…, to company I…, making clear that the act of transformation of the company - dispensable, inserted into the process, was essentially or primarily directed to the tax advantage that it provided.
d) Normative Element
Pursuant to no. 2 of article 38 of the General Tax Law:
"...through artificial or fraudulent means and with abuse of legal forms..."
This element underlies the non-conformity of the result obtained with the ratio legis, the spirit or purpose of the law, and with the principles of the Code in question or of the Tax System. In fact, the mode of objectification of the content of legal normativity manifests itself, in law, as a system that is coherent.
In purely strategic-programmatic terms - a specific strategy guided by a purposive orientation and translated into a government program, the exclusion from taxation of capital gains from the disposition of shares held for a period exceeding 12 months had at its genesis the objective of developing the financial market, stimulating and invigorating the capital market, and attracting investments, without, however, ceasing to tax mere short-term securities speculation, or any artificial form of exclusion, as is indeed derived from the preamble to CIRS, approved by Decree-Law no. 42-A/88, of December 30, specifically from nos. 10 and 12 of its original text.
Given the Principles underlying the tax legal system, notably the Principle of equality (with constitutional standing), in the aspect of equality before public burdens, materialized in the apportionment of effort equally among citizens, it is legitimate to inquire about the respect owed to the freedom of action of the State that the action of the taxpayer reveals, because "our freedom ends where the freedom of others begins", Kant. As such, the taxpayer's freedom to plan his private life ends when the State's freedom to create and collect taxes begins, which is, moreover, freedom conferred and legitimated by the taxpayer himself - Principle of consent.
It should be noted that, following Diogo Leite Campos and João Costa Andrade in "Contractual Autonomy and Tax Law," p. 62, "contractual freedom is conceivable independently of the State and Law, but constructed within it, normatively." Regarding private autonomy, these authors defend in the same work, p. 64, that "private autonomy can be exercised freely as an instrument of the free development of personality. (...) the person is competent (has "natural" legitimacy) to govern himself (self-govern). To govern himself, persons and property but not others (persons and property). (...) when one invades the legal sphere, the rights and legally protected interests of another, one is faced with a phenomenon of "incompetence." (...) the acts in themselves may not be "unlawful," but they cannot produce effects in the legal sphere of another."
In the case at hand, the taxpayers disposed of the shareholdings to an SGPS company, which is acceptable and foreseeable; however, what does not hold from that same rationale is the transformation of the company, from limited liability company to joint-stock company, by virtue of such act - transformation, proving unnecessary to the objective that the succession of events dictated as final, the disposition of shareholdings, since SGPS-type companies can acquire and hold shares or quotas, as provided for in no. 1 of article 3 of Decree-Law no. 495/88, of December 30.
Considering that, to achieve that final objective - the disposition of shareholdings - the taxpayer was not obligated to proceed with the transformation of the company, we can conclude that the act of transformation, beyond being dispensable, does not correspond to conduct with its genesis in economic rationality, it being noted, corroborating, that the transformation of a limited liability company into a joint-stock company adds costs that were not at all necessary for the disposition to be effected, namely the costs arising from the preparation of the report (prepared by a certified public accountant) for transformation of companies, provided for in article 99 of the Commercial Companies Code, as well as the legal requirements for the constitution of a joint-stock company, which are far more demanding than the requirements for establishing a limited liability company, involving, from the outset, notably as regards the amount of share capital required, the minimum number of shareholders and the obligation to have an audit body (ROC).
The joint-stock company is thus a type of company whose constitution entails, a priori, a superior economic and procedural cost, which, in the case at hand, makes the transformation carried out by the taxpayers, beyond being a dispensable act, an illogical act, ingeniously conceived so as to avoid the emergence of a tax obligation.
From this perspective, pursuing rational justness, normatively founded, the conditions present themselves for defending the fiscal unacceptability of the act of transformation that, being economically dispensable, comes, in contravention of constitutional principles, unlawfully to exempt from taxation under Personal Income Tax the capital gains obtained with the sale of the shareholdings.
VI - Justification for Application of the Anti-Abuse Norm
Given all the foregoing and aiming at a normatively rationalized practice of law, it is understood that the conditions are met for the application of the mechanism provided for in no. 2 of article 38 of the LGT, transcribed above.
In fact, the subsumption of the concrete case to the norm was based on a critical and combined analysis, according to common experience and social normality of the facts and elements gathered that, with reasonable certainty, demonstrate the abusive nature of the tax planning undertaken by the taxpayers.
Thus, it is clear that the garb (the transformation) given "at the last moment" constitutes a preconceived and pre-ordered act, not to the obtaining of any economic advantage resulting, notably, from the increase in business potential based on the new form, but solely to the obtaining of a tax advantage.
It thus follows from this information that the procedural prerequisites provided for in no. 3 of article 63 of the Code of Tax Procedure and Process for application of the provision in no. 2 of article 38 of the LGT are met, specifically:
a) Description of the legal transaction executed or legal act performed and the legal transactions or acts of identical economic purpose, as well as indication of the incidence norms applicable thereto.
b) The demonstration that the execution of the legal transaction or the performance of the legal act was essentially or primarily directed to the reduction, elimination or temporal deferment of taxes that would be due in case of legal transaction or legal act with identical economic purpose, or to the obtaining of tax advantages.
VII - Correction Proposals
Given the manifest occurrence of the prerequisites inherent in the provision of no. 2 of article 38 of the General Tax Law, the following correction is proposed to the Personal Income Tax assessment for the year 2008.
Calculation of capital gain
[Calculation table]
Note - Part of B…'s quota valued at €200 was disposed of for its acquisition value of €200 on the same date on which the transformation of C…was effected - 2008/05/30, having no impact on the assessment that is now proposed to be corrected.
A - Corrections to the Personal Income Tax assessment of the family unit (A… and B…)
Year - 2008
[Correction table]
IX - Right to Be Heard
The taxpayers exercised, on 2015/10/16, their right to be heard (Annex 7) within the period established by the notice contained in memorandum no. … of 2015/09/21 in compliance with articles 60 of the General Tax Law (LGT) and no. 4 of article 63 of the Code of Tax Procedure and Process (CPPT).
Taking into account and weighing the elements raised in the prior hearing, it is necessary to ascertain whether these are capable of altering the conclusions of the Draft Report.
The taxpayers base the substance of their right to be heard exercised, in the terms set out below:
Ø The procedure for application of the anti-abuse norm, pursuant to article 63 of the CPPT, at the time of the facts - year 2008 - had a period of three years for its initiation.
This reasoning does not hold, since an alteration to a norm of procedural character is of immediate application, given the provision in article 12, no. 3 of the LGT.
The text of no. 3 of article 63 of the CPPT in effect at the time of initiation of the anti-abuse norm application procedure (text given by Law no. 64-B/2011, of December 30) does not provide any time limit for initiation of the anti-abuse norm application procedure.
What is not in question is the right to assessment (which, as we shall see below, still subsists) but only the power to apply a special procedure to a particular set of acts and legal transactions.
Such procedure must follow what is established at the time of its initiation, running the risk of being unlawful if this were not the case.
Ø The taxpayers begin by invoking the suspension of the tax criminal proceeding provided for in no. 1 of article 47 of the RGIT to conclude that in the case at hand "nothing authorizes" the suspension of the tax proceeding to await the decision in the criminal case, whereby the running of the statute of limitations period was not suspended and therefore the right to assess Personal Income Tax would have expired.
The taxpayers ignore that if the right to assess relates to facts regarding which a criminal inquiry was initiated, which is the case, the statute of limitations period, pursuant to no. 5 of article 45 of the LGT, is extended until the date of dismissal of the inquiry (it not being necessary that it result in an indictment) plus one year.
In the case at hand, the tax facts underlying the assessment in question were subject to investigation in the criminal sphere, having been a tax criminal inquiry initiated (criminal process NUIPC …/10-…IFLSB, in which the facts under analysis were investigated regarding the possible commission of the crime of tax fraud, as provided for and punished under article 103 of the General Tax Infractions Regime), having on 2014/12/19 a decision been issued to dismiss the preliminary investigation), whereby the prerequisites necessary for the suspension of the statute of limitations period to operate are met.
X - Authorization for Application of the Anti-Abuse Provision
Pursuant to the provisions of no. 7 of article 63 of the CPPT, and for purposes of authorization for application of the anti-abuse provision, the submission of this report is proposed, containing a proposal for application of the general anti-abuse clause, provided for in no. 2 of article 38 of the LGT and no. 1 of article 63 of the CPPT, to the Director General of the Tax Authority and Customs Authority.
d) On 16-12-2015, at 15:20 hours, the Claimants were notified, through notification with certified hour, of the following assessments: (document no. 1 attached with the request for arbitral decision, whose content is reproduced):
– Total tax adjustment assessment without interest - Assessment 2015…, in the amount of €187,107.50, relating to Personal Income Tax for the year 2008;
– Compensatory Interest - Assessment 2015 … in the amount of €48,774.89, relating to Personal Income Tax for the year 2008;
– Compensatory Interest, improper receipt - Assessment 2015 … in the amount of €840.64, relating to Personal Income Tax for the year 2008.
e) On 29-01-2016, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to this proceeding.
2.2. Unestablished Facts
There are no facts relevant to the resolution of the case that have not been established.
2.3. Justification for the Determination of Factual Findings
The established facts are based on documents attached by the Claimant with the request for arbitral decision and on the administrative file.
3. Legal Findings
3.1. Question of Violation of the Time Limit for Initiation of the Procedure Provided for in Article 63 of the CPPT
Article 63 of the CPPT, in its original text, established the following, to the extent pertinent:
1 - Assessment of taxes on the basis of any anti-abuse provisions pursuant to the codes and other tax laws depends on the opening for that purpose of a special procedure.
2 - Anti-abuse provisions shall be understood to mean, for purposes of this Code, any legal norms that establish the ineffectiveness before the tax administration of transactions or legal acts executed or performed with manifest abuse of legal forms from which results the elimination or reduction of taxes that would otherwise be due.
3 - The procedure referred to in the preceding number may be opened within three years after the performance of the act or the execution of the legal transaction subject to application of the anti-abuse provisions.
Law no. 64-A/2008, of December 31, amended no. 3, which came to have the following text:
3 – The procedure referred to in no. 1 may be opened within three years counting from the beginning of the following calendar year to the performance of the legal transaction subject to anti-abuse provisions.
With Law no. 64-B/2011, of December 30, no further reference was made to a time limit for the opening of the procedure for application of the general anti-abuse clause.
The Claimant argues, in summary, that, being in question the application of the general anti-abuse clause to the act of transformation of a company that occurred in 2008, the text in force in 2008 should be applied:
– «initially 3 years after the verification of the fact»,
– «and, subsequently, within 3 years counting from the beginning of the following economic year».
– «in the "worst" of the texts, in the case at hand, the procedure would have to be opened until 31/12/2011».
The Tax Authority and Customs Authority argues, in summary, that with the elimination, brought about by Law no. 64-B/2011, of the time limit for opening the procedure for application of the general anti-abuse clause, its opening is not subject to any time limit, whereby it can be opened, regarding facts occurring in 2008, after the three years provided for in the aforementioned texts of no. 3 of article 63 of the CPPT.
As stated in the arbitral decision of 09-05-2013, issued in proceeding no. 123/2012-T, in the texts that were in force until the entry into force of Law no. 64-B/2011, no. 3 of article 63 manifestly resulted for the taxpayer the "guarantee" that the procedure for application of the general anti-abuse clause could not be opened after the expiration of the period provided.
Thus, the running of the provided period extinguished the potestative right enjoyed by the Tax Authority and Customs Authority to initiate the said procedure.
By temporally delimiting the potestative right of the active subject, the period established in article 63, no. 3, of the CPPT, in those versions, was a statute of limitations: "statute of limitations or preclusion is an institute by which potestative rights are extinguished by virtue of their non-exercise prolonged for a certain time" ([1]); "statute of limitations, also called preclusion, is the institute by which rights, which, by force of law or agreement must be exercised within a certain period, are extinguished by their non-exercise during that period" ([2]).
«The active subject has the potestative right – it can be said, from another angle, that it has a power-duty – to open the procedure up to a certain moment. The statute of limitations under analysis is justified by objective reasons of legal certainty, having the ultimate purpose of generating the definition of the situation of the obligated taxpayer within a reasonable period, the running of which leads to the preclusion of the State's right regarding the exercise of the right subject to the statute of limitations». ([3])
Article 12, no. 3, of the LGT, in establishing that «norms on procedure and process are of immediate application, without prejudice to the guarantees, rights and legitimate interests previously established of taxpayers», has as its effect, regarding the application of law in time of Law no. 64-B/2011, that, regarding rights to initiate procedure for application of general anti-abuse clause that had not yet expired at the date of its entry into force, the expiration ceases to occur, since the new law does not provide a time limit for such initiation.
In truth, when the period of extinction of a right is running, one is faced with a legal situation in the course of extinction, which is extinguished when that period runs out.
Faced with a succession of laws governing a legal situation in the course of extinction, if that situation did not become extinct during the force of the old law, the law competent to determine the regime of its extinction (including its non-extinction) is the new law.
But, for the new law to which retroactive effect is not attributed to be able to regulate that legal situation it is necessary that it still subsists at the date of entry into force of the new law, that is, that the right in question had not already been extinguished, prior to this entry into force. If the right was extinguished during the force of the old law, the new law cannot be applicable to it, without retroactivity, since it has no temporal connection with the already-extinct situation, there being no even a problem of application of the new law in time, if this is not retroactive.
Article 297 of the Civil Code, which contains special norms for the application in time of laws concerning time periods, evidences the legal support for this understanding, by conditioning its application to periods that are running at the moment of entry into force of the new law.
The law that eliminates a time period constitutes, in face of this article 297, even by purely declarative interpretation, a law that establishes «a longer period», since the non-existence of a period is equivalent to a period of infinite duration.
Thus, the new law is applicable to periods that are running, but only to those, not applying to periods that have already run their full course.
In other words, the certainty and legal security conferred by the statute of limitations of the right only arises if the period runs in its entirety without the potestative right being exercised, but, after its full running, one will be faced with a situation in which there no longer exists the right to initiate the procedure, there being no legal support for understanding, without retroactivity, that it is reborn by the fact that the new law comes to eliminate the period.
In the case at hand, Law no. 64-B/2011, of December 30, does not attribute retroactive effect to the new text that it introduced in article 63 of the CPPT, notably the elimination of the time limit for initiating anti-abuse clause application procedure, whereby one must understand that this elimination only occurs for periods that were running at the date of its entry into force, which occurred on 01-01-2012 (article 215 of that Law).
Applying this legal regime to the case at hand, it is established that, as the Claimants argue, the right to initiate procedure for application of the general anti-abuse clause is extinct.
In truth, the transformation of company C… from limited liability company to joint-stock company occurred on 30-05-2008, and the disposition of shares occurred in August 2008.
As results from the express text of no. 3 of article 63 of the CPPT, in the versions prior to that of Law no. 64-B/2011, the facts relevant for the counting of the three-year period were «the performance of the act or the execution of the legal transaction subject to application of anti-abuse provisions» (original version) and «the beginning of the following calendar year to the performance of the legal transaction subject to anti-abuse provisions» (version of Law no. 64-A/2008, of December 31).
There is, thus, no legal support for the understanding defended by the Tax Authority and Customs Authority in this proceeding that the time of filing of the Personal Income Tax return is relevant for fixing the beginning of the time period, since, at this moment, no «legal transaction» subject to application of the general anti-abuse clause occurred.
At the time of entry into force of Law no. 64-A/2008, the period for initiating procedure for application of the general anti-abuse clause regarding facts occurring in 2008 was running, whereby the text of this Law is the applicable one, pursuant to article 12, no. 3, of the LGT.
But, with the application of this Law, the three-year period for initiating the procedure commenced on 01-01-2009 («the beginning of the following calendar year to the performance of the legal transaction subject to anti-abuse provisions»), whereby it ended on 31-12-2011.
For that reason, on 01-01-2012, when Law no. 64-B/2011 entered into force, the period for initiating the procedure for application of the general anti-abuse clause had already expired.
Thus, having the procedure for application of the general anti-abuse clause been initiated in 2015, it is concluded that its initiation occurred after the applicable period had expired, whereby it was unlawful, by violation of article 63, no. 3, of the CPPT, in the version of Law no. 64-A/2008.
Consequently, the assessments contested, which have as their premise the said procedure, are affected by the same defect, which justifies their annulment [article 163, no. 1, of the Code of Administrative Procedure of 2015, subsidiarily applicable pursuant to article 2, section c), of the LGT].
3.2. Questions of Moot Consideration
The assessments contested having to be annulled on the basis of a defect that ensures stable and effective protection of the rights of the Claimants, consideration of the remaining defects imputed to them becomes moot, as it would be futile.
4. Decision
In accordance with the foregoing, this Arbitral Tribunal agrees to:
A) Judge the request for arbitral decision as well-founded;
B) Annul the Personal Income Tax assessment no. 2015…, in the amount of €187,107.50, and the compensatory interest assessments nos. 2015… and 2015…, in the amounts of €48,774.89 and €840.64, respectively.
5. Value of the Case
In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure of 2013, article 97-A, no. 1, section a), of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €236,723.03.
6. Costs
Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at €4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.
Lisbon, 15-07-2016
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(José Nunes Barata)
(Victor Simões)
([1]) See ANDRADE, MANUEL DE, General Theory of Legal Relations, Vol. II, p. 463.
([2]) See FERNANDES, CARVALHO, General Theory of Civil Law, Vol. II, p. 699.
([3]) Decision issued in proceeding no. 123/2012-T.
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