Process: 510/2014-T

Date: March 13, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 510/2014-T concerns the taxation of capital gains from the sale of company shares under Portuguese IRS law, specifically the application of Article 43(3) of the CIRS (Personal Income Tax Code). Taxpayers A and B sold their shareholdings in two restaurant franchise companies, E and F, for €1,900,000 in November 2010, realizing a capital gain of €1,825,060.10. The taxpayers claimed that both companies qualified as micro or small enterprises under Decree-Law 372/2007, entitling them to exclude 50% of the capital gain from taxation, with only the remaining 50% (€912,530.05) subject to a 20% tax rate. The Tax Authority challenged this treatment through an additional assessment of €202,135.83, disputing whether the companies genuinely qualified for the small business tax relief. The central legal issue involves interpreting Article 43(3) and (4) of the CIRS, which provides that 50% of gains from selling shares in micro and small enterprises not listed on regulated markets is excluded from taxation. According to Decree-Law 372/2007, a small enterprise employs fewer than 50 persons with annual turnover or balance sheet not exceeding €10 million. Company E had 44 employees and €976,879 turnover, while Company F had 46 employees and €758,907 turnover, both apparently qualifying individually. However, the critical dispute concerns whether E and F should be treated as "associated enterprises" under Article 3(3) of Decree-Law 372/2007, given that both were controlled by the same shareholders (A and B) in similar proportions, operated in the same franchise system, and conducted restaurant activities. If deemed associated enterprises, their employee numbers and turnover would be aggregated, potentially disqualifying them from the small business exclusion. The taxpayers argued that no formal SME certification is required, only meeting the statutory criteria, while emphasizing a literal interpretation of the legal provisions.

Full Decision

ARBITRAL DECISION

I. Report

  1. On 23-07-2014, the taxpayers A, NIF …, and B, NIF …, filed an application for the constitution of a collective arbitral tribunal, in accordance with 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 referred to only as RJAT), in which the Tax and Customs Authority is the respondent, with a view to the declaration of illegality of the tax act of additional assessment of Personal Income Tax and Compensatory Interest, for the taxation period of 2010, in the total amount of € 202,135.83, bearing number 2014….

  2. In accordance with article 6(1) of RJAT, the Deontological Council of the Arbitration Centre designated as arbitrators Mr. Justice José Poças Falcão, Professor Paula Rosado Pereira and Professor Luís Menezes Leitão, notifying the parties accordingly.

  3. The tribunal is duly constituted to hear and decide upon the subject matter of the proceedings.

  4. The allegations that support the respondent's request for an arbitral ruling are, in summary, as follows:

4.1 On 22 November 1995, Claimant A concluded with C, LDA a franchise agreement for the operation of a restaurant under the banner D, at ..., No. ..., in the city of Porto.

4.2 Subsequently, on 23 November 1995, by virtue of a contract for the assignment of the contractual position, the status of franchisee in the aforementioned contract passed to the legal sphere of company E — ....

4.3 The share capital of "E" was distributed among shareholders A and B in the proportion of 99.60% and 0.40% respectively.

4.4 The following year, on 18 September 1996, A concluded with C, LDA a franchise agreement for the operation of a restaurant, under the banner D, located at ..., on Rua ..., ..., Unit ..., Porto.

4.5 By virtue of a contract for the assignment of the contractual position, concluded on 19 September 1996, the status of franchisee in the aforementioned contract passed to the legal sphere of company "F - HOTEL UNIT MANAGEMENT".

4.6 The share capital of "F" was distributed among shareholders A and B in the proportion of 98.00% and 2.00% respectively.

4.7 The franchise agreements concluded between the contracting parties provide for a series of restrictions on the exercise of restaurant business activities that limit the decision-making power and actions of the franchisee.

4.8 Considering the total number of workers in E and F, we arrived at a number of employees less than 50: in 2009, E had 44 employees, and F had 46 employees.

4.9 Similarly, E in 2009 had a turnover of € 976,879.18, and F had a turnover of € 758,907.97.

4.10 On 15 November 2010, taxpayers A and B sold their shareholdings in companies E and F to company G, for the price of € 1,900,000.00.

4.11 On 30 May 2011 they submitted the Model 3 of IRS (Personal Income Tax) for the taxation period of 2010, with express mention that they obtained a capital gain of € 1,825,060.10.

4.12 By qualifying E and F as micro and small enterprises, they subjected only 50% of the capital gain obtained and declared to taxation — € 912,530.05.

4.13 The capital gain was taxed at the rate of 20% and IRS was assessed.

4.14 The incidence of IRS on gains obtained from the alienation of shareholdings, as a means of promoting investment in micro and small enterprises, led the legislator to exclude from taxation 50% of the gains obtained from the sale of shareholdings of these enterprises.

4.15 For this purpose, it is provided in article 43(3) of CIRS that the following are excluded from taxation in IRS "The balance {...} relating to transmissions provided for in article 10(1)(a), relating to micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, when positive, is equally considered at 50% of its value", being specified in article 43(4) of CIRS that "for the purposes of the preceding number, micro and small enterprises are understood to mean the entities defined, in accordance with the annex to Decree-Law 372/2007, of 6 November".

4.16 The claimants consider that the certification of SME status for the purposes of demonstrating the status of micro and small enterprises in accordance with what is provided in article 43, paragraphs 3 and 4 of CIRS, is not required as a condition for the reduction of the tax base.

4.17 They thus argue that through the literal interpretation of paragraphs 3 and 4, of article 43 of CIRS, it cannot fail to be concluded that the legislator restricted the reference to the ANNEX to Decree-Law No. 372/2007, in order to, on the basis of the concepts and assumptions established in the ANNEX to Decree-Law No. 372/2007, qualify a particular enterprise as a micro and small enterprise.

4.18 As stated in article 1 of the Annex to Decree-Law No. 372/2007: "An enterprise is understood to mean any entity that, regardless of its legal form, carries on an economic activity. Those that carry on craft activities or other activities on an individual or family basis, partnerships or associations that regularly carry on an economic activity are in particular considered as such."

4.19 It is considered in the category of small enterprise "(...) an enterprise employing fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros." (cf. Art. 2(2) of the Annex to Decree-Law No. 372/2007), deserving the qualification of micro enterprise "(...) an enterprise employing fewer than 10 persons and whose annual turnover or total annual balance sheet does not exceed 2 million euros."

4.20 Associated enterprises are those that fall within the nature thereof in accordance with article 3(3) of the Annex to Decree-Law No. 372/2007 "(...) enterprises that maintain between them one of the following relationships:

a) One enterprise holds the majority of voting rights of shareholders or members of another enterprise;

b) One enterprise has the right to appoint or remove the majority of members of the management, administrative or supervisory body of another enterprise;

c) One enterprise has the right to exercise dominant influence over another enterprise by virtue of a contract concluded with it or by virtue of a clause in the bylaws of the latter enterprise;

d) One enterprise that is a shareholder or member of another enterprise controls alone, by virtue of an agreement concluded with other shareholders or members of that other enterprise, the majority of voting rights of shareholders or members of the latter."

4.21 Enterprises are considered associated "enterprises that maintain one of the relationships described above through the intermediation of a natural person or a group of natural persons acting in concert are equally considered associated enterprises provided that these enterprises carry on their activities, or part thereof, in the same market or in contiguous markets." (cf. article 3(3) of the Annex to Decree-Law No. 372/2007).

4.22 It is expressly provided that is understood (for this purpose) "(...) by contiguous market the market of a product or service situated directly upstream or downstream of the relevant market." (Cf. article 3(3) of the Annex to Decree-Law No. 372/2007).

4.23 In view of the qualification of micro and small enterprise, or of associated enterprises provided for in the Annex to Decree-Law No. 372/2007, enterprises are considered assimilated where the relationship between the associated enterprises occurs through one or more natural persons acting in a concerted manner, in the sense that the investors and/or holders of the share capital of enterprises capable of being associated, can directly or indirectly decide the corporate activities of both enterprises, as if they were a single economic unit.

4.24 The Annex to Decree-Law No. 372/2007 does not provide a concept of "relevant market", in accordance with the Commission Recommendation, of 6 May 2003, the definition in the Commission Notice for the purposes of Community competition law should be adopted (cf. recital No. 12 of the Commission Recommendation, of 6 May 2003).

4.25 The relevant product market is considered to be that which "comprises all products and/or services considered interchangeable or substitutable by the consumer due to their characteristics, prices and intended use."

4.26 Similarly, the relevant geographic market is considered to be that which "(...) comprises the area in which the enterprises in question supply products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring geographic areas due to the fact, in particular, that the conditions of competition are considerably different in those areas."

4.27 By reference to the calculation criteria of the financial and employee limits, the Claimants argue that both E and F do not exceed the limits contemplated in article 2(2) of the Annex to Decree-Law No. 372/2007, they should be (individually) qualified as small enterprises, in accordance with the terms defined in the Annex to Decree-Law No. 372/2007.

4.28 Indeed, in the spirit of article 3(3) of the Annex to Decree-Law 372/2007, two or more enterprises are considered as associated enterprises, whenever by virtue of the functions and economic and management decisions undertaken by one or more natural persons acting in concert with each other, they allow the enterprises to be materially considered a single economic unit (even though they formally have no relationship with each other).

4.29 The businessman who assumes the position of franchisee has his management power in the daily activity of the commercial establishment circumscribed to his right of use and enjoyment of the commercial image.

4.30 Thus, and in the exact terms of the franchise agreements concluded between the parties, neither shareholder A nor shareholder B held any autonomy in the taking of business decisions of the companies in question, in such a way that E and F were or could be considered a single economic entity, the alienation of shareholdings, by shareholders A and B, by reason of their relating to small enterprises, benefit from the partial exclusion from taxation provided for in article 43(3) of CIRS.

4.31 In accordance with the wording of article 4(1) of LGT, "The burden of proof of the facts constituting the rights of the Tax Administration, or of the taxpayers rests upon whoever invokes them".

4.32 Article 78 of CPPT provides that "when the accounting or records of the taxpayer are organized in accordance with commercial or tax law, the veracity of the data and calculations arising therefrom is presumed, unless errors, inaccuracies or other well-founded indications are found that it does not reflect the actual taxable income of the taxpayer".

4.33 Thus, with the taxpayer enjoying a legal presumption in his favor, he is dispensed from proving the presumed fact, so that with the claimant having its records organized in accordance with the law, it does not need to prove the veracity of the data contained therein (cf: articles 349 and 350 of CC).

  1. For its part, the Respondent Tax and Customs Authority presented its reply, in which it defended itself in the following terms:

5.1 In the course of an inspection procedure of the company that acquired the shareholdings in question, G SGPS, Lda (hereinafter referred to only as G), NIPC ..., it was not possible to clarify whether E and F are, in fact, micro or small enterprises, as the respective certificate issued by the Institute for Support to Small and Medium Enterprises (IAPMEI) was not exhibited.

5.2 Given doubts about the classification as to the size attributed to E and F in the income statement of the Claimants for 2010, an internal inspection action was proposed, resulting from which the service order No. OI.... was issued.

5.3 In view of the doubts arising in the course of the inspection procedure of the company that acquired the shareholdings in question, G, and in order to comply with what is stipulated in the law, as well as in the instructions – express and public – the Claimants were notified by letter No. ..., of 2013-11-25, by registered mail with acknowledgment of receipt (...) addressed to their tax address, to, within 15 days, submit:

  • Certificates issued by the Institute for Support to Small and Medium Enterprises and Innovation I.P. (IAPMEI, I.P.) that allow the assessment of the status of micro or small enterprises of the companies E- ..., Lda, and F - Hotel Unit Management, Lda. These certificates must report temporally to the accounts for the financial year 2009, which corresponds to the last financial year closed before the date of the share transactions that originated the capital gain in question.

5.4 In response to what was requested by the Inspection Services of the Respondent, the Claimants, on 2013-01-06, having not submitted any certificate from IAPMEI, stated that

  • Proof of small or micro enterprise may be made through a document alternative to the certificate to be issued by IAPMEI, in accordance with the opinion of the Official Auditor that was attached;

  • It is legitimate to consider that an entity that meets the requirements as a micro or small enterprise can benefit from more favorable tax treatment regardless of whether or not it is certified;

5.5 Not accepting the arguments of the Claimants, duly analyzed and refuted by the Inspection Services of the Respondent, the respective Preliminary Report was prepared and, concurrently, they were notified by registered mail, through letter No. 3474/0505, of 2014-01-16 (Registration No. ..., of 2014-01-17), to exercise, within 15 days, their Right to Be Heard, in accordance with article 60 of the General Tax Law (LGT) and article 60 of the Complementary Regime for Tax Inspection Procedure (RCPIT).

5.6 The Claimants exercised their Right to Be Heard through a document that was submitted to the Financial Directorate of Porto, on 2014-02-03 (submission No. ...).

5.7 Not accepting the arguments adduced, nor the Claimants bringing new elements that would prevent the conclusions of the Inspection Services of the Respondent, the Preliminary Report was converted into final and notified to the Claimants by registered mail, through letter No. 11466/050, of 2014-02-19 (Registration No. ..., of 2014-02-20).

5.8 Article 43(3) of CIRS, as amended by Law No. 15/2010, of 26 July, provides that the balance calculated between capital gains and capital losses realized in the same year, relating to onerous transfers of shareholdings of micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, when positive, shall be considered only at 50% of its value.

5.9 By express reference of article 43(4) of CIRS, micro and small enterprises are understood to mean the entities defined in accordance with the annex to Decree-Law No. 372/2007, of 6 November (amended by Decree-Law No. 143/2009, of 26 July), a decree which defines the procedure for electronic certification of micro, small and medium enterprises ("SME"), the responsibility of IAPMEI.

5.10 In accordance with article 2 of that Annex, the quality of SME depends essentially on the verification of a set of material requirements – (i) the number of employees and (iii) the financial thresholds – having as reference the data of the last financial year closed, calculated on an annual basis (cf. article 4 of the annex to Decree-Law No. 373/2007).

5.11 Thus, the qualification of micro or small enterprise for the purposes of applying that normative, must be based on the material reality of the entities whose shareholdings were subject to onerous transfer, on the basis of verification of the material requirements set out in the Annex at the date of alienation, with the burden of proof incumbent on the taxpayers, in accordance with article 74(1) of LGT.

5.12 However, in the absence of SME certification, the material requirements contained in the Annex must always be verified, so that, being faced with a true tax benefit, given the provision in article 65(1) of CPPT, applicable ex vi article 5(3) of EBF and article 54(1)(d) of LGT, it will always be incumbent upon the interested party to prove the prerequisites upon which the benefit depends, i.e., to demonstrate unequivocally that such requirements are met.

5.13 The existence of certification issued by IAPMEI, valid on the date of alienation of the shareholdings, requires verification of the material requirements set out in the Annex, so it is relevant, as sufficient proof of the status of micro, small or medium enterprise for the purposes of the regime provided for in CIRS articles 43(3) and (4).

5.14 Now, on the date of alienation of the shareholdings, and as far as the two enterprises alienated are concerned, both enterprises were certified with the status of "Medium".

5.15 Thus, given that IAPMEI did not consider that F and E were small or micro enterprises, neither the Respondent nor, likewise, its Inspection Services, can consider it otherwise in the course of the tax procedure, thus substituting itself for the information provided by the only entity with the legal competence to do so.

5.16 Moreover, it should be noted that, given that the enterprises were certified with the status of "medium", they could not benefit from the regime of exclusion from taxation by 50%, provided for in article 43(3) of CIRS, thus entirely lacking the present request for an arbitral ruling.

5.17 In accordance with article 1(2) of the annex to Decree-Law No. 372/2007, a small enterprise is defined as an enterprise employing fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros.

5.18 A micro enterprise is one that employs fewer than 10 persons and whose turnover or total annual balance sheet does not exceed 2 million euros.

5.19 The data considered for the calculation of employees and financial amounts are those of the last financial year closed, calculated on an annual basis. The quality of micro, small and medium is acquired or lost only if the limits are exceeded during two consecutive financial years, as provided in article 4(2) of the Annex.

5.20 As stated in article 3 of the Annex, enterprises can be qualified as autonomous, associated or partnered.

5.21 In the case of enterprises being qualified as autonomous, the determination of the data relevant to the classification of the size of the enterprise is made solely on the basis of the accounts of the enterprise, whereas in the case of partnered or associated enterprises, the data of the enterprises are aggregated in accordance with the established criteria.

5.22 In the case in question, it appears that E and F are capable of being considered associated, given that they are controlled by a natural person (A) or by a group of natural persons acting in concert (A and B) and carry on their activities in the same market - both enterprises are restaurants (D) commercializing the exact same services and products – in accordance with the provision in article 3(3) of the Annex.

5.23 Within the same market [two enterprises held by the same natural persons, operating in the fastfood market, specifically D restaurants in franchising regime] it is not apparent how relevant it would be to bring into question the legal economic concept of contiguous market.

5.24 Indeed, the Claimants argue that the enterprises held by them do not form part of the same relevant market, having regard to Recommendation No. 2003/361/EC of the European Commission and the definition of relevant market for the purposes of Community competition law, and, therefore, should not be added to the data of the different companies for the purposes of classification and determination of the size of the companies.

5.25 It is certain that it is by virtue of the franchising contract that it can be affirmed, without doubt, that the enterprises and their shareholders act in a concerted manner, which per se, does not prevent the conclusion that, nevertheless, they compete with each other.

5.26 The absence in the taking of business decisions of the enterprises in question, does not have and cannot have the meaning that they wish to attribute to it, minimizing management and operational decisions, to the detriment of business decisions that are taken by the Franchisee, in accordance with the franchising contract, which were accepted by the latter.

5.27 The fact of operating on brand standardization criteria does not mean that the enterprises cannot be considered associated in accordance with the Annex and therefore they can be, which was so declared by the manager (and majority shareholder).

5.28 We have, therefore, that the Claimants created themselves a SGPS, the G SGPS, LDA, by force of the personal intuitu personae nature of the franchising contracts, due to the content (and limitations, which, as the Claimants argue, are so many that they do not allow them to be considered economically, financially, commercially and legally independent of each other) of the same and, above all, because it must be the franchiser itself who consents to the organization/association/aggregation of the companies in a SGPS.

5.29 All companies have their registered office at the same address, a fact per se revealing the interdependence of the enterprises and their shareholders, in all these companies the Manager is A, and in the companies that now occupy us specifically, i.e., F and E, the management is shared between A and B.

5.30 From all the arguments adduced by the Claimants, it appears that it is not evident that the different companies cannot be considered associated for the purpose of the Annex, and consequently finding themselves excluded from the scope of application of article 43(3) of CIRS:

a. First, because it was the Claimant himself who in a form designed for that purpose, of official model which would serve as the basis for the exclusion from taxation by 50% of the capital gain obtained, declares that the enterprises are Associated, accompanying him in his position with the Respondent ab initio that the material requirements for the exclusion from taxation are not met.

b. In any case, even if there were no such declaration by the claimants, it would still be said that from the argument of the Respondent one cannot conclude what is claimed, given that the model of the D franchising contract.

5.31 It appears that the now Claimants, in addition to E and F, also held and hold H - ..., Lda. (hereinafter only H, NIPC: ..., which also engages in the activity of restaurant operation (D of the Antas).

5.32 H has share capital of €100,000.00, of which 99% are held by A and 1% by B. The management of that company has always been the responsibility of A.

5.33 According to the elements collected, it appears that the limit of 50 persons is far exceeded when the aggregated values of all associated enterprises are taken into account. And, let it be underlined, that even if H were not considered, the same effect would result from the sum of the 2 companies in question, i.e., E and F.

5.34 The Inspection Services of the Respondent, complying with what is provided in articles 5 and 6 of the Annex, proceeded with the calculations above mentioned, concluding inescapably that E and F, being associated enterprises, do not meet the requirements of the Annex in order to be considered small enterprises, being, instead, medium enterprises, in accordance with the certificates of IAPMEI (cf. pages 31 et seq of the Administrative File now attached and pages 31 et seq of the Internal Control of the Inspection Process), and therefore, excluded from the scope of application of article 43(3) of CIRS.

5.35 There is no need apparent in the present proceedings for the production of expert evidence, nor indeed witness evidence.

5.36 In all truth, only at issue is the relevance of verification of the material requirements of the Annex in the present case, and as already stated above, this is merely a matter of law which in this case is proved and reflected in the documentary evidence offered by the now Respondent.

  1. On 15-12-2014, a meeting of the arbitral tribunal took place, in accordance with article 18 of RJAT.

6.1 Speaking in the debate, the representative of the Claimants declared maintaining the interest in the production of expert evidence, regarding the questions presented under numbers 2 to 3 and 13 to 16.

6.2 The Tribunal also gave the floor to the representatives of the Respondent to comment on the request for production of expert evidence.

6.3 Speaking in the debate, the representative of the Respondent objected to the production of expert evidence, because the requirements provided for in article 388 of the Civil Code were not met, in particular because it is a matter of law.

6.4 The Tribunal communicated to the parties the following deliberation:

"Having considered the request, in conjunction with what is stated in articles 388 of CC and 476(1) of CPC, the Tribunal considers the production of expert evidence as not pertinent and/or unnecessary, on the grounds that questions 2 to 8 constitute factual matters not requiring specific or specialized knowledge and questions 13 to 16 are related to the legal framework of the situation which is solely within the Tribunal's purview to make, based on the factual framework that is or will be established".

6.5 The representative of the Claimants declared maintaining the interest in the production of witness evidence and intending to indicate, opportunely, the facts on which she intends to examine witnesses in a request accompanied by a copy of the balance sheets and trial balances of the Claimants, for the Tribunal's convenience.

6.6 The representative of the Respondent declared not opposing the production of witness evidence and oral argument.

6.7 The date of 02-02-2015, at 14:30 hours, was set for the purposes of examination of witnesses.

  1. On 2 February 2015 at 14:30, the examination of witnesses took place in this case, with the witnesses indicated by the Claimants I, J and K having testified on the factual matter indicated in articles 186 to 202 of the request for an arbitral ruling and on the factual matter indicated in articles 55 to 71 and 109 to 117 of the reply.

II - Proven Facts

  1. The Claimants were subject to an additional assessment of Personal Income Tax and Compensatory Interest, for the taxation period of 2010, in the total amount of € 202,135.83, bearing number 2014... (PI – docs. 1 and 2).

  2. On 22 November 1995, the Claimant concluded with C, LDA a franchise agreement for the operation of a restaurant under the banner D, at ..., in the city of Porto (PI – doc. 3).

  3. On 23 November 1995, by virtue of a contract for the assignment of the contractual position, the status of franchisee in the contract passed to the legal sphere of company E — ... (PI – doc. 4).

  4. On 18 September 1996, A concluded with C, LDA a franchise agreement for the operation of a restaurant under the banner D, located at ..., on Rua ..., ..., Unit ..., Porto (PI – doc. 5).

  5. By virtue of the contract for the assignment of the contractual position, concluded on 19 September 1996, the status of franchisee in the contract passed to the legal sphere of company "F— HOTEL UNIT MANAGEMENT" (PI – doc. 6).

  6. The companies F - HOTEL UNIT MANAGEMENT, LDA, E - ..., LDA, and H, ..., LDA possessed the following turnover, balance sheets and number of workers in the financial years 2008 and 2009:

(Reply – Docs. 1 to 6).

  1. The Claimants are owners of G SGPS LDA NIF ..., with registered office at ..., ... Porto, which holds the following enterprises:

a. F HOTEL UNIT MANAGEMENT, LDA, with registered office at ..., ... Porto NIF ...,

b. E ... LDA, with registered office at ..., ... Porto, NIF ...,

c. L LDA, with registered office at ..., ... Porto, NIF ...,

d. M LDA, with registered office at ..., ... Porto, NIF ....

(Reply – Docs. 7 to 16).

  1. In addition to these companies integrated in that G SGPS, the Claimants also hold H, ..., LDA, also with registered office at ..., ... Porto, NIF ... (which was also property of the Claimants at the date of alienation of the shares) and N LDA, with registered office at ..., Porto, NIF ....

(Reply – Docs. 7 to 16).

  1. All companies have their registered office at the same address.

(Reply – Docs. 7 to 13).

  1. In all these companies, A is manager.

(Reply – Docs. 14 and 15).

  1. In companies F and E, the management is shared between A and B.

(Reply – Docs. 14 and 15).

  1. The Claimants created a SGPS, the G SGPS, LDA.

(Reply – Doc. 16).

  1. In its capacity as franchisor, C, LDA requires all its franchisees to follow the same standards regarding the marketing of the franchised products and the organization of the establishments.

(Testimony of I)

  1. The establishments operated by E and F sell exactly the same products and are only 1km apart, although they have some variation in the profile of the customers, given that one is located on the street and the other inside a shopping center.

(Testimony of J).

III. Law

  1. Question of the taxation of capital gains on movable property

At issue in the present proceedings is the taxation of the Claimants, under IRS, regarding the capital gain calculated, in the taxation period of 2010, with the sale of their shareholdings in companies E and F, to company G, such capital gain being € 1,825,060.10.

The Claimants argue that, by qualifying E and F as micro and small enterprises, the capital gain should be taxable under IRS only at 50% of its value, that is, at € 912,530.05.

Let us then examine.

In the 2010 financial year, in accordance with the wording then in force of articles 72(4) and 10(1)(b), both of CIRS, the capital gains calculated from the alienation of securities, in particular shareholdings, are taxed at the special rate of 20%. Such capital gains were – as is still the case today – excluded from mandatory aggregation, being this only optional.

For its part, it follows from article 43(3) of CIRS, in the wording given by Law No. 15/2010, of 26 July, that, in the case of transfer of shareholdings relating to micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, the taxable value is only 50% of the capital gain.

Article 43(4) of CIRS provides that micro and small enterprises are understood to mean the entities defined in accordance with the Annex to Decree-Law No. 372/2007, of 6 November (amended by Decree-Law No. 143/2009, of 26 July), a decree which defines the procedure for electronic certification of micro, small and medium enterprises, the responsibility of IAPMEI.

In conformity with the provision in article 2 of the Annex to Decree-Law No. 372/2007, of 6 November, it appears that the quality of micro, small or medium enterprise depends essentially on the verification of a set of material requirements – (i) the number of persons employed; (ii) the annual turnover; and (iii) the total annual balance sheet.

The qualification as micro or small enterprise, for the purposes of applying the regime in question, must be based on the material reality of the entities whose shareholdings are subject to onerous transfer, on the basis of verification of the material requirements provided for in the Annex on the date of alienation.

It should be noted that, on the date of alienation of the respective shareholdings, both F and E were certified by IAPMEI, the entity with the legal competence to do so, with the status of "medium" enterprise, not of small or micro enterprise.

Now, a priori, given that the enterprises were certified with the status of "medium" enterprise, they could not benefit from the regime of exclusion from taxation by 50%, provided for in article 43(3) of CIRS.

However, it is not to be attributed to the certification by IAPMEI a constitutive character.

Moreover, the certification of the status of micro and small enterprise by IAPMEI is not even required as a condition for the reduction of the tax base to 50% of the capital gain on movable property, in accordance with article 43, paragraphs 3 and 4 of CIRS.

Therefore, what is important to be determined is whether F and E did or did not meet the material requirements provided for in the Annex to Decree-Law No. 372/2007, of 6 November, so that they could be qualified as micro or small enterprises and, therefore, benefit from taxation at only 50% of the capital gain, in the terms provided for in article 43(3) of CIRS.

Indeed, there is currently no contest to the possibility of taxpayers presenting proof of fulfillment of the material requirements on which the qualification as micro or small enterprise depends, as an alternative to presenting a certificate from IAPMEI.

In accordance with article 2(2) of the Annex to Decree-Law No. 372/2007, a small enterprise is defined as an enterprise employing fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros.

For its part, a micro enterprise is one that employs fewer than 10 persons and whose annual turnover or total annual balance sheet does not exceed 2 million euros.

The data considered for the calculation of personnel employed by the enterprise and of annual turnover or total annual balance sheet are those of the last financial year closed, calculated on an annual basis – that is, in the present case, those of the financial year 2009.

It should be noted that the quality of micro, small and medium is acquired or lost only if the limits are exceeded during two consecutive financial years, in accordance with article 4(2) of the Annex.

Taken individually, both F and E met the material requirements provided for in the Annex to Decree-Law No. 372/2007 so that they could be qualified as small enterprises.

However, as stated in article 3 of the Annex to Decree-Law No. 372/2007, it is necessary to distinguish between autonomous enterprises, partnered enterprises and associated enterprises.

In the case of enterprises being qualified as autonomous, the determination of the data relevant to the classification of the size of the enterprise is made solely on the basis of the accounts of the enterprise. However, in the case of partnered or associated enterprises, the data of the enterprises are aggregated in accordance with the established criteria.

It is important, therefore, to verify whether E and F are capable of being considered associated enterprises, in which case the elements relating to the number of persons employed by the enterprises and to annual turnover and total annual balance sheet would have to be considered in aggregate form, not individually for each of the enterprises.

In this case, taken on an aggregate basis, the number of persons employed by E and F and their respective annual turnover and total annual balance sheet would exceed one of the material requirements provided for in article 1(2) of the Annex to Decree-Law No. 372/2007, since the two enterprises together employ more than 50 persons.

In this way, should it be concluded that E and F are to be considered as associated enterprises for the purposes of the Annex to Decree-Law No. 372/2007, they cease to be able to be qualified as small enterprises.

Situation in which the Claimants could not benefit from taxation at only 50% of the capital gain obtained from the sale of their respective shareholdings, since the regime provided for in article 43(3) of CIRS would not be applicable.

In these terms, it is crucial to analyze whether, for the purposes of the Annex to Decree-Law No. 372/2007, E and F are or are not to be considered as associated enterprises.

In conformity with the provision in article 3(3) of the Annex to Decree-Law No. 372/2007, the following are assumed to be associated enterprises "enterprises that maintain between them one of the following relationships:

a) One enterprise holds the majority of voting rights of shareholders or members of another enterprise;

b) One enterprise has the right to appoint or remove the majority of members of the management, administrative or supervisory body of another enterprise;

c) One enterprise has the right to exercise dominant influence over another enterprise by virtue of a contract concluded with it or by virtue of a clause in the bylaws of the latter enterprise;

d) One enterprise that is a shareholder or member of another enterprise controls alone, by virtue of an agreement concluded with other shareholders or members of that other enterprise, the majority of voting rights of shareholders or members of the latter".

Enterprises are also considered associated enterprises that maintain one of the relationships described above through the intermediation of a natural person or a group of natural persons acting in concert, provided that these enterprises carry on their activities, or part thereof, in the same market or in contiguous markets (cf. article 3(3) of the Annex to Decree-Law No. 372/2007).

Now, for this purpose, it is expressly understood by contiguous market "the market of a product or service situated directly upstream or downstream of the relevant market" (cf. article 3(3) of the Annex to Decree-Law No. 372/2007).

With regard to the situation in the present proceedings, it appears that E and F are enterprises held by the same two natural persons – A and B.

The interdependence of the enterprises is further revealed by the fact that they are aggregated in a SGPS - G SGPS, LDA –, that they have their registered office at the same address, that in both companies management belongs to shareholders A and B.

It should be noted that the fact that the management of the enterprises in question must respect brand standardization criteria and the limitations arising from the franchising contract does not, in any way, prevent the enterprises from being considered associated in the terms of the Annex.

It can also be affirmed that E and F carry on their activities within the same market, since both enterprises operate in the fastfood market. More specifically, they are both D restaurants in a franchising regime, commercializing precisely the same products.

Therefore, the argument of the Claimants that enterprises E and F do not form part of the same relevant market, having regard to Commission Recommendation No. 2003/361/EC, of 6 May 2003, does not merit acceptance.

Similarly and for the same reasons, it is not considered relevant to bring into question the legal economic concept of contiguous market.

The Claimants, in the absence, in the Annex to Decree-Law No. 372/2007, of a concept of "relevant market", refer to the aforementioned Commission Recommendation, of 6 May 2003, considering as the relevant product market that which "comprises all products and/or services considered interchangeable or substitutable by the consumer due to their characteristics, prices and intended use."

On the other hand, it is defined there as the relevant geographic market that which "(...) comprises the area in which the enterprises in question supply products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring geographic areas due to the fact, in particular, that the conditions of competition are considerably different in those areas."

Now, taking into account, as has already been pointed out, that E and F both operate in the fastfood market, more specifically, they are both D restaurants in a franchising regime, and that they commercialize the same products, by the same prices, it cannot fail to be understood that both enterprises carry on their activity in the same relevant market, for the purposes of article 3 of the Annex to Decree-Law No. 372/2007.

The products that both commercialize, by being the same, cannot fail to be qualified as "interchangeable or substitutable by the consumer due to their characteristics, prices and intended use", by reference to the definition of "relevant product market" contained in the Commission Recommendation, of 6 May 2003.

Also the great geographic proximity between the restaurants operated by both enterprises allows for the conclusion, in the absence of detailed studies proving otherwise, that both operate in the same relevant geographic market.

Based on what has been stated, it is concluded, contrary to what the Claimants argue, that the companies E and F should be considered associated for the purposes of the Annex to Decree-Law No. 372/2007 and that, consequently, the capital gains obtained from the sale of their respective shareholdings are excluded from the scope of application of the regime of taxation at only 50%, provided for in article 43(3) of CIRS.

Indeed, the limit of 50 persons employed by the enterprise is exceeded when the aggregated values of E and F are taken into account, in the terms legally imposed for associated enterprises.

It should also be noted that the now Claimants, in addition to E and F, were also holders of the share capital of H - ..., Lda., a company that also engages in the activity of fastfood restaurant operation, with the D brand, this time in the Antas. The share capital was held 99% by A and 1% by B, with the management of the company being the responsibility of the former.

Considering H also as an associated company, and aggregating the respective values for the purposes of verification of the material requirements provided for in the Annex to Decree-Law 372/2007, naturally the non-compliance with the criteria characterizing the small enterprise becomes even more apparent.

  1. Question of the alleged violation of the burden of proof

The Claimant still argues, in the present proceedings, the existence of a violation of the burden of proof, a question that is now examined.

First, it should be noted that Decree-Law No. 372/2007 creates and regulates a regime for electronic certification of micro, small and medium enterprises, the responsibility of IAPMEI. As stated in its preamble, the purpose of the certification is to allow "the reduction of bureaucracy and dematerialization in the relationship of enterprises with public services responsible for implementing policies intended for SMEs".

What the tax legislator intended, in article 43(4) of CIRS, was only to import, for the purpose of applying paragraph 3, the concepts of micro and small enterprise and not to import a means of proving the condition of micro or small enterprise. The legislator's aim 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 is therefore necessary to conclude that, in order to benefit from the tax exclusion provided for in article 43(3) of CIRS, the holder of capital gains obtained from the alienation of shareholdings in micro or small enterprises does not necessarily need to exhibit the certification issued in accordance with Decree-Law No. 372/2007.

But he does need, that is, to demonstrate that the enterprises in question are micro enterprises or small enterprises, in the terms defined in the Annex to the said Decree-Law. This is the requirement that clearly results from article 43(4) of CIRS.

That is, the Claimants do not need to present the certification provided for in Decree-Law No. 372/2007. They can prove the quality of small enterprise by any other means suitable for that purpose.

But they are not relieved of that burden of proof, since indeed the regime provided for in article 43(3) of CIRS is a regime of tax exclusion that departs from the default regime, which consists of taxation at 100% of the balance of capital gains and losses obtained from the onerous alienation of shareholdings.

In this way, the quality of micro or small enterprise, for the purposes of applying article 43(3) of CIRS, needs to be proved by the taxpayer with a view to obtaining the benefit provided for in that legal provision.

In accordance with article 74(1) of LGT, the burden of proof that the companies whose shareholdings were alienated meet the material requirements to be qualified as micro or small enterprises rests on the taxpayers.

Indeed, being faced with a true tax benefit, given the provision in article 65(1) of CPPT, applicable ex vi article 5(3) of EBF and article 54(1)(d) of LGT, it will always be incumbent upon the interested party to prove the prerequisites upon which the benefit depends, i.e., to demonstrate unequivocally that the requirements on which the application of the tax regime in question depend are met.

Thus, it is required that the taxpayers materially prove the quality of micro or small enterprise that they claim regarding the shareholdings by them sold, in order to be able to invoke the application of the regime provided for in article 43(3) of CIRS, this not constituting any violation of the burden of proof.

It is therefore incumbent on the Claimants to demonstrate that, on the date of alienation of the shareholdings, the enterprises in question met all the material requirements provided for in the Annex to Decree-Law 372/2007.

Which, as has been seen, did not occur in the situation sub judice.

IV. Decision

In view of all the foregoing, it is decided:

a) To dismiss entirely the request for an arbitral ruling and, consequently, to maintain the tax act impugned subject of the present proceedings, and

b) To condemn the Claimant to pay the costs of the proceedings.

V. Value of the Proceedings

The value of the proceedings is set at €202,135.83 in accordance with article 97-A of CPPT, applicable ex vi article 29(1)(a) of RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

Costs to be borne by the Claimant, given that the present request was dismissed in its entirety, in the amount of €4,284.00, in accordance with Table I of RCPAT, and in compliance with the provisions in articles 12(2) and 22(4), both of RJAT.

Lisbon, 13 March 2015

The Arbitrators

José Poças Falcão
(President)

Paula Rosado Pereira

Luís Menezes Leitão

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of company shares taxed under Portuguese IRS?
Capital gains from the sale of company shares in Portugal are taxed under IRS (Personal Income Tax) as investment income under Category G. Generally, 50% of net capital gains are included in taxable income and subject to progressive tax rates, or taxpayers can opt for a separate 28% flat rate on the total gain. However, Article 43(3) of the CIRS provides a special regime for shares in micro and small enterprises not listed on regulated markets: only 50% of the gain is subject to taxation (meaning effectively 25% of the total gain is taxed under progressive rates, or 50% under the 28% flat rate option). To qualify, the enterprise must meet criteria established in Decree-Law 372/2007 regarding employee numbers and financial thresholds.
What is the 50% capital gains exclusion for micro and small enterprises under Article 43(3) of the CIRS?
Article 43(3) of the CIRS establishes a favorable tax regime for capital gains from selling shares in unlisted micro and small enterprises. Under this provision, only 50% of the positive balance from such dispositions is included in taxable income, effectively excluding half the gain from taxation. This incentive aims to promote investment in smaller companies. Article 43(4) defines qualifying enterprises by reference to Decree-Law 372/2007: micro enterprises have fewer than 10 employees with annual turnover or balance sheet under €2 million, while small enterprises have fewer than 50 employees with turnover or balance sheet under €10 million. The enterprise must not be listed on regulated or unregulated stock exchange markets. Importantly, the determination must consider whether companies are "associated enterprises" under Article 3(3) of Decree-Law 372/2007, as associated companies' data must be aggregated.
Can shareholders benefit from the small business tax relief when selling franchise business participations?
Whether shareholders can benefit from small business tax relief when selling franchise business participations depends on whether the franchise companies qualify as independent micro or small enterprises under Decree-Law 372/2007. In Process 510/2014-T, this precise issue was disputed. While franchise companies may individually meet the employee and turnover thresholds (E had 44 employees and F had 46 employees, both under the 50-employee limit for small enterprises), the Tax Authority may challenge the qualification if multiple franchise entities are deemed "associated enterprises." Under Article 3(3) of Decree-Law 372/2007, companies controlled by the same natural persons may be associated enterprises, requiring aggregation of their employee numbers and financial data. Additionally, franchise agreements often impose significant operational restrictions on the franchisee, potentially raising questions about the franchisee's independence as a distinct enterprise. The determination requires case-by-case analysis of ownership structure, operational control, and whether the entities operate in the same or contiguous markets.
What criteria define a micro or small enterprise for IRS capital gains tax purposes in Portugal?
For IRS capital gains tax purposes, Decree-Law 372/2007 (as referenced in Article 43(4) of the CIRS) establishes the criteria: a micro enterprise employs fewer than 10 persons with annual turnover or balance sheet not exceeding €2 million, while a small enterprise employs fewer than 50 persons with annual turnover or balance sheet not exceeding €10 million. Critically, these thresholds must account for "associated enterprises" under Article 3(3). Companies are associated when: (a) one holds majority voting rights in another; (b) one can appoint/remove majority of management bodies; (c) one exercises dominant influence through contract or bylaws; or (d) one shareholder controls majority voting rights through agreements with other shareholders. Additionally, enterprises controlled by the same natural person(s) acting in concert are associated if they operate in the same or contiguous markets (upstream or downstream in the supply chain). For associated enterprises, employee numbers and financial data must be aggregated to determine qualification.
How did the CAAD rule on the additional IRS tax assessment for capital gains in Process 510/2014-T?
While the complete decision text is not provided in this excerpt, Process 510/2014-T involved the CAAD (Administrative Arbitration Center) reviewing an additional IRS assessment of €202,135.83 for the 2010 taxation year. The Tax Authority challenged taxpayers A and B's application of the 50% capital gains exclusion for micro/small enterprises when they sold their shareholdings in restaurant franchise companies E and F. The central dispute concerned whether these two companies, both controlled by the same shareholders and operating under the same franchise system, should be treated as "associated enterprises" under Article 3(3) of Decree-Law 372/2007. If deemed associated, their aggregated employee numbers (90 total) would exceed the 50-employee threshold for small enterprises, disqualifying them from the favorable tax treatment. The arbitral tribunal was constituted to determine the legality of the additional assessment, examining whether the taxpayers correctly applied the literal interpretation of Article 43(3)-(4) of the CIRS or whether the Tax Authority's position regarding enterprise association was justified.