Process: 52/2015-T

Date: October 1, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Case 52/2015-T addresses a fundamental question in Portuguese tax law: when should capital gains from share sales be taxed when payment is deferred and contingent? The taxpayer A... challenged IRS assessments totaling €26,720.53 for tax years 2011 and 2012, arising from variable payments received from a 2009 share sale. The central dispute revolves around whether the taxable event occurred in September 2009 when the shares were alienated, or in 2011-2012 when variable price components were actually received. The taxpayer sold shares in B..., SA on September 17, 2009, for a price comprising a fixed installment (€1,333,000.00) plus variable installments based on the company's annual sales performance over 2010-2012. Under the IRS regime applicable in 2009, capital gains on shares held for more than 12 months were excluded from taxation. The taxpayer argued that applying the post-2010 tax regime—which eliminated this exclusion—to a 2009 transaction constitutes unconstitutional retroactive taxation, violating Article 103(3) of the Portuguese Constitution. The Tax Authority countered with two defenses: procedurally, that the right of action had expired; and substantively, that this was a 'successive formation' transaction rather than an instantaneous one. Since payment was subject to suspensive conditions with uncertain verification at the alienation date, the Tax Authority argued the capital gain could not be determined in 2009 and was only realized when the variable portions were actually received in 2011 (€70,471.34 taxed at 20%) and 2012 (€35,214.42 taxed at 25%). This case highlights the tension between the principle of non-retroactivity in tax law and the timing of capital gains recognition when transaction prices include contingent, future-dependent components. The arbitral tribunal's decision would have significant implications for determining when taxable events occur in complex corporate transactions involving deferred or performance-based consideration.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 52/2015-T

Claimant: A…

Respondent: Tax and Customs Authority

Subject Matter: Personal Income Tax (IRS), taxation of capital gains.

   I.             REPORT

  1.  On 30 January 2015, A…, taxpayer No. …, hereinafter identified as Claimant, submitted a request for arbitral award, pursuant to the provisions of articles 2, no. 1, subparagraph a) and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter referred to as LRTA), in conjunction with subparagraph a) of article 99 and no. 2 of article 102 of the Code of Tax Procedure and Process (CTPP), applicable by virtue of article 10, no. 1, subparagraph a) of Decree-Law No. 10/2011, of 20 January.

  2.   In the aforementioned request for arbitral award, the Claimant sought that the Arbitral Tribunal declare:

a) the illegality of the Personal Income Tax assessment notice No. 2014 …, including the corresponding compensatory interest assessments Nos. 2014 … and 2014 … and the respective reconciliation statement No. 2014 … in the amount of €17,248.00, relating to the year 2011;

b) the illegality of the Personal Income Tax assessment notice No. 2014 …, including the corresponding compensatory interest assessment No. 2014 …, and the respective reconciliation statement No. 2014 …, in the amount of €9,472.53, relating to the year 2012.

  1.  The request for establishment of the arbitral tribunal was accepted on 2 February 2015, by the Honorable President of CAAD and subsequently the Tax and Customs Authority (hereinafter identified as Respondent Entity) was notified.

  2.  The Claimant did not appoint an arbitrator, whereby, pursuant to the provisions of article 6, no. 1 of the LRTA, the undersigned was appointed by the President of the Deontological Council of CAAD to constitute this sole Arbitral Tribunal, and the appointment was accepted in accordance with legal provisions.

  3.  After hearing the parties, the holding of the meeting provided for in article 18 of the LRTA was waived by order of 9 July 2015.

  4.  Following notification to that effect, the Respondent Entity submitted its allegations on 14 September 2015.

  5.  The Claimant sustains its request, in summary, on the understanding that the moment of taxation of the gains under consideration in this proceeding relates to the moment when the sale transaction was completed, which occurred on 17 September 2009.

  6.  The Claimant understands that for purposes of taxation of capital gains on securities, the taxable event occurs at the moment when the alienation takes place and, furthermore, that the application of a law that began to tax capital gains that were previously excluded from taxation or the application of a more burdensome rate to facts prior to the entry into force of the law constitutes retroactive application of the law and is therefore illegal. The Claimant further holds that the taxable event should be located in time in accordance with the respective rule of incidence and not in accordance with a rule for determining taxable income.

  7.  On this basis, the Claimant contends that since it held the stake in question for more than twelve months, any capital gain was excluded from taxation in accordance with the law in effect in 2009, whereby its taxation based on the amendments introduced in 2010 violates no. 3 of article 103 of the Portuguese Republic's Constitution.

  8. In its Reply, the Respondent Entity invoked the expiration of the right of action by virtue of having directly challenged the assessment acts whose legality is contested, without examining the declaration of illegality of the act denying the administrative appeal previously lodged against those same assessment acts.

  9. The Respondent Entity further contends the lack of merit of the request on the ground that the taxable event did not occur in 2009, being at issue an act of successive formation and not instantaneous formation, inasmuch as payment of the shares transacted was subject to a suspensive condition of uncertain verification at the date of alienation.

  10. For the Respondent Entity, in the case at hand the realization of the capital gain did not end with receipt of the fixed portion in 2009 but was realized successively in 2011 and 2012 with receipt of the variable portions agreed, depending on the annual sales value of company B…, SA, from which resulted the impossibility of determining the value to be received at the time of alienation.

II.              ORDERS AS TO PROCEDURE

The Tribunal is materially competent and is duly constituted, pursuant to articles 2, no. 1, subparagraph a), 5 and 6, all of the LRTA.

The parties have legal standing and capacity, are parties and are represented, pursuant to articles 4 and 10 of the LRTA and article 1 of Administrative Order No. 112-A/2011, of 22 March.

There are no procedural defects, whereby it is now incumbent to consider the exception raised and the merits of the request.

III. SUBJECT MATTER OF THE ARBITRAL AWARD

The following questions are presented to the Tribunal, as described above:

                            i.            consideration of the expiration of the right of action;

                          ii.            application of the regime of exclusion from taxation of capital gains from shares held by their holder for more than 12 months to a transaction that occurred in 2009, of which the price was partially paid in 2011 and 2012.

IV. FACTS

Facts Found Proven

  1. In a tax inspection conducted by the Finance Directorate of ... with the objective of analyzing the application of the neutrality regime in corporate divisions and mergers, it was verified that company C…, Lda registered a simple division, allocating part of its assets to establish company B…, SA, which in turn in 2010 was merged into company D…, SA – page 5 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  2. On 15 July 2009, A…, E…, F… and G…, the future shareholders of the company to be established – B…, SA – signed a promise of sale contract for all the shares of this new company with the other shareholder D…, SA, for a global price divided into fixed installments (€1,333,000.00) and variable installments (2.50% of the annual sales value of B…, SA, if this were less than €2,250,000.00 and 5.00% if annual sales were equal to or greater than €2,250,000.00, in the fiscal years 2010, 2011 and 2012) – page 5 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  3. On 17 September 2009, following the registration of the simple division, the share sale contract was signed – page 5 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  4. According to the Inspection Report "it was confirmed by the taxpayer A… that the sale price stated in the share purchase and sale contract is the same as stated in the share promise of purchase and sale contract" – page 5 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  5. With respect to the variable portion of the contract – which was received in 2011 (€18,883.47 and €51,587.87) and 2012 (€35,214.42) – A… did not declare any amounts – page 5 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  6. From the Inspection Report "resulted the determination of unpaid IRS of €14,094.27 (€70,471.3420%) for the year 2011 and €8,803.61 (€35,214.4225%) for the year 2012" – page 10 of the Inspection Report, attached as Doc. 3 with the Claimant's petition;

  7. On 29 March 2014, an assessment notice for Personal Income Tax No. 2014 … was issued in the name of A…, for the year 2011, in the amount of €17,230.00, which includes the compensatory interest assessments Nos. 2014 … and 2014 … – attached as Doc. 1 with the Claimant's petition;

  8. On the same date, an assessment notice for Personal Income Tax No. 2014 … was issued in the name of A…, for the year 2012, in the amount of €9,472.53, which includes the compensatory interest assessment No. 2014 … – attached as Doc. 2 with the Claimant's petition;

  9. The Claimant filed an administrative appeal against the aforementioned IRS assessment notices and Compensatory Interest assessments, which was denied by order of the Finance Director of 3 November 2014, as notified by Official Letter of the same date from the Finance Directorate of ....

The facts found proven, which are peacefully acknowledged and accepted by the parties, are based on the documentary evidence presented.

Facts Not Found Proven

No essential facts with bearing on the merits of the case were found not to have been proven.

V.            ON THE LAW



    i.            On the expiration of the right of action

  1. The Respondent Entity invokes in its Reply as a dilatory exception preventing consideration of the merits of the case the alleged untimeliness of the request formulated in this proceeding.

  2. It sustains the exception invoked on the circumstance that the request for arbitral award has only as its object the IRS assessment notices Nos. 2014 … and 2014 …, relating to the years 2011 and 2012, corresponding reconciliation statements and compensatory interest assessment statements, and on the fact that ultimately only the declaration of illegality of those same acts and consequent annulment is requested.

  3. In the request for arbitral award no defects specific to the decision denying the administrative appeal are raised.

  4. For the Respondent Entity, since the annulment of the decision denying the administrative appeal that preceded this arbitral request is not sought, the latter is untimely by virtue of the fact that the period for direct challenge of the acts under consideration has expired.

  5. As is proven in the case file and is not disputed by the parties, this arbitral request was submitted following the denial of the administrative appeal filed against the assessment acts now under consideration.

  6. The Respondent Entity contends that since the annulment of the decision denying the administrative appeal is not requested, the period for submission of the request for arbitral award must be counted from the end of the period for voluntary payment, and not from notification of said decision denying the appeal.

  7. The position adopted by the Respondent Entity on this question cannot be accepted.

  8. When, as is the case, the matter at issue is not the consideration of acts fixing the taxable base, determining taxable income or fixing property values, the request for arbitral award necessarily has as its object the declaration of illegality of assessment acts (in the broad sense, encompassing self-assessments, withholding at the source and estimated payments), as expressly results from no. 1 of article 2 and no. 1 of article 13 of the LRTA.

  9. The subject matter of the request for arbitral award must not be confused with the period for formulating the request for arbitral award regulated in article 10 of the LRTA.

  10. In the case at hand the matter at issue is consideration of the legality of assessment acts, whereby in accordance with said no. 1 of article 10 of the LRTA, the request for establishment of an arbitral tribunal may be made within a period of 90 days counted from the end of the period for voluntary payment or, within the same period of 90 days, but counted from notification of the remaining acts that may be subject to autonomous challenge, being this latter period applicable in the case of notification of the decision on administrative appeal (cf. also subparagraphs a) and e) of no. 1 of article 102 of the Code of Tax Procedure and Process).

  11. From the provisions cited it results that a request for arbitral award having as its object the declaration of illegality of assessment acts may be submitted within a period of 90 days counted from the end of the period for voluntary payment or from notification of the decision on the administrative appeal filed against that same assessment act.

  12. It is true that legal doctrine holds that "although subparagraph a) of no. 1 of article 2 of the LRTA only makes explicit reference to the competence of arbitral tribunals to declare the illegality of assessment acts, acts defining the amount to be paid by the taxpayer, this competence extends also to second and third degree acts that consider the legality of these primary acts, specifically acts denying administrative appeals and acts denying hierarchical appeals filed against decisions on such appeals" (SOUSA, Jorge Lopes de – Guide to Tax Arbitration – Commentary on the Legal Regime for Tax Arbitration, Coimbra, 2003, p. 121).

  13. This interpretation permits – as expressly results from the cited commentary – extending the competence of arbitral tribunals to consideration of second or third degree acts.

  14. Legal doctrine advances in this context that "(…) in such cases the immediate subject matter of the challenge proceeding is, as a rule, the second degree act that considers the legality of the assessment act, an act which, if it affirms such act, must be annulled in order to obtain the declaration of illegality of the assessment act" (SOUSA, Jorge Lopes de – Guide to Tax Arbitration – Commentary on the Legal Regime for Tax Arbitration, Coimbra, 2003, p. 121).

  15. And it is on the basis of this understanding that the Respondent Entity contends in the case at hand the expiration of the right of action.

  16. Without prejudice to what shall be further developed hereinafter, it is important first of all to note that, being at issue a matter of procedure, considerations not directly reflective in the law cannot override the legitimate expectations of taxpayers, based on the law texts themselves – and, as results from the foregoing – the LRTA does not require challenging the decision denying the administrative appeal.

  17. In analyzing a similar question, Lopes de Sousa does not hesitate in concluding that coherence considerations may only be utilized "when their use does not result in restrictions of rights of appeal that have support in the content of legal texts, which may reasonably serve as the basis for citizens' expectations as to the periods within which they have to challenge acts that harm their rights or legitimate interests," lest there be violation of the "right to effective judicial protection (arts. 20, no. 1, and 268, no. 4, of the Constitution), which imposes that such protection be, first and foremost, accessible to the interested parties, which has as a corollary that they cannot be surprised by restrictive interpretations regarding terms of exercise of rights of substantive challenge, with which they cannot reasonably count" (SOUSA, Jorge Lopes de - Code of Tax Procedure and Process, Annotated and Commented, Volume II, Áreas Publisher, 6th edition, 2011, p. 152).

  18. That is, it is accepted that coherence considerations may serve as the basis for interpretations in the sense of extending the periods for exercise of rights of appeal, but not for interpretations that result in restriction of those same rights.

  19. Nonetheless, and returning to the question addressed that the immediate subject matter of the challenge proceeding is, as a rule, the second degree act, note that this is the interpretation adopted in light of the provisions regulating judicial challenge, which – unlike subparagraph a) of no. 1 of article 2 of the LRTA – expressly provide for challenging the complete or partial denial of administrative appeals of tax acts (cf. subparagraph c) of no. 1 of article 97 of the Code of Tax Procedure and Process and subparagraphs a) and j) of article 101 of the General Tax Law).

  20. However, even in this context case law is not settled, it having been argued that "judicial challenge, even if filed following denial of an administrative appeal is aimed solely and exclusively at the tax assessment act and not at the order denying the appeal" (cf. Judgment of the Supreme Administrative Court issued in Case No. 021089, of 24-09-1997, in www.dgsi.pt).

  21. Indeed, as was stated in the cited Judgment of the Supreme Administrative Court of 24-09-97 – Appeal No. 21089, when the taxpayer files judicial challenge to the denial of an appeal it is attacking "the assessment act and not the act denying the administrative appeal, which may be challenged on any ground, whereby the challenger is not obliged to attack the ground invoked by the administration to deny the administrative appeal" (Judgment of STA of 14-6-95, Appeal No. 18985, AP-DR of 14-8-97, page 1710, cited in the Judgment of the Supreme Administrative Court, issued in Case No. 0975/09, of 25 November 2009, in www.dgsi.pt).

  22. Other Judgments, even when concluding that the appeal constitutes the immediate subject matter of the challenge and the assessment the mediate subject matter, do not fail to clarify that "such differentiation has no significance."

  23. Attention is drawn in this context to the tenor of the following Judgment, also of the Supreme Administrative Court, which directly addresses the definition of the subject matter of judicial challenge of the denial of the appeal and the subsequent hierarchical appeal (whether of the assessment itself, whether of the decision of the administrative procedure, whether of both): " 11. Thus, from the denial of the appeal, without question the maintenance of the tax assessment act emerges. However, the decision of denial itself is also at issue, as judicial challenge thereof is available under the terms set forth. We even lean toward the understanding that this constitutes its immediate subject matter and the assessment its mediate subject matter - cf. the judgment of this STA, of 7 June 2000 – appeal No. 21.556. However, such differentiation has no significance given that, thus being the case, the two are part of the tribunal's consideration: the judgment of the STA of 6 November 1996 – appeal No. 20.519, followed by the decision of the same date issued in appeal No. 24.803, considers as the immediate subject matter of challenge the assessment act but immediately adds that therein knowledge extends to both aspects relating to defects specific to the denial of the appeal as well as illegalities attributed to the tax act that the latter found not to exist. (…) But, thus being the case, it is to be concluded that, having filed an administrative appeal of the assessment and having filed a subsequent hierarchical appeal, judicial challenge to the decision of such appeal is still available, unless another has already been filed, having as its subject matter, mediate or immediate, the same tax assessment act". Applying this doctrine to the specific case at hand from it immediately results that, annulling the assessment, the decision on the appeal necessarily falls, whereby it is not necessary to annul it nor to substitute its decision (cf. Judgment of the Supreme Administrative Court, issued in Case No. 0975/09, of 25 November 2009, in www.dgsi.pt).

  24. Now, if the contested assessments are annulled the decision on the appeal against the same is necessarily voided, there is no ground found to make consideration of the legality of the contested assessments dependent upon the challenge of the decision denying the administrative appeal.

  25. In summary, in the case at hand, the request was filed against the assessment acts whose legality is contested – with no intention of attributing any defects to the act denying the administrative appeal filed against these same assessment acts, an act which is merely confirmatory in nature – within the legal period of 90 days, counted from notification of the appeal decision, as expressly provided in no. 1 of article 10 of the LRTA and in subparagraph e) of no. 1 of article 102 of the Code of Tax Procedure and Process, whereby the exception of expiration of the right of action invoked by the Respondent Entity is found to be without merit.

    ii. On consideration of the legality of the assessment acts

  26. The question to be decided in this proceeding concerns, in essence, the determination of whether the exclusion from taxation of capital gains from shares held by their holder for more than 12 months, in effect in 2009, is applicable to gains whose amounts were received in the years 2011 and 2012, with reference to a transmission that occurred on 17 September 2009.

  27. For the Claimant, in the case of capital gains taxation, we are before a tax of single obligation, which applies to operations that are produced and exhausted in an instantaneous manner, without prejudice to taxable income being determined annually.

  28. And, basing itself on subparagraph b) of no. 1 of article 10 of the Personal Income Tax Code, the Claimant contends that the gains should be considered obtained at the moment of the act of alienation of the shareholdings – which occurred on 17 September 2009 – a date on which capital gains from shares held by their holder for more than 12 months were still excluded from taxation.

  29. It further concludes that taxing under applicable law a reality which on the date of its effectuation was excluded from taxation is constitutionally prohibited by no. 3 of article 103 of the Portuguese Republic's Constitution.

  30. For its part, the Respondent Entity counters that what is at issue is a complex fact of successive formation in which the perfection of the paid alienation of the shareholdings – the taxable event in question – was postponed to a moment subsequent to the execution of the contract itself – at the time of payment of the variable portions in 2011 and 2012 – entailing the corresponding taxation.

  31. As shall be further developed hereinafter, the Claimant's understanding is adopted that in the case of capital gains taxation the taxable event is born and exhausted at the autonomous moment of realization of the capital gain, it being accepted also that as a rule the realization of the capital gain occurs at the moment of alienation.

  32. There are however situations in which the gain is not obtained at the moment of alienation and in this hypothesis the realization of the capital gain does not occur at that moment.

  33. Falling within these situations are cases in which the gains are actually received at a later moment, in particular where payment in installments has been agreed upon or where payment of part or all of the price has been conditioned upon the occurrence of a certain condition.

  34. However, before directly entering into consideration of the question it is important to bear in mind the regime for taxation of capital gains under the heading of Personal Income Tax applicable in the years in question, that is between 2009 and 2012.

  35. In 2009, gains obtained resulting from paid alienation of shareholdings constituted capital gains, with gains considered obtained at the moment of performance of the acts (cf. subparagraph b) of no. 1 and no. 3 of article 10 of the Personal Income Tax Code – in the version introduced by Decree-Law No. 228/2002 of 31 October).

  36. Excluded from taxation then were capital gains from alienation of shares held by their holder for more than 12 months (cf. no. 2 of article 10 of the Personal Income Tax Code – in the version introduced by Decree-Law No. 228/2002 of 31 October).

  37. The Personal Income Tax Code was subsequently amended by Law No. 15/2010 of 26 July – which entered into force on the day following its publication – and which provided for repeal of no. 2 of article 10 of the Personal Income Tax Code, pursuant to which the aforementioned capital gains from alienation of shares held by their holder for more than 12 months were excluded from taxation (cf. article 1 and 5 of Law No. 15/2010 of 26 July).

  38. It is this amendment of the regime that repeals the prior exclusion from taxation which makes it relevant in the case at hand to determine the moment at which the taxable event occurs, since the legality of the acts under consideration is contested on the ground that it is considered applicable no. 2 of article 10 of the Personal Income Tax Code, in the version prior to the entry into force of Law No. 15/2010 of 26 July.

  39. Personal Income Tax is characterized by being a direct tax on the income of natural persons, by being a periodic tax – the configuration of the temporal element of the taxable event is, in Personal Income Tax, of long duration – and by being annual – it applies to the annual value of income in each of the respective categories, with taxable income resulting from the aggregation of such income, after deductions and allowances legally provided for (cf. no. 1 of article 1 and no. 1 of article 22 of the Personal Income Tax Code).

  40. The fact that Personal Income Tax "is a tax of periodic nature does not prevent it from being composed of income of instantaneous formation and income of successive formation. Indeed, while some income is, by the nature of its source, of successive formation over time (such as income in categories A, B, F and H, in which income and respective deductions succeed one another over time, with tax assessed based on the brackets and marginal rates resulting from the aggregation of these categories), others, such as the increases in assets that tax law considers as capital gains taxable in Category G, derive from operations individually carried out or instantaneous, in which each source of taxation presents itself as autonomous and complete, that is, without requiring any fact or subsequent occurrence." (cf. Judgment of the Supreme Administrative Court, issued in Case No. 01292/14, of 16-09-2015, in www.dgsi.pt).

  41. As already advanced, subparagraph b) of no. 1 of article 10 of the Personal Income Tax Code includes in the field of taxation scope gains obtained resulting from paid alienation of shareholdings.

  42. This scope supposes the realization of the capital gain, that is, it is not the mere increase in the value of the assets in which it is materialized that constitutes the source of taxation, the source of taxation is as a rule associated with the paid alienation of the asset.

  43. As already clarified by the Supreme Administrative Court "in the matter of the scope of income tax on natural persons, the Personal Income Tax Code establishes that "capital gains are gains obtained which (…) result from paid alienation of shareholdings and other securities" and determines that "gains are considered obtained at the moment of alienation" - article 10, no. 1, subparagraph b), and nos. 3 and 4. That is, it establishes, in clear and unequivocal fashion, that the increases in assets or gains derived from paid alienation of shareholdings, which are embodied in the difference between the value of acquisition and the value of realization of such goods, constitute capital gains which are considered obtained at the moment of alienation. Consequently, capital gains arise as soon as the amount collected by the respective holder/transferor is greater than the amount for which it had acquired the good, that is, as soon as alienation occurs and the inherent gain is achieved. Which is to say that it is in this gain, obtained at the moment of alienation, that the source of taxation generating capital gains resides. And given that the gain is measured by the difference between the value of realization and the value of acquisition of the good itself, and consequently assessed in each concrete act of alienation, it becomes clear that the capital gain relates to each gain per se. Reason for which, (…), we consider that the taxable event relates to the moment at which the capital gains are realized, or, in other words, the taxable event which originates and shapes them is born and exhausted at the precise moment (autonomous and complete) of alienation and contemporaneous realization of the capital gains, being for this reason an instantaneous taxable event, and not a complex taxable event of successive formation over a year. (cf. Judgment of the Supreme Administrative Court, issued in Case No. 01292/14, of 16-09-2015, in www.dgsi.pt).

  44. And to this understanding "there is no obstacle from the circumstance of being taxed "the balance determined between the capital gains and capital losses realized in the same year", since what is at issue in article 43, no. 1 of the CIRS is, alongside the rules governing the determination of gain subject to tax, the determination of taxable income as it relates to income resulting from capital gains" (cf. Judgment of STA, issued in Case No. 01078/12, of 08-01-2014, in www.dgsi.pt).

  45. For the above-cited Judgment it is "a situation similar to autonomous assessments under Corporate Income Tax, where it was concluded that "the fact that tax is assessed at the end of a certain period does not transform it into a periodic tax, of successive formation or of lasting character. That assessment operation amounts only to aggregation, for purposes of collection, of the set of operations subject to such taxation [...]" [cf. Judgment of the Constitutional Court No. 310/2012]. Indeed, also in capital gains resulting from alienation of shareholdings, the tax applies to operations that are produced and exhausted in an instantaneous manner, with the source of taxation arising isolated in time. Merely there is an annual consolidation of capital gains and capital losses for purposes of determining taxable income (…)" (cf. Judgment of STA, issued in Case No. 01078/12, of 08-01-2014, in www.dgsi.pt).

  46. This characteristic is common to the remaining capital gains, given that in the subparagraphs of no. 1 of article 10 paid alienation of the asset or an equivalent operation is required.

  47. Regarding "the moment at which the tax is due – a definition which is essential for attributing the taxable capital gain to a particular year – no. 3 of article 10 applies, which establishes, as the general rule, that gains are considered obtained at the moment of performance of the acts provided for in no. 1". That is, the source of taxation refers to the moment of the act that "realizes" the capital gain. It will be said, in general terms, that the relevant moment is therefore that of alienation of the asset in which taxable capital gains were determined, or an equivalent operation." (cf. XAVIER DE BASTOS - IRS - Real Scope and Determination of Net Income, Coimbra, 2007, p. 397 and 427).

  48. The law provides exceptions to this rule regulated in no. 3 of the same article 10 of the Personal Income Tax Code.

  49. In addition, the Personal Income Tax Code adopts in the construction of the concept of taxable income the conception of income-increment.

  50. In this conception, income for a period is the sum of all net increases in assets verified in the period, whether those deriving from participation in productive activity – which constitute income-product – or those not attributable to production.

  51. There is thus an extension "of the tax base to all increases in purchasing power, including in it capital gains and, in general, irregular receipts and fortuitous gains"(cf. Preamble to the Personal Income Tax Code).

  52. Capital gains constitute unexpected increases in the value of assets, being – as already advanced – one of the general principles of their taxation the principle of realization, in accordance with which taxation occurs only when the capital gain is realized, that is, as a rule when the asset is transacted.

  53. But from the principle of realization it also results that only "realized increases in assets – those that are reflected in a net increase of the monetary means of their holder (cash basis)" are taxed (cf. Xavier de Bastos - IRS - Real Scope and Determination of Net Income, Coimbra, 2007, p. 32).

  54. Taxation independent of this net increase in the monetary means of its holder would not only not result in taxation of actual income, but could lead to assessment of tax greater than the actual increase in income for the year, in the measure that the amount actually received was not sufficient to cover the respective tax charges.

  55. In this manner, and as sustained in a Judgment of the Supreme Administrative Court, issued in Case No. 0320/03, from the totality of the rules of Personal Income Tax it results that it should apply only to actual income and, in each year, only to actual income of that year.

  56. Which requires that no. 3 of article 10 of the Personal Income Tax Code be interpreted not as determining, in the year of performance of the act, taxation of income not actually earned, nor made available to the holder in that year, but rather as a mere presumption that income constituting capital gains is earned at the moment of performance of the act.

  57. Now, presumptions embodied in rules of tax scope always admit of rebutting evidence (cf. no. 1 of article 73 of the General Tax Law).

  58. And, as results from the facts found proven, the amounts subject to taxation which form the basis of the assessment acts whose legality is contested were only received in 2011 and 2012.

  59. In the situation under consideration, in the aforementioned Judgment of the Supreme Administrative Court, issued in Case No. 0320/03, at issue was the sale of shares of a company, in which it was agreed that part of the price would be paid in installments over the following years, it being considered whether the amount of Personal Income Tax (category G) relating to capital gains obtained as a consequence of alienation of such shares should be fixed based on the amount actually received in that same act or by the total price fixed in the respective deed of assignment of shares and which was not fully received in that year.

  60. In this context, the Supreme Administrative Court held that no. 3 of article 10 of the Personal Income Tax Code cannot be interpreted "without regard to the comprehensive character of Personal Income Tax taxation, of which mention is made in the preamble to the CIRS (no. 3) and the essential principles on which this tax rests, as the principle of "unity of the legal system" requires. "Of the three interpretive factors to which article 9, no. 1 refers, this is without doubt the most important. Its consideration as a decisive factor would be imposed upon us by the principle of coherence of values or axiological coherence in the legal system (…). Now and as is known, the introduction of Personal Income Tax aimed not only at obtaining higher revenue through extension of its tax base, but also that such increase be made without prejudice to justice and equity. And because it is so, the legislator adopted a broad concept of income, while determining that taxation should apply, fundamentally, to actual real income. Thus it requires, indeed, article 107, no. 2 of the Constitution and is also stated, in general terms, in article 4, no. 4 of Law No. 106/88 of 12/9, which authorized the Government to approve the CIRS. On the other hand, one of the principles also determinative in the matter of Personal Income Tax is that of annuality, understood in the sense that the income which it seeks to tax is all that, in each year, is earned or made available to its holder (cf. articles 1, 21, no. 1 and 41, no. 1 of CIRS). Thus from the totality of the rules of Personal Income Tax it results that, in relation to each taxpayer and in each year, Personal Income Tax applies not only to actual income, but also to what such person obtained in it. And if this is so, it is important to interpret the aforementioned article 10, nos. 1, subparagraph b) and 3 not as determining, at the moment of performance of the act, taxation of income not actually earned nor made available to the holder in that year, but rather as a presumption that income constituting capital gains is that earned at the moment of performance of the act" (cf. Judgment of the Supreme Administrative Court, issued in Case No. 0320/03, of 9 April 2003, www.dgsi.pt).

  61. Transposing this interpretation – which is adopted – to the case at hand, it is important to conclude that in the year of 1999, regarding capital gains calculations, only the income actually received in that year may be considered, which corresponds to the amount made available to the Claimant at the time of execution of the share purchase and sale contract (in the year of 2009 it was not yet even possible to know whether there would be further gains in the following years and in what amount).

  62. In hypotheses such as the present, as long as it is demonstrated that part of the value was only received in the following years, it is at the moment when the actual receipt occurred that the increase in assets should be considered realized and consequently the taxable event.

  63. In sum, with respect to the part of the price which the contract provides be paid in installments in the following years or which is dependent on the occurrence of a certain condition, there is place for realization of capital gain only if and when the amount is actually received.

  64. In view of the foregoing, having it been demonstrated that part of the value obtained from the transmission of the shareholdings was only received in 2011 and 2012, it is at each of those moments that the respective gain was realized and consequently the taxable event occurred.

  65. Now, in the years 2011 and 2012 capital gains from alienation of shares held by their holder for more than 12 months were no longer excluded from taxation, consequently the contested acts do not suffer from the illegality invoked.

  66. Likewise, they do not suffer from unconstitutionality, by violation of no. 3 of article 103 of the Portuguese Republic's Constitution, since the assessment acts result from application of legal rules in effect at the moment of the occurrence of the respective taxable events.

  67. In view of the foregoing, the request for annulment of the acts whose legality is contested is found to be without merit.

VI. DECISION

In view of the foregoing, it is decided:

i) To find without merit the exception of expiration of the right of action raised by the Respondent Entity in its Reply;

ii) To find without merit the request for arbitral award.

The value of the proceeding is fixed at €26,720.53 (twenty-six thousand seven hundred twenty euros and fifty-three cents), pursuant to article 97-A of the Code of Tax Procedure and Process, applicable by virtue of the provisions of subparagraphs a) and b) of no. 1 of article 29 of the LRTA, and no. 2 of article 3 of the Costs Regulation for Tax Arbitration Proceedings (CRTA).

Costs to be borne by the Claimant in the amount of €1,530.00 (one thousand five hundred thirty euros), pursuant to Table I of the CRTA, given that this request was found to be without merit, and in compliance with the provisions of no. 2 of article 12 and no. 4 of article 22, both of the LRTA, and the provisions of no. 4 of article 4 of the cited Regulation.

Notify.

Lisbon, 1 October 2015

[Text produced by computer, pursuant to article 131, no. 5 of the Code of Civil Procedure (CCP), applicable by referral of article 29, no. 1, subparagraph e) of the LRTA, with blank space and reviewed by the undersigned].

The Arbitrator

(Ana Moutinho Nascimento)

Frequently Asked Questions

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What is the tax treatment of capital gains (mais-valias) under Portuguese IRS in CAAD Case 52/2015-T?
In CAAD Case 52/2015-T, the tax treatment of capital gains depended on timing. The Tax Authority taxed variable payments received in 2011 at 20% (€14,094.27 on €70,471.34) and in 2012 at 25% (€8,803.61 on €35,214.42), applying the post-2010 IRS regime. The Authority argued the capital gains were realized successively when payments were received, not when the shares were sold in 2009. However, the taxpayer contended that under the 2009 law applicable at the time of alienation, capital gains on shares held for more than 12 months were excluded from taxation, making the subsequent taxation of variable portions illegal.
Can a new tax law retroactively apply to capital gains realized before its entry into force?
The core constitutional issue in Case 52/2015-T was whether a new tax law can retroactively apply to capital gains realized before its entry into force. The claimant argued that applying the 2010 tax law amendments—which began taxing capital gains previously excluded from taxation—to a September 2009 share sale violates Article 103(3) of the Portuguese Constitution. The taxpayer maintained that the taxable event must be located at the moment of alienation according to the incidence rule, not according to income determination rules. Therefore, taxing gains from a 2009 transaction under a more burdensome regime that took effect in 2010 constitutes prohibited retroactive application of tax law. The Tax Authority disagreed, arguing the capital gain was realized successively in 2011-2012, not in 2009.
How did the taxpayer challenge the IRS tax assessments for 2011 and 2012 at the CAAD?
The taxpayer A... filed an arbitration request with CAAD on January 30, 2015, under Articles 2(1)(a) and 10 of Decree-Law 10/2011 (RJAT). The challenge sought declarations of illegality for: (a) IRS assessment notice 2014... for 2011, including compensatory interest assessments, totaling €17,248.00; and (b) IRS assessment notice 2014... for 2012, including compensatory interest, totaling €9,472.53. The request was accepted on February 2, 2015. The taxpayer did not appoint an arbitrator, so a sole arbitrator was appointed by the President of CAAD's Deontological Council pursuant to Article 6(1) of RJAT. The Tax Authority raised a procedural defense claiming expiration of the right of action because the taxpayer directly challenged the assessment acts without first challenging the denial of the administrative appeal.
What legal provisions govern arbitration requests for IRS disputes under the RJAT (Decree-Law 10/2011)?
IRS arbitration requests under RJAT (Decreto-Lei 10/2011) are governed by Articles 2(1)(a) and 10 of Decree-Law 10/2011, dated January 20, which establishes the Legal Regime for Tax Arbitration. These provisions apply in conjunction with Article 99(a) and Article 102(2) of the CTPP (Code of Tax Procedure and Process), applicable by virtue of Article 10(1)(a) of the RJAT. Article 6(1) governs arbitrator appointment when parties fail to designate one. Article 18 addresses procedural meetings, which can be waived by agreement. The regime provides taxpayers an alternative dispute resolution mechanism for challenging tax assessments, with the arbitral tribunal having material competence to decide on the legality of IRS assessment notices and related compensatory interest determinations.
What was the total amount of IRS tax and compensatory interest contested in Process 52/2015-T?
The total amount contested in Process 52/2015-T was €26,720.53, comprising two tax years: (a) €17,248.00 for the 2011 assessment (IRS assessment notice 2014..., compensatory interest assessments 2014... and 2014..., and reconciliation statement 2014...); and (b) €9,472.53 for the 2012 assessment (IRS assessment notice 2014..., compensatory interest assessment 2014..., and reconciliation statement 2014...). The underlying unpaid IRS determined by the tax inspection was €14,094.27 for 2011 (calculated as €70,471.34 × 20%) and €8,803.61 for 2012 (calculated as €35,214.42 × 25%), with the difference representing compensatory interest on the late payment of these tax obligations.