Summary
Full Decision
ARBITRAL TRIBUNAL DECISION
The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Nuno Oliveira Garcia and Dr. A. Sérgio de Matos (arbitrator members), designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 17-11-2015, agree as follows:
1. Report
A…, Tax ID Number … (hereafter briefly designated as "Claimant"), filed a request for constitution of the collective arbitral tribunal, pursuant to articles 2nd and 15th of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereafter only designated as RJAT), in which the Tax Authority and Customs Authority is the Respondent, with a view to the declaration of illegality and annulment of the act of assessment of Personal Income Tax and compensatory interest no. 2014…, relating to the year 2013.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 18-09-2015.
Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6th and subparagraph b) of paragraph 1 of article 11th of the RJAT, as amended by article 228th of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the office within the applicable deadline.
On 04-11-2015 the parties were duly notified of this designation, having not manifested any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11th paragraph 1 subparagraphs a) and b) of the RJAT and articles 6th and 7th of the Code of Ethics.
Thus, in accordance with the provision in subparagraph c) of paragraph 1 of article 11th of the RJAT, as amended by article 228th of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 17-11-2015.
The Tax Authority and Customs Authority responded, arguing that the request should be dismissed.
By order of 14-01-2016, it was decided to dispense with the meeting provided for in article 18th of the RJAT and that the proceedings continue with submissions.
The Parties submitted their submissions.
The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with the provisions of articles 2nd, paragraph 1, subparagraph a), and 30th, paragraph 1, of the RJAT.
The parties are duly represented and possess legal personality and capacity, are legitimate and are represented (articles 4th and 10th, paragraph 2, of the same diploma and article 1st of Regulation no. 112-A/2011, of 22 March).
The proceedings do not suffer from nullities and no exceptions were invoked.
Thus, there is no obstacle to examination of the merits of the case.
2. Facts
2.1. Proven Facts
Based on the elements contained in the file and in the administrative proceeding attached to the record, the following facts are considered proven:
a) On 04-10-2005, by judgment of the 5th Civil Court of Lisbon, rendered in the Special Process Action no. …/2001, the acquisition by acquisitive prescription (usucapião) was declared in favor of the Claimant, of the urban property located at Av.…, no.…, described in the Land Registry of Lisbon under no. … of the extinct parish of … and registered in the urban registry of the same parish under article number …, which today corresponds to article … of the new parish of … (document no. 6 attached to the request for arbitral pronouncement, the content of which is reproduced);
b) In the aforementioned judgment, it is concluded that the herein Claimant was in possession of the property in question for more than 15 years and it is established, furthermore, that on 28-02-1985, a "partition promise contract" was executed in which the herein Claimant was attributed, together with B…, his father, and C…, his sister, the property in question, sustaining what had been verbally agreed in 1982 and that from the year 1982, and also in accordance with his father and sister, the herein Claimant began to collect and benefit from the rents of the property in the capacity of landlord, to pay and assume all tax obligations relating to the same, to ensure the maintenance and proper conservation of the property, in the sight of all, in a peaceful and continuous manner, in the belief of being its respective owner;
c) In his Personal Income Tax return, filed in 2014, relating to 2013, the Claimant presented as income for that year what he understood would be the capital gain realized by the sale of the property referred to in the previous paragraph, in the amount of € 1,667,417.60, in the terms set forth in the table that follows:
[Details of capital gain calculation with acquisition value of € 637,872.40 with monetary correction, expenses and charges of € 94,710.00, and realization value of € 2,400,000.00]
d) The Tax Authority and Customs Authority corrected the acquisition value of the urban property to € 100,909.86 (with monetary correction: € 117,055.44) and disregarded entirely the expenses and charges declared, thus determining a capital gain of € 2,282,944.56;
e) On 12-12-2014 the herein Claimant was notified to exercise, within a period of 15 days, his right to prior hearing prior to the intent of the tax authorities to carry out the aforementioned corrections (document no. 2 attached to the request for arbitral pronouncement, the content of which is reproduced);
f) On 19-12-2014, the tax administration issued assessment no. 2014…, which is contained in document no. 1 attached to the request for arbitral pronouncement, the content of which is reproduced);
g) On 29-12-2014, the document relating to the exercise of the right to prior hearing was submitted to the Tax Authority and Customs Authority, in the terms set forth in document no. 3 attached to the request for arbitral pronouncement, the content of which is reproduced, with documents attached and requesting an extension of the deadline for a further 15 days);
h) On 14-01-2015, the Claimant was personally notified of office no.…, of 07-01-2015, of the Finance Service of … which is contained in document no. 4 attached to the request for arbitral pronouncement, the content of which is reproduced, in which is referred, among other things, the following:
There is in this Finance Service a request directed to the Chief of the Finance Service of … -…, in the name of A…, tax ID number…, and requested by a different person, without having exhibited a document that legitimates the aforementioned request, pursuant to articles 5 and 40 of the Code of Administrative Tax Procedure.
Furthermore, it is clarified that any request submitted to the Tax Authority should, pursuant to Decree-Law 14/2013 article 31 paragraphs 1 and 2, indicate the tax identification number of all intervening parties.
However, it is clarified that it was entered after the official assessment was prepared, consequently after the deadline for prior hearing, and therefore, after receipt of the assessment, he may appeal within the terms and deadlines indicated in the same.
The request did not come in duplicate, however a copy of its entry is attached.
For the above stated the said request shall have no effect.
i) On 19-01-2015, the Claimant, through his representative, submitted to the Tax Authority and Customs Authority the request which is contained in document no. 5 attached to the request for arbitral pronouncement, the content of which is reproduced in which he ratifies the request that had been submitted on 29-12-2014;
j) On 09-03-2015, the Claimant filed a gracious appeal/administrative review of the aforementioned assessment (administrative proceeding);
k) The gracious appeal was denied by the order of the substitute of the Head of Division of Administrative Justice of the Finance Directorate of Lisbon, of 29-05-2015 (document no. IA, attached to the request for arbitral pronouncement, the content of which is reproduced);
l) In the information to which the order of dismissal refers, the following is stated, among other things:
However, first and foremost, we will analyze the ground alleged in second place (violation of the transitional regime established in article 5 of Decree-Law no. 442-A/88 of 30/11), this is because, should it happen that the herein Appellant is correct, that functions, in our view, as a preliminary issue, with all the legal consequences that flow therefrom, especially, causing the remaining grounds alleged to remain unexamined, as it appears, manifestly unnecessary.
Thus, with the reform of Patrimony, carried out by Decree-Law no. 287/2003 of 12/11, the Code of Stamp Tax and its respective attached Table was profoundly altered, passing this legal diploma to also incorporate the legal norms relating to gratuitous transfers of property and onerous transfers of activities or service operations (legal norms these, previously provided for in the Code of Municipal Tax on Transfer of Property and Tax on Succession and Donations, which was repealed on 2003-12-31), amendments that came into force on 01-01-2004, as can be seen from the combination of articles 1st, 2nd, 8th, 9th, 31st and 32nd all of the said Decree-Law.
That is, from this date (01-01-2004), the tax legislator began to expressly provide for the taxation of original acquisitions of immovable property, through the legal figure of "acquisitive prescription (usucapião)", as provided in subparagraph a) of paragraph 3 of article 1st of the Stamp Tax Code, which has the heading "Objective Scope", this for the purposes of the application of item 1.2 of the General Table attached to the cited code, and it is further certain that, pursuant to article 3rd paragraph 3 subparagraph a) of the same legal diploma, the burden of stamp tax belongs to the acquirer, that is to say, in the case of acquisition by acquisitive prescription, to the acquirer by acquisitive prescription.
Article 5 subparagraph r) of the Legal Diploma that occupies us further provides that "The tax obligation is considered to be established, in acquisitions by acquisitive prescription, on the date on which the judicial justification action becomes final, the deed of notarial justification is executed or at the moment when the decision rendered in the justification proceeding pursuant to the Land Registry Code becomes final;" which means, in our view, that in this type of acquisitions and for the purposes of the objective scope of the tax, the tax legislator, disregarded the legal provisions of civil law applicable to this same subject matter, having instead opted for the economic criterion, which is to consider that the tax is owed to the State, at the moment when the title justifying the acquisitive prescription is judged/rendered final.
Now, as the acquisitive prescription in question in the present record was verified in late 2005, as can be seen from pages 36 to 43, no doubts can exist that, the same, contrary to what is defended by the herein Appellant, cannot benefit from the transitional regime set forth in article 5 of Decree-Law no. 442-A/88 of 30/11 (and not 442-A/80 of 30/11 as mentioned in article 9 of the Information, certainly by mistake), since its acquisition, as we have seen, is subject to Stamp Tax and, consequently, its alienation, subject to Personal Income Tax, in category G, in view of the combination of articles 10th paragraph 1 subparagraph a), 43rd paragraphs 1 and 2, 44th and 45th all of the Personal Income Tax Code, therefore, the grounds alleged cannot prevail regarding this matter, because they are entirely devoid of legal basis, namely the doctrine presented and contained in pages 44 to 46, which should be considered repealed, even if tacitly, at least from 01-01-2004, and that contained in pages 47/48, in our view, does not apply here, as it concerns rural property, while here we are speaking, "ab initio" of urban property.
As for the remaining grounds alleged, we are of the belief that neither is there any reason to assist the herein Appellant, as follows:
The herein Appellant refers as the first ground that the assessment now under review suffers from the defect of violation of the right of participation of the Appellant, an allegation that we cannot follow, insofar as, as can be seen from pages 60 to 68 of the present record, with special emphasis on page 61, the Tax Authority and Customs Authority, under the authority of articles 76th paragraph 1 and 65th paragraph 4 both of the Personal Income Tax Code, corrected the values declared by the herein Appellant in his Personal Income Tax Return Form 3 that he filed on 2014-05-31 (see pages 75 to 80), namely in annex G, having for this purpose, instituted on 20-06-2014, a divergencies procedure;
On 07-10-2014, within the scope of that same procedure, it notified the herein Appellant to exercise the right to hearing, inasmuch as, in light of the elements declared and those that were within the knowledge of the Tax Authority, the latter proposed to alter/correct, not only the acquisition value of the immovable property in question (to change the value from € 549,890.00 to € 100,909.86), as well as disregard the expenses and charges mentioned in field 401 of the said annex G (passing from € 94,710.00 to € 0.00), because in its understanding, the same, were not considered as indispensable for this purpose (this in light of the position adopted by the Tax Authority in this regard), since they concerned fees paid to his lawyer, all as can be seen from pages 52/53 of the present record;
The aforementioned right to hearing was exercised via internet on 30-10-2014, as can be seen from pages 61/66, and it is certain that the Services, given the content of that exercise, did not accept what was alleged, having informed the herein Appellant of this through emails dated 05-11-2014 (see pages 64/65), this in light of the reason that was at the origin of the institution of the already mentioned divergencies procedure, namely the alienation of immovable property, identified through the designation D39 (see page 60 of the present record;
However, certainly by mistake, since no reason is seen for this, the Services notified the herein Appellant to exercise a "new" right to hearing, as can be seen from pages 61/63, so that, after detection by them of such a mistake, they tried to correct it, sending an email accounting for the conclusion of the divergencies procedure with corrections, and which is at the basis of the assessment now put in question, when they should, in our view, also send another to annul the email that granted him a "new" right to hearing, because it was illegal, since it was granted improperly, this being therefore the only censure to be made to the Services in this entire procedure, however, in our view, it can never invalidate the procedure in question, much less the assessment now under review, as intended by the herein Appellant, even because, as we have seen, there was no formal essential violation of the right of participation, since the Appellant was granted the right to hearing and exercised it, not having only been accepted by the Services, given the law and doctrine established regarding the corrections carried out, hence also here, the grounds alleged cannot be accepted, because they are devoid of legal basis;
Regarding the value, which should serve as the acquisition value of the immovable property in question, if it is true that the herein Appellant was notified of the valuation value that was attributed to it (€ 549,890.00), as can be seen from pages 49 to 51, it is also no less true, indeed as is well known to the herein Appellant, that that valuation never produced effects, either in the context of Stamp Tax, or in the context of Real Estate Transfer Tax (IMI), as can be seen from pages 71 to 73 and 81 to 100, since there was no assessment, even if additional, of Stamp Tax, and the Real Estate Tax Value that served as the basis for the assessment of Real Estate Transfer Tax for various years, from 2005 to 2012, was not the one contained in the valuation, since this, as can be seen from page 93, is in the situation of "For production of effects", despite us also not discerning the reason for such situation, therefore, if that valuation never produced tax effects, the herein Appellant cannot, in our view, come now to want his property to have been acquired at that value, hence the Services acted well, in considering the Real Estate Tax Value of € 100,909.86, which was the one that was valid at the date of acquisition of the immovable property, "ex vi" of article 13th paragraph 1 of the Stamp Tax Code;
Finally, regarding the expenses and charges, which the herein Appellant declared in field 401 of Annex G, in the amount of € 94,710.00, and which concern the fees that he paid to his lawyer, for all the extrajudicial and judicial services rendered, and which led to the acquisition and sale of the immovable property that occupies us, we also understand that the same cannot be accepted, because, in our view, they cannot be subsumed, either under the provision of article 51st subparagraph a) of the Personal Income Tax Code, nor in the doctrine that exists regarding this subject matter, because they cannot be considered necessary and indispensable for the acquisition and alienation of the immovable property in question, on the contrary, if the said expenses/charges concerned a real estate broker/agent, since, provided all the necessary requirements are met to demonstrate, unequivocally, the connection of the amount paid with the concrete transaction that gave rise to the capital gain, and being properly documented that same intervention, it would already be accepted, because it would be framed in the provision of the cited legal norm, as can be seen from the understanding sanctioned in the binding information - Binding Information - Case no. 12/2008, with concordant orders of the legal substitute of the Director-General of Taxes of 14-07-2008 and 12-08-2008, consultable "in the Finance Portal - Binding Information - Article 51" subparagraph a) Personal Income Tax Code"
Therefore, for all that we have been expounding, the present Gracious Appeal should be entirely dismissed, with all the legal consequences flowing therefrom, especially to maintain in the tax legal order the tax act in question, because, in our view, it is legal, inasmuch as the same does not suffer from the defects/pathologies that are pointed out to it by the herein Appellant.
III - EXERCISE OF THE RIGHT TO HEARING
Having proposed that the present Gracious Appeal not be entirely granted, prior hearing took place, pursuant to subparagraph b) of paragraph 1 of article 60 of the General Tax Law, however, no reaction was obtained from the herein Appellant, within the period of 15 days, which for this purpose was granted to him, pursuant to paragraph 6 of the cited legal provision, a period which ended on the 19th of the present month and year (with its beginning on 05-05-2015) and, if so, the sense of the draft decision, already previously notified, should be maintained, converting it into a final decision.
IV - CONCLUSION
Thus, it is found that the Appellant's tax situation does not require correction, so it is proposed that the present Gracious Appeal be ENTIRELY DISMISSED, for the reasons previously cited, notifying the same, in the person of his Representative, not only of the present information, but also of the order that may be issued on the same, in accordance with and for the purposes provided in paragraph 6 of article 77 of the General Tax Law.
m) On 04-11-2003, the Tax Authority and Customs Authority issued the opinion that is contained in document no. 7 attached to the request for arbitral pronouncement, the content of which is reproduced, in which is referred, among other things, the following:
Type ORDER, OPINION …
Date 04-11-2003
Descriptors transitional regime; acquisitive prescription; Personal Income Tax; capital gains; category g; date of acquisition
Text of the Circular
MINISTRY OF FINANCE
DIRECTORATE-GENERAL OF TAXES
LEGAL SERVICES AND LITIGATION DIRECTORATE (DSJC)
OPINION No. 452
SUBJECT/SUMMARY: Acquisition by acquisitive prescription of the right of ownership of immovable property - the date on which it should be considered realized for the purposes of applying the transitional regime established for capital gains resulting from the alienation of urban properties, under Personal Income Tax, by article 5° of Decree-Law no. 442-A/88, of 30 November - possible relevance of the deed of notarial justification of that possession.
1 - By determination of the Director-General of Taxes of 19 August 2003, it is incumbent upon this Legal Services and Litigation Directorate to issue an opinion on the date on which the acquisition by acquisitive prescription of immovable property should be considered realized, for the purposes of applying the transitional regime established for capital gains resulting from the alienation of immovable property, under Personal Income Tax, by article 5°, paragraph 1, of Decree-Law no. 442-A/88, of 30 November, and the possible relevance of the deed of notarial justification of that possession.
2 - The question on which it is incumbent upon us to issue the present opinion was raised in a letter addressed on 18 October 2002 to the Finance Director of the district of Castelo Branco by "A...", resident in the municipality of .... in which he requests binding information in accordance with the generally applicable terms, which are those of article 68°, paragraphs 1 and 2, of the General Tax Law, concerning the following situation:
a) The petitioner took possession, 27 years ago, in 1976, of two urban properties mentioned in a deed of justification executed on 15 January 1997 at the notarial office of ....
b) The aforementioned possession would never be titled by public deed, so that, to register the aforementioned urban properties, the herein petitioner had to resort to the execution of the aforementioned deed of notarial justification.
c) In the aforementioned deed of notarial justification, it is stated by the executing parties that the petitioner entered into possession of the aforementioned properties continuously and consecutively for more than 20 years, and therefore, given the public, peaceful and good faith character of that possession, he acquired them in the meantime by acquisitive prescription, a mode of acquisition that, thus, prevails over what would result from the demonstration of his right of ownership by normal extrajudicial means, which moreover is prejudiced by the occurrence of the aforementioned type of acquisitive prescription.
d) Only after the execution of the deed did the petitioner manage to obtain registration in the land registry of the immovable property in question.
e) He now wishes to know what date, for the purposes of applying the aforementioned transitional regime of article 5°, paragraph 1, of Decree-Law no. 442-A/88, should be considered as the date of acquisition of the immovable property in question: the date of commencement of possession, the execution of the deed of notarial justification or the registration of the properties in the land registry in the name of the petitioner.
3 - Information from the Services Directorate of Personal Income Tax of 6 June 2003, approved by order of the Director of Services of 27 June following, would respond to the question raised in the sense that, pursuant to article 1317°, paragraph 1, subparagraph c), of the Civil Code (C.C.), the moment of acquisition of the right of ownership is, in the case of acquisitive prescription, the moment of commencement of possession, so the immovable property in question should be considered as acquired in 1976, the date which, according to the aforementioned deed of notarial justification, the public, peaceful and good faith possession began that would originate the aforementioned acquisitive prescription.
4 - We consider indisputably correct the position sustained by the Personal Income Tax Services Directorate in the sense that the transmission in question is covered by the transitional regime of article 1° of Decree-Law 442-A/88, so that the gains resulting from the alienation of immovable property acquired by means of possession begun in 1976 and the object of the aforementioned deed of notarial justification of 1997 are not covered by the scope of Personal Income Tax.
In fact, pursuant to the common legislation, in the case of acquisitive prescription, ownership is acquired at the moment of commencement of possession of the property.
The question of knowing, in the case of acquisitive prescription, when property ownership of the goods that are the object of possession is considered to be acquired, which is now expressly resolved in the law, would also have been controversial during the validity of the Civil Code of 1867 by the Viscount of Seabra, having then confronted the antagonistic positions of those who opted for the commencement of possession or the expiration of the acquisitive prescription period.
The aforementioned article 1317°, paragraph 1, subparagraph c), of the C.C., moreover, is nothing more than the manifestation of the provision of article 1288° of the said Code, pursuant to which, when acquisitive prescription is invoked, its effects are retroactive to the date of commencement of possession.
It was intended with this solution to safeguard the efficacy of the institute of acquisitive prescription, which would not be guaranteed if the effects of acquisitive prescription only occurred after the expiration of its respective period.
5 - It is a fact that Tax Law did, however, carve out an autonomous concept of transmission distinct from that of civil legislation, which is currently contained in the provisions of the Code of Municipal Tax on Transfer of Property and Tax on Succession and Donations (C.I.M.S.I.S.D.).
This concept is, however, not incompatible with the solution to be given to the case in question.
On the contrary: the tax transmission independent of civil transmission also occurred, in the situation that is the object of the present request for binding information, on the date of commencement of possession of the acquirer.
Pursuant to article 2°, paragraph 1, 2°, of the said Code, in fact, the transmission of immovable property ownership is considered the promise of purchase and sale or exchange of immovable property as soon as delivery is made to the prospective buyer or to the prospective exchangers, or when the latter or these are enjoying the property.
It has been a constant understanding of the tax administration and tax courts that the incidence of the transfer tax, under the authority of the said legal provision, falls on the contract of purchase and sale not titled by public deed converted by lack of form into a promise contract in accordance with article 293° of the Civil Code (C.C.), provided that delivery of the sold property to the acquirer has in the meantime occurred.
In the present case, would be demonstrated by the public deed of justification the existence in 1976 of a purchase not titled by public deed of urban properties followed by its delivery to the acquirer, having thus been met the legal requirements of tax transmission.
The aforementioned operation was indisputably subject to transfer tax, but the fact is that the acquirer did not request its assessment and the period for prescription of article 180° of the C.I.M.S.I.S.D. has long since expired.
6 - Concluding:
a) In the situation configured by the present request for binding information, the civil and tax transmission occurred at the moment of commencement of possession by the petitioner which occurred in 1976.
b) Accordingly, the provision of article 5°, paragraph 1, of Decree-Law no. 442-A/88 applies to the case in question, so that the capital gains resulting from the onerous alienation of the urban properties acquired by the petitioner are not subject to Personal Income Tax.
Lisbon, 3 October 2003
Legal Services and Litigation Directorate
The jurist,
(…)
n) On 22-01-2007, the Tax Authority and Customs Authority issued the opinion that is contained in document no. 8 attached to the request for arbitral pronouncement, the content of which is reproduced;
o) On 16-06-2006, the Tax Authority and Customs Authority issued the information that is contained in document no. 13 attached to the request for arbitral pronouncement, the content of which is reproduced;
p) On 14-07-2008, the order P …/2008 was issued, which is contained in document no. 14 attached to the request for arbitral pronouncement, the content of which is reproduced;
q) On 20-05-2008, the Tax Authority and Customs Authority assigned the real estate tax value of € 549,890.00;
r) On 20-03-2013, the Claimant paid the amount of € 94,710.00 to D…, concerning "extrajudicial and judicial services rendered (case No. …/09… LSB)" (document no. 11 attached to the request for arbitral pronouncement, the content of which is reproduced);
s) Regarding the payment referred to in the previous subparagraph, the Professional Fee Note was issued which is contained in document no. 12 attached to the request for arbitral pronouncement, the content of which is reproduced, in which is referred, among other things, the following:
My professional fees for services rendered from 1985 to this date with the objective of selling the urban property located at number … of Avenue…, in Lisbon, comprising all conversations, contacts, negotiations, that occurred with potential buyers from that date and which culminated in the sale of the property for the value of €2,400,000.00 (Two million and four hundred thousand euros), including the filing of an eviction action against the tenant E…, S.A., which is still pending in the 1st Section of the 6th Civil Court of the Judicial Court of Lisbon, case no. …/09… LSB
t) On 01-09-2015, the Claimant submitted the request for constitution of the arbitral tribunal that gave rise to the present proceedings.
2.2. Unproven Facts
There are no facts with relevance to examination of the merits of the case that have not been proven.
2.3. Grounds for the Establishment of Facts
The proven facts are based on the documents attached to the request for arbitral pronouncement and the administrative proceeding, with no controversy regarding them.
3. Matters of Law
The Claimant submitted a Personal Income Tax return for the year 2013 in which he included income in the amount of € 1,667,417.60 comprised of capital gains, considering the acquisition value, in October 2005, of € 637,872.40 (with monetary correction), the "expenses and charges" of € 94,710.00 and the realization value of € 2,400,000.00, in March 2013.
The Tax Authority and Customs Authority corrected the acquisition value of the urban property to € 100,909.86 (with monetary correction: € 117,055.44) and disregarded entirely the expenses and charges declared, thus determining a capital gain of € 2,282,944.56.
The capital gains in question result from a property that the Claimant acquired by acquisitive prescription, declared by judgment of 04-10-2005, in which it was concluded that the herein Claimant was in possession of the property in question for more than 15 years and it is established, furthermore, that on 28-02-1985, a "partition promise contract" was executed in which the herein Claimant was attributed, together with B…, his father, and C…, his sister, the property in question, and that from the year 1982, and also in accordance with his father and sister, the herein Claimant began to collect and benefit from the rents of the property in the capacity of landlord, to pay and assume all tax obligations relating to the same, to ensure the maintenance and proper conservation of the property, in the sight of all, in a peaceful and continuous manner, in the belief of being its respective owner.
In the present proceedings, the Claimant argues, firstly, that the gains obtained from the transmission of the property in question are excluded from Personal Income Tax taxation, because the acquisition is prior to 01-01-1989, and the provision of article 5°, paragraph 1, of Decree-Law no. 442-A/88, of 30 November is applicable to the situation.
Subsequently, the Claimant argues that the Tax Authority and Customs Authority violated article 68°-A of the General Tax Law by being bound by the administrative guidance that it defined.
Furthermore, the Claimant understands that the acquisition value considered by the Tax Authority and Customs Authority is wrong and that the charges he incurred for the sale of the property should be considered.
The Claimant further imputes to the assessed income a procedural defect, for violation of the right to prior hearing.
3.1. Order of Examination of Defects
In accordance with the provision of article 124° of the Code of Administrative Tax Procedure, subsidiary applicable by force of the provision of article 29°, paragraph 1, of the RJAT, it not being imputed to the Personal Income Tax return defects leading to the declaration of non-existence or nullity, nor indicated a relation of subsidiarity, the order of examination of the defects should be that which, according to the prudent discretion of the judge, provides more stable or effective protection of the offended interests.
In the case in question, the defects imputed by the Claimant to the assessed income that provide more stable and effective protection of his interests are the first two.
As is a corollary of the establishment by the aforementioned article 124° of the Code of Administrative Tax Procedure of an order of examination of defects, if a defect is held to be well-founded that ensures effective protection of the rights of those who challenged the act, it will not be necessary to examine the remaining ones, for, if it were always necessary to examine all the defects imputed to the challenged act, the order of their examination would be irrelevant.
3.2. Defect for Violation of the Rule of Article 5°, Paragraph 1, of Decree-Law no. 442-A/88, of 30 November
Article 5°, paragraph 1, of Decree-Law no. 442-A/88, of 30 November, which approved the Personal Income Tax Code, establishes the following:
1 - Gains that were not subject to the capital gains tax, created by the code approved by Decree-Law no. 46 673, of 9 June 1965, as well as those derived from the onerous alienation of rural properties used for agricultural activity or the allocation of these to a commercial or industrial activity, exercised by their respective owner, are only subject to Personal Income Tax if the acquisition of the property or rights to which they relate was effected after the entry into force of this Code. ( [1] )
The Code of Capital Gains Tax, approved by Decree-Law no. 46 673, of 9 June 1965, did not impose the tax on gains obtained from the transmission of buildings, limiting the scope, regarding property not held by companies, to land for construction (article 1° of this Code).
The controversy between the Parties is substantiated in knowing when the acquisition of the property occurred, for the purposes of applying the Personal Income Tax Code:
– the Claimant understands that the acquisition occurred on a date prior to 01-01-1989, the date of entry into force of the Personal Income Tax Code, because the effects of acquisition by acquisitive prescription are retroactive to the date of commencement of possession and this date is the moment of acquisition of the right of ownership, pursuant to articles 1288° and 1317°, paragraph 1, subparagraph c), of the Civil Code, and that it should be in light of these rules that the moment of acquisition relevant for application of the Personal Income Tax Code should be determined;
– the Tax Authority and Customs Authority recognizes that, in terms of civil law, the effects of acquisitive prescription are retroactive to the date of commencement of possession (article 6° of the Response), but understands that the concept of tax transmission is different and "with the reform of Patrimony, carried out by Decree-Law no. 287/2003 of 12/11, the Code of Stamp Tax and its respective attached table was profoundly altered, passing this legal diploma to also incorporate the legal norms relating to gratuitous transfers of property and onerous transfers of activities or service operations (legal norms these, previously provided for in the Code of Municipal Tax on Transfer of Property and Tax on Succession and Donations, which was repealed on 31/12/2003), amendments that came into force on 01/01/2004".
Thus, the controversy has as its essential point knowing if the concept of transmission used in the Stamp Tax Code is applicable in Personal Income Tax.
The thesis of the Tax Authority and Customs Authority is based on articles 1°, paragraph 3, subparagraph a), 3°, paragraphs 1 and 3 subparagraph a), and 5°, subparagraph r), of the Stamp Tax Code, which establish the following:
Article 1°
Objective Scope
(...)
3 - For the purposes of item 1.2 of the General Table, the following are considered gratuitous transmissions, in particular, those that have as their object:
a) Right of ownership or segmented figures of that right over immovable property, including acquisition by acquisitive prescription;
Article 3°
Burden of Tax
1 - The tax constitutes a burden of the holders of the economic interest in the situations referred to in article 1°.
3 - For the purposes of paragraph 1, the holder of the economic interest is considered to be:
a) In transmissions by death, the estate and legatees and, in the remaining gratuitous transmissions, as well as in the case of onerous acquisitions, the acquirers of the property;
Article 5°
Birth of Tax Obligation
The tax obligation is considered to be established:
(...)
r) In acquisitions by acquisitive prescription, on the date on which the judicial justification action becomes final, the deed of notarial justification is executed or at the moment when the decision rendered in the justification proceeding pursuant to the Land Registry Code becomes final; (As amended by Law no. 64-A/2008, of 31 December)
However, there is no normative support for applying these rules to Personal Income Tax, as they are provided only for the purposes of stamp tax, as results from their own content.
In fact, acquisitive prescription is a form of original acquisition, so that, in civil law terms, it is not considered a transmission.
In accordance with the provision of article 11°, paragraph 2, of the General Tax Law, "whenever, in tax norms, terms proper to other branches of law are employed, they should be interpreted in the same sense that they have there, unless another follows directly from the law".
As follows from the final part of this rule of interpretation of tax norms, only when it results directly from the law that a term proper to another branch of law is used with another scope in tax law, can it be given a meaning different from that which corresponds to it in that other branch of law.
In the case in question, in article 1°, paragraph 3, subparagraph a), of the Stamp Tax Code, acquisitive prescription was included in the concept of "gratuitous transmission", moving away from the application of the civil law concept, but, as is express in its text, this equating of acquisitive prescription to transmission is made "for the purposes of item 1.2 of the General Table".
This express reference that this equating is made "for the purposes of item 1.2 of the General Table" has a clear restrictive intention as to its field of application, limited only to one of the items of the General Table of the Stamp Tax Code.
Thus, what results directly from the law is that this equating of acquisitive prescription to transmission is made only for the purposes of that item 1.2 of the General Table of the Stamp Tax Code and not for any other purpose.
On the other hand, the Personal Income Tax Code (of 1988) is a diploma prior to the Stamp Tax Code (of 2003), so that there is no logical or legal basis to conclude that in the concepts used in the first there is a reference to those of the second.
Being thus, by force of that rule of article 11°, paragraph 2, of the General Tax Law, in the context of Personal Income Tax, particularly for the purpose of article 43° of the Personal Income Tax Code, there being no norm from which it directly results that, in the case of acquisitive prescription, a concept proper to tax law be useable, the concepts of civil law must be applied, not only as to the concept of acquisition, but also as to the moment in which it is considered effected, since no indication of a different moment is included in the list contained in paragraph 6 of that article 43° (in the amended version of Laws no. 15/2010, of 26 July, and 64-B/2011, of 30 December, which corresponds to paragraph 4 in the version of Law no. 32-B/2002, of 30 December).
According to civil law, acquisition by acquisitive prescription is considered to be effected on the date of commencement of the acquisitive prescription possession, pursuant to articles 1288° and 1317°, subparagraph c), of the Civil Code, so it is this date that is the relevant date of acquisition for the purposes of capital gains in Personal Income Tax.
In the case in question, as results from the judgment that recognized the acquisition by acquisitive prescription, the commencement of possession is dated to 1982, the year in which the Claimant began to collect and benefit from the rents of the property in the capacity of landlord, to pay and assume all tax obligations relating to the same, to ensure the maintenance and proper conservation of the property, in the sight of all, in a peaceful and continuous manner, in the belief of being its respective owner.
For this reason, it was in that year of 1982 that the acquisition of the property in question occurred, for the purposes of Personal Income Tax.
Furthermore, even if one were faced with a situation of doubt regarding the meaning of the application of article 5°, paragraph 1, of Decree-Law no. 442-A/88, of 30 October, and one should pay attention to "the substance of the tax facts", as required by article 11°, paragraph 3, of the General Tax Law, the same conclusion would be reached, for, in economic terms, the alteration of the situation generated by the possession produces effects from the time it begins, in line with what is legislatively recognized in the cited norms of the Civil Code. In fact, in the case in question, it was in 1982 that, as recognized in the judgment, the Claimant began to exercise the powers corresponding to the exercise of the right of ownership, namely enjoying the property through the receipt of rents. It is even the recognition of this preexisting economic alteration that underlies the concept of acquisitive prescription which is reduced to the prevalence of a situation of fact over a preexisting legal situation, in this case the right of ownership.
Moreover, in the case in question, in which underlying the possession is a "partition promise contract", accompanied by delivery of the immovable property, a situation in which, precisely for reasons of the prevalence of economic substance over legal concepts, it is recognized that one is facing a "transmission" for the purpose of Transfer Tax (article 2°, § 1°, n° 1 of the Code of Municipal Tax on Transfer of Property and Tax on Succession and Donations, in force in 1985, date of execution), it is necessary to conclude that the transmission, for tax effects, both in economic and legal terms, occurred at least in 1985. In economic terms, there was only one acquisition of ownership by the Claimant, so that tax law cannot, paying attention to the substance of tax facts, treat this tax fact as if there had been two.
It is thus concluded that the acquisition of the property by the Claimant occurred before the entry into force of the Personal Income Tax Code, so that, by force of the provision of article 5° of Decree-Law no. 442-A/88, of 30 October, the gains obtained with its sale, which were not subject to the capital gains tax in light of the Code of Capital Gains Tax, are also not subject to Personal Income Tax.
By the foregoing, the assessed income suffers from a defect of violation of law, for error regarding the presuppositions of law, which justifies its annulment [article 135° of the Administrative Procedure Code of 1991, subsidiary applicable by force of the provision of article 2°, subparagraph c), of the General Tax Law].
3.3. Issues Prejudiced by Knowledge
The request for arbitral pronouncement should proceed on the ground referred to, remaining prejudiced, by being unnecessary, the examination of the remaining questions raised.
4. Decision
The arbitrators of this Arbitral Tribunal hereby agree to:
– hold the request for arbitral pronouncement to be well-founded;
– annul the assessment of Personal Income Tax and compensatory interest no. 2014… .
5. Value of the Case
In accordance with the provision of article 306°, paragraph 2, of the Code of Civil Procedure and 97°-A, paragraph 1, subparagraph a), of the Code of Administrative Tax Procedure and 3°, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 620,664.86.
6. Costs
Pursuant to article 22°, paragraph 4, of the RJAT, the amount of costs is set at € 9,180.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax Authority and Customs Authority.
Lisbon, 15-02-2016
The Arbitrators
(Jorge Lopes de Sousa)
(Nuno Oliveira Garcia)
(A. Sérgio de Matos)
[1] As amended by Decree-Law no. 141/92, of 17 July.
The original wording was as follows: "1 - Gains that were not subject to the capital gains tax, created by the code approved by Decree-Law 46373, of 9 June 1965, are only subject to Personal Income Tax if the acquisition of the property or rights from the transmission of which they derive was effected after the entry into force of this Code".
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