Process: 570/2017-T

Date: March 15, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

In this CAAD arbitration (Process 570/2017-T), an insolvency administrator challenged an IRC assessment of €325,166.75 imposed on property sales during insolvency proceedings. The dispute concerned six property units sold for €1,012,000.00 in 2014, significantly below their combined Tax Patrimonial Value (VPT) of €2,234,349.65. The Tax Authority applied Article 64 of the IRC Code, treating the €1,222,349.65 difference as taxable capital gains, arguing that when sale price falls below VPT, the VPT should determine taxable income. The insolvency administrator contested this assessment, seeking its annulment and restitution to the insolvency estate plus compensatory interest. The Tax Authority raised preliminary objections including the tribunal's incompetence and the claimant's failure to follow Article 139 CIRC procedures for contesting valuations. The case raises fundamental questions about whether normal IRC capital gains rules apply to forced sales in insolvency contexts, where market conditions and liquidation urgency typically depress prices below administrative valuations. The tribunal had to determine whether CAAD possesses jurisdiction over valuation disputes in insolvency sales, whether Article 139 CIRC procedures were mandatory prerequisites, and whether properties sold through court-supervised insolvency proceedings should be valued at actual sale price or administrative VPT. The decision has significant implications for insolvency estates and creditors, as applying VPT rather than actual sale proceeds creates tax liabilities that reduce recoveries for creditors, potentially conflicting with insolvency law principles prioritizing creditor satisfaction over tax collection.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Prof. Doctor Nina Aguiar and Prof. Doctor Paulo Jorge Nogueira da Costa (arbitrator members) appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 11-01-2018, hereby decide as follows:

1. Report

A…, NIF…, with professional domicile at Rua …, no. … - …, …-… Lisbon, in her capacity as insolvency administrator of the commercial company "B…, SA" (hereinafter B…), NIF …, presented, pursuant to article 2.º, no. 1, paragraph a), article 10.º, no. 1, paragraph a) and no. 2, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), and articles 96.º and following of the Code of Tax Procedure and Process (CPPT), a request for the constitution of an arbitral tribunal and an arbitral pronouncement against the Corporate Income Tax assessment no. 2017…, relating to the fiscal year 2014, in the amount of € 325,166.75.

The Claimant requests the annulment of the said assessment and the restitution to the insolvency estate of the amount paid, and also orders the condemnation of AT in the payment of compensatory interest calculated from the date of payment of the tax to the date on which the respective reimbursement order is processed.

The AUTHORITY FOR TAX AND CUSTOMS (Autoridade Tributária e Aduaneira) is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Tax and Customs on 30-10-2017.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable time period.

On 21-12-2017 the parties were duly notified of this appointment and neither manifested the will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11.º no. 1 paragraphs a) and b) of RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in compliance with the provision of paragraph c) of no. 1 of article 11.º of RJAT, in the wording introduced by article 228.º of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 11-01-2017.

The Tax and Customs Administration presented an Answer in which it raised the exception of absolute incompetence of the Arbitral Tribunal, invoked the failure to use the procedure provided for in article 139.º of CIRC and defended the dismissal of the request for arbitral pronouncement.

By order of 12-02-2018, the meeting provided for in article 18.º of RJAT was dispensed with and it was decided that the case would proceed with written submissions.

The Parties submitted written submissions.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2.º, no. 1, paragraph a), and 10.º, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The Parties are properly represented, enjoy legal standing and capacity, are entitled and are represented (articles 4.º and 10.º, no. 2, of the same decree and article 1.º of Ordinance no. 112-A/2011, of 22 March).

The case is not affected by any nullities.

It is necessary to prioritarily assess the issue of incompetence raised by the Authority for Tax and Customs (article 13.º of the Code of Procedure in Administrative Courts) and then the issue of the failure to use the procedure provided for in article 139.º of CIRC.

2. Factual Matters

2.1. Established Facts

The following facts are considered proven:

  • The Claimant was appointed administrator of the insolvency of "B…, S.A." (hereinafter "B…") under judicial proceedings no. …/11…TYLSB filed in the … Court of the Commercial Court of Lisbon (document no. 1 attached to the request for arbitral pronouncement, whose contents are considered herein reproduced);

  • In the fiscal year 2014, the Claimant, in her capacity as insolvency administrator and within the scope of the judicial proceedings identified above, proceeded to the sale of a set of real property, for the total price of € 1,012,000.00, namely:

    – the autonomous units designated by letters A to F of the property situated at Rua …, numbers…, …, registered in the urban registry of the parish of … and … under article…, for the total price of € 362,000.00;

    – the autonomous unit designated by letters AC of the property situated at Rua …, numbers …, in Lisbon, registered in the urban registry of the parish of … under article…, for the total price of € 650,000.00 (document no. 4 attached to the request for arbitral pronouncement, whose contents are considered herein reproduced);

  • The total tax patrimonial value (VPT) of the said units was, at the date of alienation, € 2,234,349.65, so that the difference between the sale price and the said tax patrimonial value amounted to € 1,222,349.65, which was included in the said tax return form 22 and constituted the taxable matter set out in the "note demonstrating the calculation of the tax" notified to the Claimant;

  • On 07-07-2017, B… submitted the tax return form 22, a copy of which is contained in document no. 3 attached to the request for arbitral pronouncement, whose contents are considered herein reproduced, in which the value of € 2,234,349.65 is indicated in field 739 of Schedule 7, relating to "Positive difference between capital gains and capital losses without reinvestment intention (art. 46.º)";

  • The submission of the tax return form 22 was made at the verbal indication of the services of the Authority for Tax and Customs who invoked the provision of article 64.º of the IRC Code, having had access to a copy of the deeds and having detected that the VPT of the alienated units was higher than the declared price (statement of the Claimant in article 4.º of the request for arbitral pronouncement, which is not disputed by the Authority for Tax and Customs);

  • On 10-07-2017, the Authority for Tax and Customs issued the Corporate Income Tax assessment no. 2017…, relating to the fiscal year 2014, a copy of which is contained in document no. 2 attached to the request for arbitral pronouncement, whose contents are considered herein reproduced, in which B… is indicated as the Tax Subject, indicating the amount payable of € 325,166.75 and the payment deadline of 23-08-2017;

  • The Tax Administration issued, on 14-09-2009, Circular no. 22/2009, which is published at:

    https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/Circular_22-2009.pdf

  • In that Circular, whose contents are considered herein reproduced, the following is stated, among other matters:

    Following doubts that have arisen regarding the concept of judicial sale provided for in rule 16 of no. 4 of article 12.º of the Municipal Code for Onerous Transfers of Real Property (CIMT), it was, by my order of 27.08.2009, sanctioned the following understanding:

    1 - In the determination of the taxable value for Municipal Tax on Onerous Transfers of Real Property (IMT) purposes, rule 16 of no. 4 of article 12.º of CIMT provides: "The value of goods acquired from the State, Autonomous Regions or local authorities, as well as those acquired through judicial or administrative sale, is the price stated in the deed or in the contract". This rule corresponds to one of the exceptions to the general principle of taxable value for IMT purposes enshrined in no. 1 of the same article, which provides: "IMT shall apply to the value stated in the deed or in the contract or to the tax patrimonial value of the real property, whichever is greater".

    2 - For its part, with the reform of the Code of Civil Procedure (CPC), specifically regarding the legal regime of enforcement proceedings, in article 886.º of the CPC, where "modalities of sale" in enforcement proceedings are mentioned, which include sale by private negotiation, the distinction between judicial and extrajudicial sale is no longer made.

    3 - In fact, the amendment to the wording introduced in article 886.º of the CPC by Decree-Law 38/2003, of 8 March, did not remove the judicial nature from the sale in enforcement proceedings (or any other emanating from judicial proceedings, regardless of its modality), rather it merely distinguished according to whether the sale took place in court, before a judge, or outside it, through the intervention of the enforcement agent or judicial liquidator, always under the supervision of a judge.

    4 - The modality of sale by private negotiation, provided for in paragraph d) of no. 1 of article 886.º of CPC, is characterized precisely by the "freedom of those entrusted with it as to the procedures to adopt" without, however, abandoning the concept of sale in enforcement proceedings (lato sensu), which represents the strengthening of the role of the enforcement agent or judicial liquidator, without prejudice to the powers of the court.

    5 - Thus, sale by private negotiation (which takes place in enforcement proceedings) is merely one of the modalities of sale in enforcement proceedings enshrined in law and the fact that it is based on a contract of sale and purchase does not alter the nature of the transaction which, at its origin, is always enforcement-based, that is, initiated from the appropriate judicial authority within enforcement proceedings.

    6 - A judicial sale is "an act of onerous acquisition of a value in legally organized competition" which takes place through a court or under its control despite the ever-increasing intervention of the enforcement agent or judicial liquidator, a purchase and sale which is characterized "by competition – at least potential – of acquisition proposals, prior and legally organized, that is, arising from a previously fixed system intended precisely to enable it" – enforcement proceedings – and, within this, most especially through the sale and its respective modalities expressed in law.

    7 - Thus, judicial sale is one of the most common forms that a sale can take, consisting in the acquisition of a good in public auction or through sale in the modalities described in article 886.º of CPC and following articles.

    8 - Specifically, sale by private negotiation, carried out within judicial proceedings, has the control of the competent magistrate and is reviewed by him, so that, for the purposes of rule 16 of no. 4 of article 12.º of CIMT, it integrates the concept of judicial sale.

  • On 21-08-2017, the Claimant paid the amount assessed (statement of the Claimant, not disputed by the Authority for Tax and Customs);

  • On 30-10-2017, the Claimant presented the request for arbitral pronouncement which gave rise to the present case.

2.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

2.3. Justification for the Establishment of Factual Matters

The established facts are based on documents submitted by the Claimant.

The Tax and Customs Administration informed in its Answer:

"non-existent administrative proceedings – only an assessment exists".

There is no controversy regarding the factual matters.

3. Exception of Lack of Material Competence of the Arbitral Tribunal

The Authority for Tax and Customs raises the exception of incompetence of the Arbitral Tribunal on the ground that the Claimant did not submit a gracious claim regarding the assessment.

The Authority for Tax and Customs states, in summary, the following:

– Article 2.º, paragraph a) of Ordinance 112-A/2011 provides that the commitment of AT to arbitral jurisdiction has as its object the assessment of claims relating to taxes whose administration is entrusted to it, referred to in no. 1 of article 2.º of RJAT, "with the exception of claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account which have not been preceded by resort to the administrative procedure in accordance with articles 131.º to 133.º of the Code of Tax Procedure and Process".

– In this circumstance, it follows that in the situation sub judice, for the present Arbitral Tribunal to be able to pronounce itself, the mandatory precedence of a gracious claim was always required in accordance with the provision of no. 1 of article 131.º of CPPT.

The Claimant contends that she did not challenge a self-assessment but rather an assessment issued by the Authority for Tax and Customs, and therefore the exception to the commitment of the Authority for Tax and Customs to arbitral jurisdiction referred to in article 2.º, paragraph a) of Ordinance no. 112-A/2011, of 22 March, is not applicable.

It is clear that the Claimant is correct, since the act that she challenged is an assessment issued by the Authority for Tax and Customs, a copy of which is contained in document no. 2 attached to the request for arbitral pronouncement.

The assessment of the legality of assessment acts is included within the competence of the arbitral tribunals operating at CAAD, indicated in paragraph a) of no. 1 of article 2.º of RJAT.

The commitment of the Authority for Tax and Customs that results from the body of article 2.º of Ordinance no. 112-A/2011 encompasses "the assessment of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2.º of Decree-Law no. 10/2011, of 20 January", with the exceptions referred to therein.

Since none of the exceptions is present, in particular the self-assessment exception that the Authority for Tax and Customs invokes, it must be concluded that this Arbitral Tribunal has competence to assess the request for arbitral pronouncement.

Being so, the constitutional issues that the Authority for Tax and Customs raises do not even arise, as they rest on the incorrect premise that the object of the case is an act of self-assessment.

In these terms, the exception raised by the Authority for Tax and Customs is dismissed.

4. Issue of Failure to Use the Procedure Provided for in Article 139.º of CIRC

In its Answer, the Authority for Tax and Customs also refers to the fact that "the procedure for Proof of the Effective Price in the Transfer of Real Property provided for in article 139.º of CIRC was not opened".

The Claimant states that what she defends is that "the rule of prevalence of VPT is not applicable", so it would not make sense to institute a procedure to set aside a rule that is not applicable and reaffirms that "she does not intend here to provide any proof regarding the truth of the declared price".

Article 64.º of CIRC establishes, in its nos. 1 and 2, that "sellers and buyers of real rights over real property must adopt, for the purposes of determining taxable profit in accordance with this Code, normal market values which cannot be less than the final tax patrimonial values that served as the basis for the calculation of the Municipal Tax on Onerous Transfers of Real Property (IMT) or that would serve in case there is no reason for the calculation of this tax" and that "whenever, in the onerous transfers provided for in the previous number, the value stated in the contract is less than the final tax patrimonial value of the property, it is this value that shall be considered by the seller and buyer for the determination of taxable profit".

However, by virtue of the provision of article 139.º, no. 1, of CIRC, the provision of this no. 2 may be set aside "if the tax subject provides proof that the price effectively practiced in the transfers of real rights over real property was less than the tax patrimonial value that served as the basis for the calculation of the Municipal Tax on Onerous Transfers of Real Property", which must be done through the procedure provided for in nos. 3 and following of this article 139.º.

Pursuant to no. 7 of the same article 139.º, the use of this prior procedure is a necessary prerequisite of "the judicial challenge of the assessment of the tax that results from corrections made by application of the provision of no. 2 of article 64.º, or, if there is no reason for assessment, of corrections to taxable profit under the same provision, depends on prior submission of the request provided for in no. 3, there being no place for a gracious claim".

In the case at hand, as results from the request for arbitral pronouncement, the Claimant does not intend to set aside the application of the provision of article 64.º, no. 2, of CIRC by providing proof that the price practiced was that stated in the contract.

In fact, the Claimant's thesis is, in summary, that, by virtue of a special regime for goods "acquired through judicial or administrative sale, it is the price stated in the deed or in the contract", one finds oneself in a special situation of departure from the rule of no. 2 of article 64.º of CIRC.

That is, what is at issue is knowing whether, legally, the prices to be considered are those stated in the contracts, regardless of the production of proof that they were the prices effectively practiced.

Thus, since the Claimant does not intend to provide proof that the prices effectively practiced were those stated in the contracts, one is not in a situation to which the procedure provided for in article 139.º is applicable.

For the above reasons, there is no procedural obstacle to the assessment of the request for arbitral pronouncement arising from the failure to use the procedure provided for in article 139.º of CIRC.

5. Matters of Law

5.1. Positions of the Parties

The Claimant, in her capacity as insolvency administrator of a company, sold real property belonging to it for prices lower than the tax patrimonial values.

The Authority for Tax and Customs understood that, in this situation, the value relevant for the purposes of determining the taxable matter of Corporate Income Tax is the tax patrimonial value, by virtue of the provision of article 64.º, no. 2, of CIRC.

The Claimant contends that the values of the sales stated in the contract are relevant for Corporate Income Tax purposes, because, in summary:

– the rule of prevalence of tax patrimonial value over the declared price, for Corporate Income Tax purposes, was imported from the Municipal Tax on Onerous Transfers Code in the 2003 reform (see article 6.º of Decree-Law no. 287/2003, of 12 November, which added article 58.º-A to the then Corporate Income Tax Code with the wording that is now found in article 64.º of the same Code), and this prevalence is conditioned on the fact of being faced with a VPT that has effectively served as the basis for the calculation of Municipal Tax on Onerous Transfers or, in case of exemption or exclusion of this tax, faced with a VPT that would serve as the basis for such calculation if the exemption or exclusion did not exist;

– having been recorded in the deeds of purchase and sale that the transfer of the autonomous units in question benefited from Municipal Tax on Onerous Transfers exemptions, recognized on the basis of article 8.º no. 1 of CIMT and article 270.º, no. 2, of the Insolvency Code, it must be determined whether the VPT of the said units would serve as the basis of incidence for that tax in case the exemptions did not apply;

– the taxable value for Municipal Tax on Onerous Transfers purposes, if the exemptions were not recognized, should be the value of the contract and not the tax patrimonial value, as results from the provision of rule 16 of no. 4 of article 12.º of CIMT, which constitutes a derogation from the general rule contained in no. 1 of article 12.º of the said CIMT which orders the comparison of VPT with the declared price stated in the deed or in the contract, with the greater prevailing;

– if for Municipal Tax on Onerous Transfers purposes the value on which the respective rate would be levied, if there were no exemption, was precisely the price of the transfer and not the VPT, even if higher, for Corporate Income Tax purposes, in view of the provision of the aforementioned no. 1 of article 64.º of CIRC, the rule is exactly the same and, consequently, the taxable profit for the purposes of this tax should be the price stated in the contract and not the VPT;

– in view of article 64.º no. 1 of CIRC, there will only be a place to correct the taxable profit of Corporate Income Tax based on the VPT higher than the price if for Municipal Tax on Onerous Transfers purposes that was also the applicable rule;

– if, as was the case, the rule of prevalence of VPT was not applied nor would it be applied in the calculation of Municipal Tax on Onerous Transfers even if it had applied (because there was no exemption), then it is also not applicable for Corporate Income Tax purposes.

The Authority for Tax and Customs contends, in summary, that the burden of proof that the price effectively practiced in the transfer of the real property was less than the VPT falls on the tax subject and that, in the case, in addition to not having resorted to the legal means of recourse, it was also not demonstrated by the Claimant that the price effectively practiced in the transfer in question was less than the established VPT.

5.2. Assessment of the Issue

Article 64.º of CIRC establishes the following:

Article 64.º

Corrections to the Value of Transfers of Real Rights over Real Property

1 - Sellers and buyers of real rights over real property must adopt, for the purposes of determining taxable profit in accordance with this Code, normal market values which cannot be less than the final tax patrimonial values that served as the basis for the calculation of the Municipal Tax on Onerous Transfers of Real Property (IMT) or that would serve in case there is no reason for the calculation of this tax.

2 - Whenever, in the onerous transfers provided for in the previous number, the value stated in the contract is less than the final tax patrimonial value of the property, it is this value that shall be considered by the seller and buyer for the determination of taxable profit.

3 - For the application of the provision of the previous number:

a) The seller tax subject must make a correction, in the tax return for the taxation period to which the income obtained from the transfer operation is attributable, corresponding to the positive difference between the final tax patrimonial value of the property and the value stated in the contract;

b) The buyer tax subject adopts the final tax patrimonial value for the determination of any taxable result in Corporate Income Tax with respect to the property.

4 - If the final tax patrimonial value of the property is not determined by the end of the period established for the submission of the tax return for the taxation period to which the transfer relates, the tax subjects must submit the amended return during January of the year following that in which the tax patrimonial values became final.

5 - In the case there is a positive difference between the final tax patrimonial value and the cost of acquisition or construction, the buyer tax subject must prove in the fiscal documentation process provided for in article 130.º, for the purposes of the provision of paragraph b) of no. 3, the accounting and tax treatment given to the property.

6 - The provision of this article does not preclude the possibility of the Authority for Tax and Customs making corrections to taxable profit, in the terms provided for in law, whenever it has elements that prove that the price effectively practiced in the transfer was higher than the value considered.

By virtue of the provision of no. 1 of this article, normal market values which cannot be less than the final tax patrimonial values that served as the basis for the calculation of the Municipal Tax on Onerous Transfers of Real Property (IMT) or that would serve in case there is no reason for the calculation of this tax must be adopted for the purposes of determining taxable profit.

In the case at hand, there was no reason for the calculation of Municipal Tax on Onerous Transfers, because exemptions were recognized, provided for in articles 8.º, no. 1, of CIMT and 270.º, no. 2, of the Insolvency Code.

Thus, pursuant to the final part of no. 1 of article 64.º, to determine the minimum value relevant for determining taxable profit it is necessary to ascertain what value would have been considered for Municipal Tax on Onerous Transfers purposes, if it had been assessed.

The taxable value for Municipal Tax on Onerous Transfers purposes is determined in accordance with the rules contained in article 12.º thereof, which establishes the following, insofar as is relevant here:

Article 12.º

Taxable Value

1 - IMT shall apply to the value stated in the deed or in the contract or to the tax patrimonial value of the real property, whichever is greater.

(...)

4 - The provisions of the previous numbers are, however, understood without prejudice to the following rules:

(...)

16 - The value of goods acquired from the State, Autonomous Regions or local authorities, as well as those acquired through judicial or administrative sale, is the price stated in the deed or in the contract;

As can be seen, in no. 1 of this article 12.º of CIMT the rule is established that "IMT shall apply to the value stated in the deed or in the contract or to the tax patrimonial value of the real property, whichever is greater", but this rule is understood without prejudice to the rules provided for in no. 4 of the same article.

Thus, the rules contained in no. 4 have a special nature in relation to that of no. 1, so that the rules of no. 4 are preferentially applicable in their specific fields of application.

The Claimant contends that the sales of the real property referred to in the case fall within this rule 16, which should be understood as referring to all cases in which the sale is carried out in judicial proceedings, through any of the judicial sale modalities provided for in article 811.º of CPC, and this is the understanding that the Tax Administration adopted in Circular no. 22/2009, which is in force.

It appears that the reference to "judicial sale" included in that rule 16 should be interpreted in a modern way, as referring to the modalities of judicial sale, for, when CIMT was approved, by Decree-Law no. 287/2003, of 12 November, judicial sale had already been excluded from the sale modalities provided for in CPC, as can be seen from article 886.º thereof, in the wording given by Decree-Law no. 329-A/95, of 12 November, reformed by Decree-Law no. 38/2003, of 8 March.

Also in CPPT, sale had already been excluded from the sale modalities, with the revocation of article 254.º thereof, carried out by Law no. 15/2001, of 5 June.

Thus, interpreting that rule 16 of no. 4 of article 12.º CIMT, taking into account "the specific conditions of the time in which it is applied", which no. 1 of article 9.º of the Civil Code requires to be taken into account in the interpretation of law, that reference to judicial sale should be interpreted as referring to any modality of judicial sale.

The reason that explains this rule is the control that exists over the real value of the sale when it is made judicially or administratively, for there is an act of an entity invested with public powers that ensures what the real value of the sale was. That is, in these situations it is considered proven that the price of the transfer is the real one.

It is precisely in this sense that the understanding of the Director-General of Tax Authorities expressed through the said Circular no. 22/2009, in which it concludes that "judicial sale is one of the most common forms that a sale can take, consisting in the acquisition of a good in public auction or through sale in the modalities described in article 886.º of CPC and following" and that "specifically, sale by private negotiation, carried out within judicial proceedings, has the control of the competent magistrate and is reviewed by him, so that, for the purposes of rule 16 of no. 4 of article 12.º of CIMT, it integrates the concept of judicial sale".

Moreover, as the Claimant well contends, being in force this Circular (which remains published on the Tax Authority Portal), its force is, by itself, a reason for the Tax Administration not to fail to apply the understanding published therein, by virtue of the provision of article 68.º-A, no. 1, of the General Tax Law, which establishes that "the tax administration is bound by the generic guidance contained in circulars, regulations or instruments of identical nature, regardless of their form of communication, aimed at the standardization of the interpretation and application of tax norms".

It is concluded, thus, that, for the purposes of no. 1 of article 64.º of CIRC, the minimum values that should have been adopted for determining taxable profit were those stated in the contracts of sales carried out in judicial proceedings, because those are the ones that should be considered for Municipal Tax on Onerous Transfers purposes, if the exemptions did not exist.

For the above reasons, the Claimant is correct, and therefore the assessed taxation is affected by a defect consisting in a violation of law that justifies its annulment, in accordance with the provision of article 163.º, no. 1, of the Code of Administrative Procedure, subsidiarily applicable in accordance with article 2.º, paragraph c), of the General Tax Law.

6. Reimbursement of Amount Paid and Compensatory Interest

The Claimant paid the amount assessed and requests its reimbursement, with compensatory interest.

In accordance with the provision of paragraph b) of article 24.º of RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for for appeal or challenge, and the latter must, in the exact terms of the merits of the arbitral decision in favor of the tax subject and until the end of the period provided for for the voluntary execution of the judgments of the tax judicial courts, "restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been made, adopting the necessary acts and operations to that effect", which is in harmony with the provision of article 100.º of the General Tax Law [applicable by virtue of the provision of paragraph a) of no. 1 of article 29.º of RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of a gracious claim, judicial challenge or appeal in favor of the tax subject, to the immediate and full restoration of the legality of the act or situation that was the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2.º, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating at CAAD, without making reference to condemnatory decisions, it should be understood that the powers that are attributed to tax courts in judicial challenge proceedings are included in their competences, being this the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as the first guideline, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of compensatory interest, as appears from article 43.º, no. 1, of the General Tax Law, in which it is established that "compensatory interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services from which the payment of the tax debt results in an amount higher than legally due" and from article 61.º, no. 4 of CPPT (in the wording given by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the original wording), which states that "if the decision that recognized the right to compensatory interest is judicial, the payment period is counted from the beginning of the period for its voluntary execution".

Thus, no. 5 of article 24.º of RJAT, when stating that "payment of interest, regardless of its nature, is due, in the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in the arbitral process, as well as the reimbursement of the amount paid, which is the basis for calculating the interest.

It is therefore necessary to assess the request for reimbursement of the amount improperly paid, increased by compensatory interest.

In the case at hand, it is clear that, as a consequence of the illegality of the assessment act, there is a place for reimbursement of the tax paid, by virtue of the aforementioned articles 24.º, no. 1, paragraph b), of RJAT and 100.º of the General Tax Law, as this is essential to "restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been made".

As regards compensatory interest, it is also clear that the illegality of the assessment act is attributable to the Tax Administration, which, on its own initiative, made it without legal basis. In fact, although the Claimant submitted the tax return form 22, its submission was made at the verbal indication of the services of the Authority for Tax and Customs, as is referred to in paragraph e) of the established facts.

Consequently, the Claimant is entitled to compensatory interest, in accordance with article 43.º, no. 1, of the General Tax Law and article 61.º of CPPT.

Compensatory interest shall be paid from the date on which the Claimant made the payment until the full reimbursement of the amount paid, at the legal suppletory rate, in accordance with articles 43.º, no. 4, and 35.º, no. 10, of the General Tax Law, article 61.º of CPPT, article 559.º of the Civil Code and Ordinance no. 291/2003, of 8 April.

7. Decision

In these terms, the Arbitral Tribunal hereby decides:

  • To uphold the request for arbitral pronouncement;

  • To annul the Corporate Income Tax assessment no. 2017…, relating to the fiscal year 2014, in the amount of € 325,166.75;

  • To condemn the Authority for Tax and Customs to reimburse the Claimant the amount of € 325,166.75, increased by compensatory interest from the date of payment until the date on which reimbursement is made.

8. Value of the Case

In accordance with the provision of article 306.º, no. 2, of CPC and article 97.º-A, no. 1, paragraph a), of CPPT and article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of € 325,166.75.

9. Costs

Pursuant to article 22.º, no. 4, of RJAT, the amount of costs is fixed at € 5,814.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the expense of the Authority for Tax and Customs.

Lisbon, 15-03-2018

The Arbitrators

(Jorge Lopes de Sousa)

(Nina Aguiar)

(Paulo Nogueira da Costa)

Frequently Asked Questions

Automatically Created

How is IRC (Corporate Income Tax) applied to property sold during insolvency proceedings in Portugal?
IRC on properties sold in insolvency proceedings typically follows Article 64 of the IRC Code, which can deem capital gains when sale price falls below Tax Patrimonial Value (VPT). However, this application is contentious in insolvency contexts where forced liquidation naturally produces below-market prices. The key issue is whether VPT should override actual sale proceeds achieved through court-supervised processes, potentially imposing tax on fictional gains while reducing creditor recoveries.
Can the CAAD arbitral tribunal rule on disputes over the valuation of real estate assets sold in insolvency?
CAAD's jurisdiction over real estate valuation disputes in insolvency is contested. The Tax Authority raised incompetence exceptions, arguing valuation disputes may require specialized procedures. However, CAAD generally has competence over IRC assessments under Article 2 of RJAT. The tribunal must determine whether valuation challenges in insolvency sales constitute matters within its statutory jurisdiction or require alternative procedures under Article 139 CIRC.
What is the role of Article 139 of the IRC Code in determining the taxable value of properties sold below market price?
Article 139 of the IRC Code establishes procedures for contesting tax authority determinations of taxable values in transfer pricing and similar situations. The Tax Authority argued the insolvency administrator should have followed these procedures before seeking arbitration. This provision requires taxpayers to contest valuation determinations through specific administrative channels, potentially as a prerequisite to judicial or arbitral review of IRC assessments based on deemed values.
What are the grounds for annulling an IRC tax assessment on property transfers within an insolvency process?
Grounds for annulling IRC assessments on insolvency property transfers include: (1) improper application of Article 64 CIRC to court-supervised sales where actual proceeds should govern; (2) conflict with insolvency law principles requiring maximization of creditor recoveries; (3) lack of legal basis for treating VPT differential as taxable income in forced liquidation contexts; (4) procedural irregularities if assessment ignored insolvency sale special regime; (5) violation of principle that judicial sales should be valued at actual price per administrative guidance (Circular 22/2009).
Is the insolvent estate entitled to compensatory interest (juros indemnizatórios) after an unlawful IRC liquidation is annulled?
Insolvency estates are entitled to compensatory interest (juros indemnizatórios) when IRC liquidations are annulled as unlawful, calculated from payment date until reimbursement. This follows Article 43 of the General Tax Law (LGT), which mandates compensatory interest for undue tax payments. The right extends to insolvency administrators acting for the estate, ensuring creditors receive full restitution including time-value compensation for amounts wrongly extracted from the insolvency mass.