Process: 633/2017-T

Date: July 4, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 633/2017-T) addresses the statute of limitations (caducidade) for IRS assessments and procedural violations by the Portuguese Tax Authority. The claimant discovered through the Finance Portal that a tax enforcement proceeding had been initiated for 2010 IRS debts without prior notification of the assessment. The central legal issue concerns whether the four-year limitation period for IRS assessments was validly suspended by a criminal inquiry, as claimed by the Tax Authority under Article 45(5) of the General Tax Law (LGT). The claimant argued that the assessment, notified beyond the December 31, 2014 deadline, was time-barred. The Tax Authority merely invoked a criminal proceeding against a related company without demonstrating that the specific tax assessment depended on criminal investigation findings. The claimant also alleged violations of the right to prior hearing (audiência prévia) under Article 60 of both LGT and RCPITA, and failure to notify the inspection report. The Tax Authority raised a procedural defense, arguing the arbitral tribunal lacked jurisdiction because challenges to assessments not properly notified within the limitation period should be raised through opposition to tax enforcement (oposição à execução fiscal) under Article 204(1)(e) or (i) of the CPPT, not through administrative appeal followed by arbitration. This case highlights critical procedural requirements in Portuguese tax law, including proper notification procedures, the narrow application of criminal inquiry exceptions to limitation periods, and the appropriate legal remedies for challenging time-barred assessments.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. A…, taxpayer no. …, resident at Rua …, …, …, Santa Maria da Feira, filed on 04-12-2017 a request for constitution of an arbitral tribunal, pursuant to articles 2º and 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as RJAT), in conjunction with article 102º of the Code of Tax Procedure and Process (CPPT), in which the Tax and Customs Authority (hereinafter referred to as the Respondent, or ATA) is sued.

  2. The claimant seeks, through its request, a declaration of illegality of the tax acts of assessment of IRS (Personal Income Tax), with reference to the year 2010 and of the act of dismissal of the administrative appeal which it filed against it, with consequent reimbursement of the tax paid, as well as recognition of the right to compensatory interest.

  3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 05-12-2017.

3.1. The claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of paragraph 2 of article 6º and subparagraph b) of paragraph 1 of article 11º of the RJAT, the President of the Ethics Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the deadline.

3.2. On 26-01-2018 the parties were notified of the appointment of arbitrators, and no objection was raised.

3.3. In accordance with the provision in subparagraph c) of paragraph 1 of article 11º of the RJAT, the collective arbitral tribunal was constituted on 15-02-2018.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to examine and decide upon the subject matter of the case.

  1. To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

By consultation of the Finance Portal, the Claimant ascertained that there was pending against it a tax enforcement case no. …2016…, initiated for IRS debts relating to the year 2010, without having previously been notified of such assessment or of any act performed by AT in any procedure related to such assessment and/or debt.

After obtaining a certificate, pursuant to article 37º of the CPPT, the Claimant filed an administrative appeal against the tax assessment which gave rise to that debt, imputing to it the following grounds of illegality:

  • lapse of the right to assess;
  • lack of prior hearing;
  • lack of notification of the tax inspection report.

As a rule, the right to assess IRS lapses if the assessment is not validly notified to the taxpayer within a period of four years counted from the end of the year in which the tax event occurred.

In the absence – as is the case – of any ground for suspension or extension of the limitation period, the right to assess IRS for the year 2010 effectively lapsed due to the lack of valid notification of such tax act until the aforesaid date of 31/12/2014.

It is stated in the inspection report that "the right to assess taxes is guaranteed by the application of paragraph 5 of article 45º of the General Tax Law (LGT), as a criminal proceeding has been initiated", adding that, "given the relationships existing between the taxpayer under inspection [the former spouse of the present Claimant] and the company "B…, Lda", it was requested, by communication dated 2014/11/20, its inclusion in the criminal inquiry proceedings no. …/2012…TDPRT, initiated against that company and others".

In addition to the mere invocation that a criminal inquiry was initiated "against that company [B…, Lda] and others", nothing appears in the tax inspection report or in any other element to which the Claimant had access that permits proof and conclusion, insofar as it matters here, that the assessments impugned relate to "facts regarding which a criminal inquiry was initiated".

As a rule, the definition of the tax situation precedes the closure of investigations in a criminal tax proceeding. The apparent breach introduced in that rule by paragraph 5 of article 45º of the LGT, giving priority to the criminal proceeding over the definition of the tax situation, has its scope of application restricted to those exceptional cases (in need of proof) in which, concretely, the tax qualification is dependent upon the criminal qualification of the facts, that is, to those cases in which the conclusion of the investigation in a criminal inquiry proves indispensable for the AT to perform tax assessment acts.

Now, in the case at hand, in addition to the lack of identification of the facts which led to the initiation of the criminal inquiry, there is not even any allegation (much less proof) that the assessment whose illegality is invoked was dependent on the investigation in the criminal tax proceeding and that the knowledge of the facts determining the assessment was obtained from the investigations in the criminal proceeding.

In sum, it is not even alleged and, much less, demonstrated that the assessment initially challenged and now the subject of the present arbitral request relates to facts regarding which a criminal inquiry had been initiated in accordance with and for the purposes of paragraph 5 of article 45º of the LGT.

In any event, the Claimant was not notified.

  • of the assessment determined;
  • of the tax inspection report;
  • of the draft tax inspection report;
  • of the draft tax inspection report.

Of these failures to notify, the one relating to the draft tax inspection report is of particular relevance and has invalidating effect, having in view the possibility of exercising the right of hearing in accordance with article 60º of the RCPITA and article 60º of the LGT.

From the documents attached it is not demonstrated that the Claimant was notified of the assessment, of the inspection report, of the prior draft or of the beginning of the inspection procedure to its tax domicile, which, moreover, is acknowledged in the decision on the administrative appeal.

The assessment which is the subject of the present request for arbitral pronouncement is, therefore, illegal due to the aforementioned failures to notify the Claimant, with violation, moreover, of the provision in article 60º of the RCPITA and article 60º of the LGT.

The Claimant therefore concludes that the assessment which is the subject of the arbitral request is illegal, requesting restitution of the amounts already paid under the PERES programme plus compensatory interest.

  1. The Tax and Customs Authority presented its response, defending itself by way of exception and impugnation, invoking in summary the following:

There is an error in the form of the case and/or material incompetence of the arbitral tribunal to hear the lack of notification of assessments within the limitation period for the right to assess.

Contrary to what the Claimant argues, the failure to notify the assessment within the limitation period is solely a ground for opposition to tax enforcement, pursuant to subparagraph e) or subparagraph i) of paragraph 1 of article 204º of the CPPT.

In the present case, the Claimant invoking that there was no notification whatsoever of the assessment that gave rise to the tax enforcement proceeding, when that tax enforcement proceeding was initiated, the assessment act was ineffective, thus one is dealing with a ground for opposition to tax enforcement which, if not classifiable under subparagraph e) of paragraph 1 of article 204º of the CPPT, will certainly be classifiable under subparagraph i) of the same paragraph 1.

Since it is certain that the Claimant should have resorted to the opposition to tax enforcement proceeding, which it did not do, it was not legitimate for it to resort, additionally, to the present arbitral request, by way of the dismissal of the administrative appeal.

The opposition to tax enforcement is therefore the proper procedural means for the Claimant to see declared such lack of notification of the assessments after the limitation period for the right to assess has already passed.

Furthermore, since the competence of arbitral tribunals is limited to the matters indicated in paragraph 1 of article 2º of the RJAT, the examination of the request for declaration of inefficacy of the assessment does not fall within the scope of these competencies, even though the Claimant, attempting to escape from this inevitability, masked the request for arbitral pronouncement by asking for "illegality" due to lack of notification of the assessment within the limitation period for the right to assess.

Therefore, due to error in the form of the proceeding and/or the material incompetence of the Arbitral Tribunal to hear the Claimant's request which constitutes a dilatory exception that prevents the continuation of the case, the respondent entity should be absolved from the instance in accordance with the provisions of articles 576º, paragraph 2, and 577º, subparagraph a), both of the CPC, applicable by force of article 29º, paragraph 1, subparagraph e) of the RJAT.

The taxpayer "C…" with tax identification number (NIF) …, spouse of the Claimant in 2010, was the subject of a tax inspection action credentialed through Service Order no. OI 2015…, of 2015-12-22, which covered the period of 2010.

Following notification effected, by registered mail, on 2016/07/06, of the "Draft Conclusions of the Tax Inspection Report", the taxpayer did not exercise the right of hearing, within the deadline and in the terms provided for in articles 60º of the General Tax Law (LGT) and the Supplementary Regime of the Procedure for Tax and Customs Inspection (RCPITA), wherefore notification of the Final Report was effected, through office no. …, of 30 August 2016, received on 31 August 2016.

Following this, the corresponding additional assessment was issued with reference to the year 2010 and, due to non-payment, a tax enforcement proceeding no. …2016… was initiated.

In view of document no. 2, which it protests to annex (certificate of constitution as defendant in the criminal inquiry case no. …/2012…TDPRT), it is verified that the Division of Criminal Tax Cases of the Finance Directorate of Porto initiated the aforementioned criminal inquiry proceedings no. …/2012…TDPRT against the Claimant's spouse, communicated to the Deputy Prosecutor of the DIAP.

It does not result from article 45º, paragraph 5 of the LGT that the legislator makes the suspension of the limitation period dependent on the outcome to be achieved in the criminal inquiry.

Equally, it is not within the competence of the learned Tribunal to investigate the criminal motivations that led to the inquiry, insofar as the inquiry is precisely the procedural phase that aims to investigate the existence of a crime, determine its perpetrators and their responsibility, and discover and collect the evidence, with a view to deciding on prosecution, as determined by article 262º of the Code of Criminal Procedure.

The legislator, in article 45º, paragraph 5 of the LGT, does not make the suspension of the limitation period depend on the legal subsumption of the facts under law, but rather on the mere existence of those facts.

Observing all the reasoning set out in the final inspection report, it is not clear how "it is not even alleged and much less demonstrated that the assessment initially challenged and now the subject of the present request for arbitral pronouncement relates to facts regarding which a criminal inquiry had been initiated in accordance with and for the purposes of paragraph 5 of article 45º of the LGT" when it was precisely the facts that determined that a criminal inquiry be initiated that motivated the opening of the Service Order at the genesis of the assessment now impugned.

Without prejudice to the fact that the inspection procedure was carried out in a year when the Claimant was no longer married, the income at issue relates to a fiscal year in which they were, and therefore income of the then family unit is at issue.

And pursuant to article 21º, paragraph 1 of the LGT, unless provided otherwise by law, when the elements of the tax event occur in relation to more than one person, all are jointly and severally liable for fulfillment of the tax debt. The claimant is jointly and severally liable for the IRS debt whose legality she contests here, since in 2010 she was married to C….

The Respondent concludes that the assessment act contested by the Claimant is legal and should therefore be maintained.

Later attached to the case documents, as it had protested in its response.

  1. By order of 10-04-2018, the meeting provided for in article 18º of the RJAT was dispensed with, as well as, with the consent of the parties, the filing of submissions.

II – CLARIFICATION

8.1. The tribunal is competent and is regularly constituted.

8.2. The parties have legal capacity and standing, show themselves to be legitimate, and are regularly represented (articles 4º and 10º, paragraph 2, of the RJAT and article 1º of Ordinance no. 112-A/2011, of 22 March).

8.3. The proceedings are not affected by any nullities.

8.4. The cumulation of claims is legal, in view of the same article 3º, paragraph 1.

8.4. The Respondent raised the exception of error in the form of the proceeding and/or material incompetence of the arbitral tribunal to hear the lack of notification of assessments within the limitation period for the right to assess.

Ruling on such exception:

The Claimant seeks to have declared the nullity of the notification of the IRS assessment for the year 2011 because such notification occurred after the limitation period for the right to assess had already expired.

According to the Respondent, the failure to notify the assessment within the limitation period is, by mandate of subparagraph e) of paragraph 1 of article 204º of the CPPT, solely a ground for opposition to tax enforcement, given that the request only concerns a declaration of inefficacy of the assessment, a matter that would be withdrawn from the material competence of the Arbitral Tribunal.

In defense of its thesis, it invokes, in particular, the decision of the STA (Supreme Administrative Court), through the Judgment of the Plenary of the Tax Contentious Section of 18/09/2013, handed down in Proc. no. 0578/13.

Deciding the exception:

It is certainly established that the jurisprudential orientation is in the direction that the absence of notification of the assessment act, whether before or after the expiration of the limitation period for the right to assess, configures inefficacy of that tax act and constitutes, therefore, a ground for opposition to tax enforcement.

This understanding does not conflict with another translated into the possibility of deduction of a judicial challenge on the ground of illegality of the assessment act, just as, moreover, the aforementioned judgment of the STA (Plenary) cited by the Claimant [of 18-9-2013 – Proc. no. 0578/13) defends.

And, in this same line, go the judgments of the STA (Plenary) of 20-1-2010 [Proc. no. 832/08] and of 7-7-2010 [Proc. no. 545/09].

Specifically: it is not forbidden to the taxpayer to deduce a judicial challenge (or request for arbitral pronouncement) on that ground. And this even results from the aforementioned judgment cited by the Claimant (Judgment of the STA of 18-9-2013, handed down in Proc. no. 0578/13) when, to that conclusion, it adds: "independently of, if it is considered a ground of illegality of the assessment act, it can also be invoked in judicial challenge. It is, in fact, what happens with the other situations in which the legality of the assessment act can be examined in opposition to tax enforcement, namely those classifiable under subparagraphs a) and g) of paragraph 1 of article 204º, which can be invoked both in judicial challenge and in opposition to tax enforcement [in the situations referred to in subparagraph h), by definition, the illegality of the assessment of the debt subject to enforcement can only be examined in opposition to tax enforcement]".

In the same line the STA pronounced itself in more recent decisions – see Judgments of 18-06-2014 in Proc. 0344/13 and of 27-10-2016 – Proc. 09810 – saying in the one of 18-06-2014 that "Similarly to what happens with abstract illegality and double collection, the lack of notification of the assessment within the limitation period also constitutes a defect invocable both in opposition to tax enforcement and in judicial challenge, thus no error in the form of the proceeding occurring if invoked in judicial challenge".

This same understanding was also followed both in the arbitral decisions handed down within the scope of CAAD in Proceedings no. 725/2014-T and 126/2012-T, and by the present signatory, in judgment no. 325/2016-T.

The defect invoked, like any other illegality of the assessment, falls within the sphere of competence of the arbitral tribunal, as results from paragraph 1 of article 2º of the RJAT and from Ordinance 112-A/2011, of 22 March.

In these terms, adhering to the grounds contained in the various decisions indicated, the exception raised is declared unfounded.

There are no other questions or exceptions to examine which prevent examination of the merits and which must be examined.

III – FINDINGS OF FACT AND LAW

III.1. Findings of Fact

In view of the positions assumed by the parties and the documentary evidence attached to the case file, the following facts are considered, with relevance for examination and decision on the questions raised:

  • By registration of CTT (Portuguese Postal Service) on 08-12-2016, a postal citation was sent to the Respondent relating to citation for the tax enforcement proceeding no. …2016…, whose executive title is based on the IRS assessment, relating to 2010, no. 2016…;

  • The Claimant was married in the year 2010 to C…;

  • The aforesaid C… was the subject of a tax inspection credentialed by Service Order no. OI2015…, of 22-12-2015, which covered the year 2010;

  • From the final report resulting from that inspection procedure, of 12-08-2016, it appears that "Given the relationships existing between the taxpayer and the company "B…, Lda", its inclusion in the criminal inquiry proceedings no. …/2012…TDPRT, initiated against that company and others, was requested by communication dated 2014/11/20. The right to assess taxes is guaranteed by the application of paragraph 5 of article 5º of the General Tax Law";

  • The taxes assessed were paid by the Claimant on 18 and 27 September 2017.

Reasoning of the findings of fact:

The findings of fact established as proven are based on critical examination of the documentary evidence presented and not contested, which is here deemed reproduced, as well as of the administrative case file attached to the proceedings.

9.3. There are no other facts with relevance for examination of the merits of the case that have not been proved.

III.2. Matters of Law

As results from the arbitral request, the Claimants manifest their disagreement with the assessment acts impugned, as they understand, in summary, that the AIMI, instituted by article 135º-B of the IMI Code, translates into a tax on real property wealth, whereby properties affected to an economic activity, and which are held for its pursuit, would not be subject to it: In any event, they maintain that land for construction that is intended for the construction of buildings for commercial, industrial or service purposes can never be subject to AIMI. Subsidiarily they argue that the taxation in AIMI of land for construction for those purposes – commerce, industry, services or others – configures discriminatory treatment, devoid of legal basis, generating disproportionate and inadequate differentiations which configures its unconstitutionality.

Let us then see:

Having regard to the provision in article 124º of the CPPT, when it determines that the judge shall examine the defects whose merits determine more effective protection of the interests defended, we will thus analyze the defects and arguments invoked by the Claimant.

TAXATION IN AIMI OF LAND FOR CONSTRUCTION

Law 42/2016, of 28 December amended the CIMI, among others, adding article 135º-A which establishes: "passive taxpayers of the supplementary municipal property tax are natural or legal persons who are owners, usufructuaries or superficiaries of urban properties situated in Portuguese territory".

In turn, the following article – 135º-B – provides:

"1 that "the supplementary municipal property tax is levied on the sum of the taxable property values of urban properties situated in Portuguese territory of which the taxpayer is the holder.

2 – Excluded from the supplementary municipal property tax are urban properties classified as "commercial, industrial or for services" and "others" in accordance with subparagraphs b) and d) of paragraph 1 of article 6º of this Code".

Based on this wording, the Claimants argue that the taxable value of land for construction which do not have as their destination the building of non-residential properties cannot be relevant for purposes of AIMI, under penalty of absolute inconsistency with the legislative option to exclude from subjection to AIMI urban properties which, likewise, do not have as their destination habitation.

Indeed, we understand that it would be inconsistent with the necessary and intended unity of the legal system to interpret such an article differently, in the sense that all land for construction would be subject to AIMI, regardless of the purpose for which it is intended. It would, in fact, be absolutely contrary to the spirit of the legislator that, for purposes of application of that tax, the interpreter would abstract from the purpose for which the land for construction is intended, being, for that reason, irrelevant whether it is a question of habitation – the only one to which built properties are subject – or not.

It is known that, in accordance with the provision in article 9º of the Civil Code, interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative intent, having particularly in mind the unity of the legal system, which has full application in tax norms, as determined by paragraph 1 of article 11º of the LGT.

Honoring such principles, it is manifest that the exclusion provided for in paragraph 2 of article 135º-B of the CIMI relating to urban properties classified as commercial should be interpreted in "extensive form" so as to understand the legislative intention to include there also, in that exclusion, land whose construction is intended for the same purpose.

Now, of the land subject to taxation in AIMI that is the subject of the present arbitral request, there is one – registered in the urban tax register under article …, of the parish of …, Cascais which corresponds to land for construction intended for "commerce", having been assessed as such.

From the foregoing it follows, therefore, that the assessment which is the subject of the request relating to land for construction registered in the urban tax register under article …, of the parish of …, Cascais, is illegal and should, therefore, be annulled.

OF THE UNCONSTITUTIONALITY OF AIMI

It is established that the Claimants are real estate companies whose corporate purpose comprises the purchase, sale and leasing of immovable property.

The Claimants argue that article 135º-A of the CIMI would be violative of the principle of equality, in the aspect of taxpaying capacity, by making a non-discriminate taxation of all land for construction, understanding that all land for construction affected to economic activities are necessarily excluded from such taxation.

This is rejected by the Respondent, arguing that judgment of unconstitutionality of AIMI based on violation of the principle of equality is based on premises that rest on a comparison between incomparable situations.

We consider it established that the freedom enjoyed by the legislator requires that the principle of taxpaying capacity have some flexibility and can yield, up to a certain limit, in the face of other purposes of the State.

Hence, when an apparently or tendentially equal situation is treated in an apparently different way, one can only speak of tax inequality if there are no relevant reasons that have led the legislator to make the choices it made. In other words, what is constitutionally forbidden to the legislator is pure arbitrariness, which will not occur when it has in view the pursuit of objectives to which it attributes greater value – as is the paradigmatic case of tax benefits, in which the legislator prefers to forego tax revenue to achieve other objectives.

It is, in fact, within that spirit that the legislator, insofar as the case matters, only intends to tax properties classified as residential, refraining from making AIMI apply to the others. That is to say, it took a measure of distinction of what is unequal, making a choice whose justification appears clear: not to increase the tax burden on the productive sectors, aimed at the so-called needs for investment and economic growth.

We would say, on the other hand, that properties intended for habitation constitute goods for enjoyment, of which it can be said that their accumulation or high value will reveal a higher index of wealth and, as such, of greater taxpaying capacity.

Therefore, even if the taxpaying capacity revealed can be equal, no violation of the principle of equality is discerned, given the reasonableness of the distinction and the purposes sought.

However, the Claimants argue the circumstance that the immovable properties in question form an integral part of their commercial activity as that is their corporate purpose, wherefore it lacks foundation and, on the contrary, would be violative of the principle of equality, to make AIMI apply to such properties, by comparison with other entities, non-real estate companies, that are owners of properties.

It indeed invokes the similarity of the legal regime with that of the repealed item 28 of the General Table of Stamp Duty and the judicial and arbitral decisions on the matter existing.

On this point it appears to us that the Claimants are right, in accordance with a position which, regarding the aforementioned item 8 of the TGIS, we have already subscribed to in proceeding no. 458/2016-T.

There it was made reference to the judgment of the arbitral tribunal handed down on 17 March 2016 in proceeding no. 507/2015-T, when it considered that:

  • "It is unequivocal that companies dedicated to the commercialization of land for construction are subjected to a significant additional burden in relation to the generality of companies, based on a hypothetical index of taxpaying capacity that does not necessarily correspond to reality, since the imposition of taxation has no relation whatsoever with the actual income of the activity developed by the companies and burdens them even if they have negative results, with the burden heightened, cumulated annually, precisely in situations where, due to the lack of success of the land commercialization activity, the lands are held for several years and, for that reason, there would be less justification for the imposition of an additional taxation, exclusive to this type of company.

On the other hand, there is no apparent reason to distinguish between companies that commercialize land for construction of residential buildings and those that commercialize land for other purposes.

For this reason, also from this perspective, item 28.1 of the TGIS materializes an unjustified negative discrimination of companies commercializing land for construction, which implies its unconstitutionality on the ground of substance, by violation of the principle of equality".

We discern no reason to alter the understanding that we subscribe to now in the matter of AIMI.

As was, in fact, considered in the Judgment of the Constitutional Court no. 250/2017, of 24-05-2017:

  • "if behind the tax imposed on the owner of a residential house with a taxable property value exceeding one million euros there could be a taxpayer with sufficient economic force to bear the respective tax burden, behind the tax imposed on the owner of land for construction there will normally be an entrepreneur, as a rule in the form of a commercial company dedicated to real estate development, about whose economic force we know nothing;

  • we cannot presume that that taxpayer has economic force proportional to the value of the land, which is merely instrumental in relation to its economic activity. We are unaware of what profit margin it will obtain from its exercise, if it is even in legal and economic conditions to develop it, or whether it may not even have a negative net position".

Concluding therefore that there is a violation of the principle of tax equality "…because it does not respect the different taxpaying capacity of the owners of the properties on which it bears, striking indiscriminately taxpayers with and without the taxpaying force necessary to bear the tax, both because the differentiations it introduces between those who are covered and excluded from its scope are not proportional, being inadequate to satisfy the purpose sought by the norm, which is to tax in enhanced form immovable patrimonies of greater value in terms that satisfy 'the principle of social equity in austerity'".

From the foregoing it follows that the Claimant's claim succeeds, declaring the illegality of the remaining assessments and their annulment.

Thus, examination of the other questions raised is rendered moot.

OF COMPENSATORY INTEREST

In addition to the reimbursement of the tax, the Claimants seek to have declared the right to payment of compensatory interest.

Such right is enshrined in article 43º of the LGT, which presupposes that it be determined, in administrative appeal or judicial challenge – or in tax arbitration – that there was error attributable to the services from which resulted payment of the debt in an amount exceeding that legally due.

Recognition of the right to compensatory interest in the arbitral proceeding results from the provision in article 24º, paragraph 5 of the RJAT, when it stipulates that "payment of interest, independent of its nature, is due in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process".

However, in the case at hand, the requirements for the granting of compensatory interest are not met, as the Respondent properly argues.

It is true that AT performed an act which the arbitral tribunal now decides to be illegal.

But, for the Tax Administration to be condemned to payment of compensatory interest, it is necessary, as mentioned, that "it be determined […] that there was error attributable to the services from which resulted payment of the tax debt in an amount exceeding that legally due" (paragraph 1 of article 43º of the LGT).

In this case, AT did nothing more than act in accordance with the legal determination resulting from the CIMI. And it could not act otherwise, considering its binding to the law and the impossibility of disapplying it based on a judgment of supremacy of constitutional law, which it is not its role to make. In sum, it did not incur in error from which resulted payment of undue tax, and cannot, in the absence of that error, be condemned to payment of compensatory interest.

Thus, the request for condemnation of the Respondent to payment of compensatory interest is doomed to failure.

IV. DECISION

In these terms, it is decided in this Arbitral Tribunal:

  • To judge the arbitral request filed as well-founded and, consequently, to declare the illegality of the acts of assessment of the supplementary municipal property tax with nos. 2017…, 2017… and 2017…, relating to the year 2017 and, consequently, to condemn the Tax and Customs Authority to reimburse the amount of tax paid.

  • To judge the request for payment of compensatory interest as unfounded.

  • To condemn the Respondent and the Claimants in the costs of the proceeding, in the proportion of their respective failure to prevail, that is to say, €873.00 and €45.00, respectively.

V. VALUE OF THE PROCEEDING

The value of the proceeding is fixed at €17,405.30, in accordance with article 97º-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by force of subparagraphs a) and b) of paragraph 1 of article 29º of the Legal Regime for Tax Arbitration and paragraph 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The amount of the arbitration fee is fixed at €1,224.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with articles 12º, paragraph 2, and 22º, paragraph 4, both of the Legal Regime for Tax Arbitration, and article 4º, paragraph 4, of the aforementioned Regulation.

Let notification be made, including to the Public Prosecutor's Office, in light of the provision in article 280º, paragraph 3, of the Constitution of the Portuguese Republic.

Lisbon, 04 July 2018

The Arbitrator

(António Alberto Franco)

Frequently Asked Questions

Automatically Created

What is the statute of limitations (caducidade) for IRS tax assessments in Portugal?
Under Portuguese tax law, the statute of limitations (caducidade) for IRS assessments is four years, counted from the end of the year in which the taxable event occurred (Article 45 of the General Tax Law - LGT). For IRS relating to 2010, the right to assess would lapse on December 31, 2014, unless validly notified to the taxpayer before that date. This limitation period can only be suspended or extended under specific circumstances defined by law, such as when a criminal inquiry is initiated regarding facts that directly affect the tax assessment, but the Tax Authority must demonstrate that the assessment actually depends on the criminal investigation.
Can a pending criminal inquiry process suspend or extend the IRS assessment deadline under Portuguese tax law?
Yes, a criminal inquiry can suspend the IRS assessment deadline, but only under strict conditions specified in Article 45(5) of the General Tax Law (LGT). The suspension applies exclusively when the tax assessment relates to facts that are the subject of a criminal investigation and when the tax qualification depends on the criminal qualification of those facts. The Tax Authority must prove that the criminal investigation is indispensable for performing the tax assessment. A mere general reference to a criminal inquiry involving related parties or entities is insufficient; there must be a demonstrated connection between the specific facts under criminal investigation and the tax assessment in question.
What happens if the Portuguese Tax Authority fails to notify a taxpayer of an IRS assessment within the legal deadline?
If the Portuguese Tax Authority fails to notify a taxpayer of an IRS assessment within the legal limitation period (four years from the end of the year of the taxable event), the assessment becomes time-barred and loses legal effectiveness. The taxpayer can challenge this through opposition to tax enforcement (oposição à execução fiscal) under Article 204(1)(e) or (i) of the CPPT if an enforcement proceeding has been initiated. The lack of valid notification within the limitation period renders the assessment illegal and unenforceable, and any amounts collected must be reimbursed to the taxpayer. Additionally, violations of notification requirements for inspection reports and denial of prior hearing rights constitute independent grounds for illegality.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is declared illegal by CAAD?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when an IRS assessment is declared illegal by CAAD and amounts have been unduly paid to the Tax Authority. Compensatory interest is calculated from the date of undue payment until reimbursement, as provided in Article 43 of the General Tax Law (LGT). This right applies when the Tax Authority's action caused financial harm to the taxpayer through illegal tax collection. In cases where assessments are annulled due to procedural violations such as failure to notify within the limitation period or denial of prior hearing rights, the taxpayer is entitled to full restitution of amounts paid plus compensatory interest at the legally established rate.
What are the legal consequences of the Tax Authority not providing prior hearing (audiência prévia) before issuing a tax assessment?
Failure to provide prior hearing (audiência prévia) before issuing a tax assessment constitutes a serious procedural violation under Portuguese tax law. Article 60 of both the General Tax Law (LGT) and the Tax Inspection Regulations (RCPITA) guarantee taxpayers the right to be heard before administrative acts that may adversely affect their rights. The Tax Authority must notify taxpayers of the draft inspection report, allowing them to present their position before the final assessment is determined. Violation of this right constitutes a formal illegality that invalidates the assessment. Additionally, failure to notify the taxpayer of the inspection report itself, the beginning of the inspection procedure, or the final assessment represents further procedural violations that render the tax act illegal and unenforceable.