IRC Fiscal Transparency Regime: Arbitration on Tax Assessment Errors (652/2014-T)

ARBITRAL DECISION

Carla Castelo Trindade, Arbitrator appointed by the Ethics Council of the Centre for Administrative Arbitration to form this arbitral tribunal hereby renders the following:

ARBITRAL DECISION

I – REPORT

On 3 September 2014, A, LDA., legal entity no. …, with registered office at Street … , registered at the Commercial Registry Office of … (hereinafter "Claimant"), having been notified by official letter no. … of 30 May 2014, of the decision dismissing the Administrative Complaint no. …, filed in accordance with Article 68° of the Code of Tax Procedure and Process (CPPT), concerning the corporate income tax (IRC) assessments no. 2013 … for the year 2010 and no. 2013 … for the year 2011, in the total amount (to be refunded) of €20,679.60, filed a request for arbitral determination, in accordance with Article 2° no. 1 letter a), Article 5° no. 2 letter a), Article 6° no. 1, Article 10° no. 1 letter a), all of the Legal Regime for Arbitration in Tax Matters (Decree-Law no. 10/2011, of 20 January), for examination of the legality of those tax acts.

The aforementioned additional IRC assessments resulting in €20,679.60 to be refunded to the Claimant resulted from the application, by the Tax Authority, of the fiscal transparency regime provided for in the IRC and Personal Income Tax (IRS) Codes.

Disagreeing with those tax assessments and also with the decision dismissing the Administrative Complaint, the Claimant requested the constitution of an arbitral tribunal seeking the annulment of the additional IRC assessments on the grounds that:

a) there was an error in the quantification of taxable income for IRC purposes - since it should have been calculated in accordance with statements sent by the Claimant and self-assessment made by it;

b) there was an error in the reasoning, since the inspection report contains no grounds that would justify the corrections made;

c) there was an error of characterization in erroneously determining that the Claimant is subject to the fiscal transparency regime.

With the request for arbitral determination, the Claimant attached 7 documents and did not call any witnesses.

Since the Claimant opted for non-designation of an arbitrator, in accordance with letter a) of no. 2 of Article 6° and letter b) of no. 1 of Article 11° of the Legal Regime for Tax Arbitration, in the wording introduced by Article 228° of Law no. 66-B/2012, of 31 December, the Ethics Council appointed Dr. Carla Castelo Trindade as arbitrator of the single arbitral tribunal, who communicated acceptance within the applicable time-frame.

The parties were notified of this appointment, and no request was filed for recusal of Dr. Carla Castelo Trindade's appointment as arbitrator.

Thus, in accordance with the provision in letter c) of no. 1 of Article 11° of the Legal Regime for Tax Arbitration, in the wording introduced by Article 228° of Law no. 66-B/2012, of 31 December, the single arbitral tribunal was constituted on 26 November 2014.

On 6 January 2015, the Tax and Customs Authority (hereinafter "Respondent") filed a response in which it defended the total dismissal of the request for arbitral determination.

By order of 16 January 2015, the tribunal notified the Claimants of the non-holding of the meeting provided for in Article 18° of RJAT, and further notified them to present arguments within 10 days, first by the Claimant and then by the Respondent.

Neither the Claimant nor the Respondent presented arguments.

II. PRELIMINARY MATTERS

The arbitral tribunal was regularly constituted and is materially competent.

The process is not affected by any nullities and no issues have been raised that could prevent examination of the merits of the case.

The parties possess legal capacity and standing, are legitimate and are legally represented.

All matters having been considered, a decision must be rendered.

III. FACTS

III.1. FACTS PROVED

With respect to factual matters, it is important first to note that the tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that are material to the decision and distinguish proved facts from unproved ones. All in accordance with Article 123°, no. 2, of CPPT and Articles 607°, nos. 2, 3 and 4 of the Code of Civil Procedure (CPC), applicable ex vi Article 29°, no. 1, letters a) and e), of the Legal Regime for Tax Arbitration. In this manner, the facts relevant to the determination of the case are selected and delineated according to their legal relevance, which is established having regard to the various plausible solutions to the question(s) of law (see former Article 511°, no. 1, of CPC, corresponding to current Article 596°, applicable ex vi Article 29°, no. 1, letter e), of the Legal Regime for Tax Arbitration).

Now, given the positions assumed by the parties, the documentary evidence and the Administrative File attached to the record, the following facts are considered proved as material to the decision:

1.  The Claimant was incorporated in 1997, with the object of providing services related to medicine, occupational hygiene and safety, with partners B and C, husband and wife, a physician and teacher by profession, respectively.
   

2.  The Claimant's share capital, totalling €5,000.00, was distributed in two shares of €2,500.00 each, belonging in equal parts to both partners.
   

3.  On 9 February 2009, there occurred the transfer of one of the shares, that of C, to B.
   

4.  This transfer was registered on 9 February 2009, as appears from page 3/5 of the Permanent Certificate attached as annex 7 of the Inspection Report included in the administrative file.
   

5.  Pursuant to Minute One (attached as document 6 by the Claimant), on 9 February 2009, part of B's share was transferred to D.
   

6.  Also pursuant to Minute One, on that same date, the company consented to the transfer of shares.
   

7.  D does not exercise the medical profession.
   

8.  Notwithstanding the content of Minute One, the acquisition of the share by D was not registered at the time of execution of the contract.
   

9.  Only on 12 January 2013 did the Claimant proceed with the registration of the fact concerning the division, transfer and unification of shares.
   

10. Thus, for purposes of commercial registration, on 9 February 2009, the Claimant came to have as sole partner B, by virtue of the transmission of C's share…

11. …in that the transfer of part of the share to D was not registered.

12. Between 9 February 2009 and 12 January 2013, the Claimant maintained share capital of €5,000.00, distributed in two shares, according to the alterations in the company's corporate structure as follows:

1. On 29 November 2012, the inspection procedure commenced, under which the Claimant was confronted with the fact that it was subject to the fiscal transparency regime since 2009.

2. During the years 2009 to 2013, the Claimant complied with its tax obligations without ever acting, however, as if it were a legal entity subject to the fiscal transparency regime provided for in the IRC Code.

3. On 21 January 2013, at a meeting held between the Tax Authority Services, the Claimant and its representatives, the latter came to produce a contract for division, transfer and unification of shares.

4. Pursuant to said contract, executed between B (first party) and D (second party), father and son, respectively, it is stated, in summary, that:

5. "The first declares that he is the sole partner of company A Lda., with share capital of five thousand euros, distributed in two equal shares with a nominal value of two thousand five hundred euros each, which belong to him;

6. The first declares that he proceeds to divide one of the shares with a nominal value of two thousand five hundred euros into two new shares, one with a nominal value of two hundred and fifty euros which he transfers to the second, for the price of two hundred and fifty euros, and another with a nominal value of two thousand two hundred and fifty euros which remains in his ownership;

7. The first party further declared that he unifies in a single share, the share valued at two thousand two hundred and fifty euros with the one he already held valued at two thousand five hundred euros, coming to be holder of a single share with a nominal value of four thousand seven hundred and fifty euros";

8. The contract is dated 9 February 2009.

9. Following the presentation of said contract, the Respondent requested that the minute book also be presented, so that the corporate resolutions could also be analyzed.

10. The taxpayer responded to this request 28 days later.

11. From said minute book it appears that the first minute is precisely dated 9 February 2009.

12. From this Minute One, already referred to above, it appears that the division of one of the shares with a nominal value of two thousand five hundred euros into two new shares was resolved, one with a nominal value of two thousand two hundred and fifty euros, which remains in the ownership of partner B, and another with a nominal value of two hundred and fifty euros, which is transferred to his son, for the price of two hundred and fifty euros.

13. When questioned about the prior minutes, as well as about the fact that the first minute of the exhibited book corresponded precisely to the resolution to divide and transfer shares dated 9 February 2009, it was stated that the prior minute book had been lost.

14. The prior minute book was never presented.

15. Given the factual situation set out above, the Respondent considered the Claimant as a professional partnership, thus falling within the fiscal transparency regime, provided for in Article 6° of the IRC Code, in the period between 9 February 2009 and 11 January 2013…

16. …having made corrections for IRC purposes for the years 2009, 2010 and 2011.

17. As a result of the inspection procedure, IRC assessments no. 2013 … for the year 2010 and no. 2013 … for the year 2011 were issued.

18. Disagreeing with the same, the Claimant filed an Administrative Complaint on 19 November 2013.

19. On 2 June 2014, the Claimant was notified of the decision dismissing the Administrative Complaint.

III.2. FACTS NOT PROVED

As stated, with respect to the factual matters accepted as established, the tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that are material to the decision and distinguish proved facts from unproved ones (see Article 123°, no. 2, of CPPT applicable ex vi Article 29°, no. 1, letters a) and e), of the Legal Regime for Tax Arbitration).

In this manner, the facts relevant to the determination of the case were selected and delineated according to their legal relevance, which is established having regard to the various plausible solutions to the question(s) of law (see former Article 511°, no. 1, of CPC, corresponding to current Article 596°, applicable ex vi Article 29°, no. 1, letter e), of the Legal Regime for Tax Arbitration).

Thus, there is no other factuality alleged that is relevant to the proper resolution of the procedural dispute, especially since the evidentiary assessment of the documents attached to the case was not questioned.

IV. MATTERS OF LAW

Preliminary Question of Procedural Order

Given the positions of the parties as assumed in the pleadings filed, the central question to be resolved by this arbitral tribunal consists of examining the legality of the IRC assessment acts.

Since the Claimant has attributed various defects to the impugned tax acts, the order of examination of these must be determined, and the order established in Article 124° of CPPT must be observed, applicable by virtue of Article 29°, no. 1, letter a) of the Legal Regime for Tax Arbitration[1].

The substantiation of any of the defects invoked by the Claimant will result in the annulment of the tax act. The defect of violation of law will be examined first, in that it is the one that will result in the "most stable or effective protection of the injured interests", since its possible substantiation will prevent the renewal of the act, which does not occur with annulment resulting from the other defects.

Accordingly, the tribunal will first examine the defect of violation of law, then examining the defect of error in reasoning and subsequently the argument of unconstitutionality.

Preliminary Question – Brief Framework

In very general terms, and for purposes of theoretical framework, this tribunal begins by noting that at the origin of the fiscal transparency regime there is always a company, legal entity, or equivalent entity, which, were it not for its subjection to the fiscal transparency regime, would be taxed under the IRC.

The fiscal transparency regime is, therefore, alternative to the general regime for taxation of the income of companies and equivalent entities, and is therefore understood, also by this tribunal, as a special regime.

Thus, the legislator, for reasons that will be attempted to be clarified below, created in certain and specific types of business/business realities/professional activities a regime composed of a compromise between the determination of taxable income following IRC rules and the allocation of this result to the partners who will thus be taxed under IRS or IRC depending on the case. The legislator also created, for reasons that will also be seen below, a regime of exception to this general rule of the special regime.

But the fiscal transparency regime is special also because, having as stated objectives fiscal neutrality, the elimination of double economic taxation of distributed profits and the prevention of tax fraud and evasion, it consists of an exceptional regime of taxation of certain collective entities and their partners.

The legal personality of the entity is, therefore, disregarded for purposes of taxation of the determined income, with this income often being allocated, regardless of actual distribution, to its partners or members, to be taxed under IRS or IRC, depending on whether they are natural or legal persons[2],[3].

It is provided for in the current Article 6° of the IRC Code (previously and originally, Article 5°) that:

Article 6°

Fiscal Transparency

1 - The taxable income of the following companies, with headquarters or effective management in Portuguese territory, is allocated to partners, being integrated, in accordance with the applicable legislation, in their taxable income for purposes of IRS or IRC, as the case may be, even if there has been no distribution of profits:

a) Civil partnerships not established in commercial form;

b) Professional partnerships;

c) Asset management partnerships, of which the majority of share capital belongs, directly or indirectly, for more than 183 days of the fiscal year, to a family group, or of which the share capital belongs, on any day of the fiscal year, to no more than five partners and none of them is a public law entity

(…)

1. For purposes of the provision in no. 1, the following shall be considered:

a) Professional partnership:

The partnership established for the exercise of a professional activity specifically listed in the activities list referred to in Article 151° of the IRS Code, in which all partners who are natural persons are professionals in that activity"

Thus, there is no doubt that this article establishes that the taxable income of professional partnerships is allocated to partners, being integrated, in accordance with the applicable legislation, in their taxable income for purposes of IRS or IRC, as the case may be.

In this regard, Article 15° prescribes, concerning entities subject to IRC that carry on principally a commercial, industrial or agricultural activity, as is the case, that taxable income is considered:

Article 15°

Definition of Taxable Income

1 - For purposes of this Code:

a) Regarding legal entities and entities referred to in letter a) of no. 1 of Article 3°, taxable income is obtained by deducting from taxable profit, determined in accordance with Articles 17° and following, the amounts corresponding to:

1. Tax losses, in accordance with Article 52°;

2. Any tax benefits that consist of deductions from that profit;

27°.

From this it follows that there is no specific rule, called special, for the definition of taxable income in the fiscal transparency regime, which therefore follows the general rule provided for in Article 15° of the IRC Code.

There is also no doubt that by professional partnership should be understood any partnership established for the exercise of any professional activity listed in the list referred to in Article 151° of the IRS Code, in which all partners who are natural persons are professionals in that activity.

Given the foregoing, what must be determined in the case at hand is whether, in the periods 2009 to 2013, the Claimant was or was not a professional partnership qualifying for purposes of Article 6° of the IRC Code.

A) Regarding the Defect of Violation of Law – Error in the Quantification of Taxable Income for IRC Purposes due to Incorrect Characterization of the Claimant as a Taxpayer Subject to the Fiscal Transparency Regime

As stated, the Claimant requested the constitution of an arbitral tribunal petitioning for the annulment of the additional IRC assessments on the grounds that:

a) there was an error in the quantification of taxable income for IRC purposes - since it should have been calculated in accordance with statements sent by the Claimant and self-assessment made by it;

b) there was an error in the reasoning, since the inspection report contains no grounds that would justify the corrections made; and

c) there was an error of characterization in erroneously determining that the Claimant is subject to the fiscal transparency regime.

Strictly speaking, the first and third defects are interdependent – in that the first only exists to the extent that the third subsists, and in reality, both are reducible to the defect of violation of law.

In other words, there will only be an error in the quantification of taxable income for IRC purposes if it is concluded that there was, on the part of the Respondent, an incorrect characterization of the legal-tax situation of the Claimant by considering it as a taxpayer subject to the fiscal transparency regime. Should this be the case, the tribunal will have to declare a violation of law defect.

The Claimant alleges, in this regard, that the inspection report erroneously concluded that from February 2009, the company was held exclusively by B, all because it disregarded the fact that on that date there occurred the transfer of one of C's shares to B, and that on that date there also occurred the division of said share and transfer of part of the share to D.

The Claimant further alleges that since this latter partner does not exercise the medical profession, the fiscal transparency regime provided for in Article 6° of the IRC Code is not consequently applicable.

The Claimant further adds that the shares were not unified by B, which would have occurred had he effectively remained as sole holder of the two shares.

To corroborate its defense, it alleges that, although the acquisition of the share was not registered at the time of execution of the contract, such registration is not constitutive, and therefore the transfer of shares should be considered effective from 9 February 2009, the date on which the company consented to the transfer of shares.

The Respondent entity argues, on the other hand, that between 9 February 2009 and 12 January 2013, the Claimant was subject to the fiscal transparency regime since it has the object of providing services related to medicine, occupational hygiene and safety and the share capital of €5,000.00 was distributed in two shares both belonging to B, a natural person with the profession of physician.

The Respondent is correct from the outset when it argues that for a partnership to be considered, in accordance with law, as a professional partnership it is sufficient that it meet two conditions:

1.  It be established for the exercise of a professional activity specifically listed in the activities list annexed to the IRS Code, and;
   

2.  All partners who are natural persons are professionals in that activity.
   

The Respondent is also correct when it argues that once these requirements are met, the fiscal transparency regime is automatically applicable, not depending on any option or decision of the taxpayer in question.

The Respondent is also correct when it states that the fact that it is a partnership with two shares, but with these being held by a single holder, does not disqualify it as an eligible partnership for purposes of the fiscal transparency regime.

For this last statement, it is important to analyze the characterization of a single-partner limited partnership, where the sole partner exercises a profession listed in the activities list annexed to the IRS Code, with respect to the fiscal transparency regime. Now, by virtue of Article 2° of Decree-Law no. 257/96, of 31 December, the Commercial Companies Code was amended, with Chapter X "Single-Partner Limited Partnerships" being added to Title III "Limited Partnerships", which contemplates Articles 270°-A to 270°-G. The single-partner limited partnership is established by a sole partner, a natural or legal person, who is the holder of the entire share capital, as determined in no. 1 of Article 270°-A of the Commercial Companies Code. Thus, in that in a single-partner limited partnership there is only one sole partner, not ceasing to be a partnership, it is sufficient that that sole partner exercise any of the activities listed in the list referred to in Article 151° of the IRS Code for the partnership to be considered subject to the fiscal transparency regime. In other words, it is not therefore due to the fact that it is a single-partner partnership that its subjection to the fiscal transparency regime is invalidated.

It remains therefore to determine whether the two shares were both held by B, taking into account the effects of the contract for division, transfer and unification of shares executed on 9 February 2009 but only registered on 12 January 2013.

In this regard, the great question that must be resolved is whether the fact that there was no registration of the transfer of shares to D is or is not irrelevant for purposes of characterizing the partnership as a transparent partnership for tax purposes. In other words, it is important to know whether a transfer of shares appearing in a minute and in a partnership contract, although not registered, is or is not binding against third parties, in particular against the Tax Authority.

First, it should be noted that the issue raised here goes beyond the discussion concerning the constitutive effect of commercial registration. The constitutive effect of commercial registration consists, in summary, in the fact that the law requires the occurrence of registration in order for certain acts to produce all their effects, thus contracting the principle of consensuality, i.e., the immediate production of effects by mere consequence of the contract (Article 406°, no. 1 of the Civil Code)[4]. In this regard, the large majority of doctrine and case law follow the thesis that, regarding commercial partnerships, registration is, in principle, constitutive. Against this understanding, Menezes Cordeiro understands that the "constitutive" registrations provided for in the Commercial Companies Code (…) are not true instances of constitutive registration", but rather cases in which registration is a conditioning factor of full effect, requiring case-by-case analysis[5].

Now, what is intended to be examined here is, solely and exclusively, whether registration of the division, transfer and unification of shares is or is not mandatory, and if, having not been promoted the respective registration, that division, transfer and unification of shares is or is not binding against third parties, in particular against the Tax Authority. Should it be considered that the division, transfer and unification of shares is or is not binding against third parties even before the respective registration, it is still necessary to determine whether the Tax Authority should be considered a "third party" for purposes of commercial registration. It should be noted, however, that for the case in dispute it is irrelevant whether or not the Claimant partnership itself qualifies as a "third party" and even the production of effects of said contract among the contracting parties and the Claimant. The issue concerns solely the characterization of the Tax Authority as a "third party" for purposes of commercial registration.

The transfer of shares, as a voluntary inter vivos transfer, must be in writing (see Article 228° no. of the Commercial Companies Code). Before such provision, the Claimant concludes, and correctly so, that "the transfer of shares made between the sole partner and his son by a private written document signed by the parties is, from the perspective of partnership law, fully valid". In this regard, the Claimant also concludes that "in accordance with the general rules of law (see Article 406° of the Civil Code), the transfer of the share produces its effects between the parties, transferor partner and transferee partner, from the date of its execution."

The Claimant also concludes that "the transfer of the share became effective vis-à-vis the partnership when it came to recognize such transfer (tacitly) by admitting the new partner to participate in General Meetings of partners." Thus, the Claimant argues that from February 9, 2009 that "the partnership is configured as a multi-partner partnership with two partners with full duties and rights vis-à-vis the partnership".

The Claimant does not say, however, whether this fact is binding against third parties.

It is this that must now be examined.

The facts subject to registration are provided for in the Commercial Registration Code and the Commercial Companies Code, and are intended to fulfill the function of the registration institution, which is publicity, a value to which it is tied.

No. 1 of Article 3° of the Commercial Registration Code establishes that "the following facts relating to commercial partnerships and civil partnerships in commercial form are subject to registration: (...) c) The unification, division and transfer of shares of limited partnerships, as well as of partnership interests of limited partners of simple limited partnerships".

Thus, it follows from the law the obligation of subjection to registration as can be read in no. 1 of Article 15° of the Commercial Registration Code.

Article 15°

Facts Subject to Mandatory Registration

1 - Registration of the facts referred to in letters a) to c) and e) to z) of no. 1 and in no. 2 of Article 3°, in Article 4°, in letters a), e) and f) of Article 5°, in Articles 6°, 7° and 8°, and in letters c) and d) of Article 10° is mandatory. (emphasis ours).

Thus, registration of the unification, division and transfer of shares of commercial limited partnerships (letter c) of no. 1 of Article 3° of the Commercial Registration Code) is, without a doubt, mandatory.

This means that the contract for division, transfer and unification of shares executed on 9 February 2009 was subject to mandatory registration.

Furthermore, note that, pursuant to no. 1 of Article 14° of the Commercial Registration Code "facts subject to registration only produce effects against third parties after the date of the respective registration" (emphasis ours).

In other words, registration of acts subject to mandatory registration – in particular the contract for division, transfer and unification of shares of a limited partnership – is a condition of binding effect against third parties of those same acts.

In this sense, the fact relating to the division, transfer and unification of shares – especially the transfer of shares to D – is only binding against third parties from 12 January 2013, the date of the respective registration. Indeed, between 9 February 2009 – the date of execution of the contract – and 12 January 2013 – the date of registration of the fact – the transfer of shares to D produced effects, at most, only among the contracting parties and the partnership itself.

As to the notion of "third party" for purposes of commercial registration, it must be understood that this does not correspond at all to that of "third parties with incompatible rights or interests received from a common source". In fact, as case law has correctly noted,

"The notion of third parties for purposes of commercial registration is not to be confused with that made in the technical-registration sense (of third parties with incompatible rights or interests received from a common source).

A third party, for purposes of commercial registration, is anyone who is not a party to the fact subject to registration, their heir or representative." (see Decision of the Supreme Court of Justice of 2012-03-15, case no. 954/06.3T CLRS.L1.S1)

Before this framework, the Tax Authority is, therefore, a third party for purposes of commercial registration. In this sense, the division, transfer and unification of shares only produces effects against the Tax Authority after registration of that fact by virtue of Articles 15°, no. 1, 3°, no. 1, letter c), and 14°, no. 1, all of the Commercial Registration Code.

It is concluded, therefore, that the said contract in which the transfer of part of one of the shares to D occurs is not binding against the Tax Administration, creditors and any other third parties, until the date of its registration.

What consequences are drawn from said non-bindingness?

Between 9 February 2009 and 12 January 2013, following the transfer of C's share in favor of B, the latter thus became the sole holder of both of the Claimant's shares. Recovering what was said above, the Claimant thus became held by a sole partner – B – who was the holder of the entire share capital (see 270°-A of the Commercial Companies Code).

Furthermore, B is, as he was at the time, a physician by profession. A profession that is listed in the list referred to in Article 151° of the IRS Code. For this reason. Thus, and from what has been set out above, it is necessarily concluded that the Claimant became, between 9 February 2009 and 12 January 2013, subject to the fiscal transparency regime, with its sole partner being taxed under IRS in accordance with the special rules applicable to this fiscal transparency regime.

The Respondent entity was correct in characterizing the Claimant as subject to the fiscal transparency regime in the years 2009 to 2013.

Given all the foregoing, it is concluded that there is no error whatsoever in the characterization of the legal-tax situation of the Claimant by considering it as a taxpayer subject to the fiscal transparency regime, which prevents the declaration of the alleged error in the quantification of taxable income for IRC purposes on the part of the Respondent. In sum, the tribunal concludes that the defect of violation of law does not exist, and the Claimant's request is therefore without merit in this part.

B) Regarding Error in Reasoning

The Claimant alleges in its request for arbitral determination that there was "an error in reasoning, since the inspection report contains no grounds that would justify the corrections made", without however justifying this conclusion it reached. In its response, the Respondent did not pronounce on this defect.

The current case law of the Supreme Court of Administrative Justice, taking as reference the Decision of 10 February 2010, case no. 01122/09, has held that

"the reasoning of the administrative act is a relative concept that varies according to the type of act and the circumstances of the specific case, but is only sufficient when it allows a normal recipient to perceive the cognitive and evaluative process followed by the author of the act in rendering the decision, that is; when that person can know the reasons why the author of the act decided as it did and not differently, so as to be able to trigger the administrative or contentious mechanisms of challenge".

More recently, and in other words, that tribunal argued that

"The act will be sufficiently reasoned when the administered party, placed in the position of a normal recipient – the bonus pater familiae mentioned in Article 487° no. 2 of the Civil Code – can come to know the factual and legal reasons that are at its origin, so as to allow it to choose, in an informed manner, between accepting the act or triggering the legal means of challenge, and so that, in this latter circumstance, the tribunal can also exercise effective control of the legality of the act, assessing its legal correctness in light of its contextual reasoning." (Decision of the Supreme Court of Administrative Justice of 12-03-2014, case no. 01674/13)

In the present case, it appears that the cognitive and evaluative process followed by the Tax Authority in the Inspection Report, which grounds the administrative acts at issue, does not contain any error in reasoning. Indeed, the Inspection Report contains the reasons that justify the corrections made, in particular the reasons for which the Tax Authority understands that the fiscal transparency regime should be applied to the Claimant.

Moreover, as stated, the Claimant merely alleges, finally, the defect of "error in reasoning", without however justifying it, saying only that it was not effectively possible for it to "know the reasons why the author of the act decided as it did and not otherwise". Indeed, from the request for arbitral determination presented by the Claimant, it is clear that the latter, although disagreeing with the final result of the Inspection Report, understood the reasons for which the corrections were made – in particular the application to the Claimant of the fiscal transparency regime – and therefore it is evident that it comprehended the cognitive and evaluative process of the Respondent.

C) Regarding the Invoked Unconstitutionality

The Claimant further questions the constitutionality of the application of the fiscal transparency regime to single-partner partnerships, in that it understands that it "violates the principle of good faith, legal certainty, equality and the principle of contributive capacity".

The Claimant understands in this regard that the application of the fiscal transparency regime to single-partner partnerships prejudices the individual partner compared to companies exercising their activity with two partners that are not subject to the fiscal transparency regime. Justifying a violation of the principles of certainty and legal security, the Claimant further argues that it always exercised its activity under the assumption that it would be taxed under the IRC, and consequently its partners would be taxed only to the extent there was actual distribution of the profits.

On this issue, the Respondent pronounced itself, in response to the request for arbitral determination, arguing in summary that it does not perceive the alleged violation of such constitutional principles, having particular regard to the rationale of the regime in question – the already mentioned fiscal neutrality, prevention of tax evasion and tax fraud and the elimination of double taxation – and that the uncertainty and legal insecurity invoked by the Claimant derive from a negligent disregard of the law on the part of that entity.

It now falls to this tribunal to pronounce on the alleged unconstitutionality of the application of the fiscal transparency regime to single-partner partnerships.

In this regard, it is stated from the outset that the Claimant is incorrect when it asserts that the application of said regime to single-partner partnerships violates the constitutional principles of good faith, legal certainty, equality and also the principle of contributive capacity.

Indeed, one must first look to the very rationale of the fiscal transparency regime: to achieve fiscal neutrality; to prevent tax evasion and to eliminate the double economic taxation of profits distributed to partners. In this regard, see the Decision of the Supreme Court of Administrative Justice of 21 March 2012, case no. 0830/11:

"Regarding fiscal neutrality, such an objective translates into an immediate effect of the fiscal transparency regime because in allocating the company's income to its partners, especially in cases where these are natural persons, one is precisely emphasizing its capacity to generate income, relegating to the background its organization as a partnership.

As for the prevention of tax evasion, the same results from this way of preventing the formation of partnerships solely with the objective of reducing the tax burden on a specific activity.

Finally, regarding the objective of eliminating double economic taxation, fiscal transparency translates into an appropriate mechanism for this purpose in that by not permitting the income of certain partnerships to be taxed under the IRC, instead allocating it to the partners that make it up, and taxing that income in the sphere of each partner, one achieves the result that the income is taxed only once, that is, always in the sphere of the partner or member in question."

Second, regarding the principle of contributive capacity, it should be understood that the income to be taxed, through this fiscal transparency regime, is already revealed through a contributive capacity that manifests itself through taxable income under the IRC, in the sphere of the partnership itself, even if the corresponding profit has not been distributed among the partners.

In turn, the argument according to which there would be a violation of the principle of equality – in that individual partners would be prejudiced compared to partnerships with more than one partner – also does not hold, in that, as stated above, even in a partnership with two or more partners, if all exercise a profession listed in the list referred to in Article 151° of the IRS Code, and if the object of the partnership in question is the pursuit of activities related to the profession of its partners, the fiscal transparency regime will also be applicable. A paradigmatic example is law partnerships with two or more partners.

Finally, regarding the alleged violation of the principles of certainty and legal security, this tribunal understands that the Respondent is correct when it asserts that any uncertainty and legal insecurity that might occur in the specific case could only result from a disregard of the law on the part of the Claimant. In fact, although the Claimant alleges that it always exercised its activity under the assumption that it would be taxed under the IRC – and consequently its partners would be taxed only to the extent there was actual distribution of the profits – there is here no legitimate expectation worthy of protection, and it should be recalled that the maxim provides that "ignorance of the law is no excuse"

In sum, this tribunal considers that the argument of unconstitutionality alleged by the Claimant does not hold when it argues that the application of the fiscal transparency regime to single-partner partnerships violates the constitutional principles of good faith, certainty and legal security and equality and the principle of contributive capacity.

V. DECISION

Accordingly, this arbitral tribunal rules that the request for arbitral determination is without merit.

VI. CASE VALUE

The case value is fixed at €20,679.60, in accordance with Article 97°-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of letters a) and b) of no. 1 of Article 29° of the Legal Regime for Tax Arbitration and no. 2 of Article 3° of the Regulation of Costs in Tax Arbitration Proceedings.

VII. COSTS

The arbitration fee is fixed at €1,224.00 in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Notify.

Lisbon

6 May 2015

The Arbitrator

(Carla Castelo Trindade)

Text prepared by computer, in accordance with Article 138°, number 5 of the Code of Civil Procedure (CPC), applicable by reference in Article 29°, no. 1, letter e) of the Tax Arbitration Regime.

The drafting of this decision follows the original orthography.

[1] Jorge Lopes de Sousa, Commentary on the Legal Regime for Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, p. 202.

[2] ALVES PALMA, Ana Paula de Albuquerque, The Fiscal Transparency Regime - Analysis of the Regime's Effectiveness in Portugal and Evolution Perspectives, Master's Dissertation in the context of the Master's Degree in Accounting, Taxation and Business Finance, Lisbon, ISEG, School of Economics & Management, September 2013, supervised by Prof. Dr. Manuel Henrique Freitas Pereira, available on the Internet.

The legal nature within the IRC framework is disputed: Non-subjection? Exemption? Merely instrumental subjection? For Saldanha Sanches and Casalta Nabais, one would be faced with a case of non-subjection to IRC as to the main obligation (tax debt) and subjection to IRC as to ancillary obligations (cooperation duties). For Jorge Magalhães Correia, it would be a case of exemption, since the legal requirement that taxable income of transparent entities be determined in accordance with the IRC Code would be out of place if it were a case of non-subjection. This is, however, a marginal question to the disputed matter.

[3] In this regard, in one of the first Opinions produced by the Tax Studies Center - Opinion no. 18/89, in CTF no. 354, ABR-JUN 1989, pp. 275/286, and whose Authors were Maria de Lourdes Correia and Vale and Manuel Henrique de Freitas Pereira, having been sanctioned by dispatch of the DG of 21-03-1989 -, it was written that: "As a consequence of this regime - which always assumes, among us, a mandatory character - the partnerships and other entities to which it applies are not taxed (art.° 12° of the same Code), but remain as tax subjects of the IRC. This subjection is necessary because it is an essential instrument in defining the regime a). Indeed, transparent partnerships and other entities are "unitary reference centers" for calculating the base values that must be allocated to their partners or members, a calculation made in accordance with the provisions of the IRC Code (nos. 1 and 2 of Article 5° of the Code), including those that enable its correction (Article 78° of the Code)."

[4] See CORDEIRO, António Menezes, Law of Commercial Partnerships – I – General Part, 3rd edition, 2011, Coimbra: Almedina, p. 583.

[5] See CORDEIRO, António Menezes, Law of Commercial Partnerships – I – General Part, 3rd edition, 2011, Coimbra: Almedina, pp. 583, 586-588.