Process: 653/2018-T

Date: August 7, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 653/2018-T) addresses IRS assessments against three shareholders of a fiscally transparent company (transparência fiscal) under Article 6 CIRC. The Tax Authority issued additional IRS assessments totaling €64,951 for 2014 based on Article 64(2) CIRC, which requires correcting taxable income when real estate is sold below its Valor Patrimonial Tributário (VPT). The company sold two properties for €32,500 total but the combined VPT was €192,720. The taxpayers argued: (1) Article 139(1) CIRC establishes a procedure to prove the actual transaction price; (2) the Tax Authority violated their right to present evidence under Articles 73 LGT and 54 CPPT; (3) shareholders of transparent companies should have the same defense rights as the company itself; and (4) they should be able to challenge any illegality affecting their taxable income. The Tax Authority maintained that the VPT should prevail as the tax base since the company failed to respond to information requests and didn't correct the taxable profit in its Corporate Income Tax return. The tribunal must determine whether shareholders can invoke Article 139 CIRC procedures, whether the effective price of €32,500 can be proven despite the company's non-cooperation, and whether fiscal transparency allows shareholders independent defense rights when corrections to the company's taxable base automatically increase their IRS liability.

Full Decision

ARBITRAL DECISION

The Arbitrators agree, Dr. José Poças Falcão (Arbitrator-President), Dr. Adelaide Moura and Professor Doctor Nuno Cunha Rodrigues (Arbitrator Members), designated by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to form the Collective Arbitral Tribunal, constituted on 28 February 2019, as follows:

I. REPORT

A..., Tax ID..., resident at Rua ... no..., ... in Lisbon, B..., Tax ID..., resident at Rua ... no..., ..., in Lisbon, and C..., Tax ID..., resident at Av. ..., Plot ..., ...º, in Lisbon, jointly designated as Applicants, in coalition, requested the constitution of a Collective Arbitral Tribunal, pursuant to the combined provisions of Articles 2, no. 1, paragraph a), 3, no. 1 and 15 et seq., all of the Legal Regime of Arbitration in Tax Matters ("RJAT"), approved by Decree-Law no. 10/2011, of 20 January, with subsequent amendments.

The Applicants filed a request for arbitral ruling seeking the annulment of additional personal income tax (IRS) assessments numbered 2018..., 2018... and 2018..., dated 10.08.2018, and the corresponding late payment interest, all relating to the tax year 2014, in the individual amounts of, respectively, EUR 36,875.25, EUR 16,001.19 and EUR 12,074.77.

To that end, they invoke that:

a) The purpose of the procedure under Article 139 of the Corporate Income Tax Code consists of determining the actual price of the real estate transaction of value lower than the Taxable Property Value (VPT);

b) The contested acts result from the violation of Article 64, no. 2 of the Corporate Income Tax Code;

c) The contested acts are also illegal due to violation of Articles 73 of the General Tax Law and 54 of the Tax Code of Procedure and Process, as well as of the principle of effective judicial protection of the Applicants, given that the Tax Authority made the VPT prevail as the basis of incidence of the contested IRS, without admitting the evidence indicated by the Applicants;

d) The special subjective imputation established in Article 6 of the Corporate Income Tax Code cannot be accompanied by the attribution to the shareholders of the right to exercise all the guarantees of defense that the law reserves to the company as if it were subject to the general Corporate Income Tax regime;

e) Constituting the corrections to the taxable base of the transparent company an additional taxable income of its shareholders, subject to the concomitant additional IRS, the shareholders thereof can defend themselves based on any illegality.

The Applicants attached documents.

On 21 December 2018, the request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to the Applicants and to the Respondent entity.

Pursuant to the provisions of Articles 6, no. 2, paragraph a) and 11, no. 1, paragraphs a) and b) of RJAT, the Ethics Council of CAAD designated the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the mandate within the applicable period, with the parties being notified of such designation on 8 February 2019.

The Collective Arbitral Tribunal was regularly constituted on 28 February 2019.

The Respondent, notified on 28 March 2019 pursuant to no. 1 of Article 17 of RJAT, submitted its Response on 1 April 2019.

On 5 April 2019 the Arbitral Tribunal issued an order dispensing with the meeting of the Tribunal with the parties (Article 18 of RJAT) and the examination of witnesses [See Articles 16-c) of RJAT and 130 of the Code of Civil Procedure, applicable ex vi Article 29-1/e) of RJAT], and inviting both parties to submit, within a successive period of 20 (twenty) days, written pleadings on facts (essential facts which they consider proven and not proven) and law.

In a request dated 16 April 2019, the Applicants opposed the decision contained in the Arbitral Order of 5 April 2019.

In an order dated 18 April 2019, the Arbitral Tribunal maintained the declaration of closure of proceedings, with the duty of the parties to submit their final pleadings within the previously determined period, counted from the date of notification of the said order.

The Applicants submitted pleadings on 9 May 2019.

On 3 June 2019, the Respondent submitted its pleadings.

II. GROUNDS

II.I. FACTUAL MATTERS

With relevance for the decision, it is important to note the following facts which are considered proven:

A. The Applicants are the sole shareholders of the company D... LDA, Tax ID..., hereinafter referred to as the Company, with tax domicile at Rua ..., ..., ...º, ...-... Lisbon.

B. In 2014 this company sold two autonomous units for values lower than the definitive taxable property values of the real estate, without having made the due correction, for purposes of determining taxable profit, as provided in Article 64, nos. 2 and 3, paragraph a) of the Corporate Income Tax Code, in the Corporate Income Tax Return Form 22 for 2014 (Field 745 of Table 07), corresponding to the positive difference between the definitive taxable property value of the real estate and the value stated in the contract.

C. It presented the Corporate Income Tax Returns Form 22 for the tax year 2014 under the tax transparency regime, as did its shareholders in the context of Personal Income Tax.

D. The Company presented the Corporate Income Tax Return Form 22 for 2014, with taxable profit of EUR 41,723.98, attributed in Annex D of the Personal Income Tax Returns Form 3 of each shareholder, in proportion to their shareholding.

E. The company was notified to:

"1- Proceed with the substitution of the Corporate Income Tax Return Form 22 for the year 2014

2 - Send a copy of the transfer documents/contracts/deeds in question;

3- Send the trial balance for the year 2014;

4- Send extracts of the accounts moved;

5- Other documents/elements which it deems relevant".

F. The said notification was made on 16/11/2017, with the signature of the receipt notice.

G. However, the company did not provide the information and clarifications requested by the Tax Authority.

H. A correction to the taxable base was proposed by the Tax Authority in the context of Corporate Income Tax, relating to the period 2014, in the amount of EUR 127,720.00.

I. The company thus moved from a declared taxable profit of EUR 41,723.98 to a corrected taxable profit of EUR 169,443.98, to be attributed to the respective shareholders, considering that the company is taxed under the tax transparency regime.

J. Since it is a company subject to the tax transparency regime, it is the shareholders which comprise it who are taxed in the respective income category, in this case Personal Income Tax, as they are natural persons.

K. This means that the fiscal profits, which constitute the taxable base, are attributed, for taxation purposes, to the respective shareholders, pursuant to Article 6 of the Corporate Income Tax Code, in conjunction with Articles 20, 32 and 57 of the Personal Income Tax Code.

L. By official letters dated 11 June 2018, the Applicants were notified of the draft Inspection Reports, with the corrections to the respective taxable income in the context of Personal Income Tax.

M. On 26 June 2018, the three Applicants exercised their right to prior hearing regarding the said proposals for correction.

N. By official letters dated 23 July 2018, the Applicants were notified of the respective final Inspection Reports, confirming the corrections to the taxable income in the context of Personal Income Tax.

O. The actual and effective price of the sales of the real estate referred to above totaled EUR 32,500 (EUR 14,000 + EUR 18,500).

P. The company received EUR 65,000.00 from the sale of the two units and not EUR 192,720.00 resulting from the sum of the respective property values.

II.II FACTS NOT PROVEN

No other facts with relevance to the decision of the case were proven.

III. ON THE LAW:

On the merits

The main issue that arises in these proceedings concerns whether the additional Corporate Income Tax assessment, which is the subject of this petition, is or is not legal, considering the violation, or not, of the right to prove the actual price in transfers of real estate.

A - Position of the Applicants

In this regard, the Applicants allege, in their request for constitution of the Arbitral Tribunal, in summary, the following:

a) The contested assessments are illegal, due to violation of Article 64, no. 2 in conjunction with Article 139, no. 1 of the Corporate Income Tax Code;

b) For the tax administration to be able to assess tax on the basis of Article 64, no. 2 of the Corporate Income Tax Code, it was necessary that the doubt regarding whether the declared value corresponded or not to the actual price of the transactions remained unresolved;

c) Only under those circumstances do Article 64, no. 2 in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code, require that the respective VPT be considered as the minimum realization value;

d) In the absence of doubt regarding the actual price, the VPT, even if higher, does not prevail in determining taxable income;

e) To admit that the Tax Authority can resort to the indirect valuation powers entrusted to it by Article 64, no. 2 of the Corporate Income Tax Code, when its Inspection Report shows that it does not call into question the direct, actual and effective value of the transactions, is to accept the determination, outside the cases provided for by law, of the value of the taxable income or assets based on indicia, presumptions or other elements which the tax administration has available (cf. Article 81, no. 1, final part, and Article 83, no. 2, both of the General Tax Law);

f) Not being disputed in the Inspection Report that the actual and effective price of the transfers corresponded to that declared, the contested assessments are illegal, which disregarded that actual and effective price, due to an error in the interpretation and application of Article 64, no. 2 in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code;

g) Even if it were not understood that there was an error in the interpretation and application of Article 64, no. 2, in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code, there would be a violation of Articles 73 of the General Tax Law, 54 of the Tax Code of Procedure and Process and of the principle of effective judicial protection which constitutionally protects them.

B - Position of the Tax Authority

The Tax Authority defends, in summary, the following:

By way of exception

i)- On the lack of material jurisdiction of the Arbitral Tribunal to assess the procedure for proof of actual price provided for in Article 139 of the Corporate Income Tax Code and the error in the form of proceedings:

  1. The analysis and conclusion of the procedure for proof of actual price is an administrative act in tax matters which does not entail the assessment of the legality of the assessment act;

  2. As such, if the procedure for proof of actual price provided for in Article 139 of the Corporate Income Tax Code had been initiated by the Applicants, the judicial review of the administrative act – being involved a rejection on grounds of untimeliness - would have to be made through an administrative action, pursuant to no. 2 of Article 97 of the Tax Code of Procedure and Process and not by judicial challenge;

ii) - On the non-contestability of the act - mandatory prior presentation of the procedure provided for in Article 139 of the Corporate Income Tax Code – proof of actual price:

  1. The present challenge to the assessment is inadmissible because it lacks an essential prerequisite, that is, the request to initiate the procedure for proof of the actual price of the real estate to which the provisions of Articles 91 and 92 of the General Tax Law would apply;

  2. Furthermore, the documentation sent in the context of the right to prior hearing in the inspection report was sent for a different procedure from the one which the Applicants should have requested, pursuant to Article 139 of the Corporate Income Tax Code and did not request;

  3. The Company was obliged to have submitted the said request directed to the Director of Finances with the necessary documentation for the Tax Authority to access the bank accounts, in the tax period in which the transfer occurred and in the prior tax period, which it did not do;

  4. These being two cumulative conditions/prerequisites sine qua non and not having been satisfied, the Tax Authority should therefore be absolved of the claim (see Article 278, no. 1, paragraph e), of the Code of Civil Procedure, ex vi Article 29, no. 1, paragraph e) of RJAT) of the request for annulment of the additional Personal Income Tax assessments with the said grounds, relating to the erroneous value attributed to the income (resulting from the transfer of the property in question);

iii) -On the untimeliness of the request for proof of actual price:

  1. Pursuant to Article 139 of the Corporate Income Tax Code: "1 - The provision of no. 2 of Article 64 does not apply if the taxpayer proves that the price actually charged in transfers of real rights in real estate was lower than the taxable property value that served as the basis for the assessment of the municipal tax on onerous transfers of real estate (...)";

  2. The evidence referred to in no. 1 must be provided in a procedure initiated "by means of a request addressed to the competent Director of Finances and submitted in January of the year following that in which the transfers occurred, if the taxable property value is already definitely fixed, or within 30 days after the date on which the valuation became definitive, in the other cases. (...)" cf. no. 3 of Article 139 of the Corporate Income Tax Code (underlined).

  3. However, we found that neither the company nor the present Applicants used that mechanism within the period provided for therefor – therefore, any reaction after the period fixed in no. 3 of the said article (which is combined with Article 73 of the General Tax Law) is untimely, and therefore the present Applicants cannot attack the assessment act as if it were a procedure for proof of actual price – which they did not initiate within the time the law gives them – having the right of reaction expired.

ASSESSMENT

The controversial matter in the present action has already been analyzed in other similar proceedings that took place in CAAD, such as case no. 89/2018-T, case no. 598/2017-T or case no. 420/2016-T. We shall follow, to a large extent, the decision taken in case no. 89/2018-T.

Let us see.

Considering the right to prove the actual price in transfers of real estate enshrined in Article 139 of the Corporate Income Tax Code, it is important in the specific case under analysis to clarify the following:

a. If, the procedure not having been initiated to rebut the presumption of the prevalence of the taxable property value, was the company or the present Applicants prevented from claiming and filing the present arbitral petition?

b. Is it possible to overcome the formalism provided for in no. 3 of Article 139 of the Corporate Income Tax Code, that is, is it possible to prove the truth of the price declared in judicial proceedings, particularly in the context of the arbitral process?

c. If the answer to the two previous questions is affirmative, in the case, and in the words of the Applicants, "not being disputed in the Inspection Report that the actual and effective price of the transfers corresponded to that declared, are the contested assessments illegal which disregarded that actual and effective price, due to an error in the interpretation and application of Article 64, no. 2 in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code";

Let us see.

In Chapter VIII of the Corporate Income Tax Code, under guarantees for taxpayers, it is established, in Article 137, regarding the right to claim and judicial challenge the following:

"1 — Corporate Income Tax taxpayers, their representatives and persons solidarily or subsidiarily liable for the payment of the tax may claim or challenge the respective assessment, made by the services of the tax administration, on the grounds and in the manner established in the Code of Procedure and Process in Tax Matters.

2 — The faculty referred to in the previous number is equally conferred with respect to self-assessment, withholding at source and advance payments, in the manner and periods provided for in Articles 131 to 133 of the Code of Procedure and Process in Tax Matters, without prejudice to the provisions of the following numbers.

3 — The claim, by the recipient of income or his representative, of withholding at source of amounts wholly or partially unduly withheld only takes place when such withholding has a definitive nature and must be submitted within a period of two years from the end of the deadline for submission, by the withholding agent, of the tax withheld at source or the date of payment or placing at the disposal of the income, if later.

4 — The challenge of the acts mentioned in no. 2 is mandatorily preceded by a claim to the competent director of finances, in the cases provided for in the Code of Procedure and Process in Tax Matters.

5 — The entities referred to in no. 1 may also claim and challenge the taxable base which is determined and which does not give rise to Corporate Income Tax assessment, on the grounds and in the manner established in the Code of Procedure and Process in Tax Matters for the claim and challenge of tax acts.

6 — Whenever, with the tax paid, it is determined, in a gracious or judicial process, that in the assessment there was an error attributable to the services, compensatory interest is assessed pursuant to Article 43 of the General Tax Law.

7 — The faculty referred to in no. 1 is equally applicable to the special advance payment provided for in Article 106, in the manner and on the grounds established in Article 133 of the Code of Procedure and Process in Tax Matters."

It thus follows from the aforementioned provision that, in principle, taxpayers may claim or challenge any Corporate Income Tax assessment made by the Tax Authority.

Nevertheless, Article 139 of the Corporate Income Tax Code provides, under the heading Proof of actual price in transfer of real estate, the following:

"Proof of actual price in transfer of real estate

1 — The provision of no. 2 of Article 64 does not apply if the taxpayer proves that the price actually charged in transfers of real rights in real estate was lower than the taxable property value that served as the basis for the assessment of the municipal tax on onerous transfers of real estate.

2 — For the purposes of the foregoing, the taxpayer may, in particular, demonstrate that the construction costs were lower than those fixed in the ordinance referred to in no. 3 of Article 62 of the Municipal Real Estate Tax Code, in which case to the amount of the construction costs should be added the other objective indicators provided for in the said Code for the determination of the taxable property value.

3 — The evidence referred to in no. 1 must be provided in a procedure initiated by means of a request addressed to the competent director of finances and submitted in January of the year following that in which the transfers occurred, if the taxable property value is already definitely fixed, or within 30 days after the date on which the valuation became definitive, in the other cases.

4 — The request referred to in the previous number has a suspensive effect on the assessment, in the part corresponding to the value of the positive difference provided for in no. 2 of Article 64, which, in the case of total or partial rejection of the request, is within the competence of the Directorate-General of Taxes.

5 — The procedure provided for in no. 3 is governed by the provisions of Articles 91 and 92 of the General Tax Law, with the necessary adaptations, and the provisions of no. 4 of Article 86 of the same law are equally applicable.

6 — In case of submission of the request for demonstration provided for in this article, the tax administration may access the banking information of the applicant and the respective managers or partners relating to the tax period in which the transfer occurred and to the prior tax period, and for this purpose the corresponding authorization documents must be attached.

7 — The judicial challenge of the assessment of the tax resulting from corrections made by application of the provisions of no. 2 of Article 64, or, if there is no assessment, of the corrections to the taxable profit under the same provision, depends on the prior submission of the request provided for in no. 3, there being no place for a gracious claim.

8 — The challenge of the act fixing the taxable property value, provided for in Article 77 of the Municipal Real Estate Tax Code and in Article 134 of the Code of Procedure and Process in Tax Matters, has no suspensive effect as to the assessment of Corporate Income Tax nor suspends the period for submission of the request for demonstration provided for in this article."

Thus, it follows from nos. 1 and 5 of Article 139 of the Corporate Income Tax Code that, for purposes of rebutting the presumption established in Article 64, no. 2 of the Corporate Income Tax Code, the procedure for proof of actual price must be initiated, which is governed by Articles 91 and 92 of the General Tax Law.

In this way, notwithstanding the established right to claim and challenge any assessment act, the rebuttal of the presumption of the actual price of transferred real estate and, therefore, the proof of the real value of the transfer of real estate can only be carried out through the procedure identified.

Such presentation of the procedure being mandatory, the presentation of a gracious claim is waived.

In light of the foregoing, it is understood that, given that the non-conformity pointed out to the Corporate Income Tax assessment act under judicial review is related to the price of transferred real estate, the burden of proof of the company or the present Applicants can only be fulfilled, within the scope of the procedure for demonstrating the price provided for in Article 139 of the Corporate Income Tax Code, especially designed for the valuation of the price of real estate.

Given the specificity of the matter – price of real estate – and the need to resort to experts or other professionals in the field, it was established that recourse to this procedure constitutes a condition for the right to its subsequent judicial challenge.

It is therefore concluded that, given that proof has not been made that the procedure was requested by the company or the present Applicants to rebut the presumption of the taxable property value, the company or the present Applicants were not prevented from claiming and filing the present arbitral petition, but the legality of the assessment act in question on the grounds of error in the determination of the price of sale of the real estate is not subject to review, inasmuch as the procedure for proof of the price already identified was not previously initiated.

Having reached this point, it is therefore necessary to assess whether, as the Applicants claim, "not being disputed in the Inspection Report that the actual and effective price of the transfers corresponded to that declared, are the contested assessments illegal which disregarded that actual and effective price, due to an error in the interpretation and application of Article 64, no. 2 in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code".

As has been seen, the initiation of the procedure provided for in Article 139 of the Corporate Income Tax Code is the legal manner of rebutting the presumption enshrined in Article 64, no. 2 of the same Code.

In fact, the provision of Article 64 of the Corporate Income Tax Code applicable will not contain an imposition (fiction) that for purposes of computing taxable profit in that tax the market value of real estate be accounted for, presumed equivalent to VPT, but rather contains an anti-abuse provision, which underlies the judgment (presumption) that sale values lower than the VPT will, as a rule, result from simulation by the parties, consequently imposing a reversal of the burden of proof as to the effectiveness of such price.

In this sense, it was stated in the Administrative Supreme Court judgment of 06-02-2013, issued in case 0989/12, that:

"The consideration of the VPT for purposes of determining taxable profit in Corporate Income Tax, when the value stated in the contract is lower, constitutes a presumption of income. That presumption, if it assumed the nature of an irrebuttable presumption, which is expressly prohibited by Article 73 of the General Tax Law (Article 73 of the General Tax Law provides: 'The presumptions enshrined in the tax incidence provisions always admit proof to the contrary'.), could raise issues as to its constitutional conformity, particularly, due to violation of the principle of taxation of actual income enshrined in Article 104, no. 2, of the Constitution of the Portuguese Republic (Article 104, no. 2, of the Portuguese Constitution states: 'The taxation of companies is fundamentally based on their actual income'.)."

However, as we have seen, the initiation of the procedure provided for in Article 139 of the Corporate Income Tax Code is the legal manner of rebutting the presumption enshrined in Article 64, no. 2 of the same Code.

Such procedure is a guarantee of the conformity of this presumption with the provision of Article 73 of the General Tax Law, inasmuch as it provides to the interested parties an adequate and sufficient means to, feeling harmed by the presumption in question, demonstrate, without proper procedure, the lack of adherence to reality of the fact presumed thereby.

The said procedure, provided for in Article 139 of the Corporate Income Tax Code, is a potestative right of the taxpayer who, within the period provided for that purpose, may submit his request for it to be carried out, and it is incumbent, with the accomplishment thereof, in accordance with the law, on the Tax Authority.

From this finding, it follows immediately that, contrary to what the Applicants seem to understand, the Tax Authority does not have to provide the taxpayer with the possibility of presenting proof of the actual price.

Rather, the Tax Authority is the passive party to the subjection corresponding to said potestative right of the taxpayer, being obliged to carry out, in accordance with the law, the said procedure, as soon as called upon to do so, in time, by the taxpayer.

In this way, within the applicable legal framework, no notification or request to the Tax Authority is legally necessary or required, in the sense of the taxpayer carrying out the proof of the actual price.

Rather, it is to the taxpayer that, facing the presumption of Article 64, no. 2 of the Corporate Income Tax Code – which it should know (cf. Article 6 of the Civil Code) – that the burden falls of requesting the Tax Authority to carry out the said procedure, by means of the submission of the corresponding request.

In light of the foregoing, the possibilities of the Tax Authority preventing taxpayers from proving the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code, are limited to situations in which the said authority unjustifiably rejects the initiation of the procedure provided for that purpose, which presupposes (i) the timely submission of the corresponding request by the taxpayer, or in which, (ii) initiating it, it does not comply with the legal norms that regulate it.

Now, in this case, neither of the said situations is demonstrated.

Thus, as regards the non-observance by the Tax Authority of the provisions that regulate the procedure in question, and disregarding the question of the jurisdiction of the arbitral tribunal to review the corresponding illegalities, it is a matter that does not arise, given that it is acknowledged that the said procedure was not initiated.

In this way, only the eventual censure of the Tax Authority could be at issue in the present proceedings, confronted with a request to initiate the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code, submitted by the taxpayer in accordance with the law and in time, for not initiating such procedure, consequently preventing the taxpayer from carrying out said proof and rebutting the presumption enshrined in Article 64, no. 2 of the Corporate Income Tax Code, on which rests the tax act which is the subject of the present arbitral action.

In this case, neither the company nor the Applicants demonstrated the submission, in the manner referred to, of a request to initiate the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code.

Now, by virtue of Article 364, no. 1 of the Civil Code, proof of the submission of the request to initiate the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code, must be made by means of a written document, given that that is the form which the said request must take (cf. Article 54, no. 3 of the General Tax Law and Article 26 of the Tax Code of Procedure and Process).

In this way, the demonstration that the company or the present Applicants submitted a request to initiate the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code would have to be made through a document, which, as referred to, has not been done to date.

The Applicants further understand that "the fact that the company did not exercise its right to rebut the presumption provided for in Article 64, no. 2 of the Corporate Income Tax Code does not prevent the shareholders from being able to do so".

Now, what is at issue is whether proof has been made of the submission of the request to initiate the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code, given that what was in question was a sale carried out by the company which is governed, therefore, by this Code and not by the Personal Income Tax Code.

Therefore, one cannot resort to the mechanism for rebutting the presumption provided for in Article 44 of the Personal Income Tax Code, since we are within the scope of the tax transparency regime.

This regime applies, necessarily, to companies with registered office or effective management in Portuguese territory, even if there has been no distribution of profits which are duly identified in no. 1 of Article 6 of the Corporate Income Tax Code. This regime is characterized, in essence, by attributing to the shareholders or members of the transparent company its taxable base, even if there has been no distribution of profits.

The taxable base of these companies is determined in the context of Corporate Income Tax so that, although subject to this regime, they do not lose the status of taxpayer in the tax, remaining subject to the fulfillment of all obligations as any other type of company, in particular, to the submission of the periodic return of income.

In the context of Personal Income Tax, the attributed values are incorporated as net income in category B, with the mentioned attribution being made in accordance with what results from the constitutive act of the respective entity or, in the absence of elements, in equal parts, as provided for in no. 3 of Article 6 of the Corporate Income Tax Code.

Thus, the true characterization of the tax transparency regime of the company can be defined as a situation of non-taxation in the context of Corporate Income Tax and not as an exemption from the same tax.

Consequently, it was in light of the Corporate Income Tax Code that the shareholders (or the company) could have requested the initiation of the procedure for proof of the truth of the declared price, provided for in no. 1 of Article 139 of the Corporate Income Tax Code, which they did not do.

In this way, and in light of the foregoing, it is not considered demonstrated that the Applicants requested the initiation of the procedure provided for in no. 1 of Article 139 of the Corporate Income Tax Code, which they should have done to set aside the presumption, provided for in no. 2 of Article 64 of the Corporate Income Tax Code, according to which, whenever, in the onerous transfers provided for in the previous number, the value stated in the contract is lower than the definitive taxable property value of the real estate, it is this value that is to be considered by the alienator and acquirer, for determining taxable profit, such judgment not being contrary, on the contrary, to any legal or constitutional provision.

The Applicants finally further allege that even if it were not understood that there was an error in the interpretation and application of no. 2 of Article 64, in conjunction with Article 139, no. 1, both of the Corporate Income Tax Code, there would be a violation of Articles 73 of the General Tax Law, 54 of the Tax Code of Procedure and Process and of the principle of effective judicial protection which constitutionally protects them.

Now, as was mentioned in this decision, the company or the Applicants did not request the initiation of the procedure provided for in no. 1 of Article 139 of the Corporate Income Tax Code, which they should have done to set aside the presumption, provided for in no. 2 of Article 64 of the Corporate Income Tax Code.

As this did not occur, the provision of Article 73 of the General Tax Law was not infringed – in accordance with which "The presumptions enshrined in the tax incidence provisions always admit proof to the contrary." – nor the provision of Article 54 of the Tax Code of Procedure and Process. Also, the principle of effective judicial protection, provided for in Article 20 of the Constitution of the Portuguese Republic, cannot be invoked here given that the company or the Applicants could legitimately have requested the initiation of the procedure provided for in no. 1 of Article 139 of the Corporate Income Tax Code and judicially challenged the consequences thereof, if they saw fit to do so.

Thus, and in light of all the foregoing, the arbitral petition should be dismissed, with the Respondent being absolved thereof.

IV - DECISION

Whereupon this Arbitral Tribunal decides:

a) To wholly dismiss the arbitral petition filed and, consequently,

b) To maintain in the legal order the additional Personal Income Tax assessments numbered 2018..., 2018... and 2018..., dated 10.08.2018, and the corresponding late payment interest, all relating to the tax year 2014, in the individual amounts of, respectively, EUR 36,875.25, EUR 16,001.19 and EUR 12,074.77;

c) To condemn the Applicants to pay the costs of the proceedings, set out below.

V. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at EUR 64,951.21 (sixty-four thousand nine hundred and fifty-one euros and twenty-one cents), pursuant to Article 97-A, no. 1, a), of the Tax Code of Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29 of RJAT and no. 2 of Article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

VI. COSTS

Pursuant to Article 22, no. 4, of RJAT, and in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at EUR 2,448.00 (two thousand four hundred and forty-eight euros), to be borne by the Applicants.

Notify hereof.

Lisbon, 7 August 2019

The Collective Arbitral Tribunal

Arbitrator President

(José Poças Falcão)

Arbitrator Member

(Adelaide Moura)

Arbitrator Member

(Nuno Cunha Rodrigues)

Frequently Asked Questions

Automatically Created

What is the role of fiscal transparency (transparência fiscal) under Article 6 of the CIRC in determining IRS liability for company shareholders?
Under Article 6 CIRC, fiscal transparency (transparência fiscal) means that a company's taxable profits are directly attributed to shareholders for taxation purposes in their respective tax categories. For natural persons, this results in IRS liability under Category B income (Article 20 CIRS). The shareholders are taxed as if they directly earned the company's profits in proportion to their shareholding. Any corrections to the company's taxable base automatically flow through to increase the shareholders' IRS assessments, as occurred in this case where a €127,720 correction to corporate taxable income generated additional IRS liabilities for the three shareholders.
Can taxpayers challenge IRS additional assessments based on the difference between the property sale price and the Valor Patrimonial Tributário (VPT)?
Yes, taxpayers can challenge IRS assessments based on VPT differences, but the procedure is governed by Article 139(1) CIRC. This provision establishes that when real estate is transferred for a value lower than the VPT, the Tax Authority can determine the actual price through a specific verification procedure. The key dispute in this case is whether shareholders of a transparent company can invoke this procedure and present evidence of the actual sale price (€32,500) when the company itself failed to respond to Tax Authority requests. The taxpayers argued their right to present evidence was violated under Articles 73 LGT and 54 CPPT, which protect taxpayers' procedural rights and the principle of effective judicial protection.
What procedure does Article 139(1) of the CIRC establish for proving the effective transaction price in real estate sales below the VPT?
Article 139(1) CIRC establishes a special procedure for proving the effective transaction price when real estate is sold below its VPT. This verification procedure allows taxpayers to demonstrate the actual price paid, preventing automatic application of the VPT as the taxable base. However, Article 64(2) CIRC requires companies to make corrections to taxable profit when selling real estate below VPT. The interaction between these provisions creates the central legal issue: whether the Article 139 procedure is available when a company subject to fiscal transparency fails to make the required correction in its Corporate Income Tax return, and whether shareholders can invoke this procedure independently to defend against resulting IRS assessments.
Do shareholders of a fiscally transparent company have the right to exercise the same legal defenses available to the company under Article 64(2) CIRC?
This case presents a novel question about whether shareholders of fiscally transparent companies have independent defense rights. The taxpayers argued that because corrections to the transparent company's taxable base directly increase their IRS liability, they should be able to defend themselves based on any illegality affecting that base, including invoking procedural protections available to the company under Article 64(2) CIRC and Article 139(1) CIRC. They contended that fiscal transparency should carry with it the attribution of all defense guarantees the law reserves to companies. This argument challenges whether shareholders are limited to challenging only the attribution of income to them personally, or whether they can challenge the underlying determination of the company's taxable base from which their IRS liability derives.
How does the CAAD evaluate the legality of IRS assessments when the tax authority refuses to accept proof of the actual sale price under Articles 73 LGT and 54 CPPT?
The CAAD evaluates such assessments by examining whether the Tax Authority respected taxpayers' fundamental procedural rights under Articles 73 LGT (right to information and participation) and 54 CPPT (right to prior hearing). In this case, the tribunal must determine whether refusing to accept proof of the actual €32,500 sale price violated these protections and the principle of effective judicial protection. The analysis considers: (1) whether the company's failure to respond to information requests justifies applying the VPT without further inquiry; (2) whether shareholders can present evidence the company failed to provide; (3) whether Article 139 CIRC procedures were properly followed or bypassed; and (4) whether the Tax Authority adequately considered evidence submitted during the prior hearing phase. The decision balances the company's non-cooperation against shareholders' constitutional rights to challenge taxes affecting them.