CAAD 658/2014-T: Corporate Tax on Share Transfer & Fiscal Transparency Regime Under IRC

ARBITRAL DECISION

CLAIMANT: A..., Ltd., legal entity no. …, registered at the Commercial Registry Office of … under no. …, with registered office at Rua …, no. .., Block I, 5th Floor, Left, …-… ….

RESPONDENT: Tax and Customs Authority (hereinafter referred to as TCA) represented by Dr. …., pursuant to appointment order of the Director General of the TCA, dated 16-09-2014.

I – REPORT

1. The CLAIMANT filed a request for arbitral pronouncement, pursuant to the provisions of articles 2.º no. 1 paragraph a), 5º no. 2 paragraph a), 6º no. 1, 10.º no. 1 paragraph a) all of the Legal Regime of Tax Arbitration (LRTA) and of article 102 no. 2 of the Code of Tax Procedure and Process (CTPP), wherein it states that the same has as its object:

The declaration of illegality of the tax acts previously described as follows:

The "decision to dismiss, issued by order of 04-06-2014 of His Excellency the Head of Division Dr. …, by delegation of the Deputy Finance Director of …, which was based on the administrative objection no. …2013…, presented pursuant to article 68º of the Code of Tax Procedure and Process (CTPP), with reference to the tax acts embodied in the assessments of Corporate Income Tax (IRC) no. 2013… of the year 2009 in the amount of €5,751.00"

Finally, the Claimant petitions this Arbitral Tribunal to rule that "the aforementioned IRC assessment no. 2013… of the year 2009, object of the present request for arbitral pronouncement shall be annulled."

1. The CLAIMANT filed a Request for constitution of the Arbitral Tribunal on 03-09-2014, which was accepted by His Excellency the President of CAAD on 04-09-2014, which led to the notification of the TCA, in compliance with no. 3 of art.º 10º of the Legal Regime of Arbitration in Tax Matters (hereinafter LRTA).

2. Having the CLAIMANT chosen not to appoint an arbitrator, pursuant to the provision of no. 1 of article 6º of the LRTA, the undersigned was appointed sole arbitrator by the Deontological Council of the Centre for Administrative Arbitration, on 21-10-2014, appointment which was duly accepted and notified to the parties who did not object to the said appointment.

3. The Sole Arbitral Tribunal was constituted on 05-11-2014, combining the provision of paragraph c), of no. 1, with no. 8 of article 11º of the LRTA, whereby on 07-11-2014 the TCA was notified to, pursuant to the terms and for the purposes of the provision in nos. 1 and 2 article 17º of the LRTA, present its Response and the corresponding administrative file;

4. In Response the TCA, on 10-12-2014, presents its defence, requests exemption from holding the meeting provided for in art.º 18º of the LRTA, as well as exemption from making final arguments (no. 64.).

5. Having on 05-01-2015 been scheduled the meeting provided for in art.º 18º of the LRTA, the same did not take place as it was exempted pursuant to the defence response of the TCA on 10-12-2014 and response of the respondent on 09-01-2014, from which an order was issued on 15/01/2015, which sets the date of 30-04-2015 for issuing the arbitral decision.

II – PRELIMINARY ISSUE

The Respondent raises, in the context of Final Arguments, the removal of documents submitted by the Claimant on 23-01-2015, whereby, before appreciating the issue that is the object of the dispute, it is necessary to decide the petitioned matter.

1. Pursuant to order of 28-01-2015 of this Tribunal, the document attached to the proceedings has as its object to demonstrate the sense of a decision issued within the scope of tax arbitration, "since in those proceedings were equally under discussion the annulment of the assessments made by the TCA to the managing partner of the now Claimant, by the application of the Fiscal Transparency Regime", as sustained in the admitted request.

2. The Respondent raises, in a non-autonomous document, but only in Final Arguments, the removal of the said document from the Request for Arbitral Pronouncement, arguing that it does not comply with the provision of no. 1 of art.º 423º of the CPC;

3. Being, however, a document that was not in the availability of the Claimant at the date of the request for arbitral pronouncement, under the conditions provided for in no. 1 of art.º 423º of the CPC, and, considering the provision in nos. 2 and 3 of the same precept, combined with no. 2 of art.º 19º of the LRTA, as well as the preceding art.º 16º, paragraphs c) and f), the grounds adduced by the TCA not being verified, the request for removal of the document is dismissed, as requested in the Final Arguments of the Respondent.

III – SANEAMENTO [CLARIFICATION OF PROCEDURE]

1. The tribunal is materially competent and is regularly constituted, pursuant to the terms of articles 2º, no. 1, paragraph a), 5º, no. 2 and 6º, no. 1 of the LRTA.

2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to the terms of articles 4º and 10º of the LRTA and article 1º of Ordinance no. 112-A/2011, of 22 March.

3. The proceedings do not suffer from any defects that would invalidate them.

Whereby the apprecition of the decision on the merits will proceed

IV - STATEMENT OF FACTS

The relevant factual matter, considered proven, is the following:

1. The Claimant - A..., Ltd. - is a legal entity, registered at the Commercial Registry Office of … under no. …, with registered office at Rua …, no. .., Block I, 5th Floor, Left, …-… …;

2. The Claimant - A..., Ltd. – dedicates itself to the provision of services related to medicine, hygiene and work safety;

3. Until 9 February 2009 the Claimant - A..., Ltd., with a capital of €5,000.00, was held, in equal proportion, by two quotas of €2,500.00 each, by B..., physician by profession, and by C..., the latter being a teacher;

4. On the said date - 9 February 2009 - there occurred the transfer of the quota of €2,500.00 from C... to B...;

5. There did not occur the unification of quotas in a single partner – B…, by virtue of the transfer of quotas from C... to B..., which occurred on 09 February 2009, given that,

6. Also on 9 February 2009 a contract was entered into between B... and D…, with division, transfer and unification of quotas of the Company having been carried out;

7. The Company consented to such transfer, of which a record was made on that same day of 9 February 2009, whereby,

8. From this contract it resulted that the quotas came to be distributed by B..., corresponding to a capital share of 95%, in the amount of €4,750; and by partner D…, corresponding to a capital share of 5%, in the amount of €250.00;

9. Whereby the Company was not transformed into a sole proprietorship;

10. D… is the son of B..., not practicing the medical profession, nor any other activity related to medicine;

11. The minutes book of the Company contains a record made on 9 February 2009, as well as records dated 31 March 2009 (no. 2), 31 March 2010 (no. 3), 31 March 2011 (no. 4) and 30 March 2012 (no. 5), in whose general meetings both B... and partner D… participated. The commercial registration of the quota acquired by D… was not carried out on the date of 9 February 2009, but rather on the date of 12 January 2013;

12. At issue in the present proceedings are the tax acts embodied in the assessment of IRC no. 2013…, referring to the year 2009 in the amount of €5,751.00.

For the formation of the conviction regarding the factuality given as proven, consideration was given to the documentation submitted by the Claimant and Respondent, as well as the pleadings of both parties, in which both demonstrate the mutual acceptance of the facts here considered proven.

V – APPRECIATION OF THE MERITS OF THE REQUEST

V.A - POSITION OF THE CLAIMANT

The Claimant alleges, in summary, as the basis for the request for constitution of the Arbitral Tribunal and with relevance for its appreciation, the following:

1. That in the course of a tax audit, corrections were made in the context of IRC for the years 2009, 2010 and 2011 and various IRC assessments were issued, relating to the same years;

2. That, not agreeing with the IRC assessment no. 2013… of the year 2009, it presented an Administrative Objection on 19-11-2013;

3. That on 06-06-2014 it was notified of the decision to dismiss the Administrative Objection relating to the year 2009;

4. The Claimant manifests disagreement with the grounds for the dismissal of the Administrative Objection and which gave rise to the IRC assessment no. 2013… of the year 2009 in the amount of €5,751.00", in summary for the following reason:

4.1. That the TCA framed the Claimant in the fiscal transparency regime with respect to the period in question, and in the case at hand, in the year 2009, the factual and legal prerequisites for this were not met;

4.2. Because the transfer of quotas that occurred between B... and D…, father and son, the former a physician, the latter not, produced its effects immediately, without prejudice to the said act not having been registered that year;

4.3. As such, when on 09 February 2009, the date on which the Partner B… acquired the quota of C…, there was no unification of quotas in a single partner, partner B…;

4.4. Whereby, as a consequence of the transfer of quotas between B... and D…, the first a physician, the second not, the said company could not be subject to the fiscal transparency regime provided for in art.º 6º of the CIRC as the TCA argues, for, not having as its sole partner a single professional, physician, but rather two partners, one being a physician and the other not, the company does not meet the prerequisites for subjection to the said fiscal regime.

1. Finally, it raises the issue of the constitutionality of the subjection of sole proprietorships to the fiscal transparency regime, by violation of the principles of good faith, legal certainty, equality and taxpaying capacity.

V.B - POSITION OF THE RESPONDENT

The Respondent alleges, in summary, that the request for arbitral pronouncement cannot succeed, highlighting, with relevance for its appreciation, the following:

1. That as from 09 February 2009, the Claimant is legally subject to the fiscal transparency regime, for,

2. On 09 February 2009, partner B… acquired the quota of C..., whereby there was a unification of quotas in a single partner – B… – whereby, being a company with a single professional, physician, the same is subject to the fiscal transparency regime provided for in art.º 6º of the CIRC; it further argues,

3. That the minutes of the company, of 09 February 2009, which contains the division, transfer and unification of quotas of the Company, which led to the transfer of quotas of B... to D…, only produces effects against third parties as from the registration, therefore, only as from 12 January 2013.

4. It manifests, finally, that there is no violation of the principles of certainty and legal security invoked but rather ignorance of the law, a fact not opposable to the TCA.

V.C - APPRECIATION OF THE ISSUE

Faced with the factuality given as proven, in particular that in the minutes of the now Claimant company, on 09 February 2009 there was a transfer and unification of quotas, which led to the transfer of quotas from B... to D…, the central question that embodies the request for arbitral pronouncement, in divergence with the TCA, is whether the said minutes produces effects:

1. Immediate, that is, as from 09 February 2009, even in relation to the TCA, as sustained by the Claimant, or,

2. Only produces effects against third parties as from the registration, and consequently, also in relation to the TCA, therefore, only as from 12 January 2013, as the Respondent argues.

3. It is also important to see whether from the aforesaid all the effects can be ascribed, namely, the existence or not of a sole proprietorship, as well as the subjection of the same to the fiscal transparency regime, which implies having present the following:

3.1. Article 6.º of the CIRC - Fiscal transparency:

1 — The taxable matter of the following companies with registered office or effective management in Portuguese territory shall be imputed to the partners, integrating, under the terms of the applicable legislation, in their taxable income for IRS or IRC purposes, as the case may be, even if there has been no distribution of profits:

(…)

b) Professional partnerships;

(…)

3 — The imputation referred to in the above numbers shall be made to the partners or members under the terms resulting from the constitutive act of the entities mentioned therein or, in the absence of elements, in equal parts.

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

(…)

a) Professional partnership:

1. The company established for the exercise of a professional activity specifically provided for in the list of activities referred to in article 151.º of the IRS Code, in which all the individual partners are professionals of that activity;

Faced with this legal provision,

3.2. If the effects were not immediate – accepting the thesis of ineffectiveness of the transfer of quotas on the date of 09 February 2009, between B... and D…, his son -, in order to accept the Respondent's thesis, one would still have to understand that the Claimant, having a single partner exercising the profession of physician, would fall within the legal regime of fiscal transparency provided for in no. 1 of art.º 6º of the CIRC, in combination with the provision of paragraph a) of no. 4 of article 6.º of the CIRC, combined with the list of professional activities provided for in article 151.º of the IRS Code, the table of which was approved by Ordinance No. 1011/2001, of 21 August.

3.3. Conversely, if one were to consider that the effects were immediate – accepting the thesis of effectiveness of the transfer of quotas on the date of 09 February 2009, between B... and D…, his son -, that would be sufficient to accept the Claimant's thesis, that it does not fall within the legal regime of fiscal transparency provided for in art.º 6º of the CIRC, for the two partners do not exercise the same professional activity.

Faced with the divergence, it is necessary to appreciate and decide.

1. The Respondent not questioning the validity of the transfer that occurred on 09 February between the Claimant's partner, B..., and D…, his son – for it clearly admits it in § 3 of the Response and 25, 28 and 29 of the Final Arguments -, the issue that arises is therefore not that of the validity of that transfer, but of its effectiveness in relation to the TCA.

2. The Respondent argues that the said transfer does not produce effects in relation to third parties, whereby, being the TCA a third party, the Claimant cannot oppose itself to the taxation discussed herein.

Let us therefore see if the Respondent is correct.

1. In the first place, it not being within the scope of this Tribunal to appreciate the effectiveness of the transfer of quotas at issue in relation to any third party, it only matters to appreciate whether it can be effective in relation to the TCA.

2. For this, we shall have to avail ourselves of the rules of legal interpretation and also of the interpretation of tax norms.

3. The Respondent argues that the transaction is ineffective against third parties, and therefore also against the TCA.

4. To understand whether the TCA is correct, it suffices to consider the effects of the possible non-registration of the aforementioned transfer of quotas, had the subsequent transfer of quotas (here object of controversy) not taken place.

9.1. Indeed, having the first transfer occurred, from C... to B... on 09 February 2009, if subsequently to this transfer there were no new transfer of quotas, now from B... to D…, his son, even if that one had not been registered, the TCA could still seek to draw from it the intended effects, alleging that there had been a concentration of quotas in a single person, physician by profession, in the measure that the ineffectiveness of legal acts does not prevent taxation, at the moment when this should legally occur, if the economic effects intended by the parties have already been produced, in accordance with no. 1 of art.º 38º - Ineffectiveness of acts and legal transactions -, of the General Tax Law.

9.2. Thus, even if it were the now Claimant to argue the thesis that the transfer of quotas from C... to B... on 09 February 2009 would be ineffective in relation to the TCA, for lack of registration (thesis that the TCA now argues), the TCA would manifest itself in the direction of the unification of the quotas in a single partner. And rightly so, for registration would not be a condition of effectiveness in relation to the TCA.

1. Now, it is not seen how in the situation at hand an opposite effect could be drawn.

2. We shall however always have to read the concept of ineffectiveness raised by the TCA, in the context of the norms from which it is derived, in this case, from the Commercial Registry Code, for, being terms proper to other branches of law, they should be interpreted in the same sense that they have there, save if otherwise is derived directly from the law, in accordance with no. 2 of art.º 11º of the General Tax Law:

3. Thus, and in the context of legal interpretation, it suffices to adhere to the teleological element of the Legal Institute of the Commercial Registry, expressed in no. 1 of its art.º 1º - Purposes of the registry:

The commercial registry is intended to give publicity to the legal situation of individual traders, commercial companies, civil companies under commercial form and individual establishments of limited liability, with a view to the security of legal commercial transactions.

1. Whether by means of a constitutive or consolidative effectiveness, the objective of the Legal Institute of the Commercial Registry is the security of legal commercial transactions, whereby it is important to verify whether, in light of this teleological element, the TCA can be configured as any third party, under the terms it argues.

2. Third parties are, as the TCA refers, by reference to the Supreme Court of Justice judgment referred to in § 56 of the Response, those who are not parties to the fact subject to registration, to which we must add, by imposition of the teleological element of the Legal Institute of the Commercial Registry, that third parties are so considered in view of the referred need to safeguard the security of legal commercial transactions, read, the climate of security in commercial exchanges.

3. In other words, those who are not parties to a fact subject to registration shall, in view of the need to safeguard the security of legal commercial transactions, have the guarantee that the said fact will not produce effects against them.

4. It is intended, therefore, and solely, to protect those who are not parties to a fact subject to registration by reason of the security of legal commercial transactions, nothing more.

5. To deduce from the Legal Institute of the Commercial Registry that an act of transfer of quotas is ineffective in relation to the TCA, for being a third party, not only does not fall within the teleological element of the Legal Institute of the Commercial Registry, but is, moreover, unnecessary, for as already mentioned, the ineffectiveness of legal acts does not prevent taxation, ex.vi., no. 1 of art.º 38º of the General Tax Law.

6. It is now important to appreciate whether the opposite, the effectiveness of legal acts – as is the case, sustained by the Claimant – can prejudice the pursuit by the TCA of its function of collecting tax revenues.

7. As mentioned, the Legal Institute of the Commercial Registry protects the third party - those who are not parties to the fact subject to registration -, for, by not being parties, due to ignorance of a fact they could make choices that would jeopardize the security of legal commercial transactions.

8. Now, the TCA even not being a party to the fact subject to registration, is not in an identical situation, for its ignorance of the fact does not project itself in the domain of legal commercial transactions, but of the collection of revenues emerging therefrom.

9. In addition, not being a party to the fact subject to registration, it is not in an identical situation, for another reason, for its ignorance of the fact does not inhibit the TCA from drawing the necessary tax consequences from it. Indeed,

10. Attending to the need for the TCA to pursue its function of collecting tax revenues, the legislator placed at its disposal various norms capable of allowing it to reveal the material truth underlying any formalism presented by the taxpayer, namely:

22.1. Article 6º of the Supplementary Regime of the Tax and Customs Inspection Procedure, which the TCA availed itself of, which determines:

The inspection procedure aims at the discovery of material truth, and the tax administration shall adopt, ex officio, the appropriate initiatives for this purpose.

22.2. As well as by carrying out all proceedings aimed at the satisfaction of the public interest and the discovery of material truth, with provision in article 58º of the General Tax Law which the TCA could have availed itself of, particularly when the now Claimant presented an Administrative Objection, where the transfer of quotas between father and son, which occurred on 09 February 2009, would be called into question.

22.3. And, above all, triggering, in accordance with the provision of no. 2 of art.º 38º of the General Tax Law, the special procedure for applying the general anti-abuse clause, provided for in art.º 63º of the Code of Tax Procedure and Process which would presuppose, among other necessary requirements, under the terms of no. 3:

The demonstration that the execution of the legal transaction or practice of the legal act was essentially or mainly directed at the reduction, elimination or temporal deferment of taxes that would be due in the case of a transaction or act with an identical economic purpose, or at obtaining tax advantages.

1. It is true that the TCA, as results from the Administrative File, still indicates the "lack of credibility of the documents presented":

23.1. "And this lack of credibility of the documents is corroborated by the analysis now made in the context of administrative objection:

· The contract, allegedly executed in 2009, coincides exactly with what was intended by the objector: alteration of the corporate structure so as not to "fall" under the fiscal transparency regime. Parties: partner and his son."

23.2. Referring also that the Claimant's minutes book uses the Orthographic Agreement which only came into force on 13 May 2009, thus seeming to wish to sustain the said lack of credibility of the minutes, as well as the fact that "contrary to what is stated by the objector, neither in the accounting records nor in the Financial Statements, of the years 2009, 2010, 2011 and 2012, is there any indication that the company had, in that period, more than one partner".

1. However, the Respondent, not only did not avail itself of the appropriate means to attack that which it refers to as the lack of credibility, provided for in the already mentioned art.º 63º of the CTPP, nor did it invoke that a fraudulent process was at issue, nor did it undertake to provide proof thereof, as it would be required to, but,

2. Instead, it came to base its Response not in the sense that the said minutes of 09 February 2012 were an invalid act, but rather, taking it as valid, to argue its non-effectiveness in relation to the TCA given its registration having been carried out only on 12 January 2013, for that, by raising the effectiveness of the legal transaction, there is an assumption of its validity.

3. We have already seen, however, that the TCA is not configured as any third party for purposes of the teleology of the Legal Institute of the Commercial Registry, for, differently from third parties prejudiced by the lack of security in legal commercial transactions, who, if they did not see the act subject to registration be ineffective, could do nothing, the TCA can, and must, act.

4. Thus, not having acted, and accepting the validity of the transfer of quotas father – son, it cannot the same cease to produce effects before the Respondent for as through it is configured the existence of a company with two partners, with distinct professional exercise, it does not fall within the referred company, here Claimant, in the legal regime of fiscal transparency, under the terms of art.º 6º of the CIRC.

5. In such terms this Tribunal, in the sequence of a previous decision submitted by the Claimant, Decision no. 392/2014-T, cannot but consider that by not availing itself of the legal norms at its disposal, the position sustained by the TCA violates the principles of legality, as well as that of the prevalence of material truth over the juridico-formal reality.

6. Decision founded not only on the position sustained in this process, but also[1], e.g., within the scope of Process 297/2014-T, from whose judgment one can read:

"(…) the Tax and Customs Authority did not trigger the special procedure for applying the general anti-abuse clause, provided for in article 63.º of the CTPP, and it would be the application of that clause, which is contained in no. 2 of article 38.º of the General Tax Law, which would be the only admissible way to render ineffective, for tax purposes, the act (…).

1. Indeed, the TCA not having made use of the special procedure for applying the general anti-abuse clause, provided for in article 63.º of the CTPP, the minutes of transfer of quotas between B... and D…, being valid, is effective for the TCA, for that,

2. The only admissible way to render ineffective in the tax context, the act of transfer of quotas which occurred on 09 February 2009, between B... and D…, would therefore be the application of the clause contained in no. 2 of article 38.º of the General Tax Law:

The following acts or legal transactions shall be ineffective in the tax context: those essentially or mainly directed, by artificial or fraudulent means and by abuse of legal forms, at the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions with an identical economic purpose, or at obtaining tax advantages that would not be achieved, wholly or partially, without the use of such means, taxation being then effected in accordance with the applicable norms in their absence and the referred tax advantages not being produced.

1. In such terms it is not important to appreciate, for not being decisive for the decision of the case, the formal questions relating to the registration regime.

VI - ISSUE OF PREJUDICED KNOWLEDGE

The Claimant argues in §§ 36, even if it were concluded that there was no plural corporate structure as from 09/02/2009, it would always be possible to question the constitutionality of the application of the fiscal transparency regime to sole proprietorships.

Now, having this tribunal concluded that the plural corporate structure of the Claimant, which existed before 09/02/2009 was maintained on that date, the appreciation of the constitutionality of the application of the fiscal transparency regime to sole proprietorships, raised by the Claimant, is not beneficial to the issue under controversy, as it is considered that it is not a sole proprietorship.

VII - DECISION

In light of the foregoing, it is decided to render the request for arbitral pronouncement successful and consequently annul the IRC assessment no. 2013…, of the year 2009.

VIII - VALUE OF THE PROCEEDINGS

€5,751.00 (Five thousand seven hundred and fifty-one euros).

IX – COSTS

Pursuant to the Regulations on Costs in Tax Arbitration Proceedings, costs are fixed at €612.00, to be borne by the TCA.

Lisbon, 27 April 2015

Text prepared by computer, pursuant to art.º 131º, no. 5 of the CPC, ex VI, art.º 29º no. 1 paragraph e) of the LRTA, with blank verso of each page, using the orthography prior to the last orthographic agreement.

The Arbitrator

Henrique Curado

[1] There are several proceedings submitted to tax arbitration based on the appreciation of the General Anti-Abuse Clause, namely: 5/2011-T, 196/2013-T, 224/2013-T, 143/2014-T, 208/2014-T and 379/2014-T, as appears on the CAAD-T website.