Summary
Full Decision
ARBITRAL DECISION
CAAD: Tax Arbitration
Case No. 665/2014 – T
Subject Matter: Personal Income Tax - Capital Gains
The arbitrators Jorge Lopes de Sousa (President), arbitrator Paulo Ferreira Alves and arbitrator Filomena Salgado de Oliveira (arbitrator-members), appointed by the Ethics Council of the Center for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, constituted on 8 September 2014, agree as follows:
I – REPORT
A – PARTIES
On 5 September 2014, A… bearing Tax Identification Number [NIF] … and B… bearing Tax Identification Number [NIF] …, both residing at Street …, …, …., … Vila Real de Santo António, hereinafter referred to as the Applicants or taxpayers, requested, under the terms and for the purposes of Articles 2 and 10, both of Decree-Law No. 10/2011 of 20 January, the constitution of this Collective Arbitral Tribunal, with the Tax and Customs Authority (AT) being the respondent (which succeeded the General Directorate for Taxation, through Decree-Law No. 118/2011 of 15 December), hereinafter referred to as the Respondent or AT.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD, and the Arbitral Tribunal was duly constituted on 08-09-2014, to examine and decide on the subject matter of the present case, and was automatically notified to the Tax and Customs Authority on 08-09-2014, as recorded in the respective minutes.
The Applicant did not proceed with the appointment of an arbitrator, whereby, under Article 6(1) and Article 11(1)(b) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the Ethics Council appointed His Excellency Dr. Counsellor Jorge Lino Ribeiro Alves de Sousa (President), Dr. Paulo Ferreira Alves and Her Excellency Dr. Filomena Oliveira as arbitrators, the appointment having been accepted in accordance with the legally prescribed terms.
On 21-10-2014 the parties were duly notified of this appointment, and did not express any intention to refuse the appointment of the arbitrators, in accordance with Article 11(1)(a) and (b) of the Arbitral Tribunal Regulations and Articles 6 and 7 of the Code of Ethics.
In accordance with the provision of Article 11(1)(c) of Decree-Law No. 10/2011 of 20 January, as amended by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was duly constituted on 11-05-2014.
By order of 05-02-2015, the President of the Ethics Council of CAAD, in view of the inability of His Excellency Counsellor Jorge Lino Ribeiro Alves de Sousa, appointed His Excellency Counsellor Jorge Lopes de Sousa as arbitrator-president, in accordance with Article 8(1) of the Code of Ethics.
Thus, the arbitral tribunal is duly constituted and materially competent, in accordance with Articles 2(1)(a) and 30(1) of Decree-Law No. 10/2011 of 20 January.
Both parties agreed to waive the hearing provided for in Article 18 of the Arbitral Tribunal Regulations.
Both parties have legal personality and capacity, are entitled to bring proceedings and are legally represented (Articles 4 and 10(2) of the same decree and Article 1 of Order No. 112-A/2011 of 22 March).
The case is not affected by defects that would render it invalid.
B – REQUEST
1 - The Applicants seek a declaration of illegality of the tax assessment No. 2014 … for Personal Income Tax and compensatory interest, which fixed total tax payable of €156,407.71 (one hundred fifty-six thousand four hundred and seven euros and seventy-one cents).
C – GROUNDS FOR CLAIM
1 - To substantiate their request for arbitral pronouncement, the Applicants alleged, with a view to obtaining a declaration of illegality of the tax assessment for Personal Income Tax and compensatory interest No. 2014 …, in summary, as follows:
2 - On 13 March 2009, a contract for the promise of sale and purchase of shares in company C… - …, S.A. was executed.
3 - Subsequently, on 12 March 2010, the definitive contract for the sale and purchase of the shares was executed at the price of €2,160,000.00.
4 - Through judicial proceedings initiated by the Applicants, motivated by non-payment of the price agreed in the sale and purchase contract, they instituted precautionary proceedings in the Court of Vila Real de Santo António, case …/11….TBVRS, which resulted in a homologated and final transaction between the parties.
5 - The Applicants allege that from the said transaction, it was stipulated that possession of the shares occurred on 13.3.2009, with the execution of the promise contract, whereby it is the year 2009 that should be considered the year of the transaction, and thus the year 2009 should be considered the year of transmission, in which sense the right to assess has already been time-barred.
6 - However, the Applicants further allege, by way of contingency, that if it is considered that the year in which the transaction occurred was 2010, with the execution of the definitive sale and purchase contract, the following:
7 - Considering that the taxable event occurs at the date of realization of the capital gain, that is, at the moment of its alienation, by application of the provisions of Article 12(1) of the General Tax Code, the taxation of capital gains, which is sought to be declared illegal by the application of the new law to taxable events of instantaneous nature already completely formed and prior to its entry into force, is, consequently, a retroactive application of the law. Thus, the application of the new law to this fact that occurred prior to its approval involves, therefore, an authentic retroactivity.
8 - Recall that retroactive effect is prohibited to the amendments introduced by Law No. 15/2010 of 26 July, repealing the tax exemption provided for in Article 10(2) of the Personal Income Tax Code.
9 - The law entered into force on 27.7.2010, and did not provide for any special provision regarding its application in time, from which the general rules provided for in Article 12 of the General Tax Code should be observed.
10 - The Applicants maintain that the assessment is illegal due to the retroactive application of Law No. 15/2010 of 26 July, in that under the previous law, the applicants were exempt from taxation by virtue of holding the shares for more than 12 months, in accordance with Article 10(2) of the Personal Income Tax Code.
11 - The Applicants further allege, in the event that Law No. 15/2010 of 26 July is deemed to apply to the said transaction, that the applicable Personal Income Tax rate is not 20% but rather 10%. They also maintain that under Article 43(3) of the Personal Income Tax Code, the company in question is a micro or small enterprise whereby only 50% of the value of the capital gain should be considered.
D - RESPONSE OF THE RESPONDENT
12 - The Respondent, duly notified to that effect, presented its response in a timely manner in which, in abbreviated summary, alleged as follows:
13 - The Respondent invokes that the attorney appointment suffers from irregularity as referred to in Article 48 of the Code of Civil Procedure, insofar as the request for arbitral pronouncement is subscribed by a legal representative, and the power of attorney attached to the case file is certified by the attorney himself to whom legal powers were conferred.
14 - The Respondent argues regarding error as to the factual grounds that the Applicants are not correct on this matter, in that the assessment appears to be illegal by virtue of being based on erroneous factual grounds insofar as the shares sold by it to company D… – …, S.A. (hereinafter "D…") came into the possession of the latter on 2009-03-13, whereby, in light of Article 10(3)(a) of the Personal Income Tax Code, the transmission of those securities occurred in the period of 2009 and not 2010, from which the right to assess is time-barred.
15 - The Respondent submits that the transmission of the shares occurred on 2010-03-12, the occasion on which the promised contract for sale and purchase of the securities was executed.
16 - It further alleges that such a presumption operates in favor of the tax authority and that it is incumbent on the taxpayer who wishes to rebut the presumption contained in Article 10(3)(a) of the Personal Income Tax Code to present proof that the tradition or possession did not occur or, alternatively, that it did not take place on the date considered by the tax authority, and that the Applicants failed to rebut this presumption in the least.
17 - The Respondent contends, regarding the violation of the principle of non-retroactivity of tax law, that the Applicants are not correct when they argue that the fact that the law states that it enters into force on the day following its legal publication allows the exclusion of its application to the factual situation outlined in the case.
18 - Thus, in the first place, it appears evident that the legislator, by choosing not to include in the law any transitional provision that would safeguard potential taxable events in formation (as it had done in the past, in light of the examples cited), actually intended that situations of realization of capital gains during the year 2010 – which resulted in a positive balance – be subject to actual taxation, regardless of the date of their realization.
19 - In the second place, because the historical element contradicts the thesis defended by the Applicants, insofar as the legislator itself clearly and expressly stated that the new regime would be applicable to the result of capital gains calculated throughout the year 2010.
20 - It further states that, at the time the transmission generating the capital gains occurred (2010-03-12), the wording of Article 10(2)(a) of the Personal Income Tax Code determined the exclusion from taxation of capital gains generated by the alienation of shares held by their owner for more than 12 months.
21 - The Respondent further submits that, for the generality of doctrine and case law, the taxable event occurs on 31 December of each year, thus understanding the unitary and global character of the taxation of income, notwithstanding the analytical division of the various categories of income according to their source.
22 - In this way, the assessment of the instant case, unquestionably influenced by the amendments introduced by Law 15/2010 of 26 July, does not conflict with the provisions of Article 12 of the General Tax Code.
23 - The assessment sub judice considered the provisions of Law 15/2010 of 26 July, which entered into force on the day following its publication, and considered in the taxable matter capital gains resulting from the operation of purchase and sale of shares carried out on 12/03/2010, that is, at a moment prior to the entry into force of that legal instrument.
24 - It further alleges that it makes no sense to state that there is in the present case a situation of retroactivity of the 1st degree with respect to the amendment provided for by Law 15/2010 of 26 July, when the legal solution, on one hand, applies to the balance calculated between the capital gains and losses realized in each year and, on the other, respects factuality still in formation, whose full verification only occurs at the end of the taxation period, whereby its complete and definitive substantiation occurs within the scope of the new law.
25 - In this way, having regard to the factual circumstances that flow from the case file, it is to be concluded that there is no degree of retroactivity capable of frustrating the application of Law 15/2010 of 26 July.
26 - It also results from the case law emanating from the Constitutional Court that Article 103(3) of the Portuguese Constitution applies only to situations that can be characterized as strong, authentic or proper retroactivity, that is, of the 1st degree, reflected in the application of the new law to facts entirely verified under the old law, having already produced all its effects within the scope of that law (see, among others, Constitutional Court decisions No. 128/2009 and No. 399/2010).
27 - The application of Law 15/2010 of 26 July to the share sale operation in question in the case does not violate the principle of non-retroactivity of tax law enshrined in the aforementioned article of the Constitution.
28 - The Respondent further contends that it would never make sense to try to apply Article 12 of the General Tax Code (contained in general legislation) to the instant case for purposes of determining the temporal application of Law 15/2010 of 26 July, when in fact the solution to such question results from the Personal Income Tax Code itself (special legislation).
29 - Now, what clearly stands out from this latter body of law is the principle of annuality of Personal Income Tax.
30 - From which it results that the circumstance that the amendment provided for by Law 15/2010 of 26 July occurred on a date subsequent to the sale of the shares in question in the present case is inconsequential.
31 - The Respondent further states that the annuality of Personal Income Tax necessarily leads to the aggregation of all taxable events and income that occur up to 31 December of the period in question.
32 - The Respondent further submits that in the event that it is concluded that Law 15/2010 of 26 July applies to the case sub judice, the applicable rate would in any case be 2% and not 10%, by virtue of the shares sold by it relating to a micro or small enterprise, in accordance with Decree-Law 372/2007 of 6 November, whereby the assessment now in question is illegal by virtue of it being based on the absence of a certification from IAPMEI attesting the status of micro or small enterprise.
33 - The Respondent concludes by alleging that it was incumbent upon the Applicants to demonstrate that, at the time of alienation of the shares, the company in question fulfilled all material requirements provided for in Decree-Law 372/2007 of 6 November, and that, in theory, would give access to obtaining a certificate from IAPMEI, and none of this was done by the Applicants, when such burden fell upon them in light of Article 74(1) of the General Tax Code.
E - FINDINGS OF FACT
34 - Before proceeding to examine these questions, it is necessary to present the factual matter relevant for their understanding and decision, which was done on the basis of documentary evidence, taking into account the facts alleged.
35 - Regarding relevant factual matters, this tribunal takes the following facts to be established:
36 - The applicant executed on 13 March 2009 a contract for the promise of sale and purchase of shares in company C… - …, S.A., the content of which is given as reproduced, having executed on 12 March 2010 the definitive contract for the sale and purchase of the shares at the price of €2,160,000.00, a copy of which is contained in Annex 2 to the Tax Inspection Report, the content of which is given as reproduced, and in whose Clause 3 it is stated that "with the execution of this contract the transmission of the shares is effected".
37 - Through judicial proceedings instituted by the Applicants motivated by non-payment of the price agreed in the sale and purchase contract, they instituted precautionary proceedings in the Court of Vila Real de Santo António, case …/11….TBVRS, which resulted in a homologated and final transaction between the parties.
38 - The Applicants were notified of the tax assessment for Personal Income Tax No. 2014 …, which fixed total tax payable of €156,407.71, resulting from the application of a rate of 20% to the capital gain of the legal transaction described above.
F - FACTS NOT ESTABLISHED
39 - Of the facts with interest for the decision of the case, contained in the challenge, of all the objects of concrete analysis, it was not established that the Applicants had declared the transmission of the shares in the 2009 tax period, nor that in the proceedings …/11….TBVRS, in which the homologation of a transaction between the parties resulted, it had been determined the date of tradition or possession of the shares.
G - ISSUES TO BE DECIDED
40 - Given the positions of the parties assumed in the arguments presented, the following constitutes the central issue to be resolved, which must be examined and decided:
i) The preliminary objection raised by the Respondent invoking under Article 48 of the Code of Civil Procedure the irregularity of the power of attorney;
ii) The declaration of illegality of the tax assessment for Personal Income Tax and compensatory interest No. 2014 …, alleged by the Applicants.
H - LAW
REGARDING THE IRREGULARITY OF THE POWER OF ATTORNEY
41 - The Respondent invokes under Article 48 of the Code of Civil Procedure the irregularity of the power of attorney submitted by the Applicant, by virtue of having certified the said copy of power of attorney submitted.
42 - According to Opinion No. 15/PP/2008-G of the General Council of the Bar Association on 30/07/2008, the following is stated: "Now, it seems evident that the authentication or certification of documents and/or the recognition of signatures — acts which today can be performed by both notaries and attorneys or solicitors— must be performed by those who are free from any subordination, whether technical, legal or economic. In other words, when called upon to certify a document, or to recognize a particular signature, the Attorney cannot be in the position of an employee who receives orders or instructions (meaning, from the interested party or beneficiary in the authentication or certification). The same applies to the notary or solicitor."
43 - The Applicants proceeded with the regularization of the power of attorney, whereby the defect has been cured, the power of attorney no longer suffering from any defect, insufficiency or irregularity, and is therefore accepted and valid.
REGARDING THE ILLEGALITY OF THE TAX ASSESSMENT
44 - Given the positions of the parties assumed in the pleadings submitted, two central issues of relevance in the present case are raised, to which this tribunal must focus and decide in the following order.
45 - These issues, in the first place, are based on establishing for purposes of taxation under Personal Income Tax the moment of realization of the capital gain in accordance with Article 10 of the Personal Income Tax Code and, in the second place, should it be decided and determined that the taxable event occurred in the course of the year 2010, this tribunal must determine what legislation and respective legal regime applies to this transaction and capital gain.
46 - The factual matter is established and proven, which is why we now determine the law applicable to the disputed facts.
47 - Regarding the first issue, this consists of determining the moment of realization of the capital gain for purposes of taxation under Personal Income Tax, whether the year 2009 or the year 2010.
48 - This issue is relevant in the following sense: if it is considered that the tradition of the shares occurred with the execution of the promise contract, the relevant year for the taxation of the capital gain is the year 2009, in accordance with the legislation at the time, and thus the question of the application of Law 15/2010 to the capital gain would not arise, but if we understand that the tradition and transmission only occurred with the sale and purchase contract in the year 2010, being this the relevant tax year for taxation, here the question of the application of Law 15/2010 and respectively the second issue of the present case does arise.
49 - Taking into account the following factuality already established, which we summarize for purposes of deciding this issue, note that the Applicants executed a promise contract for the sale and purchase of shares on 13/03/2009, executing on 12/03/2010 the contract for the sale and purchase of the shares, the payment of which was made in phases in various payment forms, described in the respective contract. However, to secure payment, the Applicants had to resort to judicial proceedings, which resulted in the judgment already final, issued in the Precautionary Attachment Proceeding that took place in the Judicial Court of Vila Real de St. António, in case …/11….TBVRS, from which resulted the homologation of a transaction between the parties, without any consideration of the law of the issues raised.
50 - It was not demonstrated in the judicial decision referred to above that the Judicial Court of Vila Real de St. António decided that the moment of tradition or possession of the shares had occurred with the execution of the promise contract.
51 - The tax regime of capital gains is based on the principle of realization, from which it results for the case at hand in Article 10(1)(b) of the Personal Income Tax Code that capital gains are gains obtained which result from: "b) Onerous alienation of corporate interests, including their redemption and amortization with capital reduction, and of other securities and, as well, the value attributed to members as a result of division which, in accordance with Article 75 of the Corporate Income Tax Code, is considered as a capital gain".
52 - However, the legal regime of capital gains, enshrined in Article 10(3) of the Personal Income Tax Code, specifically establishes a rule regarding promise contracts, which consists of the presumption that the gain is realized at the moment in which the tradition or possession of the asset or right occurs.
53 - This article establishes, according to case law, a presumption in favor of the Tax Authority and which depends on two cumulative requirements, the execution of a promise contract and the tradition or possession of the assets object of the contract.
54 - As can be seen in the decision of the Northern Administrative Court, issued on 2004-10-21 in case No. 00092/04:
"Article 10(3)(a) of the Personal Income Tax Code, after establishing in its (1) the notion of capital gains for purposes of the Code, states that gains are considered obtained at the moment of performance of the acts provided for in (1), without prejudice to the fact that in cases of promise of sale and purchase or exchange it is presumed that the gain is obtained as soon as the tradition or possession of the assets or rights object of the contract is verified. We are here faced with a presumption established in favor of the Public Treasury, in order to prevent taxpayers, in case of tradition or possession of the asset or right, from being able to indefinitely delay the assessment of tax, merely by deferring the date of execution of the respective deed of sale and purchase. In this way, where the tradition of the immovable exists, and even if the definitive deed has not been executed, the gain is considered obtained as soon as the tradition or possession of the asset is verified, whereby the taxpayer should communicate the fact to the Public Treasury or the latter may effect the respective assessment ex officio, if the fact comes to its knowledge."
55 - In this way, it is important to analyze whether with the execution of the promise contract for the sale and purchase it can be presumed that the gain has been obtained, which will occur whenever the tradition or possession of the shares by D… – …, S.A. (hereinafter D…) is verified.
56 - In this respect, it should be noted that it constitutes an obligation of the taxpayer – the Applicants –, in compliance with Article 10(11) of the Personal Income Tax Code in the wording of Decree-Law No. 228/2002 of 30 November, to declare the onerous alienation of the shares, even if held for more than 12 months, as well as the date of their respective acquisition.
57 - However, it is found that the Applicants did not declare the alienation of the shares in 2009, nor even in 2010, having failed to comply with the provisions of the aforementioned Article 10(11) of the Personal Income Tax Code.
58 - It remains for us then to analyze the treatment given to this operation by the acquirer of the shares.
59 - Effectively, company D… submitted electronically on 26/03/2010, in its capacity as acquirer, the declaration of Form 4 – Acquisition and/or Alienation of Securities, through which it declares that the Applicants, A… and B…, alienated to the declarant on 12/03/2010, for €717,386.57, 1,830,000 shares and for €3,920.14, 10,000 shares, respectively, of company C… - …, S.A. In the same sense, the Simplified Business Information (IES) for the year 2010 of D… refers as the date of commencement of participation 13/03/2010. In the 2009 IES nothing is referred regarding the acquisition, apart from the evidence, in the balance sheet of D…, of the advance (5% of the transaction value) paid to the Applicants upon signature of the Promise Contract for Sale and Purchase (PCSP).
60 - On the other hand, the PCSP states in its Fifth Clause that "The promise sellers declare and warrant, before the promise buyer, that, on this date: (…) v) Until the date of execution of the definitive contract no changes will occur in the economic, financial, accounting and tax situation of company C…".
61 - From the analysis of the promise contract for sale and purchase it does not result that the tradition and possession of the assets were verified with its execution, quite the contrary. On one hand, the value of the deposit is merely symbolic (5% of the transaction value) compared to the price of sale of the shares. The tradition of the shares, in the light of a promise contract, could have conferred real and effective possession, a situation that would have occurred, for example, if the entire agreed price had been paid, at the same time as the promise seller delivered the shares to the promise buyer so that he could act as if they were his own, including as to the right to receive dividends.
62 - Facts which did not occur with the signature of the PCSP signed on 13/03/2009 between the Applicants and D….
63 - To reinforce that the tradition and possession of the shares did not occur with the PCSP, the Promise Sale Contract itself states in Clause Three that:
-
With the execution of this contract the transmission of the shares is effected.
-
Having in mind that the price of the shares is effected in accordance with the provisions of number 1 of Clause Two, the sellers reserve ownership of the shares until full payment. In case of non-payment of the price of the shares, the sellers may not waive ownership and may require the delivery of the securities. In case of refusal to proceed with the return of the securities, the sellers may proceed with the issuance of new securities, canceling those that were delivered with the execution of this contract.
(…)
64 - Now, even the Contract of Sale and Purchase imposes restrictions regarding the transfer of ownership of the shares, having in mind the amounts paid at the moment of signature of the Contract.
65 - On the other hand, point 2 of Clause Two of the same Contract further states that from the price are "… expressly excluded the balances of cash and bank accounts, which the SELLERS have the right to withdraw until the date of signature of this contract (…)".
66 - If the tradition and possession of the shares had been verified with the PCSP, why would the Sellers have the right to the balances of Cash and Bank Accounts verified at the date of transmission of the shares, calculated up to the date of signature of the contract of sale and purchase?
67 - For all the reasons presented, it seems to us licit to conclude that the possession of the shares only came to occur with the alienation of the same, which happened on 12/03/2010, assuming that the moment of tradition or possession coincided with the onerous alienation of the shares, having this only been verified with the contract of sale and purchase of the shares and not with the promise contract.
68 - If the tradition and possession of the shares had occurred on 13/03/2009, with the execution of the promise contract for the sale and purchase, then the Applicants should have declared the transaction in the 2009 tax period, as Article 10(11) of the Personal Income Tax Code imposed.
69 - Without factual substantiation supporting the position of the Applicants, in considering that with the promise contract the tradition of the shares was verified, it is decided that for purposes of taxation under Personal Income Tax, the present capital gain resulted from the onerous alienation by means of contract for the sale and purchase of shares executed on 12 March 2010, thus determining that the tax period and the year of alienation is the year 2010, specifically 12/03/2010.
70 - Having decided in this sense, it falls to this arbitral tribunal to examine and decide the second central issue of the present case, which is subsumed, as already referred to, in the determination of the Legislation and regime to apply to this operation from which resulted a gain, which occurred in the course of the year 2010 (12 March), before the approval, publication and entry into force of Law 15/2010 of 26 July.
71 - The issue consists in determining whether the legislation to apply is Law No. 15/2010 of 26 July, which entered into force on 27 July 2010, or Decree-Law No. 228/2002 of 31 October in force at the date of the transaction (12 March 2010).
72 - The relevance of the issue is related to the fact that, at the time of the transaction, the capital gain which resulted from the alienation was excluded from taxation, in accordance with Article 10(2) of the Personal Income Tax Code in the wording of Decree-Law No. 228/2002 of 31 October, with effect from 1/1/2003, and with the entry into force of Law No. 15/2010 of 26 July, this exclusion was revoked and this capital gain would now be taxed, by means of aggregation or by autonomous taxation at a rate of 20%.
73 - One of the fundamental principles of Portuguese law is the principle of legal certainty and protection of legitimate expectations, as constitutive elements of the rule of law.
74 - These constitutional principles guarantee the citizen, certainty and confidence in the predictability of solutions, in such a way that legislative changes do not alter their acquired rights, expectations created.
75 - The constitutional revision of 1997, enshrined from then in Article 103(3) of the Constitution of the Portuguese Republic the principle of prohibition of tax retroactivity, which provides:
"No one may be obliged to pay taxes which have not been created in accordance with the Constitution, which are of a retroactive nature or whose assessment and collection are not made in accordance with the law".
76 - This constitutional amendment did not aim to make explicit a simple refraction of the general principle of protection of citizens' confidence, inherent to all activity of the democratic rule of law state, but rather to express an absolute rule for defining the scope of temporal validity of laws that create or aggravate taxes, thus preventing the existence of an abstract danger of grave violation of such confidence.
77 - According to the prevailing case law of the Constitutional Court, Article 103(3) of the Constitution of the Portuguese Republic applies only to strong, authentic or proper retroactivity, which it considers totally prohibited without the possibility of balancing, however, weak, inauthentic or improper retroactivity may be prohibited in light of the principle of legitimate expectations, by means of the verification of a set of so-called "tests" requirements (See Constitutional Court decisions No. 128/2009 and 399/2010).
78 - The principles cited of legal confidence and good faith, corollaries of legal certainty, which are structural pillars of a true democratic rule of law state, proclaimed or implicit in Article 2 of the Constitution, alongside the principle of human dignity, expressed in Article 1, which imply a minimum of certainty and security in the rights of individuals and in the legally created expectations to which is inherent an idea of protection of the confidence of citizens and the community in the legal order and in the action of the State, should be had as a politically conformed principle that makes explicit the fundamental valuations of the constitutional legislator.
79 - The citizen must be able to foresee the interventions of the State and adapt and adjust their action accordingly.
80 - The principle of legitimate expectations is violated when there is an inadmissible, arbitrary or excessively onerous affect of legitimately founded expectations of citizens (Constitutional Court decisions Nos. 287/90, 303/90, 625/98, 634/98, 186/2009).
81 - This general idea of inadmissibility may be assessed, in particular, by two criteria: i) the affect of expectations, in an unfavorable sense, will be inadmissible, when it constitutes a mutation in the legal order with which, reasonably, the recipients of the norms contained therein cannot count; and ii) when it is dictated by the need to safeguard constitutionally protected rights or interests that should be considered prevalent, having recourse here to the principle of proportionality, explicitly enshrined with respect to rights, freedoms and guarantees (Article 18(2) of the Constitution) (decisions Nos. 287/90 and 186/2009).
82 - Constitutional Court decision 17/84 tells us that the citizen must "be able to foresee the interventions that the State may lead over him or before him and prepare to adapt to them. (…) He must be able to trust that his action will be recognized by the legal order and thus remain in all legally relevant consequences."
83 - As authors Gomes Canotilho and Vital Moreira tell us: "constitutionalism was born to establish the principle of legality and equality in taxes, putting an end to the arbitrariness and tax discrimination typical of the Old Regime" […] number 2 (of Article 103 of the Constitution) guarantees the principle of fiscal legality, one of the essential elements of the constitutional rule of law state. It is translated from the start in the rule of legal reservation for the creation and definition of essential elements of taxes, which cannot but be contained in legislative instrument. This entails legal typicality, with the tax being designed in the law in sufficiently determined form, without margin for regulatory development nor for administrative discretion as to its essential elements." (…) "since Constitutional Revision 97, the tax constitution enshrines the prohibition of retroactive taxes (number 3), thus making explicit a principle that could already be considered as a consequence of the principle of protection of confidence, inscribed in the principle of the rule of law. In this way, constitutionally unlawful retroactive taxes are not permitted. Thus, taxes created to apply to income already earned or to taxable events (transactions, etc.) already occurred are not constitutionally lawful. The emphatic manner in which the norm is formulated leaves no doubt as to the absolute nature of this prohibition, giving every taxpayer the right to refuse to pay such tax. In that measure, retroactive tax (or any other retroactive tax norm, provided it is unfavorable) is always constitutionally unlawful. The Constitution has applied to the obligation to pay taxes — which always results in a pecuniary depletion of taxpayers — the same regime of prohibition of retroactivity that applies to restrictions on rights, freedoms and guarantees (Article 18(3))."
84 - With this it is intended to conclude that the normative diploma, in particular Law 15/2010, cannot contain an express norm that permits its retroactivity to facts or legal transactions already occurred, because such would expressly violate Article 103(3) of the Constitution, and the principle of non-retroactivity of tax laws.
85 - Further mentioned is the importance of the inclusion of a tax exemption in an annual tax, which is provided for at the beginning of the fiscal year and creates a legitimate expectation that it will last until the end of that same fiscal year, with the potential to alter the behavior of taxpayers.
86 - The norm does not explicitly provide for a period of validity or expiration and with its repeal, cannot alter the legal relationships created and terminated during its validity, for the applicable regime may influence the behavior of the taxpayer, who might not have carried out the operation, or could carry it out on other terms.
87 - Further mentioned is that one of the objectives of the tax exemption is to promote this type of legal transaction, whereby the taxpayer cannot subsequently be prejudiced by its practice.
88 - From a material point of view, we have a violation of the legal certainty of the Citizen, when a certain behavior previously admitted without taxation and encouraged by law comes to be, subsequently, subject to taxation.
89 - If the repeal of the tax exemption subsequent to the practice of the acts were possible, the Taxpayer could never be certain of the tax to be paid in all legal transactions from which income results.
90 - Because any taxation or exemption from it in the sphere of Personal Income Tax, in order to comply with the constitutional principles of legitimate expectations and legal certainty, must allow the taxpayer and Citizen to create and promote their contractual relationships, foreseeing from the start the tax impact.
91 - It is not to be left unmentioned that the capacity of the taxpayer to foresee and plan the tax impact and the tax to be paid at the end of the fiscal year is fundamental in the day-to-day activities of all Portuguese taxpayers.
92 - In the present case, the taxpayer executed a legal transaction that created a gain for him, that gain being excluded from taxation, by means of a norm already provided for since 2003, not repealed and maintained for the State Budget for the year 2010.
93 - Not applying the norm that excludes taxation to situations already verified when its repeal occurred amounts to a violation of the principle of legitimate expectations and legal certainty of the taxpayer.
94 - It is alleged that Personal Income Tax points to the taxable event materializing on 31 December of each year, and with regard to the tax regime for securities capital gains, under Article 43(1) of the Personal Income Tax Code, what is taxed in capital gains is "the balance calculated between capital gains and losses realized in the same year".
95 - However, it is important to recall that in the case of the present operation which resulted in the gain, that is, alienation of shares held for more than 12 months, it was excluded from taxation, and thus irrelevant for purposes of calculating capital gains, to which the tax would apply.
96 - It is not compatible with the principle of legitimate expectations and legal certainty an interpretation to the effect that the rules and expectations of the Taxpayer regarding the facts subject to tax can be altered at any time, on the basis that the tax on the income of individuals is a complex fact of successive formation and because the taxable event only occurs on 31 December.
97 - It is important to make a brief exposition of the norms of relevance to the present case in force before and after the entry of Law No. 15/2010.
98 - Article 10 of the Personal Income Tax Code established until 26 July 2006 (inclusive) by means of Decree-Law No. 228/2002 of 31 October, with entry into force on 1 January 2003 the following provision:
"1 - Capital gains are gains obtained which, not being considered business and professional income, capital income or real property income, result from: […]
b) Onerous alienation of corporate interests, including their redemption and amortization with capital reduction, and other securities and, as well, the value attributed to members as a result of division which, in accordance with Article 75 of the Corporate Income Tax Code, is considered as a capital gain; […]
2 - The following are excluded from the provisions of the foregoing number:
Shares held by their owner for more than 12 months; […]
4 - The gain subject to Personal Income Tax is constituted:
By the difference between the realization value and the acquisition value, net of the portion qualified as capital income, where appropriate, in the cases provided for in items a), b) and c) of number 1; […]
11 - Without prejudice to the provisions of number 2, taxpayers must declare the onerous alienation of shares, even if held for more than 12 months, as well as the date of their respective acquisition. […]".
99 - In turn, Article 72(4) and (7) of the Personal Income Tax Code provided:
"4 - The positive balance between capital gains and losses, resulting from the operations provided for in items b), e), f) and g) of number 1 of Article 10, is taxed at the rate of 10%. […]
7 - The income provided for in numbers 4, 5 and 6 may be aggregated by choice of their respective holders residing in Portuguese territory."
100 - Law No. 15/2010 of 26 July, with its entry into force on the day following that of its publication (in accordance with Article 5), respectively on 27 July 2010, repealed number 2 of Article 10 of the Personal Income Tax Code and amended the wording of number 11 of the same article, to the following provision:
"11 - Taxpayers must declare the onerous alienation of shares, as well as the date of their respective acquisitions".
101 - Law No. 15/2010 also amended number 4 of Article 72, henceforth providing:
"The positive balance between capital gains and losses, resulting from the operations provided for in items b), e), f) and g) of number 1 of Article 10 is taxed at the rate of 20%".
102 - In light of the above normative exposition, it clearly results that the legal regime of capital gains excluded from taxation as capital gains the gains resulting from the onerous alienation of shares held by their owner for more than 12 months (Article 10(2)(a) Personal Income Tax Code, wording Decree-Law No. 228/2002, 31 October).
103 - In other words, the regime excluded, without any margin for doubt, the gain resulting from the legal transaction of the applicant and here in question.
104 - With the repeal of Article 10(2) of the Personal Income Tax Code by Law 15/2010, capital gains obtained from the onerous alienation of corporate interests even if held for more than twelve months would then come to be covered by the scope of taxation, therefore not excluded from taxation.
105 - The said Law also proceeded with the increase of the value of the rate to which the taxation of capital gains is subject from 10% to 20% (Article 72(4) of the Personal Income Tax Code).
106 - As has already been written, the regime of capital gains, in the sphere of Personal Income Tax, is established in Article 10 with the corollary of the principle of realization in capital gains, that is, taxation only occurs when the capital gain is oneously alienated, its exigibility coincides with the moment in which the taxable event is verified, that is, its onerous alienation.
107 - Within the doctrine and case law, it is considered that the taxable event of Personal Income Tax is verified on 31 December of each year, and as for the tax regime of securities capital gains, under Article 43(1) of the Personal Income Tax Code, what is taxed in capital gains is "the balance calculated between capital gains and losses realized in the same year".
108 - In the case of capital gains derived from the alienation of corporate interests, being the taxable event the moment of their onerous alienation, we are not faced with a complex taxable fact of successive formation over a year, but rather with an instantaneous taxable fact, the applicable regime being the moment in which it occurs which is relevant to determine whether these capital gains count or not for the calculation of the annual balance.
109 - Within the doctrine, as written by José Guilherme Xavier de Basto: "As regards the moment when the tax is exigible […] number 3 of Article 10 applies, which establishes, as a general rule, that gains are considered obtained at the moment of performance of the acts provided for in number 1". That is, the taxable event relates to the moment of the act that "realizes" the capital gain. It will be said, in general terms, that the relevant moment is, therefore, that of alienation of the asset in which taxable capital gains were calculated, or operation equivalent to it."
110 - The fact that an annual balance of capital gains is calculated, under Article 43(1), aims only at the determination and consolidation of the taxable matter, so that the taxpayer can choose whether or not to aggregate income from capital gains that are subject to tax, not implying that the identification of capital gains that are relevant to that balance be determined by the law in force at the end of the year. It is only with respect to this annual balance that the taxpayer has the right of choice for non-mandatory aggregation of taxable capital gains enshrined in Article 72(7) of the Personal Income Tax Code and the consequent choice for taxation at a special rate regulated in Article 72(4) of the Personal Income Tax Code, opting for the option most favorable to him, but this regime does not influence what is relevant to that balance.
111 - Should the taxpayer opt for aggregation, the general rates will be applied, depending on the total income obtained during the fiscal year, but the tax only applies to income which, when obtained, were subject to tax.
112 - Article 1(1) of the Personal Income Tax Code tells us that Personal Income Tax applies to the annual value of income from categories. The importance of the annual value of income is highlighted.
113 - However, this norm must be complemented with the regime of Article 10(1), (1)(b) and (3), Article 10 inscribed in Chapter I - Scope, Section I - Real Scope, which establishes that gains are considered obtained at the moment of performance of the acts provided for in number 1, that is, constitute capital gains the gains obtained at the moment of onerous alienation of corporate interests, which, at that moment, are taxable. This article does not limit its application to situations in which the alienation is effected exclusively by means of a sale and purchase contract.
114 - Article 43 further states, inserted in Chapter II - determination of taxable income, Section VI - Patrimonial Increments:
1 - The value of income qualified as capital gains is the corresponding to the balance calculated between capital gains and losses realized in the same year, determined in accordance with the following articles.
115 - But its number 4, which became number 6 with the entry into force of Law 15/2010, maintained its formulation, always referring to the concept "date of acquisition".
116 - What is intended with the transitions of the articles above referred to, is to clarify that the regime of capital gains considers that the moment in which the gain is considered obtained is the date of onerous alienation.
117 - A similar situation occurs in the case of autonomous taxation under the Corporate Income Tax Code, and it was in this sense that the Constitutional Court in case No. 310/2012 understood, which is transcribed:
"Thus, and in the case of the Corporate Income Tax Code, we are faced with an annual tax, in which each income received is not taxed per se, but rather the aggregation of all income obtained in a given year, the law considering that the taxable event is verified on the last day of the taxation period (see Article 8(9) of the Corporate Income Tax Code). Now, as regards autonomous taxation under the Corporate Income Tax Code, the taxable event is the very realization of the expenditure, we are not faced with a complex fact of successive formation over a year, but with an instantaneous taxable fact. This characteristic of autonomous taxation thus refers us to the distinction between periodic taxes (whose taxable event occurs in successive manner, by the passage of a given period of time, as a rule annual, and tends to repeat itself over time, generating for the taxpayer the obligation to pay tax on a regular basis) and single-obligation taxes (whose taxable event occurs instantaneously, appears isolated in time, generating on the taxpayer an obligation of payment on an occasional basis). In autonomous taxation, the taxable fact which gives rise to the tax is instantaneous: it is exhausted in the act of realization of a certain expenditure which is subject to taxation (although, the determination of the amount of tax, resulting from the application of the various taxation rates to the various acts of realization of expenditure considered, is to be effected at the end of a given taxation period). But the fact that the tax assessment is effected at the end of a given period does not transform it into a periodic tax, of successive formation or of a durable character. This operation of assessment amounts merely to the aggregation, for purposes of collection, of the set of operations subject to this autonomous taxation, to which the rate is applied to each expenditure, with no influence of the volume of expenditures effected in the determination of the rate."
118 - In this same sense, and using the argument presented in the decision of the Court referred to above (in bold), in the situation of the exclusion of Article 10(2), the Superior Administrative Court has already decided on two occasions, as decided in the decision of the Superior Administrative Court of 12/04/2013 of case 01582/13, in considering:
"in capital gains resulting from the alienation of corporate interests the tax applies to operations that occur and are exhausted instantaneously, the taxable event of the tax appearing isolated in time. However, there is an annual consolidation of capital gains and losses for purposes of determining the taxable matter, to which the special rate will apply or which will be aggregated with income from the other categories (fl. 46). decision of the Constitutional Court No. 399/10, 27 October 2010, is inapplicable to the present case insofar as, after considerations regarding the principle of non-retroactivity of tax laws: - it makes a pronouncement on a different question: application of Article 68(1) Personal Income Tax Code to all income earned in the year 2010 following amendments introduced by Law No. 11/2010, 15 June (new bracket for taxable income exceeding €150,000, subject to a rate of 45%) and by Law No. 12-A/2010 30 June (increase in the value of the rate for all brackets, including the bracket and rate introduced by Law No. 11/2010, 15 June); - does not declare the unconstitutionality of the norm contained in Article 68(1) Personal Income Tax Code, in the successive wordings conferred by the diplomas above identified."
119 - In this same sense decided the decision of CAAD in Arbitral Case No. 25/2011-T, in a question equal to the present case, decided in the following sense:
"Having the new law entered into force on 27 July, it may only apply, by force of Article 12(2) of the General Tax Code, with respect to capital gains obtained from such date, and not before. It is reiterated that, if the new law had determined its validity from the beginning of the year, Article 12(2) would cease to apply, but the law provided nothing in this sense."
120 - The said decision further states:
"Regarding the application of Article 12 of the General Tax Code:
A different question is whether, notwithstanding that such violations do not occur, the assessment respected the rules for the application of tax law in time, enshrined in Article 12 of the General Tax Code. The General Tax Code is not a Law of reinforced value, whereby its rules give way to later law in contrary sense. Any later fiscal law may establish a regime of application of law in time that departs from the regime of the said Article 12 of this law.
The question is whether such occurred in the present case. And if the answer is negative, what regime of application of law in time is to apply.
Let us see:
Article 5 of the law determines that "This law enters into force on the day following that of its publication". Having the law been published on 26 July, this means that it entered into force on the 27th of that month.
Going through the legal provisions, no norm is found that determines the application of the law to the taxation period prior to the date of its entry into force. In this context, it seems appropriate to consider the application to the case of Article 12(2) of the General Tax Code which determines that "If the taxable event is of successive formation, the law only applies to the period elapsed from its entry into force".
Being Personal Income Tax a periodic tax of successive formation, in the absence of a provision in the new law that provides otherwise, this "only applies to the period elapsed from its entry into force".
In our view, this means the application of the new law to the facts of life that are successively occurring throughout the year and which are generating income.
It is certain that from a conceptual point of view, the taxable event only occurs on the last day of the year. Part of this complex taxable event are a set of legal facts that are occurring during the taxation period, in diverse moments, and which, at the end of the taxation period, form a whole.
For these cases, if the new law does not provide otherwise, the same may only apply, with respect to Personal Income Tax, to income obtained in the period of its validity. The old law will apply to income obtained in the period of its validity.
Writes Sérgio Vasques: "The main scope of the distinction between periodic taxes and single-obligation taxes lies in the application of law in time and in the rules of expiration and prescription" (op. cit. p. 201).
And further: "Now the application with immediate effects of the law which creates or aggravates a tax has relevance that varies depending on whether this is of a periodic or single-obligation nature.
(…) an aggravation with immediate effects of Personal Income Tax or Corporate Income Tax, produced in the middle of the year, appears in a certain way retroactive, since the tax applies to income that forms between 1 January and 31 December, being the taxable event of successive formation. Article 12(2) of the General Tax Code therefore provides that (…) suggesting thus that an aggravation of Personal Income Tax or Corporate Income Tax produced in the middle of the year can only apply to the portion of income that has not yet been generated" (Ibidem p. 203. It should be noted, however, that the same Author in footnote 471, p. 294 makes critical observations to the legal solution).
Also tells us António Lima Guerreiro that "The taxable event, when durable, only completes at the end of the taxation period. But this nature of the taxable event does not prevent that it can be fragmented or decomposed, for purposes of application in time, of the tax norms, as of its development. There is then, place to a true taxation "pro rata temporis".
Thus, in case of taxable events of successive formation such as income, the old law applies to income generated until the entry into force of the new law and the new law to subsequent income" (General Tax Code Annotated, Reis dos Livros, 2000, p. 91).
In the same sense Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa (General Tax Code Annotated and Commented, Encontros da Escrita Publishing, 2012, p. 130) state that "Number 2 seems to adopt the position of A. Xavier regarding 3rd Degree retroactivity" (as is known, Alberto Xavier sustains at pages 201-202 of his Manual of Tax Law, the thesis of division of income pro rata temporis, being considered by the doctrine that his position inspired the solution of Article 12(2) of the General Tax Code).
Against this solution objections of practicability have been raised. Manuel Faustino writes, on this point, that "(…) the application of legislative amendments to Personal Income Tax pro rata temporis, perhaps defensible in light of number 2 of Article 12 of the General Tax Code, is, for us, a question that does not even arise, not only by impracticability – which alone would already be sufficient – but, substantively, because the solution in question is not completed, legislatively, with the mode of safeguard of the principle, which we consider preeminent, of annual progressivity of the tax, as a result of the provisions of Article 104(1) of the Constitution" (Journal of Public Finances and Tax Law, Year III, No. 3, Autumn, p. 208).
Manuel Henrique de Freitas Pereira states "It is considered that perhaps it was intended to adopt a pro rata temporis solution", but also points out problems of applicability: "This solution will not fail to create problems of applicability, which, for example, in the matter of taxation of corporate profits can only be resolved in many cases through an intermediate determination of results (…) the best solution is always for the law to define precisely the period of taxation to which it is to apply, which should be only the period which begins after its entry into force" (Tax Law, Almedina, 2005, p. 199).
Américo Fernando Brás Carlos also dealing with Article 12(2) of the General Tax Code, writes: "Take as an example the case of the Corporate Income Tax Code. Does that norm mean that, entering into force, in the middle of the fiscal year, an amendment to the rules for determining the taxable matter, or the rate of this tax, can the new law apply to the portion of the current fiscal year that remains? Or does it mean, on the contrary, that the new law will apply only to the next fiscal year or economic period?
The doctrine seems to have adopted the first interpretation. It should, however, be stated: (…)
A pro rata temporis taxation reflected, in the same taxation period, in the determination of one part of the tax under the old law and another part under the new law, may, at least in some cases, be impracticable.
Note, however, that, beyond the doubts raised by the provision of Article 12 of the General Tax Code, this is, to a large extent, irrelevant, because: (…)
A law which, for example, amends the Corporate Income Tax rate in the course of the taxation period and orders it to apply to its entirety, tacitly repeals number 3 of Article 12 of the General Tax Code, for the reasons indicated regarding the principle of legality" (Taxes, General Theory, Almedina, 2006, pp. 126-127)
Already António Carlos dos Santos pronounces himself in the following terms: "for my part, as I have publicly advocated in various interventions, I favor a pro rata temporis solution in all domains. I do not believe in the absolute impracticability of this solution, either in its administrative or computer impracticability, or in its legal impracticability with respect to brackets and rates, although I recognize the difficulty of its implementation in a very short term" (Journal of Public Finances and Tax Law, Year III, No. 4, Winter, p. 300)
There will thus be difficulty in the application of Article 12(2) of the General Tax Code but it does not seem, then, that the impracticability of its application has been demonstrated, at least in all cases. It seems to us that, regarding such difficulty or impracticability, it will be incumbent upon the legislator to formulate such judgment case by case (establishing specific provisions for transitional law), or else to formulate a global negative judgment on the norm and repeal it, which to date has not happened.
What is not acceptable, in our view, is that the impracticability of the law is invoked so that a solution more advantageous to the tax creditor than that which results from it is reached. As correctly writes António Carlos Santos: "What would indeed be strange is that the same State which, over a decade, did nothing to create the instruments necessary to put into practice the pro rata temporis principle, now comes to benefit from its own non-compliance" (Ibidem p. 300)
Moreover, in the present case, it is manifest, in our view, that such impracticability does not exist. There is no difficulty in placing in time the patrimonial increase obtained as it results from the alienation of the assets (Article 10(1)(b) of the Personal Income Tax Code), which is dated (of 21.04.2010), nor is there any question that arises regarding the principle of progressivity of the tax given that the consequence of the application of Article 12(2) of the General Tax Code is, in this case, the non-consideration of capital gains in question for purposes of assessment of the tax.
This does not mean that the distinction is not made between the taxable fact with the obtaining of the gain which is only calculated at the end of the year (and which in the case of capital gains corresponds to its balance with the losses). What happens is that Article 12(2) gives relevance in its specific temporal character to the legal facts that contribute to the formation of the complex fact of successive formation which is the taxable fact in Personal Income Tax (which only becomes complete at the end of the year), imposing, or not, its consideration for purposes of determining the tax, depending on the date of its obtaining.
Having the new law entered into force on 27 July, it may only apply, by force of Article 12(2) of the General Tax Code, with respect to capital gains obtained from such date, and not before. It is reiterated that, if the new law had determined its validity from the beginning of the year, Article 12(2) would cease to apply, but the law provided nothing in this sense."
121 - In this same sense decided the decision of CAAD in Arbitral Case No. 135/2013-T:
"That is, Article 12(2) of the General Tax Code orders that, in periodic taxes (i.e., with respect to taxable events of successive formation), the taxation period be divided, applying the old law to the taxable events occurring before the legislative change and the new law to subsequent ones.
Note that this provision arose at a moment much later than the entry into force of the present taxes on income (its principal field of application), and the legislator of the General Tax Code could not ignore the consequences which, in these taxes, the new provision would produce.
"The departure from this legal provision could, eventually, happen if it resulted in violation of constitutional principles or norms.
Now, the provision in question is what best gives expression to fundamental principles of our legal-constitutional order, such as the principle of security in taxation, an essential dimension of the principle of legitimate expectations, inherent to the idea of a rule of law state.
Legal norms governing taxation must ensure that whoever performs an act potentially generating a tax obligation may be "certain" of the tax consequences resulting from it. The first condition for this is, obviously, that the law regulating such obligations be known, be the one in force at that moment.
The thesis that the taxable event, in periodic taxes, only occurs on the last day of the year, has as implicit consequence the acceptance of a certain degree of retroactivity of tax law (the so-called improper or 3rd degree retroactivity).
We know that such "degree" of retroactivity is considered constitutionally admissible by our case law. But for such retroactive application to exist it is necessary that there be a legislative provision that requires it.
Now, this does not happen in the present case, because the general rule contained in number 2 of Article 12(2) of the General Tax Code is aimed, precisely, at preventing situations of retroactivity of tax law (although "moderated"), whenever the legislator does not specially determine otherwise.
Article 12(2) of the General Tax Code is, therefore, a norm entirely in accordance with the constitutional principles that govern taxation, it is even, the one, in this specific question, that will best give expression to such principles, by preventing the occurrence of situations of retroactive application of tax law.
"There is, admittedly, doctrine that, with well-founded arguments, questions Article 12(2) of the General Tax Code for the difficulties that its practical application may raise, by obligating the division of the taxation period into as many sub-periods as there are amendments to the norms of scope and determination of taxable matter that oblige it.
We can accept that the norm may, eventually, be set aside for violation of the principle of practicability, which – in our view - has a constitutional dimension.
However, such objections do not occur in the present case:
– although the taxable matter (mobile securities capital gains) to be taxed in Personal Income Tax corresponds to the balance of capital gains and losses realized by the taxpayer over the year, the fact is that, in the present case, there was only one alienation in 2010: that is, the taxable event, although in abstract of successive formation, "was exhausted" in a single transaction.
- as capital gains obtained from the alienation of corporate interests are subject to autonomous taxation (at a proportional rate, with no regard to the elements of personalization which, in principle, should be present in the taxation of all income, if Personal Income Tax were a true unified tax – we are faced with one of the translations of the dual character of this tax), no difficulties arise regarding the other operations which the assessment (understood in a broad sense) of the tax implies, when made with observance of the provision of number 2 of Article 12 of the General Tax Code.
There are therefore, also, no practical difficulties that prevent that, in compliance with the provision of number 2 of Article 12 of the General Tax Code, the (non) subjection to tax of the gains obtained by the Applicants on 24/04/2010 be made by application of the law in force at that date.
Making the application of the provision (Article 12(2) of the General Tax Code) impossible in cases such as the present would amount to "ignoring" its existence, which is forbidden to any Court.
In summary, it is understood that nothing prevents the application of the provision of number 2 of Article 12 of the General Tax Code, the general rule therein contained, which – as stated – the legislator understood not to set aside in Law No. 15/2010."
122 - Faced with everything that has been set out and based on the case law and doctrine cited above, we can only draw the conclusion that the capital gain of the case sub judice is excluded from taxation by application of Article 10(2) of the Personal Income Tax Code in force at the date of the contract for sale and purchase of the applicant.
123 - Only capital gains regarding transactions occurring from 27.7.2010 onwards may be taken into account for the calculation of the balance between capital gains and losses for the period elapsed from that date, since those prior are excluded.
124 - And only this subsequent balance may be taxed at the rate of 20%, with the balance relating to the period prior to that date being taxed in light of the rules in force before the entry into force of the new law – that is, excluding from taxation the alienation of shares held by their owner for more than 12 months and taxing the alienation of shares held by their owner for less than 12 months at the rate of 10%.
125 - It is further stated that the amendments introduced by Law No. 15/2010 of 26 July, in force on 27.7.2010, did not provide for any special provision regarding its application in time, from which it is concluded that the legislator did not intend to retroactively apply the repeal of the tax exemption provided for in Article 10(2) of the Personal Income Tax Code regarding capital gains.
126 - Thus the AT is prohibited from retroactively applying the new regime, being required to respect the general rules provided for in Article 12 of the General Tax Code.
127 - This uncertainty regarding what is subject to taxation is clearly what the Constitution of the Portuguese Republic intended to avoid by enshrining the fundamental principles of the rule of law state, specifically the principle of security, legal certainty and legitimate expectations, fulfilled in the fundamental principle of tax law, of non-retroactivity of tax law.
128 - There is in the present case a clear retroactive application of tax law to facts occurring before its entry into force.
129 - Regarding the secondary issue raised by the Respondent, regarding non-compliance with the requirements of Article 43(3) and (4) of the Personal Income Tax Code and Decree-Law 372/2007 of 6 November, by virtue of the shares sold relating to a micro or small enterprise, the Applicants did not submit the IAPMEI Certification attesting the status of micro or small enterprise, and thus would have to consider 100% of the value of the result of capital gains and not 50%.
130 - Regarding this issue, it would only arise if the legislation to apply to this capital gain were Law No. 15/2010 of 26 July, for this repeals the exclusion of Article 10(2), regarding the sale of shares held for more than 12 months.
131 - And as this tribunal understands that the said capital gains apply the regime in force on 12 March 2010, date of transmission of the shares, which still provided for the exclusion, the sale of the shares falls within the exclusion, regardless of whether or not it is a micro enterprise.
132 - In this sense, we conclude that the amendments introduced by Law No. 15/2010 of 26 July to the tax regime of mobile securities capital gains apply only to taxable events (onerous alienations) occurring on a date after that of its entry into force, that is, 27 July 2010, whereby until that date, the said alienations of shares held for more than 12 months were excluded from taxation, as established in Article 10(2)(a) of the Personal Income Tax Code.
133 - It is very important to take into account that this capital gain resulted from a single legal transaction, which terminated its effects with the transmission of possession, the transaction does not extend over time.
134 - At the time when the Applicants received the price and transmitted the shares, the legal regime expressly and without any margin for doubt, established that the gain resulting from this legal transaction was excluded from taxation.
135 - Permitting the repeal, during a fiscal year, of an exemption in the capital gains regime, at any time during the year, with application to facts already occurred since the beginning of the year, is a clear violation of the constitutional principle of legal certainty.
136 - The non-application of the repeal to prior situations results from Articles 12(1) of the General Tax Code and Article 12 of the Civil Code, because capital gains from corporate interests are verified with their onerous alienation, and are not a successive and complex fact over the fiscal year, but rather an instantaneous taxable fact, which is exhausted at the moment of its realization.
137 - Having the new law entered into force on 27 July, it may only apply, by force of Article 12(2) of the General Tax Code, with respect to capital gains obtained from such date, and not before. Had the new law determined its validity from the beginning of the year, Article 12(2) would cease to apply, but the new law provided nothing in this sense.
138 - By all the above, it is decided that Law No. 15/2010 of 26 July is not applicable to the transaction and capital gains in the present case, the assessment in question is illegal for violating Article 12(2) of the General Tax Code, the AT having retroactively applied the amendments introduced by Law No. 15/2010 of 26 July, thus the assessment act in question is tainted with the vice of violation of law, whereby, in consequence, its annulment is determined, with the legal consequences thereof.
139 - Being the Personal Income Tax assessment illegal, the assessment of compensatory interest is also illegal, which presupposes the existence of a tax debt and is assessed together with it (Article 35(1) and (8) of the General Tax Code).
H - DECISION
Accordingly, given all the above, this Arbitral Tribunal decides as follows:
i. To uphold the application for a declaration of illegality of the Personal Income Tax assessment and compensatory interest No. 2014 …, which fixed total tax payable of €156,407.71, due to error on matters of law, and to annul that act.
ii. The value of the case is fixed at €156,407.71 having regard to the economic value of the case determined by the value of the tax assessment being challenged, and in accordance therewith, the costs are fixed in the respective amount of €3,672.00 (three thousand seven hundred and seventy-two euros), to be borne by the respondent in accordance with Article 12(2) of the Tax Arbitration Regime, Article 4 of the Regulations for the Administrative Dispute Resolution Procedure and Table I attached to the latter. – number 10 of Article 35, and numbers 1, 4 and 5 of Article 43 of the General Tax Code, Articles 5(1)(a) of the Regulations for Administrative Dispute Resolution Procedure, 97-A(1)(a) of the Administrative Procedure Code and 559 of the Code of Civil Procedure).
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Lisbon, 10 February 2015
The Arbitrators
Jorge Lopes de Sousa
(arbitrator-president)
Paulo Ferreira Alves
(arbitrator-member)
Filomena Salgado de Oliveira
(arbitrator-member)
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