Process: 68/2015-T

Date: October 16, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision from CAAD (Process 68/2015-T) addresses the critical issue of property valuation for IRC (Corporate Income Tax) purposes when actual transaction prices differ from patrimonial tax values (VPT). The claimant company challenged an additional IRC assessment for 2010, arguing that property sales should be taxed based on prices established in 1978 and 1983 promise-to-sell contracts, rather than 2010 tax values. The company invoked Article 139 of the IRC Code, which permits taxpayers to prove actual transaction prices differ from tax values, along with the fundamental principle that IRC should be based on real profits under Article 104(2) CIRC. The Tax Authority defended the assessment, asserting the company failed to properly request the Article 139 procedure and that CAAD lacked jurisdiction over such matters. In preliminary rulings, the arbitral tribunal rejected the Tax Authority's jurisdictional challenges, clarifying that the dispute concerned the legal application of valuation rules, not a challenge to the tax valuation methodology itself. The tribunal distinguished between the company's legal grounds—whether actual contractual prices should apply—and mere arguments about valuation amounts. Critically, the tribunal found the company was not asking it to substitute for the Tax Authority in conducting Article 139 procedures, but rather to determine whether such procedures were properly invoked and whether the law requires using actual prices. The tribunal deferred final ruling on whether the Article 139 procedure was adequately initiated, as this determination required assessment of factual evidence. This decision establishes important precedent regarding CAAD's jurisdiction over IRC assessments involving property transactions and the interplay between actual transaction values and patrimonial tax values.

Full Decision

ARBITRAL DECISION

The arbitral tribunal functioning with a sole arbitrator constituted at CAAD – Administrative Arbitration Centre pursuant to the legal regime established by Decree-Law No. 10/2011 of 20 January[1], to which the arbitrator on the Centre's list Nuno Maldonado Sousa was appointed by the respective Deontological Council, hereby sets out his arbitral decision.

1.1. Report

1.2. Constitution of the arbitral tribunal

A…, S.A., with registered office at …, parish of …, municipality of …, tax identification number …, filed a request for constitution of the arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of the RJAT and Articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, with the Tax and Customs Authority being the respondent[2].

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 06-02-2015 and notified to the Tax and Customs Authority on 13-02-2015.

Pursuant to the provisions of Article 6, No. 1 and Article 11, No. 1, subsection b) of the RJAT, the Deontological Council appointed the signatory as arbitrator of the sole arbitral tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of such appointment on 30-03-2015. In compliance with the rule contained in Article 11, No. 1, subsection c) of the RJAT, the arbitral tribunal was constituted on 16-04-2015.

1.3. The claimant's request

In its Initial Petition, the claimant petitioned for the annulment of the additional corporate income tax assessment No. 2014 …, dated 01-12-2014, relating to the financial year 2010, as well as the respective compensatory interest.

The claimant grounds its request on factual grounds, sustaining that the former owner of its property promised to sell in 1978 and in 1983, at prices adjusted to the time and not susceptible to update, three urban properties, the deeds of the promised contracts being executed in 2010, respecting the conditions promised. In that financial year it ascertained the results of the transaction, which is properly documented and it was based on the values contained in the contractual documents that it prepared its financial statements and it was also based on them that it paid the corporate income tax (IRC) for the financial year. From a legal standpoint, the claimant asserts that the transaction should be taken into account for the calculation of tax at its actual values, since in addition to the general rule that elects actual profit as the basis for calculating the tax (Article 104-2 CIRC[3]), the provisions of Articles 139 and 64 of the CIRC regulate it particularly in that sense. It concludes thereby that the official assessment by the Tax Authority made on the basis of the tax value of the properties is illegal.

1.4. The position of the Tax Authority

The Tax and Customs Authority replied sustaining the lawfulness of the assessment and the lack of merit of the request, affirming that in this specific case the IRC assessment must take into account the tax value because "the claimant did not request the opening of the procedure provided for in Article 139 of the IRC Code, which would allow it to prove that the prices actually practised in the transfers of the properties in question were lower than the tax values that served as the basis for the IMT assessment." Furthermore, the tax value was already previously established, without disagreement from the claimant. It concludes by defending its absolution from the request.

1.5. Proceedings and arguments

The claimant filed documents in the record and the Tax Authority filed the administrative file. On 14-07-2015 the meeting provided for in Article 18 of the RJAT was held and the witnesses listed by the claimant were heard.

The claimant and the Tax Authority agreed in written form on the arguments, which they presented, reiterating the positions assumed in the pleadings.

1.6. Interlocutory matters

1.6.1. Exception of lack of jurisdiction of the tribunal

The Tax Authority raises the exception of lack of jurisdiction of this Arbitral Tribunal on the grounds that the grounds invoked by the claimant are not susceptible to being reviewed here, namely:

(i) The claimant's disagreement with the tax value, as a parameter for assessing the IRC;

(ii) The opening by the claimant of the procedure for proof of the effective price in the transfer of properties, provided for in Article 139 of the CIRC (Articles 25-31 R-AT[4]).

It does not appear that the Tax Authority is correct, as can be inferred from the summarization of the fundamental elements characterized in the previous section. It is necessary to distinguish between the arguments used by the parties and the grounds on which they anchor their positions. As is clear understanding, not all arguments put forward by the parties are grounds of their position; the grounds converge finally in the cause of action[5]. Arguments, as this Arbitral Tribunal understands them, are the elements that the parties bring to the record to better clarify or make convincing their assertions or to illustrate circumstances surrounding the situation.

The cause of action of the claimant consists, in its factual component, of the carrying out of the transaction of sale of the properties for a determined price and the carrying out of the procedure for proof of that price and in its normative component, the legal requirement that these real values serve as the basis for calculating the tax payment (Article 139-2 CIRC). In this regard see in particular Articles 4, 5, 15, 19 and 20 of the IP[6].

It is true that the claimant comments on the valuation of the properties which it considers "quantitatively exaggerated" (Article 16 IP) but this comment does not serve as the basis for the action; it appears only as an assessment in a particular line of argument. Its disagreement does not appear to be with the tax value itself but rather with the adequacy of this value to serve as the basis for calculation in the concrete situation, since it "does not take into account elements underlying the transaction".

It is not apparent that the use of this argument can constitute any claim for revision of the tax value on the part of the claimant, so the exception fails on this point.

In the second line presented, the Tax Authority raises the question of whether this Arbitral Tribunal is incompetent to assess the proof that "the price actually practised was lower than the tax value" (Article 24 R-AT).

Neither can this Tribunal locate this assertion within the grounds of the action. The Tax Authority raises the problem in Article 24 R-AT and partially reproduces the assertion that the claimant makes in Article 19 of the IP, concerning the provision of Article 139 of the CIRC. The claimant neither asks nor suggests that this Arbitral Tribunal substitute itself for the Tax Authority in the procedure for proof of the effective price, a situation in which the question of lack of jurisdiction could then arise; it merely sets out its interpretation of the rule.

As the constituent elements of the exception are not present, it must fail, as is hereby decided.

1.6.2. Condition of impugnability of the assessment

The Tax Authority further invokes that the impugnation of the assessment made in these proceedings depends on prior opening by the claimant of the procedure for proof of the effective price in the transfer of properties (Article 139-7 CIRC), which it states was not done.

It is not possible to rule on this question for now as its assessment depends on the determination of the factual matters, especially as the claimant asserts having proposed this procedure (Articles 19 and 20 IP). This question is therefore relegated to a later moment.

1.6.3. Other procedural requirements and nullities

The arbitral tribunal was regularly constituted and has jurisdiction ratione materiae according to the rules of Article 2, No. 1, subsection a) of the RJAT.

The Parties possess legal personality and capacity (that of the Tax Authority being pursuant to the regime contained in Article 4, No. 1 of the RJAT and Article 10, No. 2, of the same instrument and Article 1, subsection a) of Ordinance No. 112-A/2011, of 22 March), are legitimated and are regularly represented.

There are no nullities that taint the proceedings.

Thus, there is no obstacle to the tribunal's examination of the merits of the case, so it is necessary to decide.

1.7. Factual matters

1.7.1. Facts considered proved

The following facts were established in these proceedings:

A. On a date subsequent to 27/03/1978, 18/01/1978 and 17/05/1978 the claimant acquired urban properties in the parish of …, municipality of …, respectively registered in the respective tax roll under articles …, … and …, being their owner at the beginning of the financial year 2010 [Article 1 IP and AP[7], pages 10-12].

B. On 27-03-1978 the property registered in the tax roll under article … of the parish of …, Municipality of …, was promised to be sold by its former owner to B… for the price of 30,000$00 escudos [Article 4 IP and its document 1].

C. On 18-01-1978 the property registered in the tax roll under article … of the parish of …, Municipality of …, was promised to be sold by its former owner to C… for the price of 40,000$00 escudos [Article 4 IP and its document 2].

D. On 31-05-1978 the property registered in the tax roll under article … of the parish of …, Municipality of …, was promised to be sold by its former owner to D…, for the price of 16,000$00 escudos [Article 4 IP and its document 3].

E. The claimant alienated in 2010 the properties referenced, located in the municipality of …, with the following values having been declared in the deeds [Article 15 IP; Article 40 R-AT, AP, page 10]:

Tax Roll Article Date of Alienation Value Declared in Deed
… 21-09-2010 300.00 €
… 10-11-2010 400.00 €
… 21-09-2010 300.00 €

F. The properties were valued for IMI purposes, having been assigned the following tax values [Article 41 R-AT, AP, page 11].

Tax Roll Article Tax Value Assigned
… 21,140.00 €
… 14,830.00 €
… 26,430.00 €

G. Between the values contained in the deeds and the tax values of the properties, the following positive differences result, totalling 61,400.00 € [Article 42 R-AT, AP, page 11].

Tax Roll Article Positive Difference between Declared Values and Tax Values
… 20,840.00 €
… 14,430.00 €
… 26,130.00 €

H. The positive difference between the declared values and the tax values was not added by the claimant to field 745 of table 07 of model form 22, relating to the financial year 2010, the year in which the assets were alienated [Article 43 R-AT, AP, page 12].

I. The claimant presented to the Tax Authority the trial balance and the extract of account 68.7.1.2.1, relating to the financial year 2010, elements which it requested [Articles 21 and 22 IP; Articles 44 and 45 R-AT, AP, page 11].

J. The transactions in question were accounted for at the values contained in the deeds of the sales [Article 29 IP].

K. On the basis of a dispatch of 28-11-2014 notified to the claimant, the Tax Authority corrected the tax return so as to record in table 07 the difference verified between the tax value of the properties and the corresponding deed values, "in order to comply with the provisions of subsection a) of No. 3 of Article 64 of the CIRC" [AP, pages 4-6].

1.7.2. Facts considered not proved

The claimant failed to prove that it presented the procedure for proof of the effective price in the transfer of properties, as it alleges in Articles 19 and 20 of the IP. It should be noted that this assertion by the claimant was expressly disputed by the Tax Authority in Articles 25, 28 and 31 of the R-AT, where it peremptorily declares that "the claimant did not request the opening of the procedure provided for in Article 139 of the IRC Code".

The claimant produced no evidence whatsoever regarding this factual allegation and the elements contained in the record do not point in the direction it claims. Indeed, in the AP attached to these proceedings (page 12) it was already stated that "the taxpayer also did not make use of the prerogative provided for in Article 139 of the IRC Code". At that time it was emphasized that this procedure should have been instituted by means of a request addressed to the competent finance director.

No other facts of interest for the decision of the case were alleged.

1.7.3. Reasoning for the facts proved

The tribunal's conviction was based on the documentary evidence contained in the record and on the position taken with regard to each fact by the Parties in the pleadings, duly identified. It was also based on the testimony of witness E…, as concerns fact "J".

1.8. The law

By the way this impugnation is configured, the basic question consists in knowing whether proof of the effective price in the transfer of properties, proposed pursuant to Article 139-3 of the CIRC is a prior and indispensable element to bringing this impugnation. If the answer is negative (if the procedure does not have to be done) then it is necessary to examine the substantive question raised by the claimant, which consists in knowing whether, if it proves in this proceeding that the alienation carried out had as its effective price that which was declared in the deeds, should that be the value relevant for IRC assessment, and consequently the correction made on the basis of the tax value of the alienated properties is illegal.

As the claimant asserts, the IRC is indeed subject to the general principle of taxation of actual income enshrined in Article 104-2 of the CRP[8]. In accordance with this principle the tax law is prevented from creating conclusive presumptions, establishing that it is always possible to produce contrary proof (Article 73 LGT[9]). The admission of rebuttal in any case is the manner that the law establishes to enable the taxpayer to be taxed at actual value, setting aside values that have been presumed. It is ultimately the way of harmonizing the existence of presumptions that tax law establishes with the cited constitutional principle.

Consider the situation in these proceedings more closely. For onerous transfers of real rights over immovable property, the law establishes a presumption for cases in which the value contained in the contract is lower than the final VPT[10] of the property, in Article 64-2 of the CIRC. This provision establishes that in situations where the value contained in the contract is lower than the VPT, this – the higher one – should be considered in determining taxable profit.

As already mentioned, this presumption is rebuttable, i.e., admits contrary proof, although that proof is not free, and must follow its own procedure. For this purpose the law designed its own system for rebutting that presumption. It did so in Article 139, Nos. 3 to 6, establishing in these provisions and complementarily in the regulation contained in Articles 86-4, 91 and 92 of the LGT, the respective discipline. It thus seems clear that the law is not satisfied with the general means of proof for the taxpayer to demonstrate that the effective price was lower than the VPT. Instead, it chose to create a regulated procedure to overturn the presumption, whose proceedings are properly structured in the LGT and which passes through the request for its opening, indication of an expert by the taxpayer, appointment of an expert by the Tax Authority, the appointment of an independent expert, meeting of experts, contradictory debate between the experts and decision by agreement or by the competent body (Articles 91 and 92 LGT).

It is a settled point that the claimant did not initiate this procedure and the law is not satisfied with the sending of elements to the Tax Authority, nor in the manifestation of willingness to allow access to banking information; the law requires that a formal procedure be initiated, with submission of a request addressed to the competent finance director (Article 139-3 CIRC) and following the procedure stipulated in Articles 91, 92 and 84-3 of the LGT, with the necessary adaptations (Article 139-5 CIRC).

In line with the establishment of its own procedure for rebutting the presumption, the law also fixed the impossibility of impugning assessments made on the basis of the price presumption, whenever the taxpayer has not resorted to the established procedure. It is thus that the provision of Article 139-7 of the CIRC subordinates the possibility of impugning the tax assessment made on the basis of the presumption established in Article 64-2 CIRC, to the prior carrying out of the procedure. In other words; the taxpayer can only impugn corrective assessments made on the basis of the presumption established in Article 64-2 of the CIRC if it previously carries out the procedure for proof established in Article 91 CIRC.

The procedure for proof of price thus constitutes a condition of impugnability of the assessment made on the ground of the presumption of Article 64-2 CIRC. Without it having existed the impugnation cannot be examined[11].

Thus it is necessary to absolve the Tax Authority of the instance (Article 278-1-e CPC, pursuant to Article 29-1-e RJAT).

1.9. Decision

Considering the factual and legal elements collected and set forth, the Arbitral Tribunal decides to grant the dilatory exception of impugnability of the correction to the IRC assessment made on the basis of the presumption established in Article 64-2 of the CIRC, without the taxpayer having previously carried out the procedure for proof established in Article 91 CIRC.

The claimant is condemned to pay the costs, which shall be determined in the appropriate place.

1.10. Value of the proceedings

In accordance with Article 306-2 of the CPC, pursuant to Article 29-1-e) of the RJAT and Article 97-A, No. 1-a) of the CPPT pursuant to Article 3-2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at 18,004.49 €.

1.11. Costs

The costs shall be borne by the party that caused them, understanding that the unsuccessful party causes them (Articles 527-1 and 2 CPC). In these proceedings and considering the cited rule, responsibility for costs lies with the claimant, as the unsuccessful party.

Pursuant to Article 22-4 of the RJAT, the amount of costs is fixed at 1,224.00 €, which shall be borne by the claimant, pursuant to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings.

Lisbon, 16 October 2015

The Arbitrator,

(Nuno Maldonado Sousa)

[1] In this decision designated by the common abbreviated form "RJAT" (Legal Regime for Arbitration in Tax Matters).

[2] In this decision designated by the abbreviated form "Tax Authority" as is common usage.

[3] In this document the acronym CIRC is used to designate the Corporate Income Tax Code.

[4] In this document the abbreviation "R-AT" is used to designate the Response presented by the Tax Authority.

[5] The concept of cause of action from Mariana França Gouveia, The cause of action in declaratory actions, Almedina, Coimbra, 2004, p. 529, is adopted, for whom causa petendi is composed of the "set of factual and legal grounds of the claim alleged by the plaintiff. It is integrated by the rule or rules alleged, the main facts alleged as the concrete substratum of these rules and the instrumental facts alleged as the concrete substratum of these main facts".

[6] In this document the acronym "IP" is used to designate the Initial Petition presented by the claimant.

[7] In this document the acronym "AP" is used to designate the administrative file joined by the Tax Authority to these proceedings.

[8] In this document the acronym "CRP" is used to designate the Constitution of the Portuguese Republic.

[9] In this document the acronym LGT is used to designate the General Tax Law.

[10] In this document the acronym "VPT" is used to designate the tax value.

[11] See in this regard the Judgment of the Supreme Administrative Court of 06-12-2013, case 0989/12 [Francisco Rhotes], accessible at www.dgsi.pt.

Frequently Asked Questions

Automatically Created

What is the role of Article 139 of the IRC Code in determining taxable property values?
Article 139 of the IRC Code establishes a specific procedure allowing taxpayers to prove that actual transaction prices in property transfers differ from the patrimonial tax values (VPT). When property is sold, the Tax Authority may use VPT as the basis for IRC calculations, but Article 139 permits taxpayers to demonstrate that real prices were lower. This procedure must be properly invoked and documented. The provision balances tax administration efficiency with the fundamental principle that IRC should be based on actual economic results, not presumed values. In this case, the company argued it properly followed Article 139 requirements to use 1978 and 1983 contractual prices rather than 2010 tax values.
Can the CAAD tax arbitral tribunal rule on IRC additional assessments based on property tax valuations?
Yes, the CAAD arbitral tribunal ruled it has jurisdiction to review IRC additional assessments based on property tax valuations. The tribunal distinguished between challenging the tax valuation methodology itself (which may fall outside its competence) and challenging the legal application of valuation rules for IRC purposes (which is within its jurisdiction). The tribunal clarified that when a taxpayer disputes whether actual transaction prices or tax values should apply under Article 139 CIRC, this constitutes a reviewable legal question about tax law application, not an impermissible challenge to property valuation. The tribunal rejected the Tax Authority's jurisdictional exception, holding that determining whether Article 139 procedures were properly invoked and whether the law requires using actual prices falls within CAAD's arbitral competence.
How does the real profit principle under Article 104(2) of the Portuguese Constitution apply to IRC property transactions?
Article 104(2) of the IRC Code establishes the fundamental principle that corporate income tax should be based on real profit (lucro real), meaning actual economic results rather than presumed or estimated values. The claimant invoked this principle to argue that IRC on property transactions must reflect actual transaction prices documented in contracts, not patrimonial tax values. This principle supports the position that when properties were sold pursuant to 1978 and 1983 promise-to-sell contracts at prices established then, those actual contractual prices should determine taxable income, consistent with economic reality. The real profit principle underpins Article 139 CIRC, which operationalizes this concept by allowing proof that actual prices differ from tax values, ensuring IRC reflects genuine economic transactions.
What happens when the sale price of a property differs from its patrimonial tax value (VPT) for IRC purposes?
When the sale price of a property differs from its patrimonial tax value (VPT), Article 139 of the IRC Code provides a mechanism for resolution. By default, the Tax Authority may use VPT as the basis for IRC calculations. However, taxpayers can invoke the Article 139 procedure to prove that actual transaction prices were different (typically lower) than VPT. This requires proper documentation and timely request to the Tax Authority. If the procedure is not invoked or the taxpayer fails to prove actual prices, tax values generally apply. The procedure recognizes that VPT may not reflect real market conditions or specific contractual arrangements (like promise-to-sell contracts executed years earlier). In this case, the dispute centered on whether the company properly invoked Article 139 to use 1978/1983 prices instead of 2010 VPT, with the tribunal deferring final determination pending factual assessment.
How did the arbitral tribunal decide on the use of 1978 and 1983 promised sale prices for the 2010 IRC assessment?
The excerpt provided contains only the preliminary procedural rulings, not the final decision on the merits. The arbitral tribunal addressed jurisdictional challenges but explicitly deferred ruling on the substantive question of whether the 1978 and 1983 promised sale prices should apply for the 2010 IRC assessment. The tribunal held it needed to first determine factual matters, particularly whether the company properly invoked the Article 139 procedure for proving actual prices. The company asserted it had proposed this procedure (Articles 19-20 of Initial Petition), while the Tax Authority claimed it had not. The tribunal scheduled witness hearings and document review to establish facts before ruling on whether the Article 139 requirements were met and whether the historical contractual prices could legally serve as the basis for IRC calculation instead of 2010 patrimonial tax values. The final substantive decision would be issued after this evidentiary phase.