IRS Capital Gains on Share Transfers & Equality Principle – CAAD Arbitration 703/2014-T

ARBITRATION DECISION

The Arbitrators Counsellor Jorge Lopes de Sousa (appointed by the Ethics Council of CAAD), Dr. José Alberto Pinheiro Pinto and Prof. Doctor Américo Brás Carlos, appointed respectively by the Claimant and the Respondent, to form the Arbitral Court, constituted on 29-01-2015, agree as follows:

1. Report

A..., NIF..., and B..., NIF..., both residents at Rua..., ..., in...-... PORTO, filed a petition for constitution of a collective arbitral tribunal, under the terms of the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the PORTUGUESE TAX AND CUSTOMS AUTHORITY (AT) is the Respondent.

The Claimants seek the annulment of the decision dismissing the hierarchical appeal they filed following the decision dismissing the administrative claim filed against the tax act embodied in the assessment of Personal Income Tax (IRS) no. 2011..., relating to the year 2007, as well as the annulment of this assessment.

The Claimant appointed as Arbitrator Mr. Dr. José Alberto Pinheiro Pinto, pursuant to article 6, no. 2, paragraph b) of the RJAT.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Portuguese Tax and Customs Authority on 03-10-2014.

Under the terms of paragraph b) of no. 2 of article 6 and no. 3 of the RJAT, and within the deadline provided for in no. 1 of article 13 of the RJAT, the head of the Tax Administration designated as Arbitrator Mr. Prof. Doctor Américo Brás Carlos.

In accordance with nos. 5 and 6 of article 11 of the RJAT, the President of CAAD notified the Claimant of the designation of the Arbitrator by the head of the Tax Administration on 17-11-2014, and notified the Arbitrators appointed by the parties to designate the third Arbitrator who assumes the status of Presiding Arbitrator.

The Ethics Council designated Mr. Counsellor Jorge Lopes de Sousa as presiding arbitrator on 07-01-2015, who accepted the designation within the applicable legal deadline.

Under the terms and for the purposes of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 07-01-2015.

Thus, in accordance with the provision of no. 7 of article 11 of the RJAT, after the deadline provided for in no. 1 of article 13 of the RJAT had elapsed without the Parties making any statement, the Collective Arbitral Tribunal was constituted on 29-01-2015.

The Portuguese Tax and Customs Authority submitted a Response, defending the lack of merit of the petition for arbitral pronouncement.

By order of 09-03-2015, it was decided to dispense with the meeting provided for in article 18 of the RJAT and that the proceedings continue with successive written submissions.

The Parties submitted their arguments.

The arbitral tribunal was regularly constituted and is competent.

The parties possess legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not suffer from nullities and no exceptions were raised.

Following the submissions, a judgment was issued that was then appealed to the Constitutional Court, which decided, in judgment no. 275/2016, of 04-05-2016:

a) Not to declare unconstitutional the norm extracted from article 10, no. 12, of the Personal Income Tax Code, approved by Decree-Law no. 442-A/88, of 30 November, in the wording given by Law no. 39-A/2005, of 29 July, according to which the exclusion established in no. 2 of the same article does not cover capital gains arising from the sale of shares in companies whose assets are constituted, from the moment of acquisition of the shares until the moment of their disposal, directly or indirectly, in more than 50%, by real estate or real rights over real estate located in Portuguese territory;

And consequently,

b) Grant the appeal, determining the reformation of the appealed decision in accordance with the prior judgment of non-unconstitutionality.

Since "the decisions of the Constitutional Court are binding on all public and private entities and prevail over those of other courts and any other authorities" (article 2 of Law no. 28/82, of 15 November), the judgment is reformed as follows.

2. Factual Matters

2.1. Proven Facts

a) On 23-05-2008, the Claimants submitted an income declaration form Model 3, relating to the year 2007, composed of annexes A, C, F, G, G1 and H.

b) In annex G1 the Claimants included the following information:

c) On 01-09-2008, assessment no. 2008... was issued with global income in the amount of €329,326.74, "tax relating to autonomous taxation" in the amount of €515.57 and calculated tax payable in the amount of €12,109.77.

d) An external tax inspection was conducted on the Claimants, relating to the years 2007 and 2008, aimed at validating the declared income and/or ascertaining operations subject to taxation under IRS, as a result of financial analysis carried out on the bank accounts held in the name of Claimant A..., whose access was granted by the claimant himself, following a tax inspection of company C..., Lda. NIPC...;

e) In the Tax Inspection Report of the aforementioned action, which forms part of the 3rd section of the administrative file, whose content is reproduced, the following is stated, among other things:

Thus, the entire participation in the capital of the company "D..., SA", was acquired by A... on the following dates:

• On 29 March 2007, through a resolution at the general assembly of the joint-stock company "F...-SGPS, SA", legal entity under number..., A..., in his capacity as shareholder of the company, proposed to increase the capital of the company by €5,200,000.00, by means of contribution in kind of the shares representing the entire capital of the company "D..., SA".

• In compliance with Article 28 of the Commercial Companies Code (CSC), this contribution in kind was certified by the Statutory Auditors Company "G..., Lda". According to the report produced, these shares were valued at €5,200,000.00 by an independent entity, based on the updated value of future cash flows.

• This resolution was voted on and approved unanimously, being reduced to writing through minutes no. 7 executed by the representatives of the shareholders of the company "F...-SGPS, SA".

• On 29 June 2007, the shareholders sign the declarations acknowledging the increase of the capital of "F..., SGPS, SA", in compliance with no. 2 of Article 88 of the CSC.

• On 2 November 2007, this is the date that, according to the share registry (Article 80 of the Securities Code approved by Decree-Law no. 486/99, of 13 November) of "D..., SA", the shares became registered in the name of "F..., SGPS", as stated in the written declaration of the Bank..., the entity holding the securities, this being the date that should be considered as the date of disposal of the shares.

Summary diagram of the operation:

III.1.2 Tax characterization of the operation by the taxpayer

• From a declaratory perspective, the taxpayer, in the year 2007, proceeded to file the IRS Form Model 3, with annex G1, in which he declared the capital gain calculated from the sale of the shareholdings in "D..., SA" to "F...-SGPS, SA", namely:

The taxpayer for purposes of completing his IRS declaration for the year 2007, complied with the characterization given by no. 2 of Article 10 of the CIRS, which excludes from taxation capital gains calculated from the disposal of shares held by the taxpayer for more than 12 months, which are declared in a separate annex (G1), having only declaratory effects.

In a first analysis, upon completion of Annex G1, presented by the taxpayer with the IRS Form Model 3 for the year 2007, it is determined that the dates of acquisition and disposal declared are not correct, without however altering the calculation of the 12 months for the exclusion from taxation, as follows:

III.1.3 Balance sheet of the company whose shareholdings were disposed of - D..., SA

• Balance sheet

Considering that the exclusion from taxation of capital gains calculated from the disposal of shares, when held for more than twelve months, as provided for in no. 2 of Article 10 of the CIRS, is conditioned to the fulfillment of the condition provided for in no. 12 of the same article, that is, ... "does not cover capital gains arising from shares of companies whose assets are constituted, directly or indirectly, in more than 50% by real estate or real rights over real estate located in Portuguese territory".

It is therefore relevant to conduct an analysis directed at the balance sheet of "D..., SA".

Thus, the Balance Sheets as of 31 December 2006 and 31 October 2007 show the following values, in accordance with the trial balances made available by "D..., SA, requested through official letter no.... of 23/02/2011:

The tangible fixed assets consist of the items Land and Assets under Construction.

• Land

What is derived from analysis of the balance sheet, as well as from consultation of the property held by the company in real estate, as information gathered in the computer system of the Tax Authority, shows that the balance sheet item "Land" includes two real properties:

These are valued at €510,467.87.

• Assets under Construction

In addition to the value of the land, there is the balance sheet item "Tangible Fixed Assets under Construction", which merits detailed analysis, given its specificity and its relationship with the land held by the company, as demonstrated:

• The company "D..., SA", since its formation has aimed to construct in the area of... a luxury hotel and golf courses, which it intended to call "...". Apart from this project, the company has no other activity.

• This project, since 17 February 2004, has been identified by the Portuguese Investment Agency (API) as a ..."structuring undertaking, in accordance with the projects that API advocates in the TVD dossier - Tourism in the Douro Valley"..., with the Investment Plan presented by the promoter "D..., SA" of September 2003 agreed upon under the SIME Incentives system.

• This hotel construction project and other complementary facilities has been classified since 2005 as a Project of Potential National Interest (PIN), under Resolution of the Council of Ministers no. 95/2005 of 24 May, Joint Order no. 606/2005 of 22 August and Regulatory Decree no. 8/2005 of 17 August, which has been monitored by the Commission for evaluation and monitoring of PIN projects since August 2005.

• Several studies and projects were produced, which form part of the PIN monitoring process, as consulted at the request of the Commission for evaluation and monitoring of PIN projects (CAA-PIN), namely: "On 26/01/2004, Acoustic environment evaluation report (ISQ);

• In July 2004, Landscape arrangement and integration project;

• On 28/07/2004, a favorable opinion was issued by the National Fire and Civil Protection Service;

• In August 2004, Technical opinion on hydraulic constraints on construction and the golf course prepared by the Faculty of Engineering of the University of Porto;

• On 13/05/2005, a favorable opinion was issued by the Directorate General of Tourism;

• On 26/01/2007, a joint favorable opinion was issued by CCDR-IPPAR, conditional on the Detailed Network Plan.

• According to the Press Release, available and published on the internet, it is established that since 2005, the company has sought to make viable the hotel construction project with the Town Hall of.... Being the necessary condition for construction of the undertaking the approval of the Detailed Network Plan (PPR), this only occurred in December 2009, through a resolution of the Municipal Assembly.

It was further established that on 11/03/2007 (prior to the resolution of the increase in capital of F...-SGPS), a promise to sell contract was executed under suspensive condition, between the company "C..., Lda" - NIPC... of which A... is the sole partner and manager, and the company "H..., SA" - NIPC..., in which the parties bind themselves to a transaction for the purchase and sale of land under the condition that "F...-SGPS" sells all the shares of the company "D..., SA" to "H...", being known to the parties:

"...that the first contracting party (C...) and its sole partner (A...) and the second contracting party (C...) only executed that contract because, indirectly, by promising to acquire the shares representing the company "D..., SA", they were promising to acquire the mixed property ... of which the company is the owner and which is located in the area covered by the Detailed Network Plan promoted by the Town Hall of... which provides for the possibility that on that property a luxury hotel and part of a golf course could be built"

We thus conclude that the balance sheet item - Tangible Fixed Assets under Construction, which as of 31/10/2007 amounted to €471,937.67, despite being separated from the value of the land, in light of the foregoing, has no meaning or economic interpretation when analyzed in isolation, but only when associated with the land on which the studies were conducted, which confer upon it constructive potential, which was the basis for the valuation given to the company upon the disposal of the shares.

III.1.4 Tax characterization of the operation and tax effects

As already mentioned, by force of no. 12 of Article 10 of the CIRS, for purposes of application of the exclusion from taxation of no. 2 of the same article, it must be shown that the company whose shareholdings are being disposed does not hold in its assets real estate with a representation exceeding 50% of the value of its total net assets.

For purposes of calculating the representativeness of real estate or real rights over real estate in relation to the value of total net assets, one should pay attention to the balance sheet values as of the date on which the company's shares are considered transmitted, as clarified by binding ruling no. 2245/09 issued by the Directorate of Personal Income Tax Services, Design Division. Since the date of transmission of shares, as provided for in Article 80 of the Securities Code, occurred on 02/11/2007, it will be on the basis of the Balance Sheet of 31/10/2007 that such calculation should be performed:

In accordance with what has been stated, it is concluded that, since the value of real estate or real rights over real estate held by the disposed company is of greater value than 50% of its total net assets, the requirements for the exclusion from taxation of the capital gain obtained from the transaction are not met, in IRS, therefore the provision of no. 2 of Article 10 of the CIRS will not apply.

Thus, this capital gain should have been declared by the taxpayer in Annex G of the IRS Form Model 3, filed for the year 2007.

Since this capital gain was not subject to taxation, despite having been declared (Annex G1), it is thus necessary to correct the taxable matter under Category G of income.

Capital gain subject to taxation:

Obs.: For purposes of completion of Table 8 of Annex G of the IRS Form Model 3, the realization value of the shares was distributed according to the dates of disposal, in accordance with the weight they represented in the declaration presented by the taxpayer.

This income, under Article 72 no. 4 of the CIRS, is subject to the special tax rate of 10%.

f) Following that tax inspection, the Tax Administration services made the following corrections, grounded in these terms in the Opinion on which the hierarchical appeal decision was based (among other things):

Year 2007: (disposal of shares of the company "D..., S.A.")

"Despite the taxpayer being the holder of the shares for more than 12 months, the capital gain obtained was subject to taxation under no. 12 of article 10 of the CIRC, as detailed:

This income is subject to the special autonomous tax rate of 10%, under article 72, no. 4 of the CIRS.

g) Following the corrections, and relating to the fiscal year 2007, on 30-05-2011 assessment no. 2011... was issued with global income in the amount of €329,326.74, "Tax relating to autonomous taxation" in the amount of €515,515.57 and calculated tax payable in the amount of €586,877.98, which includes €59,768.21 in compensatory interest;

h) On 03-11-2011, the Claimants sent by postal mail an administrative claim of that assessment, which was dismissed by order of 24-04-2012;

i) On 04-06-2012 the Claimants sent by postal mail to the Tax Office Porto... a hierarchical appeal;

j) In that hierarchical appeal Opinion no. 705/14 was issued, which forms part of section 2 of the administrative file, whose content is reproduced, in which the following is stated, among other things:

1. As a preliminary point it is necessary to clarify that in this case only the tax implications that the disposal of the entire shareholding in the company "D..., SA" had on the tax sphere of the present appellant, in his capacity as seller, are to be analyzed.

2. As regards the procedures subsequently adopted by the acquiring entity "F...-SGPS, SA" (in which the appellant is also a shareholder), in particular the increase in capital in kind, this is a matter that is not relevant to the case at hand.

On Supplementary Contributions

1. The appellant states at point 12 of the hierarchical appeal that the company "F...-SGPS" acquired shares for €4,670,000 and supplementary contributions in the amount of €530,000, which totals €5,200,000, corresponding to the realization value.

2. If supplementary contributions constitute parts of capital, the taxpayer believes they should be reflected for purposes of calculating the final capital gain, which should only amount to €4,620,000, which can occur through one of the following alternatives:

– the acquisition cost to include supplementary contributions, being corrected from €50,000 to €580,000;

– the realization value to exclude supplementary contributions, changing from €5,200,000 to €4,670,000.

1. Now, supplementary contributions have the nature of additional capital, distinct from nominal/social capital, occupying an intermediate position between this and reserves proper, hence they are accounted for in equity in a special account ["53 - Supplementary Contributions"].

2. Having analyzed the reasons justifying the constitution of supplementary contributions, it was found that they exist because it is not always possible to predict what capital will be necessary for the development of the company's business. And although they do not constitute an increase in capital, they are equivalent to it, but they exempt from compliance with the respective formalities and the expenditure of related expenses.

3. That is, with supplementary contributions it becomes easier, less bureaucratic and less complex for partners to review the company's capital needs. The evident advantages of resorting to supplementary contributions exist, allowing partners to be reimbursed for their investments more quickly, as they do not comply with the requirements of judicial authorization (article 95, no. 1 CSC), execution of public deed (article 85, no. 1 CSC) and registration and publication of the resolution (article 95, no. 4 CSC), among others.

4. In sum, supplementary contributions do not integrate the capital of the company, but only contribute to the composition of its equity.

5. As can be read on page 2 of the inspection report (pages 27 of the administrative claim) "The company "D..., SA"; with NIPC..., began its activity on 02/12/2003, with the purpose of "hotel and restaurant activity in all its modalities..., the purchase and sale of rural and urban properties and resale of those acquired for these purposes". It is a company constituted in the legal form of a joint-stock company, with the capital in the amount of €50,000.00, distributed among shares with a nominal value of €1.00.

6. The aforementioned report continues stating on page 3 that "On 29 March 2007 through a resolution at the general assembly of the joint-stock company "F...-SGPS, SA"... A..., in his capacity as shareholder of the company, proposed to increase the capital of the company by €5,200,000.00, by means of contribution in kind of the shares representing the entire capital of the company "D..., SA".") and "In compliance with Article 28 of the Commercial Companies Code (CSC), this contribution in kind was certified by the Statutory Auditors Company "G..., Lda". According to the report produced, these shares were valued at €5,200,000 by an independent entity, based on the updated value of future cash flows"

7. From this it becomes crystal clear that both the acquisition value of €50,000 and the realization value of €5,200,000 contained in annex G refer solely to the value of the 50,000 shares that make up the entire capital of the company "D..., SA". That is, they do not include the alleged supplementary contributions in the amount of €530,000.

8. It can therefore be concluded that it is not correct the assumption upon which the appellant based his claim that the disposal of the shareholding relating to the parts of capital was only €4,670,000, with the remainder attributable to supplementary contributions.

9. On the other hand, if supplementary contributions were to be considered for purposes of calculating the capital gain, as requested by the taxpayer, the final income calculated would be exactly the same, since it would have to be reflected simultaneously in the realization value and in the acquisition value (€5,730,000 - €580,000 = €5,150,000).

10. To corroborate the foregoing, it cannot be left unmentioned the following:

the contract executed on 2004-06-02, in which the relationships of the shareholders of the I... group were regulated (doc. 9 of the administrative claim), defines in clause 3, point 3.3, that the increase in capital of "F...-SGPS" in €5,200,000 by contribution in kind of the shareholding held by A... in the capital of "D..., SA", corresponding to 100% of that capital (pages 81), that is, to the value of the shares.

It can also be read in the aforementioned contract in clause 3, points 3.5 and 3.6 (pages 81 and 82), that the amount of €530,000 does not refer to supplementary contributions as invoked by the appellant, but rather to loans that the new shareholders will make to the I... group to finance the acquisition of a specific plot of land. This specific amount corresponds to "advance" of the compensation to be earned by the taxpayer A... from the disposal of the 1,300,000 shares of "F...-SGPS" to the new shareholders. For, if the aforementioned disposal of shares to new investors does not occur by the present appellant, he is obliged to return the amount received.

As for minutes no. 5 of the company "D..., SA", dated 2004-12-24 (doc. 8 of the administrative claim), it only gives legal form to what was set out in the contract executed on 2004-06-02. Therefore the statement made at point 14 of the appeal that it was shareholder A... who made the supplementary contributions in the amount of €530,000 is not correct.

1. Terms in which the taxpayer's claim is not sustained.

On the Exclusion from Taxation of the Capital Gain Calculated

On Fulfillment of the Requirements of Article 10 of the CIRS

1. To what is material to this item, the appellant invoked that the transmission of shares should be dated to the date on which the increase in capital at "F...-SGPS" was subscribed by contribution in kind of the shares "D..., SA" (of which the appellant was also the holder), which occurred on 2007-06-29, as recognized in the company's accounts.

2. In effect, and as already mentioned by the services in the administrative claim, to the case at hand the Securities Code should be applied (hereinafter CVM), approved by Decree-Law no. 486/99, of 13/11, presenting itself as special legislation on the Civil Code, and it is on the basis of this normative that questions to be resolved should be framed.

3. Thus, article 46 of the CVM states that securities may be scripless or certificated, depending on whether they are represented by book entry or by a paper document.

4. Regarding scripless securities, article 61 of the CVM defines three types of book entry, which must be recorded individually:

a) With a financial intermediary integrated in a centralized system; or

b) With a single financial intermediary designated by the issuer, or

c) With the issuer or a financial intermediary representing it.

1. As regards the integration in each system of registration or deposit, the legislature established that:

Securities in book form admitted to trading on a regulated market are mandatorily integrated into a centralized system (article 62 CVM).

When not integrated into a centralized system, bearer securities are mandatorily registered with a single financial intermediary (article 63, no. 1, paragraph a) of the CVM).

Scripless nominative securities not integrated into a centralized system nor registered with a single intermediary are registered with the issuer (article 64, no. 1 CVM).

1. As regards certificated securities, article 99 CVM defines that the same are mandatorily deposited in a centralized system or with an authorized financial intermediary.

2. Having established this, it is necessary to determine the time at which the transmission of different securities occurs.

3. Article 80, no. 1 (for scripless securities) and article 105 (for certificated securities integrated into a centralized system), both of the CVM, establish that securities are transmitted by entry in the account of the acquirer.

4. Only when the transmission of securities occurs on a regulated market was it provided for in article 80, no. 2 of the CVM the possibility for the acquirer of the securities to proceed with their sale on that same market independently of registration. Only in this situation, where the transmission of securities occurs on a regulated market, is it deemed to be effected at the moment of performance of the transaction itself (similar to the principle enshrined in article 408, no. 1 of the Civil Code).

5. Now, given that it is indisputable fact that the transaction of transmission of shares of "F..., SA" was not carried out on a regulated market, it means that the provision of article 80, no. 2 of the CVM should not be applied, as the taxpayer claims.

6. As for the transmission of certificated securities it is stipulated:

Bearer certificated securities are transmitted by delivery of the certificate to the acquirer or the depository. If the certificates are already deposited with the depository, transmission is effected by entry in its account, with effect from the date of the request for registration (article 101 CVM);

Nominative certificated securities are transmitted by declaration of transmission, inscribed in the certificate, followed by registration with the issuer or with the financial intermediary. Transmission takes effect from the date of the request for registration with the issuer (article 102 CVM).

1. That is, also in these situations transmission occurs with registration with the recording entity. What was sought to be safeguarded was only the date of the transaction as being that of the request for registration, avoiding temporal gaps in the delay of registration of transactions by the recording entities.

2. A different question, and without relevance to the appraisal of the case, are the reasons that led the legislature to establish different registration or deposit systems for securities. Still, it is suggested that it derives from the different supervision and control systems inherent to each type of market and security.

3. Accordingly, since the date recorded in the share registry of the "D..." - becoming registered in the name of "F...-SGPS" - was 02 November 2007 (cf. written declaration of..., the entity holding the securities), then this must be the date to be considered as the moment of transmission of the shares.

4. Finally, and regarding the balance sheet that should be considered for purposes of application of the provision of no. 12 of article 10 of the CIRS, it must be as of the date of transmission of the shares, as already clarified by this Directorate of Services in ruling no. 2245/09

5. Still, the following is not left unmentioned:

• Contrary to what the appellant stated, the balance sheet presented by the taxpayer to the services during the inspection procedure as of 2007-10-31 does not appear to be "hypothetical", as accounting being organized in accordance with commercial and tax legislation (a reality not contested either by the taxpayer or by the services) it is presumed to be true and in good faith, under the provision of article 75 of the LGT.

• It cannot be forgotten that all accounting must be prepared in accordance with accounting standards and generally accepted accounting principles, from 01 January through 31 December.

As regards the alleged account closing movements that the appellant invokes as not having been considered in an interim balance sheet, it is found that the company had no activity, and it is not apparent that the taxpayer wished to see any accruals and deferrals recognized in the balance sheet dated 2007-10-31 as being owed on that date.

1. Terms in which the services were correct to consider the balance sheet as of 2007-10-31, for purposes of application of article 10, no. 12 of the CIRS.

On the Unconstitutionality of No. 12 of Article 10 of the CIRS

1. It does not fall to the Tax Administration, lacking the authority to do so (article 16 of Decree-Law no. 205/2006 of 25/10 and Decree-Law no. 81/2007 of 29/03, relating to the Tax Authority and currently corresponding to article 14 of Decree-Law no. 117/2011, of 15/12 and Decree-Law no. 118/2011, of 15/12, relating to the Portuguese Tax and Customs Authority), to assess the legality of norms issued by organs of sovereignty.

2. In truth, to these services falls, among other duties, the assessment and collection of taxes in accordance with tax laws (cf. article 10, no. 1, paragraph a) of the CPPT).

3. Thus, the alleged unconstitutionality of the norm contained in no. 12 of article 10 of the CIRS is a matter whose analysis goes beyond the competence of this Directorate of Services which is limited to the application of the provisions instituted by the legislative power. And having not been declared the unconstitutionality of the said norm by the Constitutional Court, the same is fully in force in the national tax legal order, and it falls to these services to ensure its compliance.

On the Date of Effective Transmission of the Capital Parts

1. The appellant claims that the tax transmission of the shares should be dated to the year 2004, and not to the fiscal year 2007, as considered by the services and declared by him in the Model 3.

2. For this, he invokes the exception provided for in paragraph a) of no. 3 of article 10 of the CIRS which states "In cases of promise to buy and sell or exchange, the gain is presumed to be obtained as soon as delivery or possession of the goods or rights that are the subject of the contract is verified", not being applicable the general rule that the gain is obtained at the moment of the performance of the act (in this case the onerous disposal of shareholdings).

3. With this provision, the legislature created a fiction of tax transmission, for IRS purposes, as soon as the existence of a promise contract followed by delivery or possession is proven, independent of the nature of the use of the transmitted asset.

4. The promise contract is defined in the Civil Code as being "the agreement by which someone agrees to execute a certain contract" (cf. article 410, no. 1 of the C.C.).

5. From this it follows that the performance owed in the promise contract translates into a performance of a positive fact consisting in the emission of a declaration of negotiable intent intended to execute another contract (which can be denominated by the promised contract). By way of example, in a contract of sale, the parties agree to perform in the future the promised contract of sale, respectively, as buyer and as seller.

6. From the reading of the contract executed on 2004-06-02, and attached to the proceedings as document 9 of the administrative claim (pages 74 et seq) it is found that the same only "aims to regulate the relationships of shareholders of F..., SGPS, as holders of shares representing the capital of F...-SGPS, as well as certain aspects relating to the functioning of this Company and of the companies in which it has interests" (cf. clause 1, pages 79 of the administrative claim).

7. For its part, in pronouncing on the assumptions and conditions for the execution of the contract, clause 3 establishes:

"3.2. The promoters [the present appellant and his former spouse] shall be holders of a shareholding representing 100% of the capital of D..., SA, free of any liens, charges or liabilities and with all inherent rights, with a view to the fulfillment of the provision in number 3.3 of this clause:

3.3. By 31 December 2004, the promoters and the institutional investors (new shareholders) shall resolve to increase the capital of F...-SGPS, from €35,531,587.00 to €40,731,587.00, by virtue of the contribution in kind of the shareholding held by A... in the capital of D..., SA, corresponding to 100% of that capital, in the context of which 5,200,000 new ordinary registered shares are issued, with a nominal value of one Euro each ...".

1. From this it becomes crystal clear that:

On the one hand, the document exhibited does not constitute a promise to buy and sell or exchange between the present appellant and the entity that acquired the shares - "F...-SGPS" (the contract only regulates the relationships between shareholders), and;

On the other hand, the delivery or possession of the securities of the company "D..., SA" did not occur, from the present appellant to "F...-SGPS".

1. Moreover, the appellant's claim to consider the acquisition by "F...-SGPS" (and consequently the disposal by the present appellant) in the year 2004 becomes even more unreasonable if we recall that the taxpayer A... only acquired 50% of the disposed shareholding in 2007, during the year 2006. That is, the appellant is claiming that the delivery of something he did not yet possess be considered as his own.

2. Despite the foregoing, it cannot be left unmentioned the summary of the judgment of the TAC, case no. 00092/04, of 2004-10-21, which in pronouncing on the existence of a promise to buy and sell contract of real property, did not accept the same for purposes of application of the provision in article 100, no. 3, paragraph a) of the CIRS which is cited:

"If the taxpayer did not declare the income, nor did the promise purchaser pay the respective transfer tax in the year in which the respondent claims the delivery of the real property to him occurred, and the Tax Administration having no other way of knowing the transmission, nor being obliged to know it officially, the tax fact must be considered as verified, for purposes of the statute of limitations of the right to assess, at the moment of the execution of the public deed of sale. For only on that date should the Tax Administration be legally deemed to be cognizant of the transmission and not at the moment of the execution of the promise contract or of any other act evidencing transmission that was not communicated to it."

1. Given the foregoing, the services were correct in considering that the transmission of the shares occurred during the year 2007.

2. Given the foregoing, the hierarchical appeal should not be granted. The appellant being notified of the right to a hearing, under article 60, no. 1, paragraph b) of the LGT.

k) The Claimants were notified of the draft dismissal of the hierarchical appeal, for exercise of the right to a hearing, and made no statement;

l) By order of 16-06-2014, issued by the Assistant Director-General of the Portuguese Tax and Customs Authority, issued under delegation of authority, the hierarchical appeal was dismissed, with the grounds invoked in the Opinion transcribed above;

m) The Claimants were notified of the aforementioned order by official letter dated 03-07-2014 (document no. 1 attached with the petition for arbitral pronouncement, whose content is reproduced);

n) On 02-10-2014, the Claimants filed the petition for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts

It was not proven that the €530,000 that the Claimants claim to be supplementary contributions made by Claimant A..., are included in the amount of €5,200,000.00 attributed, upon increase of the capital of "F...-SGPS", to the contribution in kind of the shareholding held by A... in the capital of "D..., SA", corresponding to 100% of that capital.

The amount of €5,200,000.00 is referred to in the proposal to increase the capital of F...-SGPS as relating to the capital of "D..., SA", and this is what was certified by a company of statutory auditors, as mentioned in the Tax Inspection Report, without the Claimants contesting these facts.

Moreover, in the contract executed on 02-06-2004, in which the relationships of the shareholders of the I... group were regulated, a copy of which constitutes document no. 9 attached with the administrative claim (which is at the end of part 3 and the beginning of part 4 of the administrative file), it is mentioned that the amount of €5,200,000.00, corresponding to 100% of the capital of F..., S.A., would give rise to the issue of 5,200,000 shares with a nominal value of €1 each (clause 3.3), which confirms that that amount relates only to the shares.

Also in the same contract it is mentioned that the amount of €530,000.00 is intended for the provision of loans to D... S.A. to be made by the shareholders referred to in clause 3.5, to finance the acquisition of a plot of land, with no reference to supplementary contributions made by Claimant A....

2.3. Justification of the Decision on Factual Matters

The facts given as proven are based on the administrative file attached with the Response and the documents attached with the petition for arbitral pronouncement, with no controversy over them.

3. Legal Matters

The subject matter of the present arbitration is the taxation of capital gains in IRS obtained in 2007.

Article 10, no. 2, paragraph a) of the CIRS, in the wording in force in 2007, excluded from taxation in IRS capital gains from the disposal of shares held by their holder for more than 12 months.

However, no. 12 of the same article provided that "the exclusion established in no. 2 does not cover capital gains arising from shares of companies whose assets are constituted, directly or indirectly, in more than 50%, by real estate or real rights over real estate located in Portuguese territory".

It was on the understanding that a situation was verified that could be classified under this no. 12 that the Portuguese Tax and Customs Authority made the correction relating to the year 2007 and effected the respective assessment.

3.1. Issue Relating to the Quantification of Capital Gains Due to Non-consideration of the Value of Supplementary Contributions

In annex G1 of the IRS Form Model 3 relating to the year 2007, which the Claimants presented, they indicated as the acquisition value of the "shareholdings held for more than 12 months" the amount of €50,000.00 and the realization value of €5,200,000.00.

These were the values that the Portuguese Tax and Customs Authority considered to tax the capital gains.

The first issue raised by the Claimants is that, given that Claimant A... made supplementary contributions in the amount of €530,000, the acquisition cost of the capital parts to be considered should be €580,000, and not €50,000, as supplementary contributions are considered parts of capital.

And, if it is considered that supplementary contributions do not integrate the acquisition cost of the capital parts, then the amount relating to €530,000 should have been excluded from the realization value, an amount corresponding to the acquisition cost by F..., as it appears in its trial balance.

As mentioned in the "Unproven Facts", it was not proven that Claimant A... made supplementary contributions in the amount of €530,000.00, nor that this amount is included in the amount of €5,200,000.00 attributed, with certification by an independent entity (Statutory Auditors Company "G..., Lda"), to the shares representing the entire capital of the company "D..., S.A.", for purposes of the increase in capital of "F...-SGPS, S.A.".

Thus, it must be concluded that the assessment action does not suffer from a defect in considering that the amount of €5,200,000.00 corresponds only to the shares.

3.2. Issue of Unconstitutionality of No. 12 of Article 10 of the CIRS

Article 10, no. 12 of the CIRS establishes that "the exclusion established in no. 2 does not cover capital gains arising from shares of companies whose assets are constituted, directly or indirectly, in more than 50%, by real estate or real rights over real estate located in Portuguese territory".

The Claimant raises, in essence, two distinct constitutional questions: one of them is violation of the principles of typicality of taxes and legal security and certainty, which are interconnected in this context; the other is violation of the principle of equality.

3.2.1. Unconstitutionality Due to Violation of the Principles of Typicality and Legal Security and Certainty

The Claimants argue that, "being one of the foundations of tax law, and in particular of IRS, respect for the principle of legal security and certainty, as well as the principle of typicality (as a corollary of the principle of legality), the absence of express indication of the moment at which the percentage contained in no. 12 of article 10 of the IRS Code should be assessed, necessarily entails the unconstitutionality of the aforementioned precept".

The thesis defended by the Portuguese Tax and Customs Authority that what the Claimants are seeking is an abstract review of unconstitutionality, reserved to the Constitutional Court, does not correspond to reality, since abstract review of constitutionality only exists when judgment on constitutionality has no application in a specific case, that is, when the norm that it concerns will not be applied in a case submitted to the appraisal of a Court.

But in the case at hand, being one of the elements of the assessment the norm of article 10, no. 12 of the CIRS, it is evident that judgment on constitutionality of it constitutes concrete review of constitutionality that is imposed on all courts by article 204 of the CRP, which provides that "in cases submitted to judgment, courts cannot apply norms that infringe the Constitution or the principles enshrined in it".

The principle of fiscal legality, enshrined in article 103, no. 2 of the CRP, is one of the essential elements of the constitutional rule of law. Moreover, this principle "implies legal typicality, the tax being to be designed in law with sufficient determination, without room for regulatory development nor for administrative discretion regarding its essential elements".

The principles of legal security and certainty are principles inherent in the principle of the democratic rule of law, as has been consistently understood.

As regards the incidence of taxes, that norm requires that law determine the incidence, which presupposes that the norms that define tax facts possess sufficient densification to permit to their recipients their foreseeable application. "If the function of the reservation of law is to make the results of its application foreseeable, foreseeability must relate to all elements that lead to the identification of the object of taxation and the subject and to the determination of the amount of the tax". "The determination of law means that the set of legal arguments allows (is sufficient to) justify the decisions resulting from its application."

"The principle of fiscal legality, within the rule of law, is essentially a criterion for the realization of justice; but it is, at the same time, a criterion for its realization in safe and certain terms. The idea of legal security is certainly much broader than that of legality; but put in contact with it cannot fail to shape it, to imprint a content upon it, which necessarily must reveal the degree of security or certainty imposed by dominant concepts or by the peculiarities of the sector to which it relates. Now, Tax Law is of all branches of law that in which legal security assumes its greatest possible intensity, and it is for this reason that in it the principle of legality is configured as an absolute reservation of formal law". (...) "That in Tax Law the principle of legality is configured as an absolute reservation of formal law attests well that the idea of legal security plays a leading role in it".

"The importance of legal security in Tax Law derives not only from the importance attributed to legal security in general, which (...) is susceptible to various "graduations, depending on the nature of the interests involved. It resides also in its necessary connection with the type of economic system in which it prevails.

Indeed, in an economic system that has as organizing principles free enterprise, competition and private property, it becomes indispensable to eliminate, to the greatest extent possible, all factors that could translate into economic uncertainties susceptible to harming the free expansion of the enterprise, in particular legal insecurity. And this was what would inevitably happen if to the clear domain of law there would succeed the "voluntarism" of the Administration".

"Typicality should therefore be considered as a particular form of guarantee intended to make the tax foreseeable and calculable by choosing certain realities for elements of the tax type".

In accordance with the principle of determination, the elements making up the tax norm must be so precise and determined in their legal formulation that the organ applying the law cannot introduce subjective criteria for appraisal of their concrete application. There thus occurs in the tax norm the phenomenon of closed typicality (high degree of conceptual determination or fixing of content), of which LARENZ and ROXIN speak, and which is opposed to the existence of "incomplete", "elastic" or "rubber stamp" norms, as some have already denominated them".

The quotation made from XAVIER DE BASTO transcribed by the Claimants evidences an obvious pertinent doubt about the scope of application of that no. 12 of article 10: "the law, however, does not clarify whether that ratio must be maintained during various fiscal years or in what moment it must be assessed and scrutinized. Will it be at the moment the shareholdings are disposed that this percentage must be determined or will the percentage calculated in the balance sheet of the last fiscal year prevail?".

This pertinent question, which appears at the end of this citation, expresses only one of the doubts, as these extend and compound themselves to the first part of this citation.

Indeed, the greatest deficiency of the norm is not to reveal whether the percentage it refers to only needs to exist at the moment of disposal or at the moment of the last balance sheet or at some other specific moment or during the entire period of holding of the shares.

The question of violation of the principle of typicality does not arise at the level of the lack of clarification as to whether one should look to the balance sheet or to some other means of determining the percentage of real estate or real rights over real estate in the assets of the company, since, as the Portuguese Tax and Customs Authority rightly states, the accounting obligations of companies allow consideration of determination by balance sheet as a foreseeable means of determining such percentage, which will be absolutely secure in cases where the level of that percentage is considerably higher than 50%.

But what does not result from that no. 12 of article 10 of the CIRS and is not determinable by application of the interpretative criteria of tax norms is whether it is sufficient that that 50% percentage is verified at the moment of disposal or at the moment of the last balance sheet or in both or rather cumulatively in all balance sheets, from the moment of acquisition until that at which disposal occurs.

On the other hand, even if it were understood that the moment of transmission and the nearest balance sheet should be considered, there would still remain to be clarified whether one should look to the last available balance sheet or the last approved balance sheet, as the norm provides no information for formulating an option. And the case at hand demonstrates well the relevance of the option, as there would be no taxation if the balance sheet of 31-12-2006 were considered, but it would exist if that of 31-10-2007 were preferred, which was the last available, but which was not approved.

Being thus, having in mind the aforementioned principle of typicality, which requires sufficient determinability and foreseeability of the incidence of taxes, the omission of reference to any of the potentially relevant moments to define the percentage activating the provision of this norm can only be interpreted, without violation of that constitutional rule and with safeguard of the principle of legal security, as requiring that the percentage that defines the limit of incidence be verified in all those moments, that is, from the moment of acquisition of the shares until the moment of their disposal.

In truth, this is not a situation involving the use of any vague or indeterminate concept whose densification falls to the interpreter, but rather a situation in which the boundary between taxation and non-taxation is defined with a precise quantitative element (50% percentage), but with insufficient legislative information on the moment or moments to be considered to ascertain its verification.

From this perspective, the legislative intention that can be advanced as underlying this norm will be to prevent, through the constitution of joint-stock companies holding real estate, primarily intended for the holding of real estate, which continuously maintain a percentage of real estate in assets exceeding 50%, abusively avoiding the taxation of capital gains resulting from the disposal of real estate.

As the Claimants state, citing XAVIER DE BASTO, "(…) the privileged regime of capital gains in shares runs the risk of being exploited to achieve communicating that protection to other taxable capital gains. The typical situation is that of joint-stock companies holding real estate of great value, perhaps deliberately established to serve as an evasion vehicle, total or partial, of tax on real estate capital gains" (article 62 of the petition for arbitral pronouncement).

One is thus faced with a special anti-abuse norm, intended for the taxation of capital gains of shares of companies created for permanent holding of real estate and in which, for this reason, the assets will be permanently and mostly composed of real estate and real rights over real estate.

This legislative intent, which is the only one that can explain this legislative choice, accompanied by the non-indication of the relevant moment to ascertain whether the assets are majority constituted by real estate or real rights over real estate, corroborates the conclusion that it will be necessary, to meet the hypothesis of no. 12 of article 10, that the percentage exceeding 50% must be verified during the entire period of holding of the shares, which will certainly occur in companies constituted to obtain the fiscal effects it was intended to suppress.

This will be the only interpretation in conformity with the Constitution, by eliminating the indeterminability of the relevant moment to ascertain the constitution of assets.

In the case at hand, it is found that the assets of the company "D..., S.A." were not constituted in more than 50% by real estate during the entire period of holding of the shares by Claimant A..., as this did not occur in the balance sheet of the last fiscal year, of 31-12-2006, therefore the condition required for the taxation of capital gains would not be verified.

But, within the scope of this first defect imputed to the challenged action, the Claimants do not argue that the understanding of the Portuguese Tax and Customs Authority is wrong in choosing a single moment to ascertain whether the majority of the assets was constituted by real estate situated in national territory, saying only, in sum, that the law does not determine which moment or moments should be taken into account. Furthermore, the Claimants do not sustain that this single moment be that of disposal (although they discuss, with respect to another defect they impute to the challenged action, which moment should be considered as that of disposal, which is different).

This is evident from articles 43 and 44 of the petition for arbitral pronouncement, with which the Claimants conclude this imputation of defect:

43rd

This uncertainty and insecurity in the appraisal of the provision in question gains even more relevance if we note the fact that there is no general guidance from the tax administration in which its interpretation of no. 12 of article 10 of the IRS Code is revealed.

44th

Thus, the law not establishing the specific moment for assessing compliance with the legal requirements for the exclusion from taxation provided for in no. 12 of article 10 of the IRS Code, there is a violation of the principle of typicality provided for in article 103 of the CRP, as well as in article 8 of the LGT.

As can be seen, the defect imputed in this context is the non-fixation by the law of the specific moment for assessing compliance with the requirements and not a hypothetical error of the Portuguese Tax and Customs Authority in choosing to consider the moment of disposal as relevant. The only defect they refer to in this part is that of the uncertainty and insecurity generated by the norm, which they argue violates the principle of determinability.

Thus, not occurring, given what has been said, in an interpretation in conformity with the Constitution that is adopted here, the unconstitutionality due to violation of the principles of typicality and legal security and certainty, it must be concluded that the challenged action does not suffer from the only defect that the Claimants impute to the action in this context.

3.2.2. Unconstitutionality Due to Violation of the Principle of Equality

The Claimants also raise the question of unconstitutionality of article 10, no. 12 of the CIRS, due to violation of the principle of equality.

As mentioned, this question was considered by the Constitutional Court in judgment no. 275/2016, of 04-05-2016, in which it decided "not to declare unconstitutional the norm extracted from article 10, no. 12 of the Personal Income Tax Code, approved by Decree-Law no. 442-A/88, of 30 November, in the wording given by Law no. 39-A/2005, of 29 July, according to which the exclusion established in no. 2 of the same article does not cover capital gains arising from shares of companies whose assets are constituted, from the moment of acquisition of the shares until the moment of their disposal, directly or indirectly, in more than 50%, by real estate or real rights over real estate located in Portuguese territory".

It is manifest that in the case at hand the factual situation to which the Constitutional Court referred its judgment of non-unconstitutionality does not occur, as the assets of the Claimant were not "constituted, from the moment of acquisition of the shares until the moment of their disposal, directly or indirectly, in more than 50%, by real estate or real rights over real estate located in Portuguese territory".

However, the decision of the Constitutional Court was rendered in the context of concrete review of unconstitutionality, in an appeal aimed at altering what had been decided on the inapplicability of article 10, no. 12 of the CIRS to the existing factual situation, for which reason it must be understood that it was to the situation existing in the present case that the Constitutional Court referred its judgment of constitutionality.

Thus, having the aforementioned Constitutional Court judgment been finalized, article 10, no. 12 must be considered, in this case, as not being unconstitutional.

For this reason, the challenged action does not suffer from a defect arising from the application of the norm of article 10, no. 12 of the CIRS.

3.3. Questions Regarding Compliance with the Requirements of Article 10 of the CIRS

3.3.1. Issue of the Date to be Considered as That of Disposal of the Shares

The Portuguese Tax and Customs Authority considered the date of 02-11-2007 to be that which should be considered as being the date of the performance of the transaction of transmission of the shares, as it is the "date that according to the share registry (Article 80 of the Securities Code approved by Decree-Law no. 486/99 of 13 November) of "D..., SA", the same became registered in the name of "F..., SGPS", as stated in the written declaration of the Bank..., the entity holding the securities, this being the date that should be considered as the date of disposal of the shares".

The Claimant argues that the transmission of shares should be dated to the date on which the increase in capital of F... was subscribed by contribution in kind of the shares of D... of which the Claimants were the holders, occurring on 29-06-2007 and on this date recognized in the accounts of this company.

The Claimant states, in sum:

– that if it is true that the Securities Code, in no. 1 of its article 80, determines that scripless shares are transmitted by entry in the account of the acquirer, it is equally true that the transmission of a thing, as is the case with shares, has, in accordance with article 408 of the Civil Code, as its proper and sole cause the contract;

– that in light of this general rule of civil law, the requirement of entry in the account of the acquirer applicable to the transmission of scripless securities constitutes a mere formality upon which the production of effects of transmission before the company and third parties depends, not having in itself a transferring effect of the ownership of the shares, which operates by mere effect of the contract;

– only in this way is justified the fact that such requirement is dispensed with in the case of disposal of scripless securities on a regulated market (cf. no. 2 of article 80 of the Securities Code), as well as the fact that transmission of nominative certificated shares occurs with written declaration of transmission in the certificate followed by registration with the issuer by the transmitter (cf. article 102, nos. 2 and 4 of the Securities Code), indicative that such registration does not have a constitutive nature as it would make no sense to attribute such value to a registration that would remain entirely at the disposal of a third party to the acquirer.

– this is moreover the position defended by the majority of doctrine and jurisprudence;

– in the case of transactions generating income qualified as capital gains, no. 3 of article 10 of the IRS Code provides that gains are considered obtained at the moment of performance of the acts provided for in no. 1 – i.e. the onerous disposal of shareholdings;

– given the foregoing, the transmission of shares should be dated to the date on which the increase in capital of F... was subscribed by contribution in kind of the shares of D... of which the Claimants were holders, occurring on 29 June 2007 and on this date recognized in the accounts of this company.

The Portuguese Tax and Customs Authority maintained the position adopted in the Tax Inspection Report, stating that

– "the date of transmission of shares, as provided for in Article 80 of the Securities Code, occurred on 02/11/2007";

– to the transmission of securities should be applied the Securities Code, approved by Decree-Law no. 486/99, of 13/11, presenting itself as special legislation on the Civil Code, as is also referred to in the Judgment of the Court of Appeal of Lisbon no. 2794/2007-1 of 12-07-2007;

– where article 46 of the CVM refers that securities may be scripless or certificated, depending on whether they are represented by book entry or by a paper document;

– as regards certificated securities, article 99 CVM defines that the same are mandatory to be deposited in a centralized system or with an authorized financial intermediary;

– for its part, no. 1 of article 80 and article 105, both of the CVM, indicate that securities are transmitted by entry in the account of the acquirer;

– it is evident that if this were not so, the acquirer would never be able to demonstrate the holding of the shares and exercise his respective rights insofar as they are scripless securities;

– indeed, having the shares of "D..." - having become registered in the name of F...-SGPS – registration occurred on 02-11-2007, the date of registration at the Bank... (cf. written declaration of..., the entity holding the securities), this will be the date to be considered for purposes of transmission of the shareholdings.

Article 11 of the LGT establishes the special principles of interpretation of tax norms establishing, moreover, that "whenever in tax norms, terms proper to other branches of law are used, the same shall be interpreted in the same sense that they have therein, unless otherwise directly resulting from the law" (no. 2).

On the other hand, no. 3 of article 11 of the LGT, in establishing, with an inadequate formulation, that "if the doubt about the meaning of the norms of incidence to be applied persists, the economic substance of the tax facts should be considered", clearly establishes the teleological guideline that should orient the interpreter.

Consequently, the interpreter of tax law, before assigning to terms proper to other branches of law the meaning that is given to them therein, must ascertain whether from tax laws does not directly result that a different meaning is given to them, bearing in mind that the tax legislator's main concern was to give relevance to the economic substance of tax facts and not to their civil-law treatment.

As results from the express content of article 10, no. 1, of the CIRS, the income that constitutes capital gains is constituted by "gains obtained".

Thus, the obtaining of gains is the principal fact constituting the tax obligation and it is in that obtaining that constitutes the economic reality underlying the taxation in the case of capital gains.

On the other hand, by force of the provision of no. 3 of the same article 10, in general, "gains are considered obtained at the moment of performance of the acts provided for in no. 1".

One is here faced with norms proper to tax law that define the tax fact and the moment at which it is considered constituted, and therefore are to be applied with priority.

In light of these norms, in the case of capital gains resulting from the onerous disposal of shareholdings and other securities, gains are considered obtained at the moment of performance of the acts of disposal or even before, in cases in which there is a promise to buy and sell contract accompanied by delivery or possession of the goods or rights that are the subject of the contract, as results from the express content of no. 3 of article 10 of the CIRS.

As is obvious, if the mere promise to buy and sell shareholdings and other securities leads to presumption of the obtaining of the gain, with all the more reason the application of such presumption is justified when the contract of sale and purchase that concretizes it is executed.

In the case at hand, the disposal of the shares of D..., SA, by Claimant A..., which furnishes the obtaining of gains resulting from the holding of shares, through the acquisition of capital of F...-SGPS, SA, is complete on 29-07-2007, the date on which the shareholders signed the declarations acknowledging the increase in capital of this company and from which all "internal effects" of the increase in capital are produced, as results from no. 1 and 2 of article 88 of the Commercial Companies Code. From this date, Claimant A... began to enjoy, within F...-SGPS, SA, all the rights furnished by the disposal of the shares of D..., SA, and in function of the value of these, so the gain obtained with their holding is materialized.

Moreover, when the CIRS was approved (by Decree-Law no. 442-A/88, of 30 November), the Securities Code (approved by Decree-Law no. 486/99, of 13 November) was not yet in force, therefore it is not viable to use its concepts to interpret norms of incidence of IRS that appear in the original wording of the CIRS, as is the case with paragraph b) of no. 1 of article 10 of the CIRS. On the other hand, the legislative authorization granted by Law no. 106/99, of 26 July, upon which the Government based itself to approve the Securities Code, does not cover tax matters, therefore any hypothetical alteration of the incidence of IRS that could result from this Code would be unconstitutional for violation of articles 103, no. 2, and 165, no. 1, paragraph i), of the CRP, which impose that the incidence of taxes be defined by formal law.

Thus, for purposes of IRS, the capital gains resulting from the disposal of the shares of D..., SA are considered obtained on 29-07-2007, the date on which the shareholders sign the declarations to acknowledge the increase in capital of "F..., SGPS, SA", in accordance with the provision of no. 2 of article 88 of the Commercial Companies Code.

For this reason, the challenged action suffers from error regarding the legal bases by understanding that the disposal, for purposes of application of article 10 of the CIRS, was concretized with registration of the shares.

Given that 29-07-2007 is the date on which the disposal of the shares is considered effected and the gain resulting from their holding obtained, it is manifest that a "balance sheet" relating to the values of the assets of D..., SA could not be used to determine the values of the assets for purposes of no. 12 of article 10 of the CIRS as of 31-10-2007.

In truth, as is obvious, the balance sheet relating to 31-10-2007, to correspond to reality (which is questioned by the Claimants), can only demonstrate the values of the assets that constituted the property of D..., SA on that date and not on 29-07-2007, the date of disposal relevant for purposes of application of article 10 of the CIRS.

There is no reason to believe that the values of the property of D..., SA remained unchanged between 29-07-2007 and 31-10-2007 and far less until 02-11-2007, the date of registration of the shares, as to which no proof of those values was produced.

Moreover, the facts that the percentage of the values of the real estate property and total property of D..., SA, is very close to the value of 50% provided for in no. 12 of article 10 of the CIRS, and that this percentage varied significantly for this purpose, by variation of the value of total net assets, in light of the balance sheets of 31-12-2006 and 31-10-2007, prevents that any secure conclusion can be formulated on the eventuality of that percentage being greater than 50% on 29-07-2007.

In truth, as is seen in the chart that appears at point III.1.3 of the Tax Inspection Report, in the balance sheet relating to 31-12-2006, the value of the land was €510,467.87 (as on 31-10-2007), but the value of total net assets was €1,027,469.26 (instead of €998,631.91 on 31-10-2007), therefore the percentage of the former was 49.68%.

By the foregoing, the challenged action, in resting on the understanding that the disposal of the shares, for purposes of calculating the percentage referred to in article 10, no. 12 of the CIRS, occurred with the registration of the shares provided for in article 80, no. 1 of the Securities Code, and that the values of the real estate property and total property of D..., SA to be considered were those that appeared in the balance sheet of 31-10-2007, suffers from a defect of violation of law, due to error regarding the legal bases, which justifies its annulment (article 135 of the Administrative Procedure Code of 2001, in force at the time the assessment action was performed).

3.4. Questions of Knowledge Prejudiced

In accordance with the provision of article 124 of the CPPT, subsidiarily applicable by force of the provision of article 29, no. 1 of the RJAT, not being imputed to the IRS assessment defects leading to a declaration of non-existence or nullity, and the Claimant not indicating a relationship of subsidiarity between the defects, the order of appraisal of these should be that which, according to the prudent discretion of the judge, furnishes more stable or effective protection of the offended interests.

The establishment of an order of knowledge of defects in tax litigation, under the terms provided for in that article 124, has embedded in it the legislative understanding that, if judgment is rendered sustaining some defect that confers stable and effective protection of the taxpayer's rights, knowledge of other defects imputed to the challenged action becomes prejudiced, as useless, since if it were always necessary to know of all defects, the order of their knowledge would be indifferent.

Consequently, there is no utility in knowledge of the remaining defects imputed to the challenged actions, in particular that of the use of an unapproved balance sheet and the non-application of no. 12 of article 10 to situations in which real estate are an integral part of the assets in operation devoted to the normal activity of a company.

For this reason, knowledge is not taken of them (article 130 of the CPC).

4. Decision

In accordance with the foregoing, the members of this Arbitral Court agree to:

a) Sustain the petition for arbitral pronouncement, on the grounds of a violation of law defect, under the terms referred to in section 3.3.1 of this judgment;

b) Declare the illegality of the following acts:

– order of 16-06-2014, issued by the Assistant Director-General of the Portuguese Tax and Customs Authority, under delegation of authority, which dismissed the hierarchical appeal;

– IRS assessment no. 2011..., relating to the year 2007;

– annul the aforementioned order and assessment;

c) Consider prejudiced and take no knowledge of the defects imputed to the acts referred to in section 3.4 of this judgment.

5. Value of Proceedings

In accordance with the provision of article 306, no. 2 of the CPC of 2013, article 97-A, no. 1, paragraph a), of the CPPT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €574,768.21.

Lisbon, 08-08-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(José Alberto Pinheiro Pinto)

(Américo Brás Carlos, dissenting as per attached declaration)

DISSENTING OPINION

I voted in dissent because, contrary to the position that obtained the majority in the Judgment, I consider that the date of transmission of the shares in question is the day of their registration, under the terms determined by no. 1 of article 80 of the Securities Code (CVM). This precept provides that "Scripless securities are transmitted by entry in the account of the acquirer". In the Portuguese legal order (which naturally includes tax law) there is no other means nor moment of legal transmission – and therefore of disposal – of these securities. In the terms of no. 3 of article 10 of the CIRS it is this "moment of performance of the acts provided for in no. 1" and it is this moment at which gains resulting from those acts are considered obtained.

The legal requirement of intervention of a third depositary entity for the transmission to be deemed concretized, I understand it as the pursuit of an objective of security and certainty in legal commerce. Although the norm is not applicable to the situation sub judice, it is also that teleology, and no other, that is achieved from what is provided for in no. 2 of article 80 of the CVM, which deals with cases in which shares are transmitted on a regulated market. Because there is forthwith the intervention of an entity external to the transmitter and the transferee, it makes sense in light of those principles that, independent of the aforementioned registration, the acquirer be permitted special legitimacies of disposition of the shares.

The Judgment seeks to extend to the facts under analysis the provision of the exceptional norm of paragraph a), of no. 3 of article 10 of the CIRS, which contradicts the valuation inherent in the general rule contained in the body of this no. 3. This is not, in my opinion, admissible. This exceptional norm does only (and it is much) for a specific typified situation - promise to buy and sell or exchange followed by delivery or possession - presume (a presumption, moreover, rebuttal, under article 73 of the LGT) the anticipation of the moment of obtaining a gain relative to the moment of disposal. Extending this regime to other situations not contained in the provision of the norm violates no. 4 of article 11 of the LGT and article 11 of the Civil Code applicable by force of paragraph d) of article 2 of the LGT and runs counter to the principle of fiscal legality in its aspect of obligation of determination or typification.

The Arbitrator

(Américo Brás Carlos)