Joint Liability in IRC: Capital Gains Tax on Non-Resident Company & Statute of Limitations (CAAD 719/2014-T)

ARBITRAL DECISION

I – REPORT

On 17 October 2014, A…, taxpayer number …, with tax domicile in …, postal box …-B, …-… Faro, filed a request for the constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of additional assessment of Corporate Income Tax (IRC) No. 2007 …, of 27 November 2007, relating to the tax year 2004, in the amount of EUR 66,200.00, with respect to which he was held jointly and severally liable.

To substantiate his request, the Claimant alleges, in summary:

i.) Breach of the right to prior hearing of the Claimant, in his imputed quality as jointly and severally liable, for the exercise of his right to participate in the tax assessment act in question, in violation of article 267, No. 5, of the Constitution of the Portuguese Republic (CRP) and also of articles 100 of the Code of Administrative Procedure (CPA) and 60 of the General Tax Code (LGT);

ii.) Illegality of the tax inspection action that determined the tax assessment act in question due to the incompetence of the Finance Directorate of Faro to carry it out, in violation of article 16, No. 3, of the Corporate Income Tax Code (CIRC);

iii.) Lack of notification to the Claimant of the assessment act in question within the respective period of limitation – and likewise, lack of notification of the same act to B… HOLDINGS itself – in violation of article 45, No. 1, of the LGT;

iv.) Illegality of the quantification of the capital gain subject to taxation due to the non-application of the regime of limitation of taxable income provided for in article 43, No. 2, of the Personal Income Tax Code (CIRS) in light of the status of non-resident of B… HOLDINGS, in violation of article 63 of the Treaty on the Functioning of the European Union (TFEU);

v.) Illegality of the quantification of the capital gain subject to taxation due to failure to consider the expenses incurred by B… HOLDINGS in the acquisition and disposal of the real property that generated it.

On 20 October 2014, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Administration (AT).

The Claimant did not appoint an arbitrator, whereby, under the terms of paragraph a) of No. 2 of article 6 and paragraph a) of No. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 5 December 2014, the parties were notified of these appointments, and neither manifested any desire to challenge any of them.

In accordance with the provisions of paragraph c) of No. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 24 December 2014.

On 3 February 2015, the Respondent, duly notified for this purpose, presented her response by way of exception and by way of challenge.

On 18 March 2015, an order was issued by the Arbitral Tribunal in which, considering that, in this case, none of the purposes legally entrusted to it were present, and taking into account the position taken by the parties, under the terms of articles 16(c) and 19 of the RJAT, as well as the principles of procedural efficiency and prohibition of useless acts, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, as well as the submission of arguments by the parties, and it was determined that the final decision would be rendered within 30 days.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, No. 1, paragraph a), 5, and 6, No. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate, and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceeding is not affected by any nullities.

All things considered, it is necessary to pronounce

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Found to be Proven

1. The assessment that is the subject of the present proceedings is based on a capital gain generated by the company of Gibraltarian law C… HOLDINGS LIMITED, with tax identification number …, relating to the onerous disposal of real property, of which the present Claimant was notified, in the context of the subsequent tax enforcement proceedings, as jointly and severally liable, under the terms of article 27 of the LGT.

2. Under Internal Audit Order 2007 …, of 5 January 2007, of the Finance Directorate of Faro, an internal tax inspection action was carried out at B… HOLDINGS LIMITED, with tax identification number …, a company of Gibraltarian law, a non-resident entity without a permanent establishment in Portuguese territory, relating to Corporate Income Tax (IRC) for 2004.

3. In the said inspection it was found that by public deed of purchase and sale executed at the 2nd Notarial Registry of Faro, on 29 April 2004, the taxpayer sold urban real property, registered in the property register of the parish of …, municipality of …, under item …, with the taxable patrimonial value of € 885,200.00, for the price of € 1,150,000.00, real property which had been acquired by the taxpayer, who obtained a certificate of use on 21 October 2003.

4. With reference to Corporate Income Tax for 2004, B… did not file the tax return form 22, in accordance with article 109 and paragraph b) of No. 5 of article 112 of the CIRC, relating to the capital gain obtained from the onerous disposal of real property.

5. The tax inspection proposed a merely arithmetic correction to the taxable income relating to the capital gain obtained from the onerous disposal of the said real property, calculated in the amount of € 342,658.00, as detailed below:

1. Regarding the project of corrections by the tax inspection, to exercise the right to prior hearing, the following notifications were made:

a. Official Letter No. … of 31 January 2007, to B…, at the address then registered in the registry, in Almancil, by registered mail No. RM … … … PT, which was returned together with a letter from attorney Dr. D…, in which he informed that "he informs that for a long time he has not represented the company … and therefore returns the respective notification";

b. Official Letter No. … of 31 January 2007, addressed to the tax representative E…, at his tax residence in …, registered mail No. RM … PT, which was returned with the indication "unknown".

1. At the date of these notifications, the tax registry showed E…, with tax identification number …, in his capacity as tax representative of B…, following the notification of changes as recorded in pages 108 to 122 of the process file.

2. The final report of the tax inspection, approved by order of 5 March 2007, was subject to the following notifications:

a. By official letter No. … of 6 March 2007 to B…, at the address then registered in the registry, in …, by registered mail … PT, which was returned together with a letter from attorney Dr. D…, in which "he informs that for a long time he has not represented the company … and therefore returns the respective notification";

b. By official letter No. … of 6 March 2007, addressed to the tax representative E…, at his tax residence in …, registered mail … PT, which was returned with the indication "unclaimed", followed by a 2nd notification by official letter No. … of 20 March 2007, registered mail … PT, with the indication "moved out";

1. At the date of these notifications, the tax registry showed E…, with tax identification number …, in his capacity as tax representative of B….

2. Following that correction, the official assessment of Corporate Income Tax for 2004 was issued, with No. 2007…, of 8 October 2007, in the amount of €66,200.00, which was dispatched on 30 November 2007 by the Central Offices of the AT under postal registry No. RY … PT, of 28 November 2007, distributed by the postal service and addressed to B…, in the person of its tax representative.

3. At the date of this notification, the "System for Management and Registration of B…" registered.

4. From the assessment, certificate of debt No. 2008/66952 was extracted, with the consequent institution of Tax Enforcement Proceeding (PEF) No. … 2008 …, on 26 January 2008.

5. Within the scope of that tax enforcement proceeding, the Claimant was cited on 10 February 2012, in his capacity as manager of assets and rights of the non-resident company, as jointly and severally liable for the debt in enforcement proceedings, following the order of 6 February 2012.

6. The Claimant reacted against the contested Corporate Income Tax assessment by filing an administrative appeal, registered on 27 April 2012 with No. … 2012 ….

7. Within the scope of that appeal, a draft dismissal order was issued by order of 23 July 2012, by the Deputy Finance Director in place of the Finance Directorate of Lisbon, notified to the Claimant to exercise the right to prior hearing by official letters No. … and … of 25 July 2012.

8. The Claimant exercised his right to prior hearing, and finally a dismissal decision was issued by order of 5 September 2012, notified by registered letter of 7 September 2012.

9. Not conforming to the decision issued in the context of the administrative appeal procedure, the Claimant filed a Hierarchical Appeal addressed to the Minister of State and Finance, registered on 9 October 2012, with No. … 2012 ….

10. Within the scope of that hierarchical appeal, a dismissal order dated 26 June 2012 was issued by the Director of Services of Corporate Income Tax, by sub-delegation of powers, notified to the Claimant by registered letter of 18 July 2014 through official letters No. … and … of 18 July 2012.

11. The Claimant filed an Opposition to that Tax Enforcement Proceeding, on the grounds of paragraphs b), e) and i) of No. 1 of article 204 of the Code of Tax Procedure and Process (CPPT), which is pending before the Administrative Court (TAF) of Sintra under No. …/12….BESNT, having the Representation of the Public Treasury been notified to defend until 13 November 2012.

12. The Claimant is an attorney, holder of professional certificate No. …-F, with an office at …, No. …, 4th F, …-… ….

13. At no time, before being cited for enforcement proceedings, was the present Claimant notified by the Tax Administration within the scope of the inspection procedure that preceded the Corporate Income Tax assessment at the origin of the tax enforcement proceeding No. … 2008 …, just as he was not directly notified of the respective tax assessment, nor was he granted a period for voluntary payment thereof.

14. At no time prior to the citation carried out within the context of the tax enforcement proceeding No. … 2008 …, did the Tax Administration notify the Claimant of its understanding that he is jointly and severally liable in the putative capacity of manager of assets and rights of B… HOLDINGS, having in particular failed to proceed with notification in order to allow the Claimant to participate in the administrative decision to impute that quality to him or, at least, to gather evidence to confirm or refute such a hypothesis.

15. The citation note of the Claimant, notwithstanding that it includes a copy of the final inspection report and the demonstration of the consequent Corporate Income Tax assessment, is silent as to any notification of that assessment to B… HOLDINGS, whether as to the date of its execution or as to the means used by the Tax Administration for this purpose.

16. At the time of the acquisition of the real property referred to in item 3, B… HOLDINGS paid Property Transfer Tax (SISA) in the amount of, respectively, EUR 2,902.87 and EUR 297.02, for a total of EUR 3,199.89, and incurred Stamp Duty (IS) in the amount of EUR 255.99.

A.2. Facts Found Not to be Proven

1. In the execution of the public deeds of 29 March 2000 and 25 September 2000, B… HOLDINGS incurred the corresponding notarial costs.

2. B… HOLDINGS incurred Stamp Duty, at the time of the disposal of the real property, in the amount of nine thousand two hundred euros and twenty-five euros.

3. In the execution of the public deed of 29 April 2004, B… HOLDINGS incurred the corresponding costs.

A.3. Justification of Proven and Unproven Factual Matters

With respect to factual matters, the Tribunal does not need to pronounce itself on everything alleged by the parties, but rather it has the duty to select the facts that are relevant to the decision and to discriminate between proven and unproven matters (see article 123, No. 2, of the CPPT and article 607, No. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, No. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the adjudication of the case are chosen and selected based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) in issue (see former article 511, No. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, No. 1, paragraph e), of the RJAT).

Accordingly, taking into account the positions assumed by the parties, the documentary evidence and the process file attached to the proceedings, the facts listed above were considered proven as relevant to the decision.

In particular, the fact stated as proven in item 25 derives from the application of a criterion of normalcy to the available evidence (public deeds of disposal), which are moreover presupposed by the tax act itself that is the subject of the present proceeding, in light of the provisions of article 74/2 of the LGT, and it follows from common knowledge that the acquirer bears the tax burdens indicated there, that the notarial act in question would not have taken place without them being duly proven, and that, if that were not the case, the Tax Administration would easily have detected this situation and made the corresponding demonstration in the proceedings.

The facts found not to be proven result from the absence or insufficiency of proof regarding them.

In particular, the fact listed under item 2 results from the circumstance that, notwithstanding that payment of Stamp Duty in the indicated amount is recorded in the public deed, it does not result from the same, nor from a criterion of normalcy, that the Company incurred them.

B. LEGAL MATTERS

The Tax Administration begins by questioning "the limitation of the assessment as a ground for opposition to tax enforcement proceedings."

In this regard, the Tax Administration states that "it considers that the limitation of the assessment, as presented in the present proceedings, appears only to be capable of affecting the efficacy of the tax act and not its validity, consisting, consequently, in a ground of opposition to tax enforcement proceedings and not in a ground of challenge to the validity of the tax act."

The Tax Administration continues, stating that "in the situation under consideration, the contested assessment was made within the period of limitation, and the question being debated in the proceedings is whether valid notification of the same to B… occurred also within the same period and, with respect to the Claimant, whether the period of article 45 of the LGT applies to him."

Now, contrary to the framework established by the Tax Administration, this issue does not constitute a matter of exception (jurisdiction), but rather of merit. The Tribunal is presented with – and has competence to decide – questions relating to the legality of the assessment act. Whether the facts in question (assessment made within the limitation period and notification thereafter) generate or not the illegality of the assessment act is a question that falls within the consideration of the merit of the Claimant's claim (the illegality of the assessment act), and not within the scope of the Tribunal's jurisdiction, which undoubtedly exists, to determine the legality or illegality of that act.

Accordingly, this preliminary issue raised by the Tax Administration does not succeed.

The Tax Administration also raises, as a question of the same nature, the possible occurrence of lis pendens between the present arbitral action and the proceeding with No. …/12….BESNT, of the Administrative Court of Sintra, insofar as "it is debated in that opposition the exigibility of the debt enforceable against the present Claimant having as a basis, also, the lack of notification of the assessment within the period of limitation, under article 204(e), No. 1 of the CPPT."

Now, as the Tax Administration itself recognizes, lis pendens exists only if there is "identity of parties, of claim and of cause of action," and it is evident, and also recognized by the Tax Administration, that in the opposition to enforcement proceeding, the claim is not the illegality of the assessment, as occurs in the present proceedings, but rather the exigibility of the enforceable debt and the consequent dismissal of the enforcement proceeding.

Accordingly, there being no identity of claim, this exception should likewise not succeed.

Having established this, the Claimant raises the illegality of the assessment that is the subject of the present proceedings, on the basis of the following grounds:

i.) Breach of the right to prior hearing of the Claimant, in his imputed quality as jointly and severally liable, for the exercise of his right to participate in the tax assessment act in question, in violation of article 267, No. 5, of the Constitution and also of articles 100 of the CPA and 60 of the LGT;

ii.) Illegality of the tax inspection action that determined the tax assessment act in question due to the incompetence of the Finance Directorate of Faro to carry it out, in violation of article 16, No. 3, of the CIRC;

iii.) Lack of notification to the Claimant of the assessment act in question within the respective period of limitation – and likewise, lack of notification of the same act to B… HOLDINGS itself – in violation of article 45, No. 1, of the LGT;

iv.) Illegality of the quantification of the capital gain subject to taxation due to the non-application of the regime of limitation of taxable income provided for in article 43, No. 2, of the CIRS in light of the status of non-resident of B… HOLDINGS, in violation of article 63 of the TFEU;

v.) Illegality of the quantification of the capital gain subject to taxation due to failure to consider the expenses incurred by B… HOLDINGS in the acquisition and disposal of the real property that generated it.

Let us examine each one.

The Claimant contends that "considering, on the one hand, the alleged joint and several liability imputed to the present Claimant, and, on the other hand, the regime applicable to the guarantees and means of defense of the jointly and severally liable liable resulting from the framework above, it appears clear that the Tax Administration would be obliged to notify the present Claimant in the same terms as it was obliged to notify the principal debtor – i.e., to notify him for the exercise of his right to participate in the decision in the context of the tax inspection to which B… HOLDINGS was subject."

The Claimant further alleges that "intending the Tax Administration to impute to the present Claimant the joint and several liability for the debt in question, attributing to him the quality of manager of assets and rights of B… HOLDINGS, there can be no doubt that the Claimant would also have to be heard before such decision was made – i.e., by notifying him also for the exercise of his right to participate in that decision."

The Claimant finally refers that "neither was the present Claimant notified by the Tax Administration of any draft decision imputing the quality of jointly and severally liable for the debts of B… HOLDINGS or of the continuation of the enforcement proceeding No. … 2008 … against him."

With all due respect, it is understood that the Claimant's claim rests on two misconceptions.

The first is to equate the position of the jointly and severally liable with that of the original taxpayer or contributor, positions that are distinct, as is evident from article 22/1 of the LGT.

This distinction, moreover and for what matters now, is evident in the regime of article 9/2 of the CPPT, which provides that:

"The legitimacy of jointly and severally liable parties results from the requirement made upon them of the fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor."

Thus, during the assessment procedure against the original taxpayer, the jointly and severally liable lacks legitimacy for that tax procedure. Accordingly, only after the "requirement made upon them of the fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor," will the tax liable become legitimate parties in the pending procedures.

Thus, and since, at that date, the "requirement of the fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor" had not been made upon the Claimant, the jointly and severally liable did not have legitimacy to intervene in the assessment procedure in question, and the Tax Administration correspondingly did not have the obligation to "notify him for the exercise of his right to participate in the decision in the context of the tax inspection to which B… HOLDINGS was subject," nor for the exercise of any other faculty, or for the knowledge of any act in the assessment procedure of that company.

On the other hand, and herein lies the second misconception, while it is unquestionable that, as a harmful act, the administrative-tax act that determines the requirement made to the jointly and severally liable of "fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor" should be preceded by his prior hearing, it is equally unquestionable that such act is a distinct and autonomous act from the assessment act for the original taxpayer, and, as such, that the invalidity of such act (of determination of the requirement made to the jointly and severally liable of "fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor"), particularly the breach of the duty of prior hearing, does not extend to the assessment act, not least because it is a subsequent act to that one[1].

Thus, the invalidity specific to the act of determination of the requirement made to the jointly and severally liable of "fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor" should be raised and considered in an autonomous proceeding that has such act as its object, and not in the context of a challenge to the assessment act of the tax obligation whose fulfillment is required of the jointly and severally liable.

That is, and in summary: one thing is the act of determination of the requirement made to the jointly and severally liable of "fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor," another thing is the assessment act of the tax obligation whose fulfillment is required of the jointly and severally liable, and the defects specific to each of these acts should be raised and known in proceedings that have them, respectively, as their object.

Now, the object of the present tax arbitral action is unquestionably the Corporate Income Tax assessment act No. 2007 …, of 27 November 2007, relating to the tax year 2004, of the company B… HOLDINGS, in the amount of EUR 66,200.00, and not the act of determination of the requirement made to the jointly and severally liable of "fulfillment of the tax obligation or of any tax duties, even jointly with the principal debtor"[2].

Accordingly, and for all that has been stated, it is understood that there was no violation, with respect to the Corporate Income Tax assessment act No. 2007 …, of 27 November 2007, relating to the tax year 2004, of the company B… HOLDINGS, in the amount of EUR 66,200.00, that is the object of the present proceeding, of the Claimant's right to participate, in contravention of, in particular, article 267, No. 5, of the Constitution and also articles 100 of the CPA and 60 of the LGT.

Further in this context, the Claimant alleges that "considering that (…) notification of the original contributor suffices – B… HOLDINGS – to allow the exercise of the right to prior hearing, it will always be said, as mentioned above, that the Tax Administration does not demonstrate that such notification was carried out."

With all due respect, here too it must be understood that the Claimant is not correct.

Indeed, as appears from the process file and results from the facts proven above, two notifications were made, within the context of the prior hearing of the Company, namely:

i. One, directed to the Company, by Official Letter No. … of 31 January 2007, at the address then registered in the registry, in Almancil, by letter with postal registration No. RM … PT, which was returned;

ii. Another, by Official Letter No. … of 31 January 2007, addressed to the tax representative E…, at his tax residence in Loulé, by letter with postal registration No. RM … PT, which was also returned.

In light of these facts, and the provisions of articles 38/3 and 39/1 of the CPPT, the duty of prior hearing in question should be considered fulfilled, and this allegation should accordingly not succeed.

The Claimant further alleges that, B… HOLDINGS being a non-resident company and without a permanent establishment in Portuguese territory, "in accordance with the second part of No. 3 of article 16 of the CIRC, it would be the Director of Tax Prevention and Inspection Services who would be competent to determine the taxable income and not the Finance Directorate of Faro."

Here too, with all due respect, the Claimant is in error in his interpretation of the law.

Indeed, article 16/3 of the CIRC provided, in the relevant wording for the case, that:

"The determination of taxable income within the scope of direct assessment, when carried out or subject to correction by the services of the General Directorate of Taxes, is the competence of the finance director of the area of the seat, effective management or permanent establishment of the taxpayer, or of the director of Tax Prevention and Inspection Services in cases that are subject to corrections made by it in the exercise of its powers, or by an official in whom either of them has delegated powers."

The Claimant seeks to see in the legal text an alternative wording, whereby there would be a distribution of powers between the finance director and Tax Prevention and Inspection Services in alternative terms, that is, where the competence of one body would exclude that of the other.

However, and in light of the interpretative criteria of article 9 of the Civil Code, it is understood that this is not the correct reading of the norm in question.

Indeed, that norm should be read in conjunction with article 16 of the Regulation of Internal Organization and Competence of the General Directorate of Taxes (RCPIT), which provided that:

"The following services of the General Directorate of Taxes are competent to carry out tax inspection acts, under the terms of the law:

a) The Directorate of Services for Tax Prevention and Inspection (DSPIT), with respect to taxpayers and other tax obligors who are to be inspected by the central services of the General Directorate of Taxes, in accordance with the selection criteria provided for in the National Plan for Tax Inspection Activities or fixed by the director-general of Taxes under the terms of this Regulation;

b) The regional services, with respect to taxpayers and other tax obligors with domicile or tax seat in its territorial area;

c) The local services, with respect to taxpayers and other tax obligors with domicile or tax seat in its territorial area."

In this context, it appears that the competence conferred by law on Tax Prevention and Inspection Services is not a residual competence, defined negatively by the competence attributed to regional and local services, but rather a complementary competence that, in function of the National Plans for Tax Inspection Activities, was superimposed on that of those services.

It is thus understood that there was no legal gap in competence for inspection and corrections to non-resident taxpayers without a permanent establishment, but rather a situation of lex minus dixit quam voluit. That is, the non-express reference to non-resident taxpayers without a permanent establishment should not be understood in the sense intended by the Claimant, of subtracting them from inspection and correction actions outside the National Plans for Tax Inspection Activities, but rather as a case in which the legislator said less than what it meant, and it is understood, accordingly, that those taxpayers would be included in the inspection and correction competence of peripheral regional and local bodies, and it is not apparent – nor has the Claimant indicated – any reason why this should not be so.

Accordingly, and in light of the above, this allegation of the Claimant likewise does not succeed.

Subsequently, the Claimant alleges that "If the present Claimant is to be considered as jointly and severally liable for payment of assessment No. 2007 …, the collection claim expressed by the Tax Administration, raised for the first time, by citation in tax enforcement proceedings, will in any case be illegal, by virtue of the fact that he was not notified of the tax assessment before the end of the limitation period, from which can only follow its respective inexigibility."

The Claimant understands that the "interpretation of article 45, No. 1, of the LGT, only an inclusion of the 'jointly and severally liable' in the concept of 'contributor,' alongside the 'original taxpayer,' will correspond to an interpretation of the norm consistent with article 13 of the Constitution, since, otherwise, the ordinary legislator would be depriving him of the guarantee of certainty and legal security assured by the institute of limitation, without seeing what difference in the situation of both before the Public Treasury justifies such different treatment."

The Claimant thus concludes that the "lack of notification of the tax assessment within the respective four-year limitation period (…) determines its respective inexigibility and constitutes grounds for annulment."

In this matter, however, the doctrine of the Illustrious Councilor Jorge Lopes de Sousa[3] is followed, according to whom:

"In general, facts that do not affect the validity of acts but only have to do with their efficacy, such as the absence or irregularity of their notification, cannot be used as grounds for judicial challenge.

The notification of an assessment is an act subsequent and external to this act and therefore, in general, the defects that affect the act of notification do not affect the notified act.

The questions that have to do with the efficacy or inefficacy of the act, as questions that arise subsequently to the performance of the act and concern the possibility of the act producing effects in relation to the recipient, are questions that may be known in proceedings of opposition to tax enforcement, but cannot be the subject of autonomous consideration in proceedings of judicial challenge.

However, this is not the case in all instances of limitation of the right to assess.

In fact, under article 45 of the LGT, the right to assess taxes becomes limited if the assessment is not validly notified to the contributor within the legal period, which varies depending on the circumstances.

There are cases in which the assessment itself is made after the end of the applicable legal period and cases in which the assessment itself is made in violation of the law.

In these cases, the lack of notification within the period does not assume autonomous relevance since the act itself is illegal, having been performed belatedly.

However, it may happen that the assessment is made within the legal period and notification takes place only after its end or is made within the period but deficiently.

In these latter cases, it was understood that the legality of the assessment was affected by the lack or irregularity of notification, which was a requirement of the validity of the assessment itself, understood not in the strict sense, as the act fixing the tax, but in the broad sense as the assessment process, integrated by a set of acts connected with such fixation and its imposition on the recipient. In this context, the notification of the assessment act was a necessary requirement for the limitation period not to expire and, therefore, its absence affected the legality of the assessment process, globally considered.

Before this Code, with the lack of notification of the tax assessment within the limitation period not being provided for as a ground of opposition to tax enforcement, it was understood that these questions should be considered in judicial challenge as questions pertaining to the legality of the assessment, in the broad sense referred to.

In this Code, however, paragraph e) of No. 1 of article 204 introduced a new ground of opposition to tax enforcement proceedings which is, precisely, the lack of notification of the tax assessment within the limitation period.

Therefore, it now seems clear that the lack of notification (or the existence of irregularities affecting its validity, which translate into a lack of valid notification) affects the efficacy of the assessment act and not its validity, whereby it is in the opposition that, in principle, such lack of notification should be invoked and, as a ground of opposition, that lack of valid notification may be invoked therein even if the assessment has not been challenged.

However, if such lack of notification is invoked in proceedings of judicial challenge and the limitation period has already expired, it will constitute a definitive obstacle to the performance of a valid assessment act, whereby the possibility of knowing about it as a ground of subsequent futility of the suit should be considered, inasmuch as there would be no utility in determining whether a valid act exists that cannot come to have efficacy."

Continuing with the same author[4]:

"However, the deficiencies that affect the validity of notification do not affect the validity of the notified act.

Indeed, the notification of an act is an act external to this act and, therefore, the defects that affect the notification, which may determine the invalidity of the notification and the consequent inefficacy of the notified act, do not affect the validity of this act."

That is, and in summary: it is understood that the lack of notification of an assessment act, performed within the limitation period, as is the case, but (possibly) notified beyond that period, does not contend with the validity of that act, but only with its efficacy. Moreover, the Claimant himself seems to have, in some way, that understanding, when he refers that it generates the "inexigibility of the debt," which is, obviously, different from the illegality of the assessment.

Accordingly, since the alleged need for notification of the assessment to the jointly and severally liable does not contend with the legality of that assessment, to which the questions cognizable in the present proceeding must be reduced, it is not necessary to determine whether, as the Claimant alleges, that need derives from an interpretation of article 45/3 of the LGT consistent with the Constitution, nor even to determine the utility of the suit.

Indeed, and in the first place, in the present case, we would never be faced with a subsequent futility of the suit, but rather with an original futility, since the situation in question predated the institution of that suit. Further, because it is understood that the suit, regardless of the resolution given to the said question, would always maintain its interest. Accordingly, if it were concluded that notification to the jointly and severally liable was unnecessary, the remaining questions raised by the Claimant would always have to be known. If, on the other hand, it were concluded that such notification was necessary, it would not be concluded, for the reasons previously stated, that the assessment was invalid, and the utility for the Claimant of the consideration of the remaining questions raised by him would likewise be maintained, not least insofar as the res judicata that would flow from a decision of futility of the suit, as a decision of mere form determining the dismissal of the Tax Administration from the suit, would not prevent the continuation of enforcement proceedings.

Accordingly, since the possible need for notification of the Claimant does not extend to the validity of the impugned assessment, this allegation of the Claimant likewise does not succeed.

The Claimant next alleges that "the Tax Administration proceeded to the contested assessment considering B… HOLDINGS as a non-resident company without a permanent establishment in Portuguese territory, determining the taxable income of the same in accordance with the norms of determination of taxable income provided for in articles 22 et seq. of the CIRS" and "that, within the scope of CIRS, with respect to capital gains, there is a significant difference in treatment between resident and non-resident taxpayers, established in article 43, No. 2, of the CIRS, where a limitation of taxation to 50% of capital gains realized by residents is provided but not of capital gains realized by non-residents."

The Claimant thus concludes that "B… HOLDINGS was subject to discriminatory tax treatment based on its residence by the Tax Administration" and that "understanding that there are no arguments that could justify the discriminatory treatment operated by the regime of article 43, No. 2, of the CIRS, it is concluded that the reduction provided therein as applicable only to residents constitutes a discriminatory restriction on the free movement of capital, contrary to articles 63 and 65 of the TFEU and also to article 8, No. 4, of the Constitution, which, in light of article 135 of the CPA, determines the annulment of assessment No. 2007 …."

Once again, with all due respect always reserved, it is understood that the Claimant is in error in his analysis of the situation in question.

Indeed, if it is certain that, contrary to what the Tax Administration contends, there are no doubts that the tax act that is the subject of the present arbitral proceeding proceeded to the application of article 43 of the CIRS[5], and that No. 2 of this norm has already been considered inconsistent with Community Law[6], insofar as it discriminates unjustifiably between residents and non-residents, it will no longer be possible to make the same judgment with respect to the analogy of the situation in the present proceeding and those where that judgment of inconsistency with community rules was formulated.

Indeed, contrary to what the Claimant intends, it is understood that the judgment of discrimination should be made, not against the situation of a Corporate Income Tax taxpayer, non-resident, compared with that of a Personal Income Tax taxpayer, resident, but rather against the situation of a Corporate Income Tax taxpayer, non-resident, compared with that of a taxpayer of the same tax, resident.

That is: the Claimant cannot claim that the Company is a victim of unjustified discrimination vis-à-vis the treatment that Portuguese law grants to a resident Personal Income Tax taxpayer, since if the Company were resident it would be taxed not as a taxpayer of that tax (Personal Income Tax), but rather under Corporate Income Tax, so that, even if it were resident (or possessed a permanent establishment) in Portuguese territory, the Company would never benefit from the clause of article 43/2 of the CIRS.

Hence, what would be necessary to demonstrate in the proceedings, in order to support the existence of an unjustifiably discriminatory treatment of the Company, violating the Community Law norms invoked, would be that, if it were a resident taxpayer in Portuguese territory (or with a permanent establishment located there), would have, in Corporate Income Tax, an unjustifiably more favorable treatment.

Nothing being determined in this regard – nor having been alleged, for that matter – it cannot be affirmed that there is the invoked violation of Community Law. Indeed, there being no verification that, if it were resident, the Company would benefit from the clause of No. 2 of article 43 of the CIRS, it cannot be affirmed that its non-application to the case, as operated in the tax act in question, results in an unjustified discrimination of the Company, deriving from its status as non-resident without a permanent establishment.

Accordingly, and for all that has been stated, this allegation of this defect should also be considered as not succeeding.

Finally, the Claimant alleges that "the tax capital gain determined by B… HOLDINGS as a result of the sale of the land for construction, designated …, located in …, in …, will amount, at the maximum – without prejudice to what will be stated below regarding the realization value – only to EUR 261,319.20 and not to EUR 264,800.00, the value found by the Tax Administration."

The Claimant alleges that to "the acquisition value – duly increased in light of the coefficient of currency depreciation, provided for in article 50 of the CIRS and concretized in the "Table of updating of currency depreciation coefficients referred to in articles 44 of the CIRC and 50 of the CIRS" attached to Ordinance No. 376/2004, of 14 April, in the amount, therefore, of EUR 885,200.00 (EUR 790,357.143 x 1.12) – should not fail to be added at least EUR 3,480.88, as a title for expenses inherent to the acquisition and alienation of the rural property in question," deriving from:

i. B… HOLDINGS having paid Property Transfer Tax (SISA) in the amount of, respectively, EUR 2,902.87 and EUR 297.02, for a total of EUR 3,199.89 [(PTE 5,819,734 X 10% = PTE 581,973) + (PTE 595,466 x 10% = PTE 59,547)];

ii. B… HOLDINGS having actually incurred Stamp Duty (IS) in the amount of EUR 255.99 [(PTE 5,819,734 x 0.08% = PTE 46,558) + (PTE 595,466 x 0.08% = PTE 4,764)];

iii. In the execution of the public deeds of 29 March 2000 and 25 September 2000, B… HOLDINGS also incurred the corresponding notarial costs;

iv. B… HOLDINGS incurred Stamp Duty, at the time of disposal of the real property, in the amount of nine thousand two hundred euros and twenty-five euros;

v. In the execution of the public deed of 29 April 2004, B… HOLDINGS incurred the corresponding costs.

Examining the facts proven and not proven, it appears that, indeed, the Company will have incurred the expenses discriminated above, in items i. and ii., in the total of €3,455.88, which should be considered, as a deduction, in the realization value to be taxed, which should be €261,344.12.

Accordingly, in this respect, the arbitral claim should succeed.

C. DECISION

Accordingly, this Arbitral Tribunal decides to deem the arbitral claim partially successful and, in consequence,

a) To annul partially the Corporate Income Tax assessment that is the subject of the present proceedings, and of the corresponding compensatory interest, insofar as it relates to the realization value in excess of €261,344.12;

b) To deem the present arbitral action unsuccessful in the remaining part;

c) To condemn the parties in the costs of the proceedings, in the proportion of their respective failure, which is fixed at 1.3% for the amount borne by the Tax Administration, and 98.7%, for the amount borne by the Claimant, thus totaling the amount of €41.62 borne by the Tax Administration and €2,406.38 borne by the Claimant, taking into account what has already been paid.

D. Value of the Proceeding

The value of the proceeding is fixed at €66,200.00, under the terms of article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of article 29 of the RJAT and No. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €2,448.00, under the terms of Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective failure, fixed above, under the terms of articles 12, No. 2, and 22, No. 4, both of the RJAT, and article 4, No. 4, of the said Regulation.

Let it be notified.

Lisbon

22 April 2015

The President Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Amândio Silva)

The Arbitrator Member

(Henrique Nogueira Nunes)

[1] As explained by Carlos Alberto da Mota Pinto ("General Theory of Civil Law", 3rd Edition, Coimbra Editora, p. 605), "In invalidity, the absence of production of legal effects results from vices or deficiencies of the legal act contemporaneous with its formation."

[2] Which, it should be noted, is incorporated in the order of 6 February 2012, contained in pages 51 of the process file.

[3] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 706 et seq..

[4] "CPPT – Annotated and Commented", Áreas Editora, 2006, Vol. I, p. 327.

[5] See p. 3 of the Final Inspection Report, where it reads: "Accordingly, the capital gain obtained in the tax year 2004, determined on the basis of the provisions of articles 43, 44, and 46, all of the CIRS, was €264,800.00."

[6] See, for example, Decisions of the Administrative Supreme Court of 16 January 2008 and 30 April 2013, delivered respectively in proceedings 0439/06 and 01374/12, available at www.dgsi.pt.