Process: 723/2014-T

Date: April 8, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 723/2014-T) concerns the legality of a Corporate Income Tax (IRC) assessment related to capital gains from a 2004 property sale by F... Limited, a Gibraltar-based non-resident entity. The claimant, a Portuguese lawyer who acted as the company's representative in the transaction, was held jointly and severally liable for €122,606.40 in IRC taxes. The claimant challenged the assessment on multiple grounds: (1) procedural violations, including lack of notification during the tax inspection procedure and failure to allow participation in the decision attributing joint liability; (2) incompetence of the Tax Directorate of Faro to issue the inspection order; (3) calculation errors in determining capital gains, particularly the failure to include acquisition costs such as SISA (Municipal Transfer Tax), Stamp Duty, and notarial fees; (4) discriminatory treatment of non-residents under article 43(2) of CIRS, allegedly violating EU freedom of capital movement principles; and (5) statute of limitations (caducidade), arguing the assessment became unenforceable due to lack of notification before December 31, 2008, as required by article 45(1) of the General Tax Law (LGT). Following denial of the administrative claim and partial denial of the hierarchical appeal—where only the inclusion of €2,569.01 in acquisition costs was granted—the claimant initiated CAAD arbitration proceedings. The arbitral tribunal, constituted on December 24, 2014, rejected preliminary objections raised by the Tax Authority and proceeded to examine the merits. This case illustrates critical issues in Portuguese tax law, including taxpayer rights to notification and participation, proper calculation of capital gains for non-residents, EU law compatibility, and the strict application of statute of limitations periods in IRC matters.

Full Decision

ARBITRATION AWARD

Case No. 723/2014-T

The arbitrators Dr. Jorge Lopes de Sousa (Arbitrator-President), Dr. Nuno Maldonado Sousa, and Dr. Luís Máximo dos Santos, appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 24-12-2014, agree as follows:

1. Report

A…, NIF …, with tax domicile in …, postal box …-B, …-… …, came, pursuant to the provisions of articles 23 and 95 of the General Tax Law ("LGT"), article 99 of the Code of Tax Procedure and Process ("CPPT"), article 137, n. 1, of the Corporate Income Tax Code ("Código do IRC"), articles 10, n. 1, subparagraph a) and n. 2, of Decree-Law No. 10/2011, of 20 January ("RJAT"), to request the constitution of the collective arbitral tribunal, in which the Tax and Customs Authority is the Respondent.

The Claimant seeks an arbitral pronouncement on the illegality of the decision denying the hierarchical appeal No. … 2012 … and, consequently, of the Corporate Income Tax assessment No. 2007 …, of 8 October 2007.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 26-09-2014 and notified to the Tax and Customs Authority on 20-10-2014.

Pursuant to the provisions of subparagraph a) of n. 2 of article 6 and subparagraph b) of n. 1 of article 11 of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable time limit.

On 09-12-2014 the parties were duly notified of this appointment, and did not manifest a desire to refuse the appointment of the arbitrators, in accordance with articles 11, n. 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

In accordance with the provisions of subparagraph c) of n. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 24-12-2014.

The Tax and Customs Authority filed a response, requesting suspension of the proceedings, raising preliminary objections, and defending the total, or at least partial, dismissal of the present arbitral action.

The Claimant responded to the questions raised by the Tax and Customs Authority.

By award of 23-02-2015, the preliminary objections were found to have no merit and the request for suspension of the proceedings was denied.

In the same award, it was decided to dispense with the meeting provided for in article 18 of the RJAT and that the proceedings continue with oral arguments.

The parties submitted oral arguments.

The parties have legal personality and legal capacity, are legitimately constituted, and are duly represented (articles 4 and 10, n. 2, of the same instrument and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities and no obstacle arises to the examination of the merits of the case.

2. Statement of Facts

2.1. Established Facts

The following facts are considered established:

a) The Claimant is a lawyer, holder of professional credential No. …-F, with offices at …, No. …, ….º F, …-… …;

b) On 23 August 2004, the Claimant executed a public deed of purchase and sale of real property in representation of F… Limited;

c) The said property had been acquired in 2000 (8/9 undivided shares on 31 March 2000 and the remaining 1/9 undivided share on 27 September of the same year);

d) On 10 February 2012, the Claimant was summoned in the tax enforcement proceedings No. … 2008 …, being assigned joint and several liability for payment of € 122.606,40 (€ 92.806,77, as the amount to be enforced, for Corporate Income Tax for the year 2004, and € 29.799,63, as the corresponding increase, including default interest and procedural costs);

e) The Claimant was never notified by the Tax Administration in the course of the tax inspection procedure that preceded the Corporate Income Tax assessment that gave rise to the tax enforcement proceedings No. … 2008 …;

f) The Claimant was not directly notified of the respective tax assessment;

g) The Claimant was not given a time limit for voluntary payment thereof, prior to the tax enforcement proceedings;

h) The Claimant was not notified at any moment prior to the summons effected in the course of the tax enforcement proceedings No. … 2008 … of the Tax Authority's position regarding the joint and several liability attributed to him in his capacity as manager of assets and rights of F…;

i) The Claimant was not notified to participate in the administrative decision that attributed this capacity to him;

j) The summons note of the Claimant is silent with respect to notification of the assessment to F… Limited;

k) The Claimant filed an administrative claim against the said Corporate Income Tax assessment, requesting its annulment, as well as the consequent nullity of the compensatory interest contained in the same assessment, on the following grounds:

1- The Claimant was not notified either of the tax inspection resulting from the internal service order No. OI 2006 …, of 17 November 2006, or of the assessment No. 2007 …, for the exercise of the corresponding right to be heard prior to assessment or before the conclusion of the tax inspection report, the draft decision imputing the capacity of joint and several liable for the debts of F… LIMITED or even the continuation of enforcement proceedings No. … 2008 … against him, which constitutes a violation of the principle of participation of interested parties in administrative decisions, as provided for in articles 267, n. 5, of the Constitution of the Portuguese Republic ("CRP"), 100 of the Code of Administrative Procedure ("CPA"), 60 of the LGT and 60 of the Complementary Rules for the Tax Inspection Procedure ("RCPIT");

2- The Tax Directorate of Faro was not the competent body for issuance of the internal service order No. OI 2006 …, from which resulted the internal tax inspection procedure that gave rise to assessment No. 2007 …;

3- The costs incurred by F… LIMITED with the acquisition and disposal of the property were not considered in the calculation of the capital gain determined, such as the payment of the Municipal Transfer Tax ("SISA"), the Stamp Duty ("IS"), and notarial fees;

4- Article 43, n. 2, of the CIRS, by providing for a limitation of taxation to 50% of capital gains realized by residents but not by non-residents, establishes an arbitrarily differential treatment between resident and non-resident taxpayers, and therefore incompatible with the freedom of movement of capital, as provided for in article 63 of the Treaty on the Functioning of the European Union ("TFEU");

5- Assessment No. 2007 … is unenforceable due to lack of notification thereof to the Claimant before 31 December 2008, pursuant to article 45, n. 1, of the LGT, nor is any notification to F… LIMITED within that statute of limitations period proven;

l) Such administrative claim was denied by decision of the Tax Directorate of Lisbon, notified on 10-08-2012 to the Claimant by office letter No. …, of 7 September 2012;

m) The Claimant filed a hierarchical appeal of the same, being notified of the partial denial of that appeal by Office Letter No. …, of 17 July 2014, in which the tax act in question was upheld and only the inclusion of costs for acquisition of the property in question was granted, in the amount of € 2.569,01;

n) Pursuant to OI 2006 …, of 17-11-2006, of the Tax Directorate of Faro, an internal tax inspection action was carried out at F… LIMITED, with NIPC …, a company under Gibraltar law, a non-resident entity without permanent establishment in national territory, for the purpose of inspecting Corporate Income Tax for 2004;

o) In the inspection referred to, it was found that by public deed of purchase and sale executed at the 2nd Notarial Office of Faro, on 23-08-2004, F… LIMITED carried out the sale of a parcel of land for urban construction, registered in the property register of the parish of …, municipality of …, under item …, for the price of € 400.000,00, a property that had been acquired by the taxpayer for consideration in the amount of € 25.690,09;

p) On 05-05-2004, F… LIMITED appointed the Claimant as his representative, to whom it granted "all powers necessary to, in our name and as if they were ourselves, do, practice, execute and sign any of the following acts, deeds and things:

NAMELY:

  1. To sell at such price and conditions as he deems convenient the property of the Company, designated as parcel …, situated in the subdivision with License No. …/… denominated … or …, parish of …, municipality of …, Portugal, signing contracts for promise to sell and buy, receiving the respective price and giving receipt thereof, signing the deed of purchase and sale and any and all other documents necessary to complete the transaction" (documents of pp. 12, 13 and 14 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

q) With reference to Corporate Income Tax for 2004, F… LIMITED did not file the income tax return form 22, pursuant to article 109 and subparagraph b) of n. 5 of article 112, both of the CIRC, relating to the capital gain obtained with the sale for consideration of the property;

r) The tax inspection proposed a mere arithmetic correction to the taxable matter relating to the capital gain obtained with the sale for consideration of the said property, basing it "on the obtaining of income provided for in article 10 CIRS, following the procedure as provided in n. 2 of article 16 and article 51, both of CIRC" and its determination was made "based on the provisions of articles 43, 44, 46 and 50 of CIRS", calculated in the amount of € 371.227,10, as detailed below:

[Details of calculation as shown in original]

s) Following the inspection, the Corporate Income Tax assessment for the year 2004 No. 2007 …, dated 08-10-2007, was issued in the amount of € 92.806,77, in which, among other things, is indicated as Taxpayer "F… Limited Represented by: E…, R… N … 1 Dto, …-… …" (document No. 3 attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

t) At pp. 81 of the administrative file (page 25 of document "PA7.pdf") there is a "print" with the following content:

[Print as shown in original]

u) At pp. 82 of the administrative file (page 26 of document "PA7.pdf") there is a "print" with the following content:

[Print as shown in original]

v) The Tax and Customs Authority attached to its response document No. 1, with the following content:

[Document as shown in original]

w) The Tax and Customs Authority attached to its response document No. 2, with the following content:

[Document as shown in original]

x) The postal search tool for registered objects of CTT shows the following regarding the object with No. RY…PT (pp. 10 of document "PA4.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein):

[Search results as shown in original]

y) Following a request for clarification directed by the Tax and Customs Authority to the "Manager of CTT of the Tax and Customs Authority", regarding the fact that the postal search tool for registered objects shows the message "Status – Object not found" regarding the CTT Registry "RY … PT of 2007.11.28", the Tax and Customs Authority was informed, among other things, of the following:

"In response to your request we hereby inform you that CTT only has information in the postal objects search system, commonly called Track & Trace up to 15 months, and the physical archive is preserved up to 18 months.

Since your request for information concerns records sent/dispatched in 2007, and given the foregoing, we are unable to meet your request.

We further inform you that complaints about registered objects must be filed within 12 months for the National Service and 6 months for the International Service." (document No. 4 attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

z) On 30-05-2007, the Tax and Customs Authority sent notification of the draft inspection corrections, for exercise of the prior right to be heard, through office letter No. … of 30-05-2007, addressed to F… LIMITED to the attention of tax representative E…, indicating as address Rua …, Lot … A 4.º …, …-… …, through registered mail No. RM …, and the letter was returned marked "Unknown" (pp. 45, 46 and 47 of document "PA7.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

aa) On 30-05-2007, the Tax and Customs Authority sent notification of the draft inspection corrections, for exercise of the prior right to be heard, through office letter … of 3-05-2007, to F… LIMITED, for the address …, 7, … …, through registered mail No. RM … PT (pp. 2 and 3 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

bb) On 25-06-2007, the Tax and Customs Authority sent registered mail with proof of receipt to F… LIMITED for the address …, …, … …, for notification of the Tax Inspection Report with corrections, and the letter was received on 28-06-2007 by an unidentified person (pp. 7, 8 and 9 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

cc) On 25-06-2007, the Tax and Customs Authority sent registered mail with proof of receipt to F… LIMITED "in the person of its representative E…, indicating as address R. … – House … 1 … … …-… …" which was received by an unidentified person (pp. 10 and 11 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

dd) On 30-05-2007, according to the information system of the Tax and Customs Authority, the address of F… LIMITED was …, …, … … (pp. 15 and 16 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

ee) On 09-11-2004 and 30-05-2007, according to the information system of the Tax and Customs Authority, the address of E… was R EN…, No. … -1 …, …-… … (pp. 25 of document "PA4.pdf" and pp. 17 of document "PA8.pdf" attached with the response of the Tax and Customs Authority, which are reproduced herein);

ff) On 19-04-2009, according to the information system of the Tax and Customs Authority, the address of E… was "R …, N … – 3 … …" (pp. 40 of document "PA4.pdf" attached with the response of the Tax and Customs Authority whose content is reproduced herein);

gg) On 19-04-2009, according to the information system of the Tax and Customs Authority, the address of F… LIMITED was "R …, N … – 3 … DT, N … – 3 … DT …" (pp. 38 and 39 of document "PA4.pdf" attached with the response of the Tax and Customs Authority whose content is reproduced herein);

hh) On 06-02-2012, an order was issued in enforcement proceedings … 2008 … instituted for collection of the amount assessed as referred to above, ordering the summons of the Claimant as joint and several liable (pp. 49 of document "PA6.pdf" attached with the response of the Tax and Customs Authority, whose content is reproduced herein);

ii) On 10-12-2012, the Claimant was summoned in enforcement proceedings … 2008 ….

2.2. Facts Not Established

It was not proven that a time limit was not granted to the Claimant for voluntary payment of the amount assessed in the challenged act, namely following summons in the enforcement proceedings referred to in the file.

It was not proven that the letter sent for notification of the assessment was either sent or received.

2.3. Grounds for Fixing the Statement of Facts

The Tax and Customs Authority, at point 11 of its arguments, recognizes as true all the facts referred to by the Claimant at point III of its arguments, with the exception of those referred to in subparagraphs b) and g).

With respect to subparagraph b), the Tax and Customs Authority only does not recognize that the Claimant intervened in the deed of 23 August 2004 "in the course of exercise of his profession", as it does not question that the Claimant executed a public deed of purchase and sale of property in representation of F… Limited.

With respect to subparagraph g), in which the Claimant states that he was not given a time limit for voluntary payment of the amount assessed, the Tax and Customs Authority acknowledges that he was not given a time limit for such voluntary payment prior to the enforcement proceedings.

As for notification of the assessment, it was not established in light of manifest insufficiency of evidence.

In the assessment note, the registered number RY … PT is referred to (document No. 3 attached with the response) and the Tax and Customs Authority seeks to demonstrate that it was sent based on documents 1 and 2 which it also attached with the response.

Document No. 2 is a "print" prepared by the Tax and Customs Authority itself, prepared on 27-01-2015, which according to the same would indicate that registered items were sent on 30-11-2007, from No. RY … PT to No. RY … PT, a total of 8.319 items, thus including No. RY … PT, corresponding to the assessment note referred to.

However, the Dispatch Guide contained in document No. 1, refers only to dispatch on 30-11-2007 of 1.986 items.

For this reason, if the first registered item dispatched on that date had No. RY … PT, as referred to in that "print", the Dispatch Guide would only prove that items were dispatched up to No. RY … PT (…+1.986), thus not including No. RY... PT, … which is indicated in the assessment note.

Therefore, it cannot be concluded that this guide refers to the registered items indicated in that "print", and consequently, that the assessment was dispatched.

Moreover, it was not even demonstrated that the address of the said representative E… was, on the date indicated as being the date of dispatch of the notification of the assessment, at R …, No. … -1 …, …-… …. In fact, although this is the address indicated as being that of this representative on 30-05-2007 (pp. 17 of document "PA8.pdf"), it appears that on that same date, the Tax and Customs Authority sent the draft Tax Inspection Report for a different address, Rua …, Lot … A 4.º Esq, …-… … (pp. 45, 46 and 47 of document "PA7.pdf").

Under these circumstances, if the correct address of representative E… was, on 30-05-2007, at R …, No. … -1 …, …-… …, it must be concluded that the letter with the draft Tax Inspection Report sent for exercise of the right to be heard was not sent to the correct address. If the address of the representative, on 30-05-2007, was in fact, at Rua …, Lot … A 4.º Esq, …-… …, one cannot help but have doubts, at least, about whether this would not also be the address of this representative on 30-11-2007, when the letter for notification of the assessment was allegedly sent.

In any case, the constitutional guarantee of effective judicial protection assured to taxpayers in relation to all acts harmful to their rights and legally protected interests (articles 20, n. 1, and 268, n. 4, of the Constitution of the Portuguese Republic, hereinafter "CRP") is not compatible with a judicial review of the practice of acts by the Tax and Customs Authority based essentially on internal documents issued by it, requiring that there be external entities, independent of the Tax and Customs Authority, that make it possible to ascertain whether the acts were practiced and when they were. Namely, in the case of notifications for exercise of the right to be heard and assessments sent by mail, the guarantee of respect for the rights of taxpayers cannot dispense with proof by the postal service that dispatch and delivery were effected, which does not occur in the case at hand, in which the indication of the registered items allegedly dispatched on 30-11-2007 is made only on the basis of a "print" issued by the Tax and Customs Authority, without certification that the registered items mentioned therein were dispatched. In fact, the dispatch guide for registered items contained in document No. 2, attached with the response, could just as easily refer to the registered items contained in the "print" attached by the Tax and Customs Authority, as to any others, and moreover, the fact that the quantity of items indicated in the "print" does not correspond to the quantity indicated in the guide strongly suggests that this does not refer to those items.

3. Legal Analysis

The Claimant presents the defects attributed to the assessment challenged in a subsidiary order, and it is this order that should be adopted in the examination of the defects, as follows from the provisions of articles 101 and 124, n. 2, subparagraph b), of the CPPT, applicable supplementarily by virtue of the provisions in article 29, n. 1, subparagraph c), of the RJAT.

3.1. Violation of the Right to Prior Hearing

3.1.1. Violation of the Right to Hearing with Respect to the Claimant, Prior to Assessment

The Claimant attributes to the challenged act a defect of violation of the right to prior hearing in his capacity as joint and several liable.

The legitimacy of joint and several liable to intervene in tax proceedings "results from the requirement in relation to them of compliance with the tax obligation or any tax duties, even if jointly with the principal debtor" (article 9, n. 2, of the CPPT).

In the case at hand, before the assessment, no demand for compliance with the obligation was made to the Claimant, such demand having been made only following reversal of the enforcement proceedings, when the tax inspection and assessment procedures had already been concluded.

Article 60 of the LGT, in providing for situations in which "taxpayers" have the right to be heard, necessarily refers to those who have legitimacy to intervene in the tax procedure.

Similarly, article 60, n. 1, of the Complementary Rules for the Tax Inspection Procedure only provides for the right to be heard of the "entity inspected".

On the other hand, from article 267, n. 5, of the CRP, which establishes that "the processing of administrative activity shall be the subject of special law, which shall ensure the rationalization of the means used by the services and the participation of citizens in the formation of decisions or determinations that concern them" does not follow the requirement that the right to participation be ensured in relation to all administrative decisions, as it delegates to "special law" the definition of the forms the right to participation should take.

And the fact is that, not having the right to be heard before the assessment and the report of the tax inspection, the Claimant did not cease to have the opportunity to present his views on the final decision of the Tax Authority regarding him, namely within the scope of administrative claim proceedings and hierarchical appeal.

The joint and several liable, although he may be called to comply with the tax obligation, is not in substantive terms in the same situation as the original debtor as to responsibility for payment, as he enjoys the right of recourse against the original debtor, pursuant to article 524 of the Civil Code, which establishes that "the debtor who satisfies the right of the creditor beyond the part that befalls him has the right of recourse against each of the co-debtors, in the part that befalls them".

For this reason, taking into account the principles of proportionality, efficiency, and practicability that should govern tax proceedings (article 46 of the CPPT), it is justified that joint and several liable be granted defense rights only when such is warranted, through the demand for compliance with the obligation and not whenever a tax procedure is instituted that aims, in the first place, to require compliance with the obligation from the original debtor and only hypothetically and eventually could be traced back to the requirement of compliance with respect to the joint and several liable. In the case at hand, only after it was found, in enforcement proceedings, that the debt could not be collected from the original debtor did the Tax Authority begin to require compliance from the Claimant, and therefore, only from that moment on, in light of those principles, is it justified that defense rights be recognized to the Claimant.

Thus, there is no violation of the ordinary law provisions that provide for the exercise of the right to be heard prior to assessment.

On the other hand, since it is not essential, under article 267, n. 5, of the CRP, that the right to be heard of the joint and several liable be ensured prior to the assessment and the demand for compliance with the assessed obligation, nor is that liable in a situation identical to the original debtor with regard to the potential harm of the procedural decision, it is not incompatible with the Constitution that defense rights be granted to him only after the demand for compliance.

The claim for arbitral pronouncement fails, therefore, on this point.

3.1.2. Violation of the Right to Hearing with Respect to the Claimant, Prior to Assignment of the Status of Joint and Several Liable

The Claimant also raises the question of violation of the right to be heard for not having been "notified by the Tax Administration of any draft decision assigning the status of joint and several liable for the debts of F… LIMITED or the continuation of enforcement proceedings No. … 2008 … against his person".

As is manifest, should the right to be heard exist prior to the decision assigning joint and several liability, its violation could never affect the legality of the assessment, as such eventual omission of formality would always be subsequent to the assessment itself, and could not logically be suitable to affect it.

Therefore, the claim for a declaration of illegality of the assessment on the basis of this alleged violation of the right to be heard in the enforcement proceedings is without merit. Moreover, the question of whether or not this alleged right to be heard in the enforcement proceedings was violated is manifestly outside the scope of competence of the arbitral tribunals operating at CAAD, which is restricted to the examination of the legality of acts of the types listed in article 2 of the RJAT.

3.2. Question of Illegality of the Assessment Act Due to Lack of Competence of the Tax Directorate of Faro to Carry Out the Tax Inspection Action That Gave Rise to It

The tax inspection underlying the challenged assessment act was carried out by the Tax Directorate of Faro (Division of Tax Inspection III).

The Claimant believes that this intervention by the Tax Directorate of Faro violates the provisions of article 16, n. 3, of the CIRC, which established, in the version in force in 2007, that "the determination of taxable matter within the scope of direct assessment, when carried out or subject to correction by the services of the Directorate-General 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 the Services for Prevention and Tax Inspection in cases that are subject to corrections made by the latter in the exercise of its powers, or by an official to whom competence may have been delegated by any of them".

The Claimant also refers to subparagraph b) of n. 1 of article 16 of the RCPIT, in the version in force at the time of the tax inspection action in question, which established that the competence of the "regional peripheral services, with respect to taxpayers and other tax obligated parties with domicile or tax seat in their territorial area" ... which granted the Tax Directorate of Faro competence only for tax inspections "with respect to taxpayers and other tax obligated parties with domicile or tax seat in their territorial area"" and that "article 19, n. 1, subparagraph a), of the LGT provided, at the time of the tax inspection action in question, that "the tax domicile of the taxpayer is, except as otherwise provided: ..." "for legal persons, the place of the seat or effective management or, failing these, of its permanent establishment in Portugal."".

Thus, concludes the Claimant that "since the company F… Limited is a non-resident company without permanent establishment in Portuguese territory, the provisions of article 16, n. 3, of the CIRC fully apply, and therefore the Director of the Services for Prevention and Tax Inspection would be competent for the determination of taxable matter and not the Tax Directorate of Faro".

However, there is no legal basis for this conclusion, as article 16, n. 3, of the CIRC only attributed competence for the determination of taxable matter through direct assessment to the director of the Services for Prevention and Tax Inspection "in cases that are subject to corrections made by the latter in the exercise of its powers". In the case at hand, there was no intervention by the Services for Prevention and Tax Inspection in the inspection carried out, and therefore, the director of these services was not competent to carry out the determination of taxable matter.

The Tax and Customs Authority contends that the territorial competence of the Tax Directorate of Faro stems from the fact that the tax representative resided in its area of jurisdiction.

Pursuant to n. 6 of article 19 of the LGT, "taxpayers resident abroad, as well as those who, although resident in national territory, absent themselves therefrom for a period exceeding six months, as well as legal persons and other entities legally assimilated that cease operations, must, for tax purposes, appoint a representative with residence in national territory".

It follows from this rule, inserted in the article aimed at defining "tax domicile", that in cases of non-resident entities without permanent establishment in Portugal, it will be the domicile of the tax representative that defines the "tax domicile" of the representative.

In the case at hand, both addresses of the tax representative that were proven to be in the records of the Tax Administration are located in the area of the Tax District Directorate of Faro (… and …), and therefore the challenged act does not suffer from a defect of lack of competence.

3.3. Question of Illegality of the Assessment Due to Lack of Notification Within the Statute of Limitations Period

As results from the statement of facts established and its grounds, it was not proven that the assessment was notified to F… Limited or its tax representative or to the Claimant.

Doubt on this point must be procedurally valued in favor of the taxpayer and not against him, as this is a fact which the Tax and Customs Authority claims to have carried out, constitutive of the right which the Tax and Customs Authority seeks to exercise in relation to the Claimant and, therefore, the burden of proving that fact rests on it (article 74, n. 1, of the General Tax Law).

Thus, the legality of the challenged act must be analyzed on the basis of the assumption that notification of the assessment was not made to F… Limited or its tax representative or to the Claimant and, as the statute of limitations period for the right to assess, within which notification must be made (article 45, n. 1, of the General Tax Law), has already elapsed, it must be concluded that the assessment suffers from the defect of statute of limitations of the right to assess.

In these terms, the claim for a declaration of illegality of the assessment on the basis of this defect is well-founded.

Consequently, the decision on the hierarchical appeal that partially upheld the assessment is also illegal.

3.4. Illegality of the Assessment of Compensatory Interest

The Claimant refers to the illegality of the assessment of compensatory interest, but they are not included in the challenged assessment.

Therefore, no notice is taken of this issue.

3.5. Prejudicial Matters

Proceeding with the claim for arbitral pronouncement on the basis of the defect of statute of limitations of the right to assess, which assures effective and stable protection of the Claimant's rights, knowledge of the other defects attributed to it is prejudiced.

In truth, as is implicit in the establishment of an order of examination of defects, in the cited article 124 of the CPPT, once a defect that prevents renewal of the challenged act is found to be well-founded, there is no need to examine the others that are attributed to it. In fact, if it were always necessary to know of all defects it would be immaterial in what order their examination was made.

4. Decision

Therefore, this Arbitral Tribunal agrees to:

– Find the claim for arbitral pronouncement well-founded and declare illegal and annul the additional assessment of Corporate Income Tax No. 2007 …, of 08-10-2007, in the amount of € 92.806,77. ([1])

5. Value of the Proceedings

In accordance with the provisions of articles 305, n. 2, of the Code of Civil Procedure and 97-A, n. 1, subparagraph a), of the CPPT and 3, n. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 92.806,77.

6. Costs

Pursuant to article 22, n. 4, of the RJAT, the costs are fixed in the amount of € 2.754,00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be charged to the Tax and Customs Authority.

Lisbon, 08-04-2015

The Arbitrators

(Jorge Lopes de Sousa)

(Nuno Maldonado Sousa)

(Luís Máximo dos Santos)

([1]) Although the Claimant refers to compensatory interest, the assessment does not include them.

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What are the rules on capital gains taxation under Portuguese IRC (Corporate Income Tax)?
Under Portuguese IRC (Corporate Income Tax), capital gains taxation follows specific rules codified in the Corporate Income Tax Code (Código do IRC). For non-resident entities without a permanent establishment in Portugal, capital gains from the sale of Portuguese real property are subject to IRC taxation. The taxable capital gain is calculated as the difference between the sale price and the acquisition cost, including allowable expenses such as Municipal Transfer Tax (SISA), Stamp Duty, notarial fees, and other acquisition costs. Article 43(2) of CIRS establishes different treatment for residents versus non-residents, with residents benefiting from a 50% reduction in taxable capital gains—a provision that may be challenged on EU law grounds as potentially violating freedom of capital movement under article 63 TFEU. The tax inspection process must follow procedural requirements including proper notification of taxpayers and opportunity for participation in administrative decisions affecting their tax liability.
How does the statute of limitations (caducidade) apply to IRC tax assessments in Portugal?
The statute of limitations (caducidade) for IRC tax assessments in Portugal is governed by article 45 of the General Tax Law (LGT). Under article 45(1) LGT, the right to assess taxes expires if notification of the assessment is not made to the taxpayer by December 31st of the fourth year following the year in which the taxable event occurred. For the 2004 tax year, this meant the assessment had to be notified by December 31, 2008. The statute of limitations serves as a fundamental guarantee protecting taxpayers from indefinite tax exposure and promoting legal certainty. Failure to notify an assessment within the statutory period renders it unenforceable, regardless of the substantive merits of the tax claim. In cases involving joint and several liability, proper notification to all liable parties within the limitation period is essential. The burden of proving timely notification rests with the Tax Authority, and mere issuance of an assessment is insufficient—actual notification to the taxpayer must be demonstrated.
Can taxpayers challenge IRC liquidation decisions through CAAD arbitration proceedings?
Yes, taxpayers can challenge IRC liquidation decisions through CAAD (Centro de Arbitragem Administrativa) arbitration proceedings under the Legal Regime for Administrative Tax Arbitration (RJAT - Decree-Law No. 10/2011). Article 10(1)(a) RJAT grants CAAD jurisdiction over challenges to tax assessment decisions, including IRC liquidations. The arbitration procedure begins with a request for constitution of an arbitral tribunal, which must comply with requirements under articles 23 and 95 LGT, article 99 CPPT, and article 10 RJAT. Prior to initiating arbitration, taxpayers typically must exhaust administrative remedies by filing an administrative claim (reclamação graciosa) under article 137(1) of the IRC Code and, if desired, a hierarchical appeal. The arbitral tribunal, composed of qualified arbitrators appointed by the Deontological Council, has authority to review both procedural legality and substantive merits of IRC assessments. CAAD arbitration provides an alternative to judicial courts, offering specialized expertise in tax matters and potentially faster resolution of tax disputes.
What is the legal framework for hierarchical appeals against IRC tax assessments in Portugal?
The legal framework for hierarchical appeals against IRC tax assessments in Portugal includes provisions from the General Tax Law (LGT) and the Code of Tax Procedure and Process (CPPT). After an administrative claim (reclamação graciosa) is decided, taxpayers have the right to file a hierarchical appeal (recurso hierárquico) to a superior tax authority, requesting review of the lower authority's decision. The hierarchical appeal examines both procedural and substantive aspects of the tax assessment and the administrative claim decision. The superior authority may uphold, partially grant, or fully grant the appeal. In this case, the hierarchical appeal resulted in partial success, with the Tax Authority accepting the inclusion of certain acquisition costs (€2,569.01) in the capital gains calculation while maintaining the assessment on other grounds. Notification of hierarchical appeal decisions must be made in writing to the taxpayer. Following denial or partial denial of a hierarchical appeal, taxpayers may seek judicial review through administrative courts or, alternatively, initiate CAAD arbitration proceedings within the applicable time limits.
How does the CAAD arbitral tribunal assess the legality of capital gains tax liquidations?
The CAAD arbitral tribunal assesses the legality of capital gains tax liquidations by examining both procedural compliance and substantive correctness of the tax assessment. The tribunal's review encompasses: (1) procedural requirements, including whether the taxpayer received proper notification of tax inspections, assessment decisions, and opportunities to participate in administrative proceedings, as guaranteed by articles 267(5) CRP, 100 CPA, 60 LGT, and 60 RCPIT; (2) competence of the tax authority that issued inspection orders and assessments; (3) accurate calculation of capital gains, verifying that all legally allowable costs and deductions were properly included in determining the taxable base; (4) compliance with statute of limitations under article 45 LGT, ensuring assessments were notified within prescribed time periods; (5) compatibility with EU law, particularly regarding potential discrimination between residents and non-residents that may violate freedom of capital movement under TFEU article 63; and (6) proper attribution of joint and several liability. The tribunal applies principles of administrative law, tax law, and constitutional law, issuing a binding arbitral award that determines whether the challenged assessment should be upheld, modified, or annulled.