Process: 739/2016-T

Date: November 21, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 739/2016-T addressed a critical dispute regarding joint taxation of capital gains and losses under Portuguese IRS law. The applicants, a common-law couple who had elected joint taxation since 1999 under Article 3(d) of Law 135/99, challenged the 2015 IRS assessment of €24,216.79. In 2015, taxpayer A realized capital gains of €112,109.95 from securities transactions, while taxpayer B incurred capital losses of €217,264.06 from similar operations. When calculated jointly with monetary correction coefficients, the couple sustained a real capital loss of €105,154.11. However, the Tax Authority's system assessed tax solely on taxpayer A's gains without offsetting taxpayer B's losses, contradicting the unified treatment expected under joint taxation. The applicants argued this approach violated the principle of family financial unity inherent in joint taxation, which had governed their investment decisions for 26 years. They contended that securities transactions were made as family investments, with decisions considering the couple's overall portfolio. The arbitration request, filed under Decree-Law 10/2011 establishing the Tax Arbitration Legal Framework (RJAT), sought declaration of illegality of the assessment. The tribunal was constituted on March 21, 2017. The case highlights the fundamental question of whether capital gains and losses from different spouses must be aggregated and offset in joint IRS taxation, particularly for common-law partners exercising the joint taxation option under Portuguese tax law.

Full Decision

ARBITRAL DECISION

I. Report

A…, taxpayer no. … and B…, taxpayer no. …, both resident at Rua …, no. …, in Porto (hereinafter also referred to as "Applicants"), pursuant to the provisions of articles 2, no. 1, subparagraph a) and 10, no. 1, subparagraph a), of Decree-Law no. 10/2011, of 20 January, diploma which approved the Legal Framework for Tax Arbitration (hereinafter only "RJAT"), submit a request for constitution of an arbitral tribunal, in which the Tax and Customs Authority is the Respondent (hereinafter only "Respondent" or "TCA").

The request for arbitral ruling was submitted on 14/12/2016.

In the respective request, the Applicants requested from the CAAD's Deontological Board the appointment of an Arbitrator, in accordance with the terms provided in articles 6, no. 1 and 11, both of the RJAT.

The request for constitution of the arbitral tribunal was accepted by the Esteemed President of the CAAD and automatically notified to the TCA on 27/12/2016, with the Parties being notified on 08/02/2017 of the arbitrator appointed by the Deontological Board of the CAAD, the undersigned herein.

Following acceptance by the appointed arbitrator, the present Arbitral Tribunal was deemed constituted on 21/03/2017, in conformity with the provisions of articles 2, no. 1, subparagraph a), 5, 6, no. 1, and 11, no. 1, all of the RJAT (as amended by article 228 of Law no. 66-B/2012, of 31 December).

In the scope of the request for arbitral ruling presented by them, the Applicants petitioned for the declaration of illegality of the act of assessment of Personal Income Tax (hereinafter only "PIT"), for the year 2015.

The Applicants attached 8 documents with the arbitral request.

Having analyzed the arguments invoked by the Applicants in the arbitral request and in the written submissions, we may summarize them as follows:

  • The income of the Applicants, given that they have been in a "de facto union" for many years, has been subject to joint taxation;

  • The Applicants exercised the option for joint taxation of their income, with respect to income for the years 1999 to 2015, with a dependent, a minor child of the couple, born on 18/01/2003, becoming part of the family household;

  • In the years referred to above, the Applicants managed their patrimonial life in accordance with the tax regime for joint taxation of spouses, provided for in the Personal Income Tax Code - since its entry into force on 01/01/1989 - which became applicable, by option, to "de facto partners, as from Law no. 135/99, of 28 August, through the provision of subparagraph d) of its article 3;

  • In the context of the aforementioned management of the patrimonial life of the couple, regarding the management of financial investments, various transactions of securities were carried out, generating gains and losses, notably those identified in Annexes G and J of the annual income statement Model 3 for 2015: i) Taxpayer A: realization of capital gains resulting from three onerous alienations of securities carried out on 2015.6.15, identified in lines 9001, 9002 and 9003, whose acquisition dates were, respectively, 2007.6.25, 2009.5.5 and 2011.12.27, in the amounts, respectively, of € 75,637.87, € 8,246.04 and € 28,226.04, therefore in a total value of € 112,109.95, values resulting from deduction from each realization value of the respective acquisition value adjusted by the applicable monetary correction coefficient plus expenses and charges; and ii) Taxpayer B: realization of capital losses resulting from the onerous alienation of securities carried out on 2015.7.1, identified in line 9004, and whose acquisition date was 2013.12.31, in the amount of € 217,264.06, value resulting from deduction from the realization value of the respective acquisition value plus expenses and charges;

  • The total amount of the "realization" values of the operations of both taxpayers was € 1,567,862.42, that of the acquisition values without monetary correction was € 1,554,767.42 and that of expenses and charges was € 1,624.05;

  • Consequently, by deducting, on the basis of the values entered in the aforementioned table 9, the total of the acquisition values without monetary correction plus the total value of expenses and charges from the total value of the realization values, there would result, for the couple, a nominal capital gain of € 10,470.95;

  • Differently, with the legally due application of monetary correction coefficients to the acquisition values of the years 2007, 2009 and 2011, there results, for the couple, a real capital loss of € 105,154.11, therefore, the couple realized, in 2015, a loss of € 105,154.11;

  • The acquisitions and alienations above identified, despite the absence of any regime of patrimonial community, were decided and effected on the basis of a context of investments of a family nature, considering the regime of joint taxation characteristic of the Personal Income Tax Code since its entry into force in 1989 – therefore, for 26 years;

  • Thus, when implementing the investments and disinvestments, that is, the acquisitions and alienations above identified, the couple, constituted by the Applicants herein, always decided and considered them jointly, in accordance with a principle of management of their common family interests;

  • It is in this context that any investments or disinvestments of any of the Applicants were always "of the couple," always had underlying in the formation of relevant decisions "the entirety" of the couple's investments, in terms of obtaining the best returns for the family, including therein the better protection against the eventuality of unfavorable developments in the value of the investments;

  • Therefore, the decisions to realize the alienations effected in 2015 took into account that this would not result in any taxable capital gain, as a result or common balance, derived from the aforementioned "disinvestments," subject to a unified treatment for the purposes of PIT, therefore, adhering to the family reality, equally unified, financial and patrimonial, was abruptly and unexpectedly put into question when the couple proceeded to simulate the tax to be paid;

  • However, in 2016, the TCA's computer system considered separately the gain and the balance of capital gains realized by Taxpayer A and the capital losses realized by Taxpayer B, therefore, not considering them jointly, globally, both values, with no mitigation or compensation operating, resulting therefrom a tax owed far superior to what was expected and foreseeable, considering for the purposes of the assessment of tax the value of capital gains realized by Taxpayer A, of € 112,109.95;

  • Disregarding, for the purposes of the calculation of the same tax, the capital loss realized by Taxpayer B, of € 217,264.06;

  • After completion and filing of the due annual income statement, any hopes of the couple as to whether it might be a typo or error of the computer system for simulation of the tax calculation to be paid in 2015 faded, as, at that moment, they had confirmation of the abrupt alteration of their regime of joint taxation, which, suddenly, in 2015, ceased to mitigate or compensate for the gains and losses realized by each member of the couple, therefore disregarding the financial and patrimonial unity of the family;

  • Culminating in the situation in the receipt of notification of the tax assessment in the amount of € 24,216.79, which the Applicants paid within the voluntary payment deadline;

  • The assessment of tax on the income of the couple, carried out by the TCA, even considering the realization and acquisition values above identified and the values of expenses and charges, all entered in table 9 of Annex G, more having applied the monetary correction coefficients to the acquisition values (of 2007, 2009 and 2011), therefore, having reached the same results as those identified herein above, disregarded the value of the loss realized by Taxpayer B, assessing tax in the amount of € 31,390.79, by way of autonomous taxation of capital gains of Taxpayer A, at the rate of 28%;

  • As regards the arguments of law, the solution enshrined in no. 1 of article 55 of the Personal Income Tax Code by Law no. 82-E/2014, of 31 December, empties of content joint taxation, violating what is established in no. 1 of article 104 and in subparagraph f), of no. 2, of article 67 of the Constitution of the Portuguese Republic (CPR), constituting a violation of the Principle of Consideration or Fiscal Protection of the Family (or of non-discriminatory fiscal treatment of the family);

  • The alteration of the rule of mandatory joint taxation of spouses (and by option, of de facto partners) to the rule of separate taxation of married persons and de facto partners, with the option for joint taxation, even while conceding that it may be in accordance with the constitution insofar as it is accepted that the fundamental law does not impose joint taxation of family income, cannot lead to an emptying of the regime of joint taxation, transforming it into a mere formal solution without useful effects in the realization of family interests, as would be the effect of disregarding the taxation of family income as a balance between gains and losses;

  • The recognition and acceptance by the ordinary legislator of the new family realities cannot imply the denial or attack on the family that underlies the roots of the structural solutions in force in the Portuguese legal order, whether in the Civil Code or in the Constitution itself;

  • The legislator, recognizing the new family, did not condemn to legal-fiscal death the old family. On the contrary;

  • It appears devoid of meaning what is stated by the Personal Income Tax Reform Commission - in the Project of Reform of the Personal Income Tax – September 2014 (point 5.3.5, page 67) when it states: "The Commission also proposes that in order to make viable a regime of separate taxation, the deduction of vertical losses be established, that is, with respect to each taxpayer; losses are not communicated horizontally. Thus, the negative result of the category of one of the spouses is not absorbed in the income of the same category of the other, in the case of joint taxation";

  • With all due respect, to what extent is it necessary to eliminate the regime of communicability of losses between spouses in the regime of joint taxation in order to "make viable a regime rule of separate taxation"?;

  • It cannot be accepted that the national legal order received the new family models within the solutions of the old family, so as to, afterwards, annihilate the latter;

  • In the specific case of the Applicants, the fact that joint taxation is based on a de facto union and, therefore, there is no regime of patrimonial community whatsoever, in no way alters its scope in the constitutional protection of taxation of the family, insofar as the regime of joint taxation of spouses in the Personal Income Tax Code never had as a prerequisite the existence of any regime of patrimonial community;

  • In this context it is necessary to consider that the legislator always conceived and treated equally couples, whether united by marriage, regardless of the regime of property, whether united de facto, whereby what is alleged and concluded herein partakes of the same foundations and effects for any of the situations mentioned – even though the present case refers to joint taxation of de facto partners;

  • The unconstitutionality of the solution enshrined by Law no. 82-E/2014, alleged above, is aggravated, insofar as its interpretation and application by the TCA constitutes overt violation of the Fiscal Constitution, by violation of the Principle of Legal Certainty, "inherent in the idea of the democratic rule of law contained in article 2 of the Constitution" (see Casalta Nabais, Tax Law, Almedina, 9th edition, 2016 - point 9.2.2.), in the two senses in which such principle constitutes a limitation to the power to tax: 1) in the enactment of retroactive (unfavorable) norms, and 2) in the free revocability and alterability of tax laws (favorable) - (ibidem, Casalta Nabais);

  • Being, since the constitutional revision of 1997, the prohibition of retroactivity of taxes enshrined expressly in no. 3 of article 103 of the CPR;

  • The interpretation of the provisions in nos. 1 and 6 of article 17 of Law no. 82-E/2014, on 31 December 2014, with respect to the beginning of production of effects of the regime enshrined in no. 1 of article 55 of the PITC, which leads to that production decreed for 1 January 2015, therefore, with production of effects from the following day, is applied to capital gains realized from, precisely, 1 January 2015, even though their formation – their "realization" – occurred over several years, is tainted with the alleged unconstitutionality;

  • It is unavoidable to point out the lack of conceptual rigor on the part of the legislator in using the term "losses verified" with respect to the regime of losses, which includes "capital losses," whose fiscal concept implies knowledge and recognition of the distinction between "capital gains verified" and "capital gains realized" (see J.J. Teixeira Ribeiro, Lessons in Public Finance, Coimbra Publisher – point 35);

  • What is, in no way, admissible is to interpret the provisions in the cited article 17 with the meaning of applying to capital losses realized in 2015, accumulated (verified) over several years), the individual regime of loss carryforward of the couple, by subsumption in the concept of "losses realized" enshrined in cited no. 6 of article 17 of Law no. 82-E/2014, which the TCA did, in clear violation of the Fiscal Constitution;

  • Considering the ratio of no. 6 of article 17 of Law no. 82-E/2014 and its interpretation in conformity with the Fiscal Constitution, such norm should be interpreted with the meaning that the new regime of article 55, in particular of no. 1, regarding capital losses, applies only to capital losses realized with the alienation of assets acquired after 1.1.2015 or, at most, to the amount of capital losses "verified" from 1.1.2015;

  • The cited norms suffer from unconstitutionality if interpreted in accordance with the interpretation and application that the TCA carried out in the assessment of Personal Income Tax for 2015, with respect to capital gains and losses realized by the Applicants in the year 2015, having underlying securities acquired in the years 2007, 2009, 2011 and 2013, therefore, capital gains verified, essentially during those years;

  • The alteration, unfavorable, of a norm that materially integrates the essential elements of the Personal Income Tax, namely, no. 1 of article 55 of the PITC, constitutes an overt violation of the principle of protection of citizens' confidence, altering the legal regime applicable to losses obtained by each member of the couple, in the sense of eliminating the regime of communicability or compensation in force since 1989, moving to a regime of non-communicability or compensation of mere individual loss carryforward;

  • The financial and patrimonial situation of any taxpayer, and of the family in special, is gravely affected by solutions of abrupt alteration of the tax regime applicable to situations that are based on realities prolonged in time, whose applicable regime remained in force uninterruptedly since the entry into force of the PITC, therefore, for 25 years;

  • The application by the TCA of the provision in no. 6 of article 17 of Law 82-E/2014, stems from an erroneous interpretation with respect to losses embodied in "capital losses," contrary to the ratio of the norm, which presents itself clearly as a norm for the protection of the rights of taxpayers, deferring the application of the regime for losses that may occur from 2015;

  • With respect to losses of the nature of capital losses, if the norm is interpreted in accordance with the understanding underlying the assessment here being impugned, it is considered that the realization of the capital loss in 2015 is already a "loss verified" in 2015, subject to the new regime of losses, preventing its communicability between members of the family household in the case of option for joint taxation, which, as alleged, is constitutionally unacceptable, whether by violation of the Principle of fiscal consideration or of protection of the family, or, by violation of the Principle of Legal Certainty, insofar as the beginning of the coming into force of effects in the new legal solution, strongly restrictive of taxpayers' rights, occurs from one day to the next;

  • The aforementioned principles of the Fiscal Constitution establish limits on taxation which, in particular as regards limits derived from the Principle of Legal Certainty, have been recognized by the ordinary legislator; if not, where there has been disrespect, the Constitutional Court has appreciated and declared the unconstitutionality of the norms in question;

  • In alterations of greater density to the Personal Income Tax Code, sometimes called "reform," the ordinary legislator enshrined transitional regimes or deferment of coming into force, in terms of respecting the aforementioned constitutional limits with respect to securities capital gains, as is the case with the provision in no. 9 of article 30 of the State Budget Law for 2001 (Law no. 109-B/2001, of 27-12);

  • In the specific case, as it concerns gains and losses with the nature of securities capital gains and losses, the violation of the Principle of Legal Certainty is aggravated insofar as the "realization" of capital gains and losses, their formation, is prior to 2015, considering the various years of acquisition of the securities (between 2009 and 2013) with 2015 being merely the year of "realization" of these capital gains and losses;

  • The establishment of a regime for taxation of capital gains in accordance with the principle of realization, in the situation at hand, its application results in serious harm to taxpayers, given the abrupt coming into force of the legislative alteration here impugned;

In their request, the Applicants declare that they intend the annulment of the Personal Income Tax Assessment for the year 2015 and that the same be replaced by another that considers, jointly, the balance of capital gains and losses realized by both, in terms that results in the reimbursement of the amount of € 31,390.74, plus the legally due indemnity interest.

Notified for such purpose, the TCA, now Respondent, presented its response, in which it defended itself by exception and by objection, invoking, in summary, the following:

  • An assessment, or any act, or contract, will be illegal as a result of the violation of legal norms;

  • The pretension of the applicants, formulated as it is, would depend, always, on previously being declared the illegality of the applied norm, in accordance with art. 72 of the TPCA, declaration for which this arbitral tribunal has no competence, exception which is hereby argued for all legal effects;

  • The Applicants do not demonstrate, nor the illegality of the norm, nor the illegality of the assessment act, being that the latter would occur, solely and only, if to the same could be laid vices proper to the respective assessment procedure, or if the same violated substantive law norm;

  • Which does not happen, as to none of the cases;

  • The performance of the TCA in the formation of the assessment act is completely regular and in accordance with the law, the same being true as to the subsumption of the facts (the taxable fact) to the law;

  • As the Applicants well know and this Tribunal will corroborate, the administration cannot disregard the application of norms, by reason of judgments of alleged illegalities;

  • The non-application of a norm by the administration must always be preceded by a declaration of illegality (due to vices in its procedures of approval), in accordance with no. 1 of art. 72 of the TPCA, or by a declaration of illegality with binding general force issued by the Constitutional Court, in accordance with art. 281 of the CR;

  • Given that it results, and is sufficient to be judged, wholly lacking in merit the request of the Applicants;

  • Without conceding, and by mere duty of representation, it will always be said that it does not follow from the arguments adduced - which are understood in the exact measure in which they reflect the displeasure of the Applicants with this specific aspect of the State Budget for 2015, which is applied to them as it is to all other taxpayers in the same situation - in what manner the Personal Income Tax assessment in question violates the principle inherent in no. 1 of art. 104 of the CPR, insofar as what is recommended there is "the reduction of inequalities," determining that tax "shall be single and progressive, taking into account the needs and income of the family household";

  • The application of art. 55 of the PITC to the case at hand, in no way contends with the above-referred constitutional principles, the same being true as to the Principle of Legal Certainty, in the aspect indicated by the Applicants;

  • It is not understood how a provision that thus provides: "Article 55 of the Personal Income Tax Code, as amended by this law, applies only to losses verified after 1 January 2015," and which aims, therefore, at effects for the future, can contend with no. 3 of art. 103 of the CPR;

  • Notwithstanding the reasoning set forth by the applicants, and notwithstanding that they ceased to benefit from the previous loss carryforward regime, such circumstance does not result in the application of some tax with retroactive application, or whose creation and collection was done outside the law;

  • The case at hand, as others, and as is the case, for example, with the revocation of exemptions or tax benefits, constitutes, as the Applicants themselves ultimately recognize, no more than a legislative decision which, by contending with the tax interests of taxpayers, always constitute breaks with the prior status, but which cannot, nor is, a violation of the protection of confidence;

  • The situation with which the Applicants are confronted results no more than from a legislative tax evolution;

  • To be understood as the Applicants do, the State would be prevented from legislating, from shaping the tax system, and from doing so, yes, for the benefit of the constitutional principles of equality and the pursuit of public interest, which must always prevail over the interests of the Applicants;

  • The assessment act does not suffer from any illegality, insofar as it proves to be in accordance with positive law, to whose strict application the administration shows itself bound, and must, in conformity, be kept in the legal order;

  • In these terms, it should be judged that the material incompetence of the tribunal to issue a declaration of illegality of the norm contained in no. 1 of art. 55 of the PITC as amended by Law 82-E/2014 of 31/12 is sustained and wholly lacking in merit the request formulated;

  • The Respondent further declared that it dispensed with the meeting alluded to in article 18 of the RJAT and, as well, with submissions, stating that the same should be produced in written and successive form, should the Tribunal not dispense with its production.

Having been notified, by way of an arbitral order issued on 06/06/2017, to pronounce itself on the exceptions invoked by the TCA in its response, the Applicants said nothing.

By way of an arbitral order of 20/09/2017, the Tribunal determined the extension of the deadline for issuing the arbitral decision, for a period of 2 (two) months, under the provisions of no. 2 of article 21 of the RJAT.

On 10/10/2017 and in completion of the previous order, an arbitral order was issued dispensing with the holding of the meeting alluded to in article 18 of the RJAT, as no request for additional evidence production was made, reserving for the final decision the knowledge of the exceptions invoked by the Respondent. In this order, the Parties were further notified to, if wishing, present written submissions.

Following the issuance of that order, both Parties would present submissions, produced in successive form.

II. Sanitation

The tribunal is competent and is regularly constituted.

The parties enjoy legal personality and legal capacity, being duly represented.

The procedural means is the proper one.

Exceptions were invoked by the Respondent which, as they may preclude appreciation of the merits of the case, will be known and appreciated in the context of the present arbitral decision, in accordance with what is set forth below.

III. Facts Deemed Established

In light of the evidence brought to the case and the factuality accepted by both Parties and not contested, the Tribunal considers as proven, with relevance to the final decision, the following facts:

  • The Applicants exercised the option for joint taxation of their income, under Personal Income Tax, with respect to the years 1999 to 2015, as is ascertained from the copies of delivery confirmations which were attached with the arbitral request as Doc. no. 1;

  • In the year 2003, a dependent became part of the family household of the Applicants, as is ascertained from the copy of the 1st page of the respective Income Statement Form 3 of Personal Income Tax attached with the arbitral request as Doc. no. 1);

  • In the aforementioned years 2009 to 2015, the Applicants declared that their civil status was the one corresponding to "de facto partners" (Cf. Doc. no. 1 attached with the arbitral request);

  • With respect to the year 2015, there was declared, in Table 9 of Annex G of the respective Income Statement Form 3, with respect to Taxpayer A (the now Applicant), the onerous alienation, on 15/06/2015, of securities that had been acquired on 25/06/2007, 05/05/2009 and 27/12/2011, respectively, in the amounts of € 1,155,600.00, € 9,969.74 and € 8,916.40, with a value of expenses and charges inherent indicated of € 1,402.13, € 19.79 and € 38.95, respectively (Cf. Doc. no. 2 attached with the arbitral request);

  • The realization value declared with reference to the securities identified in the previous point, was, respectively, of € 1,348,200.00, of € 19,033.14 and € 37,448.88 (Cf. Doc. no. 2 attached with the arbitral request);

  • There was further declared, in Table 9 of Annex G of the Income Statement Form 3 for 2015 of the Applicants, with respect to Taxpayer B (the now Applicant), the onerous alienation, on 01/07/2015, of securities that had been acquired on 31/12/2013, in the amount of € 380,281.28, with a value of expenses and charges inherent indicated of € 163.18 (Cf. Doc. no. 2 attached with the arbitral request);

  • In light of this, the total realization value declared was € 1,567,862.42, whilst the total acquisition value declared was € 1,554,767.42 and, finally, the total value of expenses and charges declared of € 1,624.05 (Cf. Doc. no. 2 attached with the arbitral request);

  • There was issued, in the name of the Applicants and with reference to the year 2015, the act of assessment of Personal Income Tax no. 2016…, of 04/08/2016, corresponding to Document no. 2016…, with reference to the year 2015, in accordance with which there was ascertained an amount of tax to be paid of € 24,216.79, with a voluntary payment date of 15/09/2016 (Cf. Doc. no. 7 attached with the arbitral request);

  • The assessment act referred to in the previous point was paid on 13/09/2016 (Cf. Doc. no. 8 attached with the arbitral request);

No other facts with relevance to the final decision were identified.

IV. Statement of Reasons for Decision

First and foremost, it is important to emphasize that the Courts, including Arbitral Courts here, do not have to appreciate all the arguments presented by the parties, as is apparent by way of example from the Judgment of the Plenary Session of the 2nd Section of the STA, of 07/06/1995, issued in appeal no. 5239.

As is succinctly stated in that judgment: "The concept of 'questions' is not to be confused with that of 'arguments' or 'reasons,' the court, while it must 'resolve all questions that the parties have submitted to its appreciation,' is not bound to appreciate all arguments used by the parties, just as, and obviously, it is not prevented from, in the decision, using considerations not produced by them."

Indeed, the questions invoked by the parties are not to be confused with the arguments, the reasons or the motivations produced. Questions, namely for the purpose of the provision in no. 2 of art. 608 of the Code of Civil Procedure, are only those of substance and that integrate the decisory matter, that is, those that relate to the request, the cause of action and the exceptions (see in this sense the Judgment of the Supreme Court of Justice, of 29/11/2005, issued in appeal no. 05S2137 or the Judgment of the Central Administrative Court South, of 25/09/2012, issued in appeal no. 05073/11).

And not only is the Court not bound to rule on all arguments presented by the Parties, whether of fact or law, but it is also not, nor could it be in light of the inquisitorial principle, enslaved to these same arguments or questions. The Court also enjoys freedom as to the course and the cognitive path to be used for the issuance of the substantive decision.

Thus, having in consideration what is set forth above, what the Parties brought to the case and the nucleus of the arguments used, both in the arbitral request and the corresponding response presented by the Respondent, as well as what concerns the written final submissions, the Tribunal considers that the question of law to be decided concerns solely the possible illegality of the Personal Income Tax assessment act for 2015, in light, in particular, of the provisions in article 55 of the Personal Income Tax Code and of the other applicable legal and constitutional norms.

VI. On the Law

Regarding the Exception Invoked by the Respondent

As set forth above, the Respondent invoked, prior to the analysis of the merits of the arbitral request presented by the now Applicants, the material incompetence of the Arbitral Tribunal, for, in its understanding, "The pretension of the applicants, formulated as it is, would depend, always, on previously being declared the illegality of the applied norm, in accordance with art. 72 of the TPCA, declaration for which this arbitral tribunal has no competence, exception which is hereby argued for all legal effects."

It is therefore necessary to decide this preliminary question, being that, and advancing from now the sense of the decision in this part, we consider that the Respondent is not correct.

Indeed, the competences of the Arbitral Tribunal are limited, depending on the provisions in subparagraphs a) and b) of article 2 of the RJAT, to the appreciation of pretensions related to: a) The declaration of illegality of acts of assessment of taxes, of self-assessment, of withholding at source and of payment on account and b) The declaration of illegality of acts of fixation of the taxable matter when it does not give rise to assessment of any tax, of acts of determination of the taxable matter and of acts of fixation of patrimonial values.

It happens that the Applicants, despite pointing to certain unconstitutionalities, do so by reference to the Personal Income Tax assessment act in question, which makes it possible to frame the request in subparagraph a) of no. 2 of the RJAT.

Such assessment acts are, in fact, the object of the arbitral request now formulated.

Even when the Applicants question the apparent options of the legislator, especially with respect to the alterations to no. 1 of article 55 of the Personal Income Tax Code introduced by Law no. 82-E/2014, of 31 December, what they actually intend is that the Tribunal declare the illegality of the understanding subscribed to by the TCA and that was underlying the issuance of the act of assessment of tax and, in that measure, the illegality of the assessment act itself.

None of this invalidates the fact that the presentation of the present request also aims to prevent the application of norms considered unconstitutional, by way of the issuance of the assessment acts in question.

But the pretension of the Applicants aims at the appreciation of assessment acts which, in their understanding, were based on norms that it considers as illegal and unconstitutional, not at the declaration of abstract unconstitutionality of a norm.

Nor could it be otherwise, insofar as the Arbitral Tribunal does not have competence to declare the unconstitutionality of legal norms, but only to appreciate the legality of assessment acts, under the restricted forms that they assume in article 2 of the RJAT, declaring, if necessary, their illegality.

This is the pretension of the Applicants. Whereby the exception in question is without merit.

Appreciation of the Legality of the Personal Income Tax Assessment Act in Question

As results from the factuality deemed established, the income obtained by the Applicants, at least with respect to the years 1999 to 2015, was subject to joint taxation, taking into account the condition of "de facto partners" that they declared.

It will also have been on the basis of this presupposition that the TCA proceeded to the ascertainment and assessment of the tax owed in those years, that is, that the Applicants were in a situation of "de facto union" and of conjugal economy and that they were part of the same family household, for tax purposes.

As also occurred, in the year 2003, a dependent of both was even included in that household, for tax purposes.

The Applicants entered, in the Income Statement Form 3 for Personal Income Tax for the year 2015, the onerous alienation of various securities acquired in previous years, with a view to the joint taxation of the respective gains and/or losses ascertained.

All these facts were not contested by the Parties and are, for that reason, deemed as proven in the present case.

In the year 2015, the TCA proceeded to the issuance of a Personal Income Tax assessment which, at least as concerns the ascertainment and subjection to tax of the values referring to the onerous alienation of securities, does not reflect the joint taxation of the Applicants.

And, as appears from the evidence attached to the case, as well as from the considerations made by the Respondent, in its response and in the respective written final submissions, underlying the issuance of this assessment act was the understanding that the norm provided in article 55, no. 1, of the Personal Income Tax Code, as amended by Law no. 82-E/2014, of 31 December, presupposed the non-communicability of gains and losses of the elements of the family household.

Let us then examine, by making a first account of the legal framework applicable to the situation sub judice.

Thus, and in the first place, it is important to make reference to Law no. 135/99, of 28 August, which came to adopt certain measures for the protection of the "de facto union," establishing, in subparagraph d) of its article 3, the possibility of application to de facto partners of the legal regime of Personal Income Tax under the same conditions provided for for married taxpayers and not separated as to persons and property.

This diploma would be repealed by Law no. 7/2001, of 11 May, which, however, contemplated that regime equivalence in the same terms as Law no. 135/99.

That is, by effects of the application of this safeguard clause, taxpayers living in a situation analogous to that of spouses, for more than 2 years, could benefit from the application of the same tax regime established for married taxpayers and, if wishing, be subject to the application of the same rules for ascertainment and assessment of Personal Income Tax.

Moreover, it is also relevant for the present analysis what is provided in subparagraph b), of no. 1, of article 10 of the Personal Income Tax Code, a norm that provides for the subjection to taxation of capital gains embodied in the gains which, not being considered business and professional income, capital income or property income, result from the onerous alienation of "shares and other securities." This is the norm of incidence of gains from the sale of securities, such as those that the Applicants transacted in the year 2015.

Gains are considered obtained at the moment of the practice of the acts, that is and in the present case, at the moment of alienation (see no. 3 of article 10 of the Personal Income Tax Code). And, as results from no. 4 of article 10 of the Personal Income Tax Code, the gain subject to Personal Income Tax is constituted "by the difference between the realization value and the acquisition value."

It also bears mentioning the norm contained in no. 1 of article 43 of the same Personal Income Tax Code, according to which "The value of income qualified as capital gains is that corresponding to the balance ascertained between capital gains and losses realized in the same year, determined in accordance with the following articles."

For the purpose of ascertainment of the acquisition value on an onerous basis of the securities, it provides, as is now relevant, subparagraph a) of article 48 of the Personal Income Tax Code that it corresponds to the "documented cost or, in its absence, that of the lowest quotation verified in the two years prior to the date of alienation, if another lower one is not declared."

Finally, a reference to no. 1 of article 55 of the Personal Income Tax Code, norm which, under the heading "Deduction of Losses," and as amended by Law no. 82-E/2014, of 31 December, establishes the following: "With respect to each holder of income, the net negative result ascertained in any category can only be deducted from his net positive results of the same category, in the following terms (…).

This norm provided, in its prior wording before 2015, that "Without prejudice to the provisions of the following numbers, there is deductible from the set of net income subject to taxation the net negative result ascertained in any category of income."

In the Project of Reform of Personal Income Tax, drawn up in September 2014 and which formed the basis of the legislative alterations produced by the aforementioned Law no. 82-E/2014 in article 55 of the Personal Income Tax Code, the following can be read, in point 5.3.4, with respect to the regime of communicability of losses between spouses:

"The Personal Income Tax Code embraces a model of limitation of deduction of losses among the various categories of income, that is, mitigated horizontal communicability. The Commission also proposes that in order to make viable a regime rule of separate taxation, the deduction of vertical losses be established, that is, with respect to each taxpayer; losses are not communicated horizontally. Thus, the negative result of a category of one of the spouses is not absorbed in the income of the same category of the other, in the case of joint taxation."

Now, having identified what was the nucleus of the legal framework in which the arbitral request should be analyzed, it is necessary to decide.

It is true that the legislator intended, at the time of the Reform of Personal Income Tax effected in 2014, to alter in some way the tax paradigm, especially as concerns the regime rule for family taxation, by making separate taxation the rule.

From that moment onwards, similarly to what de facto partners could already do, married persons came to be able to opt for joint taxation (which ceased to constitute the regime-rule), in an attempt to combat the negative discrimination of which married persons were the target, by not having that same option.

It was never underlying this Reform the penalization of married taxpayers, whether by effects of the alteration of norms of incidence or of the norms for ascertainment of tax. On the contrary, the legislator sought to ensure that married persons could, should they wish to do so, opt for the non-aggregated taxation of income.

One of the alterations promoted by the legislator, in that scope, concerned the regime of losses established in article 55 of the Personal Income Tax Code, which also came to reflect the trend towards separate taxation constituting the rule in this tax category.

In this way, it was determined that, with effects from 1 January 2015 and by reference to each holder of income, the net negative result ascertained in the different categories of income could only be deducted from net positive results of the same category, as follows:

  • In the scope of category B of Personal Income Tax, the net negative result there ascertained could only be carried forward in accordance with the rules for deduction of tax losses provided in the Corporate Income Tax Code, that is, in the 12 following years;

  • The losses ascertained as to real property income could only be deducted from gains of the same category, with a deadline for carryforward now fixed at six years, instead of the previous deadline of five years;

  • In category G, the negative balance, resulting from operations with financial instruments, could be carried forward in the five following years, when previously this deadline was two years.

It happens that this norm – on which apparently the TCA based itself to proceed to the issuance of the Personal Income Tax assessment act in question – is not a norm of incidence, nor does it interfere with the ascertainment of balances and gains subject to tax, being instead a mere norm for carryforward of losses, similar to that which is precisely provided in article 52 of the Corporate Income Tax Code.

That is, it is a procedural norm, which aims to define the terms of carryforward of losses in the years following the ascertainment of those same losses.

Whereby it could never be on the basis of this norm that the TCA could justify the eventual non-communicability between the balances of capital gains and losses ascertained by the Applicants in the year 2015, when they opted for joint taxation.

In fact, the ascertainment of the balance that will be subject to tax is done, as was ascertained above, in function of the rule enshrined in article 43 of the Personal Income Tax Code, according to which the value of income qualified as capital gains corresponds to the balance ascertained between capital gains and losses realized in the same year, whose acquisition value, in the case of securities, is determined in accordance with article 48 of the Personal Income Tax Code. Not in accordance with article 55, as the TCA appears to intend.

The norm contained in article 55 of the Personal Income Tax Code embodies, as was ascertained above, a mechanism of carryforward of losses (or losses, if we will) and cannot serve as the basis for ascertainment of the final balance ascertained in a given year: whether it is a positive or negative balance. The latter is ascertained in function of the rules and of the regime by which the taxpayers opted, whether of joint or separate taxation.

Having the taxpayers opted for a regime of aggregated taxation – whether by way of marriage or de facto union -, no other hypothesis arises, other than that of the joint taxation of income ascertained by the couple and that presupposes the communication of balances, negative and positive, ascertained in a given year by any one or by both members of the family household.

Let it be seen, by way of example, and with respect to the nature of the norm contained in article 55 of the Personal Income Tax Code, what was considered by the Supreme Administrative Court, in the Judgment of 24/02/2010, issued in case no. 1085/99, in referring to the following:

"That is, although income of this category B, if positive, is, in principle, communicable with income of the other categories, it is already not communicable if negative, and the loss suffered should, rather, be carried forward, for the purpose of its deduction, to any positive income ascertained in this category in the following years.

(…)

That is, as results from art. 55 transcribed above, namely from its no. 1 and from subparagraphs a) and c) of its no. 3, such net negative result ascertained in the scope of category B, besides being able to be the object of carryforward only in the following years (and not in the year in which the loss is declared), can only operate with respect to net positive results of that same category B, with the exception of net positive results generated by the exercise of agricultural, forest or livestock activity."

Indeed, it was as to those situations that the legislator intended to establish a regime of non-communicability of losses horizontally between members of the family household, so as to give coverage to the now regime-rule of separate taxation, especially because, if it were not so, it became almost impossible for the TCA to control the impact of the eventual alterations of regime promoted by taxpayers from one (or more) given year(s) to the following one(s).

At no moment did the legislator have the intention of depriving married taxpayers, or those in de facto union, of the ability to ascertain the gain subject to tax through the sum of all gains and the subtraction of total losses obtained together. This operation, merely arithmetic, has always been done, and continues to be done, taking into consideration that the members of the family household declared the intention to be taxed together, with gains and losses being considered as obtained by both.

The legislative alteration occurring from 1 January 2015 in no way altered the manner of ascertainment of the gain subject to tax which, in the case of securities, continues to be done in accordance with articles 43 and 48 of the Personal Income Tax Code, norms which do not provide for any distinction between married taxpayers (or in de facto union) and single or divorced taxpayers. That is, such norms do not enshrine any type of prohibition of horizontal loss communication, as the article 55 appears to do, for the case of carryforward of negative results.

If it is not understood in this manner, then we would have to conclude that the legislator of the Reform of Personal Income Tax had the intention of harming married taxpayers, or those in de facto union, making it impossible for them to enjoy effective joint taxation of their income and the decisions of management of the family economy taken by members of the household in a given year. Which is not the case.

If the thesis of the TCA prevails, we will indeed have realized a violation of the principle of legal certainty and protection of confidence, a corollary of the provision in article 2 of the Constitution of the Portuguese Republic.

This is because the Applicants had the legitimate expectation that the decisions taken by them, with respect to the management of property and the economy of the family household, could be considered in an aggregated manner, respecting their option for joint taxation, which cannot fail to be accepted as a result of the application of the principle of legal certainty and protection of confidence in the aspect of "principles that classify the Democratic Rule of Law, and that imply a minimum of certainty and security in the rights of persons and in the legally created expectations to which is immanent an idea of protection of the confidence of citizens and of the community in the legal order and in the action of the State."

In light of the foregoing, the Personal Income Tax assessment act in question is illegal, by violation of the provisions in articles 10, 43, 48 and 55, all of the Personal Income Tax Code, and of the principle itself of legal certainty and protection of confidence, as underlying this act is the understanding that article 55 makes impossible the ascertainment, together, of the final balance - positive or negative – referring to the alienation of securities by members of a family household.

VII. Decision

In light of the foregoing, it is decided to judge the request for arbitral ruling to be substantively founded, and in consequence:

  • Declare the illegality of the Personal Income Tax assessment act in question, for the reasons and with the grounds invoked above, with the other legal consequences;

  • Condemn the Respondent to the payment of the costs of the present proceeding.

VIII. Value of the Case

The value of the case is fixed at € 24,216.79, in accordance with the provisions in article 97-A, no. 1, subparagraph a), of the Tax Procedure and Procedure Code, applicable by force of the provision in subparagraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

XIX. Costs

The value of the costs of the proceeding is fixed at € 1,530.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent, in function of the full defeat in the present action.

Notify.

Lisbon, 21 November 2017

The Arbitrator

(Diogo Bonifácio)

[1] In the Judgment of the Supreme Administrative Court, of 13/11/2007, issued in case no. 0164A/04.

Frequently Asked Questions

Automatically Created

How does joint taxation (tributação conjunta) apply to common-law partners (unidos de facto) under the Portuguese IRS Code?
Joint taxation for common-law partners in Portugal became available through Law 135/99 of August 28, which amended Article 3(d) of the IRS Code. Common-law partners (unidos de facto) may elect joint taxation on the same basis as married couples, provided they meet the legal requirements for de facto union status. Once elected, their income is aggregated and taxed together, with the regime applying to all income categories including employment, business, and capital gains. The option must be exercised in the annual tax return (Modelo 3) and remains in effect unless revoked. In Process 739/2016-T, the applicants had maintained joint taxation since 1999, demonstrating the regime's long-term applicability to de facto unions.
Can capital losses from securities transactions be offset against gains in a joint IRS tax return in Portugal?
Under the Portuguese IRS Code's joint taxation regime, capital gains and losses from securities transactions should theoretically be aggregated when calculating the couple's overall tax liability. Article 9 of the IRS Code governs capital gains (Categoria G), requiring both gains and losses to be reported in Anexo G and Anexo J of Modelo 3. Process 739/2016-T presented the central issue of whether losses incurred by one partner (€217,264.06) could offset gains realized by the other (€112,109.95) under joint taxation. The applicants argued that the unified nature of joint taxation requires global treatment of capital results, allowing losses to mitigate gains. However, the Tax Authority's system calculated these separately, suggesting administrative practice may not automatically offset such amounts between spouses, forming the core legal dispute in this arbitration.
What is the procedure for challenging an IRS tax assessment through CAAD tax arbitration under Decree-Law 10/2011?
To challenge an IRS assessment through CAAD arbitration under Decree-Law 10/2011 (RJAT), taxpayers must submit a request for constitution of an arbitral tribunal within the legal deadline. The request must identify the contested tax act, state the grounds for illegality, and include supporting documentation. As demonstrated in Process 739/2016-T, filed on December 14, 2016, the request triggers appointment of an arbitrator by CAAD's Deontological Board when parties don't agree on arbitrator selection (Articles 6 and 11 RJAT). The Tax Authority is automatically notified, and upon arbitrator acceptance, the tribunal is constituted. Taxpayers must attach relevant documents (8 documents in this case) and present legal arguments in written submissions. The procedure offers an alternative to judicial appeals, with specialized tax arbitrators deciding disputes. The arbitral decision has binding effect equivalent to court judgments.
What were the legal grounds for declaring the IRS 2015 tax assessment illegal in CAAD process 739/2016-T?
The legal grounds for challenging the 2015 IRS assessment in Process 739/2016-T centered on violation of the joint taxation regime's fundamental principles. The applicants argued: (1) the Tax Authority illegally assessed tax on taxpayer A's capital gains (€112,109.95) without offsetting taxpayer B's capital losses (€217,264.06), despite joint taxation election; (2) this separate treatment contradicted the unified family taxation regime maintained since 1999 under Law 135/99; (3) the couple's investment decisions were made collectively, considering their overall portfolio within the joint taxation framework; (4) applying monetary correction coefficients, the couple sustained a real capital loss of €105,154.11, not taxable gains; (5) the assessment violated legitimate expectations based on 26 years of consistent joint taxation treatment; and (6) the failure to aggregate and offset capital results between spouses undermined the legal nature and purpose of joint taxation under the IRS Code.
How are gains and losses from financial investments reported in Anexo G and Anexo J of the Modelo 3 IRS declaration?
Gains and losses from financial investments are reported in Anexo G (Schedule G) and Anexo J (Schedule J) of the Modelo 3 IRS declaration. Anexo G covers capital gains (Categoria G - mais-valias), where taxpayers detail each securities transaction in separate lines (quadro 9), including: acquisition date, sale date, acquisition value, realization value, monetary correction coefficients for inflation adjustment, and expenses/charges. Each transaction receives a line number (9001, 9002, etc.). In Process 739/2016-T, taxpayer A reported three gain transactions (lines 9001-9003) and taxpayer B reported one loss transaction (line 9004). Monetary correction coefficients must be applied to acquisition values from previous years to calculate real gains or losses. Anexo J reports income from financial investments subject to different treatment. The total acquisition values, realization values, and net results flow into the main calculation. The case revealed that despite joint taxation, the Tax Authority's system processed each taxpayer's capital results separately rather than aggregating them.