Process: 75/2018-T

Date: October 15, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitration Case 75/2018-T addresses a critical Corporate Income Tax (IRC) dispute concerning the valuation of real property for tax purposes in Portugal. The taxpayer, A... S.A., acquired two properties in 2008 and 2009 under Article 58-A of the IRC Code, which allowed companies to record property acquisitions at either the deed value or the Tax Patrimonial Value (Valor Patrimonial Tributário - VPT), whichever was higher, at the taxpayer's option. The company chose the deed values: €1,259,464.69 and €1,500.00 respectively. When these properties were sold in 2011, the Portuguese Tax Authority (AT) attempted to apply Article 64 of the IRC Code, which replaced Article 58-A effective for fiscal years beginning January 1, 2010. Article 64 eliminated the optional nature of valuation, making VPT mandatory. The AT issued an additional assessment of €125,271.37, arguing the company should have used the higher VPT values (€1,672,300.00 and €2,388.68). The taxpayer challenged this, arguing that properties acquired under the Article 58-A regime should continue under that regime's rules, as the acquisition predated the legal change. The core legal issue involves the temporal application of tax law: whether Article 64's mandatory VPT requirement applies retroactively to properties acquired when Article 58-A's optional regime was in force. This case has significant implications for Portuguese companies holding real estate acquired before 2010, establishing whether tax valuation rules are determined by acquisition date or disposal date, and whether taxpayers can rely on the legal framework existing at the time of acquisition.

Full Decision

ARBITRAL AWARD

The arbiters Dr. Alexandra Coelho Martins (arbitrator-president), Dr. Filipa Barros and Dr. Jónatas Machado (arbitrator-members), appointed by the Ethics Council of the Administrative Arbitration Centre to form the present Arbitral Tribunal, constituted on 11.05.2018, hereby agree as follows:

I. REPORT[1]

  1. A..., S.A., legal entity no. ..., hereinafter "Claimant", with registered office at ..., n.º..., ...-..., notified on 26.12.2017 of the decision dismissing the hierarchical appeal filed following dismissal of an administrative complaint against the tax act of the Tax Authority (hereinafter "TA" or "Respondent") embodied in the additional assessment of Corporate Income Tax ("CIT") for 2011 no. 2015..., dated 31.08.2015, in the amount of € 125,271.37, including the respective compensatory interest (€ 15,601.99), did, pursuant to articles 2.º, no. 1, paragraph a), 5.º, no. 3, paragraph a), 6.º, no. 2, paragraph a), 10.º, no. 1, paragraph a) and no. 2, all of the Legal Framework for Tax Arbitration ("LFTA"), request the constitution of a Collective Arbitral Tribunal.

  2. In accordance with articles 5.º, no. 3, paragraph a), 6.º, no. 2, paragraph a) and 11.º, no. 1, paragraph a) of the LFTA, the Ethics Council of the Administrative Arbitration Centre ("CAAC") appointed as arbiters of the Collective Arbitral Tribunal Dr. Alexandra Coelho Martins (arbitrator-president), Dr. Filipa Barros and Dr. Jónatas Machado (arbitrator-members), who accepted the appointment.

  3. The parties were duly notified of such appointment, to which they did not object pursuant to the combined provisions of articles 11.º, no. 1, paragraphs b) and c) and 8.º of the LFTA and 6.º and 7.º of the Deontological Code of the CAAC.

  4. By virtue of the provisions of article 11.º, no. 8 and no. 1, paragraph c) of the LFTA, as communicated by the President of the Ethics Council of the CAAC, the Arbitral Tribunal was constituted on 11.05.2018.

1.1 Description of Facts

  1. On 19.12.2008 the claimant acquired by public deed, for resale, fraction "A" of an urban property registered in the property register of the municipality of ..., under article ..., for € 1,259,464.69, which it sold on 15.12.2011. It also acquired for resale, by public deed executed on 22.04.2009, a plot of land for construction registered in the property register of ..., under article ..., for € 1,500.00, which it sold on 12.12.2011.

  2. Both properties, in accordance with the option provided for in article 58.º-A of the Corporate Income Tax Code ("CITC"), in the version of Decree-Law no. 287/2003, of 12.11, were recorded in the accounts at the value stated in the deed of purchase and sale, with the respective Tax Property Value ("TPV"), at that date, of € 1,672,300.00 and € 2,388.68, respectively. The Claimant filed the CIT declaration form 22 for 2011 and self-assessed the respective tax within the time limit, with all calculations based on the value recorded in the accounts.

  3. In 2014, the Claimant was notified by the TA, pursuant to article 64.º, no. 1 of the CITC, concerning the finding of positive differences between the Tax Property Value ("TPV") of the properties disposed of and the value of the respective contracts, such differences not being included in the income declaration form 22 of CIT, whereby it should proceed to deliver a replacement declaration for the year 2011, within 15 days, effecting the correction corresponding to such positive differences provided for in "paragraph a) of no. 3 of article 64.º of the CITC". The Claimant filed a replacement declaration of form 22 of CIT on 15.07.2014, which resulted in tax being assessed in the amount of € 19,704.57, which was paid.

  4. The Claimant was again notified, by Letter of 09.07.2015, that the TA considered that the values stated in the replacement declaration filed in 2014 were not correct because "... in the case in question, the taxpayer should not complete Field 772 of table 07 of the replacement CIT form 22, because it did not adopt the definitive Tax Property Value of the properties, since as it demonstrated through the account extracts attached to the inspection procedure, it recorded the same at the value stated in the contracts of purchase and sale".

  5. Consequently, the TA effected an additional CIT assessment with reference to the fiscal year 2011, identified above, in which the amount payable in tax and interest was determined to be € 125,271.37, on the basis of the assumptions enumerated in the preceding article, and which took into account the tax already paid as a result of the filing of the replacement declaration. The Claimant lodged an administrative complaint against the additional assessment, followed by a hierarchical appeal of the respective dismissal decision.

  6. In the request for arbitral pronouncement (hereinafter initial petition or "IP"), the Claimant petitioned for a declaration of illegality, and consequent annulment, of the order dismissing the hierarchical appeal lodged against the contested tax act and, likewise, of this same tax act, embodied in the additional assessment of Corporate Income Tax (CIT) for 2011, issued under no. 2015..., in the total amount of € 125,271.37, having assigned to the case the value of € 140,873.36.

  7. The TA, pursuant to the provisions of article 17.º of the LFTA, filed, on 18.06.2018, its reply, in which it argued that the present request for arbitral pronouncement was unfounded and that the contested tax acts should remain in the legal order, accordingly absolving the respondent entity from the claim, with all due and legal consequences.

1.2 Arguments of the Parties

  1. To substantiate its position, the Claimant focuses its allegations on the divergence relating to the value to be considered for CIT purposes as the acquisition value, as follows:

  • Both properties were acquired before the new version of article 64.º of the CITC entered into force, by Decree-Law no. 159/2009, of 13.07, which replaces the rules previously contained in the aforementioned article 58.º-A of the CITC, given that one acquisition occurred on 19.12.2008 and another on 22.04.2009.

  • The regime of article 64.º of the CITC applies to fiscal years commencing on 01.01.2010, and the change in the regime that prevailed in article 58.º-A was mainly related to the publication of Decree-Law no. 158/2009, of 13.07, which instituted on a mandatory basis the new Accounting Standards System ("ASS") and which forced a profound remodeling of the CITC, of which this article 64.º of the CITC is an example.

  • At the date of acquisition, article 58º-A of the CITC was effectively in force, with the version of Decree-Law no. 287/2003, of 12.11, which, under the heading "Corrections to the value of transmission of real property rights", established that, in the event of disposal of real property rights, alienators and acquirers should adopt, at their option, for purposes of determining taxable profit, normal market values (for convenience, the deed value) or the TPV if it was greater, the Claimant having opted for the deed value.

  • From the entry into force of the amendment to article 64.º of the CITC (which replaced article 58.º-A, in the republication of the Code), having regard to article 9.º cited of Decree-Law no. 159/2009, according to which "This decree-law applies to fiscal periods that commence on, or after, 1 January 2010", the properties recorded in the accounts should henceforth be recorded on a mandatory basis considering the TPV, ignoring the market value. That is, the optional nature ended to become mandatory.

  • And the Claimant did so with the appropriate internal corrections in the accounts, even by imposition of the ASS, which became applicable to all company accounting by virtue of article 16.º of Decree-Law no. 158/2009, which established that "This decree-law enters into force in the first fiscal year that commences on or after 1 January 2010", and filing, albeit only in 2014, a corrective replacement declaration for the fiscal year 2011, when article 58.º-A of the CITC invoked by the TA, which permitted the option, had already been repealed, thereby curing the omission found after the entry into force of the new law and the ASS.

  • When the taxable event was verified, the new version of the corrections regime was already in force, and as of the date of the additional assessment in question, the Claimant had already corrected its tax situation relating to the option it exercised at the date of acquisition of both properties.

  • If, by subsequent legislation, the taxpayer is required to alter the records, determining that the property should be recorded in the accounts at its TPV, because it is greater, it is not fitting that the law can, in the event of disposal, consider a value that it ordered to be corrected for calculation of "any taxable result relating to the property" (article 64.º, no. 3, paragraph b) of the CITC).

  • After the alteration in the registration and accounting consideration that it had initially made, the acquisition value to be taken into account ceased to be necessarily the market value, because it is lower, and became the TPV, because it is greater, the TA not being able to demand that the correction, and the corresponding additional assessment, be effected between that value and the Tax Property Value at the date of sale (€ 1,735,011.25).

  • The acquisitions did indeed occur before the entry into force of the ASS, but the disposals occurred in 2011, that is, when this normative was already in force, as well as the new version given to article 64.º of the CITC by Decree-Law no. 159/2009, of 13.07, entering into force on 1 January 2010, whereby the taxable event occurred, in both cases, already after the new law entered into force and not article 58.º-A of the CITC in the version that had been given to it by Decree-Law no. 287/2003, of 12.11, and also, after the entry into force of the ASS.

  • The taxable event for CIT purposes is verified with the transmission of the properties and on that date both were or should have been recorded at the TPV in accordance with the legislation applicable from the 2011 fiscal year, and the previous record cannot be considered, if it were the case of the market value being less than the TPV, because that ceased to be legally possible.

  • In none of these legislative changes was provision made for the maintenance of the values prior to the correction, and by virtue of article 36.º of the General Tax Law, the legal norms applicable to the determination of taxable matter and to the assessment of CIT for the fiscal year 2011 are those in force at the date of occurrence of the taxable event.

  • If the birth of the CIT tax obligation occurs in the fiscal year of the disposal of the properties in question, and on that date, by virtue of an amendment to the law with binding force for the taxpayer, the amount recorded as a result of the option that was permitted by article 58.º-A is no longer in force, because article 64.º imposed that that value should become the TPV, because greater than the market value, then also in accordance with the quantitative element of the taxable event, the values in force at the date of birth of the obligation should be considered.

  • Through Circular no. 6/2011, in nos. 23 and 24, the TA disauthorizes the interpretation of the law made by the decision taken in hierarchical appeal proceedings, confirming that from the entry into force of the new regime it is not possible to use any option for recording when the TPV is higher than the market value of the property, and it should therefore be concluded that the correction was mandatory as of the entry into force of the new law and that, from then on the parameters for "any fiscal result" were those recorded in the accounts after such mandatory corrections and not the original values.

  • The appealed Order likewise suffers from illegality due to violation of law, and should be revoked, and, concomitantly, the assessment that was contested and identified above should be revoked, by violation of the provisions of article 64.º of the CITC, a rule in force at the date of transmission, because article 58.º-A preceding is not applicable to the case in question.

  1. In a different sense, arguing for the legality of the additional assessment in question, the Respondent employed the following arguments:

  • The assessment resulted from a correction made within the scope of an inspection action carried out pursuant to Service Order SO2014... which aimed at controlling the tax situation of the Claimant, relating to taxable events arising from the transmission of real property rights in the fiscal year 2011, subject to CIT under article 64.º of the respective Code.

  • When those services found that there was a positive difference between the value stated in the contracts and the TPV, they proceeded to notify (the Claimant) for the purposes of replacement of the CIT form 22 declaration.

  • Indeed, article 64.º, no. 3 of the CITC provided that, where there was a positive difference between the TPV and the value stated in the contract, the alienator should mandatorily effect the corresponding correction in the income declaration form 22 relating to the fiscal period to which the income from the transmission of the properties was attributable (2011), which in this case raised an extra-accounting correction of € 486,616.56 – a value that should have been added to Table 07 of form 22.

  • The Claimant, instead of effecting only this correction, also completed Field 772 – Correction by the acquirer of the property when it adopts the definitive TPV for the determination of taxable result in the respective transmission (article 64.º, no. 3 paragraph b) of the CITC), placing there the difference between the value stated in the contract of purchase and the TPV, at the date of acquisition of the properties.

  • This correction cannot be accepted, since at the time of acquisition, in 2008 and 2009, the taxpayer, now Claimant, recorded the said properties at the value stated in the contract and not at the TPV.

  • If at the date of acquisition the Claimant had recorded the properties at their TPV, it would have had the possibility of, pursuant to paragraph b), of no. 3 of article 58.º-A, in force at the date of the facts, deducting the amount of € 413,723.99 in table 07, field 772 of the respective CIT form 22 declaration for the fiscal years 2008 and 2009.

  • Because the Claimant recorded the acquisition of the properties at the contract value, it cannot, in the year of disposal, effect that correction.

  • The assessments sub judice, as well as the decision delivered in the context of the administrative complaint and hierarchical appeal procedure, are in accordance with the law in force and the taxation undertaken does not violate, but rather implements, the principle of taxation by actual profit and of equal tax treatment enshrined in articles 13.º and 104.º no. 1 and 2 of the Constitution of the Portuguese Republic ("CPR").

1.3 Meeting Pursuant to Article 18.º of the LFTA

  1. By order of 04.07.2018, the holding of the meeting referred to in article 18.º of the LFTA was dispensed with, as no exceptions were raised nor was there occasion for additional evidence to be produced. It was equally determined that optional written submissions be made within 30 days.

  2. On 04.09.2018 the Respondent submitted its written submissions, while the Claimant chose not to do so.

II. PRELIMINARY EXAMINATION

  1. No exceptions were raised.

  2. The Arbitral Tribunal is regularly constituted (articles 5.º, nos. 1 and 3, paragraph a), 6.º, no. 2, paragraph a) and 11.º of the LFTA), and is materially competent (articles 2.º, no. 1, paragraph a) of the LFTA).

  3. The parties enjoy legal personality and capacity and are duly represented.

  4. The case is not affected by nullities nor were any exceptions raised, allowing proceedings to continue to a decision on the merits of the case.

III. REASONING

Facts Adjudged as Proven and Motivation

  1. Having examined the allegations contained in the procedural documents filed and the documentary evidence produced, this Tribunal adjudges as proven, with relevance to the decision of the case, the following facts:

  • On 19.12.2008 the Claimant acquired by public deed, for resale, fraction "A" of an urban property registered in the property register of the municipality of ..., under article ..., for € 1,259,464.69, whose TPV, at that date, was € 1,672,300.00 (document 4 and administrative file ("AF")).

  • The Claimant recorded the acquisition in the accounts at the deed value (€ 1,259,464.69), in accordance with the option provided for in article 58.º-A of the CITC, in the version in force at the date of purchase (AF).

  • This fraction "A" of the urban property located at ..., under article ..., was disposed of by the Claimant on 15.12.2011, for € 1,259,464.69 (AF).

  • The Claimant also acquired, for resale, by public deed executed on 22.04.2009, a plot of land for construction registered in the property register of ..., under article ..., for € 1,500.00, whose TPV, at that date, was € 2,388.68 (document 5 and AF).

  • The Claimant recorded the acquisition in the accounts at the deed value (€ 1,500.00), in accordance with the option provided for in article 58.º-A of the CITC, in the version in force at the date of purchase (AF).

  • This plot of land for construction registered in the property register of ..., under article ..., was disposed of by the Claimant on 12.12.2011, for the value of € 1,600.00 (AF).

  • The two properties referred to above were subsequently (re)assessed for Real Estate Tax (IMI) purposes, respectively at € 1,735,011.25 and € 12,670.00, values with correspondence in the urban property register, at the time when they were disposed of (2011) – (AF).

  • The Claimant filed the CIT form 22 declaration for 2011, having self-assessed the tax based on the contract values of acquisition and sale, i.e., exactly the same for the first property (it bought and sold exactly for the same amount of € 1,259,464.69) and with a difference of € 100.00 with regard to the land of ... (it bought for € 1,500.00 and sold for € 1,600.00), in accordance with the recorded amounts (AF).

  • The Claimant was subject to an inspection procedure pursuant to Service Order SO2014..., which aimed at controlling its tax situation regarding taxable events arising from the transmission of real property rights in the fiscal year 2011, subject to assessment under article 64.º of the CITC (AF).

  • Within this scope, the TA notified the Claimant, by letter dated 23 May 2014, with the following content:

"1. Pursuant to no. 1 of art. 64.º of the CITC, taxpayers who dispose of real property rights must adopt, for purposes of determining taxable profit in CIT, normal market values that cannot be lower than the definitive Tax Property Values that served as the basis for the assessment of the Tax on Onerous Transfers of Immovable Property (IMT) or which would be used if no such tax were assessed.

  1. From various cross-checks carried out in the information system of the Tax Authority and Customs Authority (TA), it was found that there are positive differences between the definitive Tax Property Value of the properties disposed of by you and the value stated in the respective contracts and, further, that such difference does not appear in the income declaration form 22 of CIT.

  2. Accordingly, you are hereby notified that, within 15 days from the day following registration, you must deliver a replacement CIT form 22 declaration for the year(s) 2011, effecting the correction of the value corresponding to these positive differences, provided for in paragraph a) of no. 3 of art. 64.º of the CITC, in field 745 of table 07, of the said form, unless you have provided proof of the matters referred to in nos. 1 and 3 of art. 139.º of the CITC, in which case you should indicate that value in field 416 of table 11 of the same declaration.

  3. It is further informed that failure to comply with this notification will result in the immediate initiation of procedures relating to the conduct of an internal inspection action, for correction of the respective value." (AF).

  • The Claimant filed a replacement declaration of form 22 of CIT on 15.07.2014, which resulted in tax being assessed in the amount of € 19,704.57, which was paid (documents 6, 7 and AF).

  • By letter of 09.07.2015, the Claimant was notified to correct the replacement declaration filed in 2014 in the following terms: "in the case in question the taxpayer should not complete field 772 of table 07 of the replacement CIT form 22, because it did not adopt the definitive Tax Property Value of the properties, since as it demonstrated through extracts attached to the inspection procedure, it recorded them at the value stated in the contract of purchase and sale" (proven by agreement).

  • On 31.08.2015, the TA issued an additional CIT assessment, under no. 2015..., which resulted in an amount to be paid to the State coffers of € 125,271.37, which includes compensatory interest in the amount of € 15,601.99 (document 3 and AF).

  • Dissatisfied, on 20.11.2015 the Claimant filed an administrative complaint against the draft decision of the inspection procedure, requesting annulment of the additional assessment mentioned above (AF).

  • On 03.10.2016, by order of the Finance Department of Lisbon – Administrative Law Division, the Claimant was notified of the decision dismissing the administrative complaint filed (AF).

  • On 27.10.2016, the Claimant lodged a hierarchical appeal against the decision dismissing the administrative complaint, being notified on 20.12.2017 by the CIT Department of the TA, of the order dismissing it issued by the Central Services Director (AF).

  • On 28.02.2018 the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to the present case.

  1. There are no facts not adjudged as proven that are considered relevant to the decision of the dispute in question, having regard to the possible legal solutions.

  2. The Tribunal's conviction resulted from the documents and the Administrative File attached to the case, respectively, by the Claimant and by the Respondent, in accordance with what is specified in the points of the evidence enumerated above.

Issues to be Decided

  1. The issue to be decided is essentially concerned with the determination, in CIT, of the value to be attributed to the acquisition of two properties, for purposes of calculating the taxable income generated by their transmission in 2011.

  2. The question is whether, having the Claimant acquired two properties, in 2008 and 2009, during the period of application of article 58.º-A of the CITC, and exercised the option, at the date permitted by no. 3, paragraph b) of that provision, to record the acquired properties in the accounts at the contract value, i.e., at the price stated in the deed, considering that (and not the TPV, which in this case was higher) as the acquisition value, for purposes of the possible determination of the taxable result in CIT from a future sale, which occurred in 2011, the application of the regime that succeeded it, of article 64.º of the same Code (which came to replace article 58.º-A of the CITC, producing effects relating to fiscal periods commencing on, or after, 1 January 2010), according to which, for purposes of calculating the taxable result of the sale of properties, the TPV must, without more, be taken into account, when higher than the contract values, regardless of the amount for which the properties were recorded in the accounts at the time of acquisition, whether from the perspective of the alienator or of the acquirer, pursuant to no. 3 of the said provision, is thereby compromised.

  3. Depending on the answer being in one sense or another, the acquisition value to be taken into account for determining the taxable result of the sale of the properties in CIT will be the price stated in the deed of purchase (lower), or the TPV of the properties at the date of acquisition (higher). It is in this difference that the dispute lies, whose legal examination involves the analysis of the succession in time of two regimes, the one in force at the date of acquisition (2008 and 2009), contained in article 58.º-A of the CITC, and the one that replaced it, of article 64.º of the CITC, which entered into force in the fiscal year preceding that of the disposal of the properties (2011), following the introduction of the ASS.

Let us examine this, then.

Legal Framework

  1. The properties to which the income assessed under CIT relates were acquired by the Claimant in 2008 and 2009, during the period of application of article 58.º-A added to the CITC in the reform of Taxation of Patrimonial Assets, undertaken by Decree-Law no. 287/2003, of 12.11, whose version was as follows:

"Article 58.º-A

Corrections to the value of transmission of real property rights

1 – Alienators and acquirers of real property rights must adopt, for purposes of determining taxable profit under the terms of this Code, normal market values that cannot be lower than the definitive Tax Property Values that served as the basis for the assessment of the Tax on Onerous Transfers of Immovable Property (IMT) or which would be used if no such tax were assessed.

2 – Whenever, in the onerous transmissions provided for in the preceding number, the value stated in the contract is lower than the definitive Tax Property Value of the property, it is this value that should be considered by the alienator and acquirer, for determination of taxable profit.

3 – For application of the provisions of the preceding number:

a) The alienating taxpayer must effect a correction, in the income declaration for the fiscal year to which is attributable the profit obtained from the transmission operation, corresponding to the positive difference between the definitive Tax Property Value of the property and the value stated in the contract;

b) The acquiring taxpayer, provided it records the property in the accounts at its definitive Tax Property Value, must take such value as the basis for calculating depreciation allowances and for the determination of any taxable result in CIT relating to the same property.

4 – If the definitive Tax Property Value of the property is not determined by the end of the deadline established for filing the declaration for the fiscal year to which the transmission relates, taxpayers must file the replacement declaration during the month of January of the year following that in which the Tax Property Values became definitive.

5 – For the acquiring party, the provisions of the preceding number do not apply when it is a matter of correction to the depreciation allowances of the property, in which case those relating to prior fiscal years shall be considered as an expense of the fiscal year in which the definitive Tax Property Value becomes determined.

6 – The provisions of this article do not prevent the Tax Directorate-General from proceeding, under the terms provided for in the law, to make corrections to taxable profit whenever it has elements proving that the price actually practiced in the transmission was higher than the value considered.

(Amended by DL 287/2003, of 12.11)".

  1. Note that two relevant consequences result from the interpretation of this legal provision, with bearing on the case before us:

  • Right of option, from the perspective of the acquirer, to record acquired properties at the actual value (price) of acquisition in detriment to recording at the TPV, in cases where the latter was higher than the former;[2]

  • Duty of accounting record of acquired properties at their definitive TPV, as a condition for the taxpayer to be able to use this value (and not that of acquisition), whether for purposes of calculating tax-accepted depreciation allowances (inapplicable to this case, as explained below), or for the determination of any taxable result in CIT relating to the same properties, namely in a future sale.

  1. With the reform of the CITC and the end of application of the Official Plan of Accounts ("OPA"), the legal solution enshrined in article 58.º-A of the CITC, specifically in paragraph b) of no. 3, was abandoned – "The acquiring taxpayer, provided it records the property in the accounts at its definitive Tax Property Value, must take such value as the basis for calculating depreciation allowances and for the determination of any taxable result in CIT relating to the same property." (our emphasis)

  2. From 1 January 2010, such wording was replaced by the version of the current article 64.º of the same Code, which provides as follows[3]:

"Article 64.º

Corrections to the value of transmission of real property rights

1 – Alienators and acquirers of real property rights must adopt, for purposes of determining taxable profit under the terms of this Code, normal market values that cannot be lower than the definitive Tax Property Values that served as the basis for the assessment of the Tax on Onerous Transfers of Immovable Property (IMT) or which would be used if no such tax were assessed.

2 – Whenever, in the onerous transmissions provided for in the preceding number, the value stated in the contract is lower than the definitive Tax Property Value of the property, it is this value that should be considered by the alienator and acquirer, for determination of taxable profit.

3 – For application of the provisions of the preceding number:

a) The alienating taxpayer must effect a correction, in the income declaration for the fiscal period to which is attributable the income obtained from the transmission operation, corresponding to the positive difference between the definitive Tax Property Value of the property and the value stated in the contract;

b) The acquiring taxpayer adopts the definitive Tax Property Value for the determination of any taxable result in CIT relating to the property.

4 – If the definitive Tax Property Value of the property is not determined by the end of the deadline established for filing the declaration for the fiscal period to which the transmission relates, taxpayers must file the replacement declaration during the month of January of the year following that in which the Tax Property Values became definitive.

5 – In the event there is a positive difference between the definitive Tax Property Value and the cost of acquisition or construction, the acquiring taxpayer must prove in the tax documentation process provided for in article 130.º, for purposes of the provision in paragraph b) of no. 3, the accounting and tax treatment given to the property.

6 – The provisions of this article do not prevent the Tax Directorate-General from proceeding, under the terms provided for in the law, to make corrections to taxable profit whenever it has elements proving that the price actually practiced in the transmission was higher than the value considered."

  1. From the comparison of the current and prior versions it follows that, in light of the discipline introduced by article 64.º of the CITC, the obligation to record properties in the accounts at their tax property value ceases to exist, given that these amendments to the CITC aimed at a separation of tax rules from accounting rules, always keeping the stated corrections in mind.

  2. Indeed, in the preamble of the said Decree-Law that amended the CITC[4], the legislator highlights the concern to eliminate the constraints on accounting arising from tax legislation, namely regarding the need to record the Tax Property Value of properties by the acquiring taxpayer, with such obligation ceasing to exist, so that it may be considered for purposes of determining any taxable result in CIT.

  3. Thus, from the entry into force of this regime, the CITC no longer requires any obligation to record the definitive TPV of properties determined at the time of acquisition in the accounts, so that it may be (must be) taken into account in determining the income from operations with those properties, such information (of the TPV) only needing to appear in the tax file, when applicable.

  4. With respect to the problem of the transition of regimes between article 58.º-A and article 64.º, both of the CITC, the TA clarified, through Circular no. 6/2011, the tax treatment of the reversal of the revaluation reserve corresponding to the positive difference between the definitive TPV and the cost of acquisition of properties and of excess depreciation calculated on the TPV (compared to the cost of acquisition). In this context, the TA situates the matter in the possibility that was conferred on the acquirer, under article 58.º-A, to record the property at the definitive TPV, if that were higher than the contract value. As stated therein, in point 23 "With this practice, a revaluation reserve was recognized and the taxpayer had the possibility of calculating depreciation based on that value, determining accounting and tax expenses higher than those it would have determined if it had recorded the property at the contract value.

  5. In the transition to the ASS the taxpayer had to reverse the revaluation made, since the accounting normative does not provide for revaluation at the TPV. Thus, the carrying amount of the property is reduced by offsetting the reserve that had previously been constituted.

  6. The reversal of excess depreciation and the revaluation reserve should not be considered as a transitional adjustment relevant for tax purposes (given that from the fiscal period commencing on or after 2010-01-01, the asset cannot be measured at the TPV and therefore, depreciation cannot be calculated on that value). Thus, that adjustment should not contribute to the formation of taxable profit.

  7. When the asset is sold, the depreciation that was reversed in the transition and which was tax-accepted in fiscal periods prior to 2010 should be calculated in the calculation of gain or loss."

  8. However, it appears that the invocation of this Circular, which it should be emphasized does not constitute a source of law, has no relevance to the situation at hand. In fact, it refers to the regime for tangible fixed assets (formerly fixed assets) and, in the case before us, the properties were acquired for resale (and were indeed resold[5]), being therefore classified in the accounts as inventories (formerly stock), in accordance with NCRF 18 which is based on the international accounting standard IAS 2 – Inventories, adopted by Regulation (EC) no. 2238/2004, of the Commission, of 29.12, following Regulation (EC) no. 1606/2002, of the European Parliament and of the Council, of 19.07. Properties intended to be sold in the course of the ordinary business of a company, as was the case, do not generate any accounting "depreciation allowances", nor is the income derived from their sale classifiable as tax gains or losses.

3.4 Application of Law in Time

  1. Under discussion in the present case is the income from the sale, completed in 2011, of two properties that were held by the Claimant. Considering that, between the date of acquisition of the properties by the Claimant (2008 and 2009) and the date of disposal (2011) there was a legislative amendment by virtue of which article 58.º-A of the CITC gave way to article 64.º of the same Code, the matter in question requires, in our view, an analysis of the principles governing the application of law in time, given the absence of a transitional provision that governs this succession of norms.

  2. As delimited above, the issue concerns the determination of the acquisition value for determining the fiscal result (of CIT) of the sale. It is important, specifically, to know whether this value should correspond to that of the contract (€ 1,259,464.69), or to the TPV (higher, of € 1,672,300.00), in both cases reported to the moment of acquisition.

  3. For the Respondent, the first value (of the deed) should prevail because that was the option exercised by the Claimant under the law in force at the date of acquisition (article 58.º-A, nos. 2 and 3 of the CITC). From the perspective of the Claimant, the acquisition value to be considered for purposes of determining the result generated by the sale should be that which results from the tax law applicable at the date of that same sale, namely the TPV, in accordance with the provisions of article 64.º, nos. 2 and 3 of the CITC. The arithmetic difference between the two positions translates into an increase to the taxable base of CIT of € 412,835.31.

  4. The following should be noted initially:

  • Article 5.º of Decree-Law no. 158/2009, of 13.07, under the heading "transitional regime" is silent on the establishment of special rules regarding the effects of the transition from the prior regime of article 58.º-A of the CITC to the new regime of article 64.º of the same Code;

  • Article 9.º of Decree-Law no. 158/2009, of 13.07, under the heading "Effective Date" provides as follows "This decree-law applies to fiscal periods that commence on, or after, 1 January 2010."

  1. There can be no doubt regarding the basic principle governing the application of substantive tax law in time: the law applicable is that in force at the moment of occurrence of the taxable event.

  2. Nor is there any doubt in the statement that the tax obligation, in this case, arises from the disposal of the properties. Thus, the determination of the income, of the fiscal result of the sale operations, must be assessed temporally to the 2011 fiscal year, the year in which they took place, and to the law in force in that fiscal period, which is article 64.º of the CITC. And it is this command that the Tribunal is obliged to respect, because, as reaffirmed by article 4.º, no. 2 of the LFTA, arbitral tribunals decide in accordance with constituted law.

  3. As noted above, article 64.º of the CITC, unlike what occurred with its predecessor – article 58.º-A of the same legal code[6] – disconnects from the tax calculation (i.e., from the determination of income from transmission of properties) the amount for which the properties are or were recorded in the accounts, adopting as (only) valid criteria for measuring the acquisition and transmission value the value of the contract[7], or the TPV, whichever is greater. In this way, under this discipline, the amount for which the properties were recorded in the accounts when acquired by their holder (now alienator) is irrelevant to the determination of the taxable base of CIT, and has ceased to be a prerequisite or conditioning factor of taxation.

  4. In summary, given that the income from the sale of two properties occurred in 2011, and the sale being the taxable event generating this income, the tax regime of article 64.º of the CITC, in force in that fiscal period, cannot fail to be applied, in accordance with the regime for accrual of taxable profit contained in article 18.º of the CITC, and with the general principles of application of law in time, of which article 12.º of the General Tax Law and article 12.º of the Civil Code are expressions.

  5. It is worth noting that the acquisition of the properties, which dates to 2008 and 2009, does not constitute the taxable event that resulted in the incidence of CIT in 2011, even though the acquisition value is an essential element of the calculation of taxable income derived from the transmission of the properties. As noted above, if the taxable event is precisely the transmission, the calculation of the respective income must be assessed by the criteria dictated by the law applicable at the date of transmission regarding its various parameters, whether concerning the quantum of the transmission itself, whether concerning the amount to be deducted from it (e.g., acquisition value) in the calculation of the taxable base of the operation.

  6. To argue that the law in force at the date of acquisition of the properties should govern the regime applicable to determining the income derived from their transmission (to the extent it determines the acquisition value to be taken into account for calculating the taxable result of the sale), when on that date (of transmission) that law had been repealed and replaced by another that provides differently in the material regulation of the quantum, corresponds to endorsing an ultra vires effect of the repealed law (article 58.º-A of the CIT Code whose validity has ceased) with which we cannot agree.

  7. Similarly, it should be noted that this line of reasoning does not involve retroactivity or retrospective effect, since the new law did not produce any effects reported to the acquisition of the properties (in 2008 and 2009)[8] which, in any event, by itself did not give rise to any expense, income, or variation in assets capable of being considered as a component of taxable profit (taxable base) of those years for CIT purposes.

3.5 In the Particular Case

  1. The reason for the additional CIT assessment in dispute lies in the taking into account by the TA, as the acquisition value of the properties, of the price stated in the deed and not of the TPV as advocated by the Claimant.

  2. According to the TA, if the Claimant chose to record in the accounts, in 2008 and 2009, the properties at the deed value and not at the TPV, in accordance with the optional regime in force at that time (cf. article 58.º-A of the CITC which conditioned the acquisition value to be taken into account, for purposes of CIT, to the recording of the same at the TPV or at the deed value), at the time of disposal of those, in 2011, the TPV (reported to the date of acquisition) cannot be taken as the acquisition value for calculating the value of taxable income in CIT.

  3. In this way, the TA does not accept the correction made in the replacement declaration of form 22 of CIT which, in addition to correcting the transmission value to the TPV (higher than the sale value) here not disputed, deducts in table 07 the amount of the difference between the value stated in the purchase contract and the TPV, at the date of acquisition of the properties, through the completion of the field "722 – Correction by the acquirer of the property when it adopts the definitive Tax Property Value for the determination of the taxable result in the respective transmission [art. 64.º, no. 3, paragraph b)]".

  4. The TA makes a retrospective analysis and concludes that if at the date of acquisition the Claimant had recorded the properties at their TPV it would have had the possibility of, at that time, under paragraph of article 58º-A, no. 3, paragraph b) of the CITC, "deducting the amount of € 413,723.99 in table 07, field 772 of the respective CIT form 22 declaration for the fiscal years 2008 and 2009". However, this is not the situation with which we are concerned, as we know that the Claimant did not recognize the properties in the accounts at the TPV. The question to be asked is, therefore, another, outside the scope of application of article 58.º-A and under article 64.º of the CITC.

  5. As noted above, in 2011, at the time of disposal of the properties by the now Claimant, article 64.º of the CITC was in force which specifically altered the tax framework to be provided by the acquirer in situations where the value of transaction of a particular property, done at normal market prices, might diverge downward from the definitive TPV of the property, determining the new provision, with the character of obligation, and not of option, that "the acquiring taxpayer adopts the definitive Tax Property Value for the determination of any taxable result in CIT relating to the property".

  6. In this way, the tax regime in force at the date of the taxable event – the transmission of the properties verified in the 2011 fiscal year – determines taxation by the TPV reference value of the properties, whenever higher than the stated/contract value. With no transitional regime that in the succession of the provisions in question (articles 58.º-A and 64.º of the CITC) had reserved prior discipline, the TPV cannot fail to be applied, for purposes of determining taxable income, in accordance with the provisions of article 64.º, nos. 2 and 3 of the CITC. This solution not only derives from the rules of succession of laws in time, but is the one that materially corresponds to full implementation of the principle of equality, as it ensures that all taxpayers are taxed by identical criteria revealing tax-paying capacity.

  7. On the other hand, even if one agreed with the TA's position, we understand that this would not imply the irreversibility of the option taken (at the moment of acquisition), a solution which appears to be of extreme rigidity and whose legal foundation was not explained.

  8. Regarding the filing procedure, it is important to note that, in order for the Claimant to be taxed on the basis of the difference between the definitive TPVs (higher than the contract values), as results from article 64.º of the CITC, the replacement declaration of form 22 of CIT must contain the value of the difference between the definitive TPV at the date of acquisition and the value of the contract (deed of acquisition) to be deducted in table 07, since the properties were recorded in the accounts, when purchased, at the deed price.

  9. In this way, regardless of whether the CIT form 22 declaration contains (or not) a specific field for this purpose, and whether field 772 of table 07 of that declaration, which was used by the Claimant, is not the appropriate one, as it is intended for adjustments based on other assumptions, such fact cannot, in our view, alter the taxation that results from the law, the filing method being merely instrumental and ancillary to the fulfillment of the main obligation, substantive, whose incidence prerequisites are fixed by legal diploma, in accordance with the principle of reserve and preeminence of law.

  10. This is to say that, as noted above, even if it were considered that field 772 of table 07 was not the appropriate one[9], the sense and amount of the deduction made by the Claimant were correct, allowing achievement of the taxable base that derives from the application of article 64.º of the CITC. The filing incorrectness, if that were the case, could underpin the application of the corresponding penalty for inaccuracy in tax declarations, but does not constitute a valid argument in support of the tax assessment, which cannot be owed simply because the filing model does not contemplate a field for completion of an adjustment. Taxation requires the cumulative meeting of the incidence prerequisites contained in the legal norm hypothesis and cannot derive from an inconsistency or failure of the filing model.

  11. For the reasons set out, it is considered that the tax assessment act issued by the TA relating to the 2011 fiscal year and better identified above, and likewise the order dismissing the hierarchical appeal that fell upon it, suffer from a material defect of error in the legal prerequisites, and should be annulled, under the terms and for the effects of article 163.º of the Code of Administrative Procedure, with the legal consequences.

  12. Finally, it is important to note that the relevant issues submitted for this Tribunal's consideration were known and examined, while those whose decision was overtaken by the solution given to others were not.

IV. DECISION

For these reasons, this Arbitral Tribunal hereby agrees to:

  • Find the claim filed by the Claimant for a declaration of illegality and annulment of the order dismissing the hierarchical appeal no. ...2016... to be well-founded;

  • Find the claim for a declaration of illegality and annulment of the additional CIT assessment no. 2011 no. 2015..., in the amount of € 125,271.37, which includes the respective compensatory interest, to be well-founded; and

  • Condemn the Respondent in the costs of the case.

V. Value of the Case

In accordance with the provisions of articles 305.º and 306.º of the Code of Civil Procedure, approved by Law no. 41/2013, of 26.06, by reference to article 29.º, no. 1, paragraph e) of the LFTA, and of article 97.º-A), no. 1, paragraph a) of the Code of Procedure and Tax Procedure, pursuant to article 3.º no. 2 of the Regulation of Costs in Tax Arbitration Cases, the value assigned to the case by the Claimant and not contested of € 140,873.36 is set.

VI. COSTS

Under the provisions of articles 12.º, nos. 1 and 2, and 22.º, no. 4, both of the LFTA, the amount of costs is set at € 3,060.00 in accordance with article 4.º, no. 5 and Table I attached to the Regulation of Costs in Tax Arbitration Cases, to be borne by the Respondent.

Lisbon, 15 October 2018

The Arbiters

Dr. Alexandra Coelho Martins
(Arbitrator-President)

Dr. Filipa Barros
(Arbitrator Member)

Dr. Jónatas Machado
(Arbitrator Member)

[1] The spelling resulting from the Orthographic Agreement of the Portuguese Language of 1990 is adopted, and has been updated accordingly, in conformity with the spelling contained in the citations made.

[2] On criticism of the legal solution enshrined, see no. 31 of the Review of the Order of Official Auditors, Oct./Dec. 2015.

[3] Amendment introduced by Decree-Law no. 159/2009, of 13.07, applicable to fiscal periods commencing on, or after, 1 January 2010.

[4] See paragraph 16.

[5] Having been disposed of before the expiry of the 3-year period from the respective acquisition.

[6] On the application of article 58.º-A of the CITC before being repealed and replaced by article 64.º of the CITC, see the Judgment of the 2nd Section of the Supreme Administrative Court, case no. 01102/16 of 20.09.2017, already reflecting the criticism that the wording of that article deserved.

[7] Being presumed as the normal market value.

[8] And even if it were understood that way, which is not the case, we do not believe that retroactivity could be invoked, at least as a constitutional limit, in the context of a benefit with "retroactive effects" or a less onerous measure to the patrimonial sphere of taxpayers.

[9] In which case there should be an alternative.

Frequently Asked Questions

Automatically Created

What is the difference between Article 58-A and Article 64 of the Portuguese IRC Code regarding property tax valuation?
Article 58-A of the Portuguese IRC Code, in effect until fiscal years beginning before January 1, 2010, allowed taxpayers to choose between recording property at the deed value or the Tax Patrimonial Value (VPT), whichever was higher, providing an optional valuation regime. Article 64, which replaced Article 58-A through Decree-Law 159/2009 effective for fiscal years commencing on or after January 1, 2010, eliminated this option and made VPT mandatory for all property transactions. The change coincided with the introduction of the new Accounting Standards System (SNC) under Decree-Law 158/2009, fundamentally transforming how properties must be recorded for IRC tax purposes from an optional to a mandatory VPT-based valuation system.
Can the Portuguese Tax Authority (AT) apply Article 64 of the IRC Code to adjust property values already declared under Article 58-A?
The Portuguese Tax Authority (AT) attempted to apply Article 64 of the IRC Code retroactively to properties acquired under Article 58-A, but this application is legally disputed. In Case 75/2018-T, the AT argued that upon disposal in 2011, properties must be revalued using the mandatory VPT regime under Article 64, regardless of the valuation method used at acquisition under Article 58-A. The taxpayer contested this, arguing that the legal regime applicable at acquisition should govern the entire lifecycle of the asset. The temporal application of tax law is critical: Article 9 of Decree-Law 159/2009 states Article 64 applies to fiscal periods commencing on or after January 1, 2010, raising questions about whether this affects properties acquired earlier. This dispute centers on whether tax valuation rules are determined by acquisition date or disposal date.
How does the Taxable Patrimonial Value (VPT) affect IRC corporate income tax calculations on property sales in Portugal?
The Taxable Patrimonial Value (Valor Patrimonial Tributário - VPT) significantly impacts IRC corporate income tax calculations on property sales by determining the taxable gain or loss. Under Article 58-A (pre-2010), companies could choose between deed value and VPT, potentially recording properties at lower acquisition values and thus recognizing higher taxable gains upon disposal. Under Article 64 (post-2010), mandatory VPT application means properties must be recorded at VPT if higher than market value, resulting in lower taxable gains upon sale. In Case 75/2018-T, the difference was substantial: the taxpayer recorded properties at deed values of €1,259,464.69 and €1,500.00, while the VPT values were €1,672,300.00 and €2,388.68 respectively. The AT's insistence on applying VPT resulted in an additional tax assessment of €125,271.37, demonstrating how VPT differences can generate significant tax liabilities and making proper valuation critical for tax planning.
What was the outcome of CAAD arbitration case 75/2018-T regarding the additional IRC tax assessment of €125,271.37?
While the complete outcome of CAAD arbitration case 75/2018-T is not fully detailed in the excerpt provided, the case involves a challenge to an additional IRC assessment of €125,271.37 issued by the Portuguese Tax Authority for the 2011 fiscal year. The taxpayer, A... S.A., requested the arbitral tribunal to declare illegal and annul both the dismissal decision of the hierarchical appeal and the underlying additional tax assessment. The Arbitral Tribunal was constituted on May 11, 2018, with Dr. Alexandra Coelho Martins as president and Dr. Filipa Barros and Dr. Jónatas Machado as members. The taxpayer assigned a case value of €140,873.36 to the dispute. The Tax Authority filed its reply on June 18, 2018, arguing the arbitration request was unfounded and that the contested tax acts should remain valid. The case centers on whether Article 64 of the IRC Code can be applied to revalue properties acquired under the previous Article 58-A regime, with significant implications for temporal application of tax legislation.
What procedural steps must a taxpayer follow to challenge an IRC additional tax assessment through hierarchical appeal and arbitration in Portugal?
To challenge an IRC additional tax assessment through hierarchical appeal and arbitration in Portugal, taxpayers must follow specific procedural steps as demonstrated in Case 75/2018-T. First, upon receiving an additional assessment (in this case, issued August 31, 2015, for €125,271.37), the taxpayer must file an administrative complaint (reclamação graciosa) with the Tax Authority challenging the assessment's legality. If the administrative complaint is dismissed, the taxpayer can file a hierarchical appeal (recurso hierárquico) to a superior administrative authority. If this hierarchical appeal is also dismissed (as occurred on December 26, 2017, in this case), the taxpayer may request arbitration under the Legal Framework for Tax Arbitration (RJAT). The arbitration request must be filed pursuant to Articles 2(1)(a), 5(3)(a), 6(2)(a), and 10(1)(a) of the RJAT. The Centre for Administrative Arbitration (CAAD) Ethics Council appoints arbitrators, and parties have the right to object to appointments under Articles 6 and 7 of the CAAD Deontological Code. The arbitral tribunal is then constituted, and both parties submit their arguments, with the Tax Authority filing a reply under Article 17 of the RJAT.