Process: 768/2015-T

Date: May 16, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitration case (Process 768/2015-T) concerns a dispute over IRS capital income taxation for the 2013 tax year. The taxpayers filed their IRS Form 3 declaration showing capital income of €693,650.10, based on pre-filled information from the Tax Authority derived from bank declarations. This resulted in a tax assessment of €383,584.14. The taxpayers challenged this assessment through CAAD arbitration, arguing that no taxable capital gain existed. Their complaint alleged that a bank declaration incorrectly characterized a mere transfer of shares between financial institutions (from D... to Banco C... on 20.05.2013) as a taxable transaction. The taxpayers contended that this transfer, recorded at nominal value of €1.006 per share, was mistakenly treated as an acquisition, when the shares had actually been purchased in 2007 and 2008 at €2,200 per share. According to the taxpayers, when properly calculated against the original acquisition cost, there was actually a capital loss of €375,294.58 rather than a gain. The case raised fundamental questions about: (1) what constitutes a taxable event for capital income purposes; (2) whether transfers of securities between depositaries without consideration trigger IRS obligations; (3) the Tax Authority's duty to correct assessments based on erroneous third-party declarations; and (4) taxpayer rights when pre-filled declarations contain material errors. The Tax Authority raised preliminary exceptions regarding jurisdiction and time limits, while defending the assessment on its merits. The arbitral tribunal was constituted on 02-03-2016 to resolve these issues.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. A. Sérgio de Matos and Prof. Doutor Vasco Valdez, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 02-03-2016, agree on the following:

1. Report

A..., and his wife B..., businesspersons, with tax domicile at Rua..., n.º..., ...-... Lisbon, taxpayers number ... and ... respectively (hereinafter referred to as "Applicants"), have come, pursuant to article 2(1)(a) of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "LFATM") to request the "Constitution of an Arbitral Tribunal for revision of the Tax Act, and consequent annulment of Form 3 Declaration of Personal Income Tax (IRS) of 2013, with number ...-... -..., filed via internet on 23.05.2014".

Ultimately, the Applicants request that "Form 3 Declaration of Personal Income Tax of 2013, with number ...-... -... of 23.05.2014 be annulled" and "verifying that the said assessment substantially harms the subjective rights of the taxpayer, the Tax Authority is constituted in the duty to annul the assessment, independently of any initiative thereof, even after having already seized accounts and properties of the taxpayers, without first correctly verifying the Tax Act".

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 04-01-2016.

Pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of the LFATM, the Deontological Council appointed as arbitrators the signatories, who communicated their acceptance of the charge within the applicable period.

On 16-02-2016, the Parties were notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11(1)(a) and (b) of the LFATM and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of article 11(1)(c) of the LFATM, the collective arbitral tribunal was constituted on 02-03-2016.

The Tax and Customs Authority filed a response raising the exceptions of lack of jurisdiction of the Arbitral Tribunal and of failure to meet a time limit, and defending that the request for arbitral pronouncement should be judged unfounded.

By order of 11-04-2016, the meeting provided for in article 18 of the LFATM was dispensed with and it was decided that the proceedings would continue with written arguments.

The Parties submitted written arguments.

Having the Tax and Customs Authority attached a request for official review submitted by the Applicants on the subject matter of the case, the Applicants were notified to present their response, which they did.

The arbitral tribunal was regularly constituted.

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

The proceedings do not suffer from nullities.

It is necessary to assess prioritarily the exceptions raised.

2. Matters of Fact

2.1. Proven Facts

The following facts are considered proven:

a) On 23-05-2014, the Applicants filed the IRS form 3 declaration relating to the year 2013, with number...-... -...;

b) In that declaration, an Annex E was included (capital income), in whose table B (Option for consolidation of income), line 450, income was indicated in the amount of €693,650.10, relating to the first Applicant and in which the number ... was indicated as "Tax Identification Number of the debtor entity, registrar or depositary" and the code of income "E1";

c) In that declaration, the Applicants also included an Annex G in which they refer only, in fields 801 and 802 (relating to "costly alienation of capital shares and other securities – Article 10(1)(b) of the Personal Income Tax Code"), amounts of realization of €20,000.00 for each of the Applicants and acquisition values of €20,000.00 and €10,000.00, respectively relating to the first and second Applicant;

d) In the said Annex G the Applicants filled in field 1 of the final part of part 9, corresponding to the word "YES", in relation to the question "Do you opt for consolidation of the income included in tables 8 and 9?";

e) Based on the said declaration, the Tax and Customs Authority issued the IRS assessment no. 2014..., with the total amount to pay of €383,584.14, dated 07-06-2014, and with a voluntary payment deadline of 31-08-2014;

f) On 27-08-2014, the Applicants filed a gracious complaint, which is part of the administrative proceedings, the contents of which are hereby reproduced, in which they invoked as grounds an erroneous indication of capital gains that did not exist, there being, rather, a capital loss in the amount of €375,294.58, substantiating their claim in the following terms:

  1. With reference to the year 2013, the present claimants submitted the competent declaration (pre-filled by the Tax Authority – T.A.), in which they erroneously showed capital gains income, which as we shall be able to verify are non-existent, namely as follows:

  2. The supposed non-existent capital gains, as will be possible to demonstrate below, led the present claimants to erroneously show a Gross Income of €846,813.86, and the consequent amount to pay in the IRS Assessment Statement that is now being claimed, of €383,584.14.

  3. Amount which is completely unjustified, since there was no capital gain whatsoever.

  4. Thus, the present Claimants hereby request the correction of the present IRS assessment statement, pursuant to and with the following grounds:

  5. The capital gains income, previously pre-filled by the T.A., in the Income Declaration of the present claimants, provided for in Article 9(1)(a) of the Personal Income Tax Code, result, pursuant to Article 43 of the CITC, from the balance determined between capital gains and capital losses realized in the same year.

  6. Now, there was no capital gain whatsoever, since, as will be possible to verify in the exposition below, and documents attached to the present, what existed was in fact a capital loss in the amount of €375,294.58.

  7. The Declaration sent by C..., on 20 January 2014, pursuant to and for the purposes of Article 125(1)(a) of the CITC, induced the T.A., into error, and led to the erroneous pre-filling of the income declaration of the present claimants and to the also incorrect filing of the income declaration by the employee, who had no knowledge of the origin/transfer, of the situation of the Shares (Banco C... Securities – PT...), cf. document attached and hereby fully reproduced as doc. no. 1.

  8. In the said doc. no. 1, it is possible to verify that we are not facing any transaction/acquisition, "ab initio", but rather a transfer of securities on 20.05.2013 to Banco C..., originating from another banking entity, more specifically a transfer with change of ownership on credit (Transfer with Change of Ownership on Credit), originating from D... (D...), as will be possible to demonstrate below.

  9. There was no acquisition of shares on 20.05.2013, there was, rather, a transfer, without any tax relevance, to the securities dossier no. ..., with Banco C..., in which the movement is recorded at nominal value (1.006), which is the rule for all securities not traded on the stock exchange.

  10. Uncertified securities/shares can be transferred, with no tax relevance in their transfer. There was no financial movement whatsoever, what existed was an in-kind entry by transfer.

  11. Moreover, the said shares were acquired/purchased on 30.10.2007 and 02.07.2008, as per docs. no. 2 and 3, which are hereby attached and fully reproduced.

  12. On 30.10.2007, 782,640 shares (Banco C... Securities – PT...) were acquired by the present claimant, taxpayer with Tax Identification Number ..., at the price of €2,200 per share, for the amount of €1,721,808.00 (cf. doc. no. 2).

  13. In turn, on 02.07.2008, 187,500 shares (Securities of...) were acquired by the present claimant, at the price of €2,200 per share, for the amount of €412,500.00 (cf. doc. no. 3).

  14. On 16.06.2010, 970,140 shares (782,640 + 187,500) were transferred (Transfer), from the account of the present Claimant at Banco C..., to his account at Banco E... (E...), whose value at that moment was €2,136,098.68 (cf. doc. no. 5 which is hereby attached and fully reproduced).

  15. On 17.06.2010, the said shares (970,140 uncertified shares) were transferred from Banco C..., S.A., to Banco E... (cf. doc. no. 6).

  16. On 06.09.2010, the shares were transferred out of E... to D..., as per documents no. 7 and no. 8 which are hereby attached and fully reproduced, without there ever having been a change of ownership.

  17. That is, the said shares never left the ownership of the present Claimant, until finally being sold on 24.05.2013, for a price substantially lower than what they were bought for on 30.10.2007 and 02.07.2008.

  18. Once again, in the document of the Bank with Reference ..., it is possible to verify the entries of the said Bearer Shares (970,140) of Banco C..., (doc. no. 8).

  19. In turn, on 1 June 2011, one share for every ten shares held was granted free of charge by Banco D... to the present claimant, namely, an increase of 97,014 Shares of Banco C... to the 970,140 already held (cf. doc. no. 9).

  20. Thus, the present claimant, as is known to Your Honours, came to hold 1,067,154 (Shares not traded on the Stock Exchange – Banco C... Securities), (document no. 10).

  21. Shares which would subsequently be transferred again to Banco C..., on 20.05.2013, (doc. no. 10) and traded (sold) on 24.05.2013, at the price of €1.65 per Share, for the amount of €1,760,804.10.

  22. Now, as was described above, there was no capital gain, since the shares were bought on 30.10.2007 and 02.07.2008, for the amount of €2,136,098.68, and sold on 24.05.2013, for the amount of €1,760,804.10 (cf. docs. no. 1 and no. 5).

  23. What really exists is a capital loss, in the amount of €375,294.58.

  24. Between the acquisition and sale (transactions with tax relevance) of the said securities not traded on the stock exchange, the Banco C... Securities were subject to transfers between the above-identified banks, transfers which were duly reported, and which have no tax relevance.

  25. Moreover, from the moment in which the Banco C... Securities were acquired, on 30.10.2007 and 02.07.2008, until the moment they were sold, on 24.05.2013, the said securities never left the ownership of the present claimant, A....

Wherefore, the present claimants request the correction of the assessment that is the subject of the present Gracious Complaint, having regard to the grounds invoked, already offering themselves to proceed with payment of the tax that is actually due.

g) By order of 17-11-2014, notification was ordered, for purposes of exercise of the right of hearing, of a draft decision dismissing the gracious complaint, which is part of the administrative proceedings, the contents of which are hereby reproduced, in which the following is referred to, among other things:

II - ANALYSIS OF THE REQUEST

• The gracious complaint procedure is the proper means, in accordance with article 68 of the Code of Tax Procedure and Process (CTPP), by reference to article 140(1) of the CITC;

• The Claimants have standing for the act, conferred by article 9(1) of the CTPP.

• The complaint is timely, pursuant to article 70(1) and article 102(1)(a) of the CTPP, since the deadline for payment of the tax occurred on 31.08.2014 and the gracious complaint was filed, via CTT, on 27.08.2014 (pp. 3 and 42);

• The claimants submitted the Form 3 Declaration of Personal Income Tax on 23.05.2014, the number of which is ...-2013-... -..., with annexes A – dependent work and pensions, E – Capital income, F – Real estate income, G – Capital gains income and H – Tax benefits and deductions (pp. 33 to 40).

• From this declaration resulted tax to pay in the amount of €383,584.14 (p. 30).

• However, the claimants claim that the assessment in question is not correct because capital gains relating to 1,067,154 shares alienated on/24.05.2013 by Banco C..., in the amount of €1,760,804.10, were considered.

• However, upon analysis of Annex G of the capital gains, namely table 8 relating to the alienation of securities capital gains, only amounts of alienation of shares in the name of F..., SA, with Tax Identification Number .... are recorded.

• It is concluded that the corporate income tax assessment now claimed is correct, effected in accordance with the legal precepts, and the allegation by the claimant is not substantiated.

III - PROPOSED DECISION

Given the elements described it is proposed to dismiss the request in question, in accordance with the grounds of the present information.

h) The Applicants presented arguments in the exercise of the right of hearing, pursuant to the terms contained in the administrative proceedings, the contents of which are hereby reproduced, referring, among other things, to the following:

The Tax Authority (T.A.), makes a correct description of the request, based on the gracious declaration submitted by the present signatory;

In the said gracious complaint, the present signatory, claimed, by oversight, of the existence of a possible capital gain (Income of category G), which would have led to the erroneous consideration of income of €846,813.86 and consequently to the amount to pay of €383,584.14.

However, the present signatory, based his gracious complaint on a wrong premise, and on the wrong declaration, also of income classified as Income of Category E, namely as follows:

The report by Banco C..., S.A., of the Banco C... Securities – PT..., was correctly effected as being income of Category G (as per doc. no. 11 which is hereby attached and fully reproduced);

The said report, effected pursuant to Articles 124 and 125 of the CITC, is consistent with the registration of the said income with the Tax Authority, as results from doc. no. 2, which is hereby attached and fully reproduced.

Now, as Your Honours will be able to easily verify, not only by the report of Banco C..., S.A., but also by the registration of the said securities (securities code PT...), documents now attached to the present, the nature of the reported operation, and the nature of the registered operation is exactly the same, (09 - others; 10 - Alienation of securities);

Nature of the operation, the said report and registration effected in accordance with Regulation no. 373/2013 of 27 December, and Regulation no. 415/2012, of 17 December (revoked by the former);

Now, "Form 13 declaration is intended to comply with the declarative obligation referred to in Article 124 of the CITC" Regulation 373/2013, of 27 December.

Regulation 373/2013, of 27 December, which regulates the instructions for filling in form 13, clearly determines, in field 11, that the code of the designation of the value or instrument, would in the case, be code 02 - Shares, or 09 - Other securities (this if we consider the said securities – shares not traded on the stock exchange, as other securities);

In these terms, given the foregoing, and under gracious complaint, the income should have been declared as income of Category G, and not as income of Category E, as was declared in error.

As a conclusion, only by error or oversight in the declaration of income that is the subject of the gracious complaint and of the present hearing, income reported and declared in form 13, as income of Category G, can appear in the said declaration, as income of Category E1, in the amount of €694,650.10.

It is incomprehensible, only by oversight can it be understood, that the entity reports, in this case, Banco C..., S.A. (Tax Identification Number...), reports in form 13, as income of Cat. G, and the same appear declared as Income of Cat. E.

Nevertheless, as was demonstrated at the gracious complaint stage, there was no capital gain whatsoever, or patrimonial increment of the passive subject, pursuant to Article 9(1)(a) of the CITC, and Article 10 of the CITC.

Without waiving, it is, however, important to note that the Tax Authority may have to take into account the provisions of the Binding Information Process no. …/2011, (binding information … with concordant order of the substitute of the Director-General, dated 1/10/2012), in order to classify the said Banco C... Securities – PT..., as income of Cat. E.

Nevertheless, as will be demonstrated, even in this case, only the positive differential determined at the moment of redemption will constitute income from the application of capital, and will be embodied "in the positive difference determined at the moment of redemption, and the cost of acquisition of the securities".

That difference covered by subparagraph p) of Article 5(2) of the CITC, namely "any other income derived from the mere application of capital".

Now, as was demonstrated in the gracious complaint, "(…) the shares were bought on 30.10.2007, and 02.07.2008, for the amount of €2,136,098.68, and sold on 24.05.2013, for the amount of €1,760,804.10" (docs. no. 1 and no. 5 attached to the said gracious complaint).

Even being considered as income of Cat. E, pursuant to Article 5 of the CITC. "The capital income to be considered in such cases shall be embodied in the difference, positive determined at the moment of redemption (…) and the cost of acquisition of the securities".

In these terms, given the foregoing at the gracious complaint stage, and in the present hearing exercise, we can conclude that there was no positive difference whatsoever, which embodies a gain for the passive subject, present claimant, in any capacity. Neither as income of Cat. G, nor as income of Cat. E.

Attached to the present hearing exercise is, as document no. 3, a simulation of the 2013 income declaration, with a summary of the Tax Calculation; Single document for payment of the tax to pay (doc. 4), in the amount of €11,900.05 and respective payment proof (doc. 5).

Without further prejudice, in case Your Honours consider it necessary, we consider that the notification of Banco C..., S.A., in order to determine, and consequently prove, everything that was stated at the Gracious Complaint stage, and in the present hearing exercise, would be beneficial and would certainly dispel any doubt regarding the matter sub iudice.

Wherefore, it is requested that the conclusions drawn from the factual elements analyzed by the Finance Directorate, in the draft decision of dismissal, be reviewed, analyzed the facts here presented in the exercise of the right of hearing, the said conclusions be reviewed, and the due deferment granted.

i) On 29-09-2015, the Deputy Finance Director issued an order dismissing the complaint, expressing agreement with the draft decision and with an opinion, the contents of which are hereby reproduced, in which the following is referred to, among other things:

III. SUPPLEMENTARY INFORMATION

Having completed the proceedings, the corresponding draft decision was communicated to the claimants by means of letter no. ... of 2014-11-18, the claimant being simultaneously notified to exercise the right of prior hearing provided for in article 60 of the General Tax Law.

The claimant exercised the said right on 2014-12-04, where he submitted the written motion contained in pp. 56 to 60 of the case, with the following grounds:

III.1. In the initial petition it is claimed, by oversight, of the existence of a possible capital gain (income of category G), which would have led to the erroneous consideration of income of €846,813.86 and consequent amount to pay of €383,584.14.

III.2. However, the gracious complaint was based on a wrong premise and the wrong declaration, also of income classified in category E.

III.3. The claimants understand that the income should have been considered as category G and not category E, as was declared in error.

III.4. Only by error or oversight in the declaration of income that is the subject of the present complaint, income of category G, can appear in the said declaration as income of category E1, in the amount of €694,650.10.

III.5. The shares were bought on 2007-10-30 and 2008-07-02, for the amount of €2,136,098.68 and sold on 2013-05-24, for the amount of €1,760,804.10.

III.6. Even being considered as income of category E, pursuant to article 5 of the CITC, "The capital income to be considered in such cases shall be embodied in the positive difference determined at the moment of redemption (…) and the cost of acquisition of the securities".

III.7. Thus the claimants conclude that there was no positive difference whatsoever, which embodies a gain for the passive subjects, present claimants.

Having analyzed the arguments raised by the claimant, it is incumbent upon us to inform:

III.8. In the initial petition the claimants come to claim that, by oversight, they considered income of category G which they did not obtain and which, consequently, were taxed inappropriately.

III.9. After analysis of the request and even in the draft decision, it was verified that the alleged income was not included in the contested assessment, so the claimants' argument was not justified.

III.10. The claimants now come, in the exercise of the right of prior hearing to alter the basis of the request, that is, to alter the cause of action.

III.11. Given subparagraph e) of article 2 of the Code of Tax Procedure and Process (CTPP), combined with current article 260 of the Code of Civil Procedure (CCP), the request must be maintained as to the persons, request and cause of action, except for the possibilities of modification provided for in the law.

In these terms, it is proposed to maintain the dismissal of the request with the grounds previously described.

j) On 23-11-2015, the Applicants submitted a replacement declaration, with number ...-...-..., a copy of which they attached with the request for arbitral pronouncement, the contents of which are hereby reproduced, in which they did not include Annex E, but added to Annex G two situations in which capital losses occur, but with amounts different from the value they had previously included in Annex E;

k) On 21-12-2015, at 10:58 hours, the Applicants submitted the request for official review of the assessment ...-... -... of 23-05-2014, a copy of which was attached by the Tax and Customs Authority with its arguments, the contents of which are hereby reproduced;

l) The documents contained in the electronic file called "Report - Doc. 3 and 4" attached with the request for arbitral pronouncement are hereby reproduced, in which is included, among other things, a printout of "Queries of Ancillary Obligations – Detail – By Taxpayer" which includes the following:

m) On 21-12-2015, at 18:58 hours, the Applicants submitted the request for arbitral pronouncement which gave rise to the present proceedings;

n) In the CAAD form with which they submitted the request for constitution of an arbitral tribunal, the contents of which are hereby reproduced, the Applicants indicated in the section relating to the "Object of the request":

Tax – IRS (Personal Income Tax)

Claim – Article 2(1)(a) – Declaration of illegality of acts of:

  • Tax assessments

  • Self-assessment

Article 2(1)(b) – Declaration of illegality of acts of:

  • Determination of taxable matter

Act(s) – Assessment no. ... of 2013 (Tax Services Lisbon-...)

Economic value – €383,584.14

Arbitrator – Opts not to appoint an arbitrator

Articles at issue and observations – Article 99(a) of the CTPP; "Erroneous qualification and quantification of income". In the present case, the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G.

2.2. Unproven Facts and Reasoning for Decision on Matters of Fact

The proven facts are based on the administrative proceedings and on the documents attached by the Applicants.

It was not proven what the origin is of the amount referred to as capital income in Annex E of the IRS Form 3 declaration, since none of the documents attached refers to such amount nor is it possible to calculate it based on them.

It was not proven that the first IRS Form 3 declaration already came pre-filled by the Tax and Customs Authority with Annex E and the amount indicated therein. The Tax and Customs Authority denies this and the Applicants do not present any proof of the assertion they make.

3. Exceptions

It is necessary to assess, first of all, the exceptions, beginning with lack of jurisdiction, which is logically prioritary, as is recognized in article 13 of the Code of Procedure in Administrative Courts of 2002, applicable to tax arbitral proceedings by virtue of the provisions of article 29(1)(c) of the LFATM.

3.1. Exception of Lack of Jurisdiction

The Tax and Customs Authority raises the issue of lack of jurisdiction for two reasons:

– the Applicants direct the request for arbitral pronouncement against the first declaration they submitted and not against the act of assessment and it is not within the powers of the Arbitral Tribunal to annul or alter a tax declaration;

– the request is directed to the Tax and Customs Authority and not to the Arbitral Tribunal.

The request for arbitral pronouncement is presented in terms appropriate to a request for official review directed to the Tax and Customs Authority and not to a request for jurisdictional review, namely the use of the expressions "revision of the tax act" and "annulment of Form 3 Declaration of Personal Income Tax of 2013", the use of which is better understood in the sequence of the pertinent attachment by the Tax and Customs Authority of a request for official review submitted on the same date as the request for constitution of the arbitral tribunal, the request for arbitral pronouncement being almost a complete textual reproduction of the appeal request, being only different the heading and article 1.

Moreover, there are statements in the request for arbitral pronouncement that are textually interpretable as specific to a request directed to the Tax Administration and not to the Arbitral Tribunal.

But, what is relevant to define the object of a jurisdictional proceeding is not the terminology used in the formulation of the motion nor in the formulation of the request, but rather the perception of the claim which is reached by means of interpretation.

More than half a century ago ALBERTO DOS REIS taught that the terms used are irrelevant when the claimant's claim is detected: "Did the claimant express his thinking in inadequate terms, using technically defective language, but sufficiently make known what legal effect he intended to obtain? The petition will be an awkward and unfortunate piece, but cannot be qualified as improper" ([1]).

The Supreme Administrative Court has been pronouncing itself essentially along these lines, for a long time ([2]).

"As the law does not impose the terms or expressions to be used in the formulation of the request, the requirement of sacramental, rigid or irreplaceable formulas in such a matter must be set aside. In this regard, what is merely required is that the claimant, after describing his claim, setting forth its grounds and object, express the will that the tribunal act in order to deliver a judgment of content favorable to the expressed claim" ([3]).

"The initial petition must be interpreted, like any procedural motion by the parties, according to the principles common to the interpretation of negotiated declarations and laws, with the meaning that a normally diligent recipient can and should discern from its verbal terms prevailing, postponing merely ritualistic and formal interpretations" ([4]).

More than observing rules of interpretation, priority should be given to freedom of interpretation, as long as it is proven that the respondent, having perceived the claimant's real will, is not prejudiced by the deficiencies of the petition, a limit imposed by the principle of prohibition of being unheard, which is a corollary of the principle of effective judicial protection (article 20(1) of the CRP).

In the case at hand, it is found that the Tax and Customs Authority perceived that the Applicants' claim is the annulment of the assessment, by referring itself in article 39 of its Response "to the annulment of the assessment suggested and not completely explicit in its petition" and by defending, in the following articles, that the expiry of the right to make the assessment would have occurred on 29-11-2014, 90 days after the voluntary payment deadline indicated in the assessment statement.

In article 44 of the Response the Tax and Customs Authority confirms that it perceived that the Applicants formulated a request against the said assessment, despite saying that it "can only be presumed in the face of the case, since the petition is in this matter nothing clear and deficient".

But, it is certain that, at least, it can be presumed that the Applicants formulated a request against the said assessment and, by this means, it was possible for the Tax and Customs Authority to identify the annulment claim that the Applicants formulate.

However, the request for arbitral pronouncement was not the only piece submitted by the Applicants to formulate their claim, since, by virtue of the provisions of article 10(2) of the LFATM, it is submitted electronically, and the form that must be filled in at that time is the first piece of the electronic proceedings, of which the Tax and Customs Authority was made aware on 22-11-2015 (pursuant to article 10(3) of the same article), a piece which appears in the electronic proceedings under the designation "Request".

Now, in the case at hand, what appears in that "Request" of which the Tax and Customs Authority was made aware is, among other things, the following:

Object of the Request

Tax – Personal Income Tax (IRS)

Claim – Article 2(1)(a) – Declaration of illegality of acts of:

  • Tax assessments

  • Self-assessment

Article 2(1)(b) – Declaration of illegality of acts of:

  • Determination of taxable matter

Act(s) – Assessment no. ... of 2013 (Tax Services Lisbon-...)

Economic value – €383,584.14

Arbitrator – Opts not to appoint an arbitrator

Articles at issue and observations – Article 99(a) of the CTPP; "Erroneous qualification and quantification of income". In the present case, the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G.

As can be seen, express indication is made that the act which is the object of the request for declaration of illegality is the assessment no. ... of 2013 and the ground for the request is "Article 99(a) of the CTPP; 'Erroneous qualification and quantification of income'. In the present case, the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G."

Thus, in this context, despite evident deficiencies of the request for arbitral pronouncement in the allusion to the income declaration as an act to be annulled, it is concluded from the set of acts referred to through which the Applicants manifested their claim that they intend that the Arbitral Tribunal declare illegal the assessment no. 2014..., relating to IRS of the year 2013, by erroneous qualification and quantification of income, embodied in "the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G."

At most, if it were necessary, the Applicants could be invited to correct the request for arbitral pronouncement, under the provisions of article 18(1)(c) of the LFATM, so that its terminology would be in accordance with that used in the "Request" which was initially notified to the Tax and Customs Authority. But, having been made this notification and being unequivocal the intention of the Applicants manifested in the form of annulment of the assessment and its grounds, one is not faced with a situation in which correction would be essential.

Moreover, the fact that the Tax and Customs Authority comes to defend the expiry of the right to make the assessment based on the date of the end of the voluntary payment period set in the document through which the assessment was notified confirms that the Tax and Customs Authority perceived that it is that act which the Applicants intend to challenge, and, although they consider "the petition nothing clear and deficient", managed to presume that the request is "against the assessment" (article 44 of the Response), which, certainly, could have been determined without use of presumptions, in view of the express contents of the "Request" which was electronically notified to it.

In any event, in the final part of the arguments, the Applicants explicitly refer that they intend that "the assessment act no. 2014..., relating to IRS of the year 2013, be declared illegal, and by erroneous qualification and quantification of income", in perfect accordance with what they initially declared in the "Request" which was notified to the Tax and Customs Authority, so it is at least doubtful that, in good faith, one can allude to in the arguments the making of "substantial alteration of the instance" or alteration of the request, as, with manifest error of interpretation, the Tax and Customs Authority defends on page 2 of its arguments.

Being this the interpretation made of the request for arbitral pronouncement, integrated by the set of procedural acts practiced by the Applicants in the proceedings from the electronic filing until the arguments, it is concluded that one is faced with a request that falls within the competencies of the arbitral tribunals that function in the CAAD, since the Applicants intend that "the assessment act no. 2014..., relating to IRS of the year 2013, be declared illegal, and by erroneous qualification and quantification of income", embodied in "the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G."

As regards the statement of the Tax and Customs Authority that, if it is not understood as it says it understands, the Arbitral Tribunal is without jurisdiction, there is "violation of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3(2) and 266(2), both of the CRP), which bind the legislator and all activity of the TA", besides being manifest the insufficiency of allegation, as the Tax and Customs Authority does not even outline an explanation of the reasons that may lead to understand that violations of any of these principles occur, it is also evident the error of the Tax and Customs Authority regarding the principle of separation of powers and the function that courts play in it.

In fact, in a rule of law State the Courts (including arbitral ones, which are constitutionally recognized by article 209(2) of the CRP) are independent and are only subject to the law (article 203 of the CRP), so it is incumbent upon the Courts to develop their activity autonomously, interpreting the procedural pieces submitted by the parties and defining the applicable law in the disputes submitted for their review.

The interpretation and application of the law by a Court effected in a jurisdictional process in a manner divergent from the Parties cannot constitute a violation of the principles of separation of powers and rule of law, since it is, rather, a materialization of these principles. In fact, when they are interpreting procedural pieces and interpreting the law to apply it to the disputes submitted for their review, arbitral tribunals are not developing an activity of a legislative or administrative nature, but rather exercising the jurisdictional power, so there is no foundation whatsoever to allude to a violation of the principle of separation of powers.

Similarly, as regards the principle of legality, it is manifest that, by adopting the interpretation of the law that they deem appropriate to apply it to the disputes that they are competent to review, arbitral tribunals are giving it effect, since all legal norms require interpretation and it is to the courts that this task falls in the proceedings within their competency. In a rule of law State, in which the courts are only subject to the law, there is no legal space for the establishment of a supralegal interpretation of the law effected by the Tax and Customs Authority whose violation may be considered incompatible with the principle of legality.

For the foregoing, the exception of lack of jurisdiction raised by the Tax and Customs Authority fails, being clarified that the act impugned is the assessment no. 2014..., relating to IRS of the year 2013, which the Applicants intend to be declared illegal, and by erroneous qualification and quantification of income, embodied in that "the sale of national bearer shares were erroneously declared as Income of Cat. E, which are in fact Income of Cat. G."

Thus, the exception of lack of jurisdiction raised fails.

3.2. Exception of Expiry of the Right of Action

The Tax and Customs Authority defends that the expiry of the right to make the assessment has occurred, as it understands that the period is counted from the end of the period of voluntary payment.

However, in the case at hand, there was a gracious complaint, timely submitted (within the period provided for in article 70(1) of the CTPP).

The act which is challengeable in an arbitral proceeding, when a gracious complaint is wholly dismissed, is the primary assessment act, since it is only this act which is the injurious act that affects the taxpayer's legal sphere. It is manifestly to this act that article 2(1)(a) of the LFATM refers.

But, pursuant to article 10(1)(a) of the LFATM, "the request for constitution of an arbitral tribunal is submitted (…) within a period of 90 days, counted from the facts provided for in articles 102(1) and (2) of the Code of Tax Procedure and Process, as to acts susceptible of autonomous challenge."

Article 102(2), which established a special period for challenging decisions on gracious complaints, was repealed by Law no. 82-E/2014, of 31 December, so that the challenge of decisions of this type is subject to the 90-day period provided for in subparagraph (e) of article 102(1) of the same article, since decisions on complaints are acts susceptible of autonomous challenge, as results from articles 95(2)(d) of the General Tax Law and 97(1)(c) of the CTPP.

Thus, the 90-day period for submitting the request for arbitral pronouncement against the assessment act which was the subject of a dismissed gracious complaint is counted from the notification of the decision dismissing the complaint.

In the case at hand, the decision on the gracious complaint was delivered on 29-09-2015 and the request for arbitral pronouncement was submitted on 21-12-2015, so that, even without considering the date of notification, it must be concluded that this request was submitted within the 90-day period provided for in said subparagraph (a) of article 10(1) of the LFATM.

Thus, the exception of expiry fails.

4. Matters of Law

The defect which the Applicants attribute to the impugned assessment is that of "erroneous classification/qualification of Income of Cat. G., wrongly treated as if it were Income of Cat. E., giving rise to an undue assessment of tax in the amount of €383,584.14."

As results from the facts established, it was the Applicants who submitted to the Tax and Customs Authority an IRS Form 3 declaration in which they included an Annex E in which they indicated, in part B, relating to "Option for consolidation of income", in field 450 the amount of €693,650.10, the number ... as "Tax Identification Number of the debtor entity, registrar or depositary" and the income code "E1".

In harmony with the instructions for filling in the Form 3 Declaration relating to income of 2013, approved by Regulation no. 365/2013, of 23 December, the income code E1 corresponds to the following income:

  • Profits and advances on account of profits due by resident entities (including dividends);

  • Income resulting from sharing or amortization of capital shares without capital reduction;

  • Income which the associate derives from the associate at the share and from the associate in participation.

In the said filling instructions it is further indicated regarding the filling in of Table 4B:

TABLE 4B - OPTION FOR CONSOLIDATION OF INCOME

In this table must be identified the income which was subject to withholding at liberatory rates, for which the option for consolidation is provided for in article 71(6) of the Personal Income Tax Code, and in articles 22, 23 and 24 of the Tax Benefits Statute.

For the option to be valid it is necessary to send to the tax services of the area of the tax domicile the document proving the income and the withheld tax, issued by the paying entity. If the declaration is filed via Internet, these documents must be sent to the tax services of the area of the tax domicile by the end of May of the year following that to which the income relates.

Once the option for consolidation is exercised, the totality of the income referred to in article 71(6) (capital income) must be declared. This option also determines taxation by consolidation of capital gains relating to securities, as well as real estate income earned in 2013 and following years, as provided for in article 22(5) of the Personal Income Tax Code.

As results from these instructions, the completion of table 4B means option for consolidation of capital income.

This option necessarily results from the option for consolidation which the Applicants made in the final part of part 9 of Annex G, by marking field 1 ("YES") to the question "Do you opt for consolidation of the income included in tables 8 and 9?"

In fact, as results from the provisions of article 22(5) of the CITC, "when the taxpayer exercises the option referred to in (3), he is, by this fact, obliged to consolidate the totality of income comprised in (6) of article 71, (8) of article 72 and (7) of article 81, and other legislation, when this provides for the right of option for consolidation."

Subparagraph (b) of (3) of this article 22, to which reference is made in (5), refers to "income referred to in articles 71 and 72 earned by residents in Portuguese territory, without prejudice to the option for consolidation provided therein", so that the option for consolidation effected in Annex G implies the consolidation of capital income provided for in article 71 and to be indicated in table 4B of Annex E.

This regime, moreover, is found in the indications for filling in table 9 of Annex G, which is contained in Regulation no. 421/2012, of 21 December, whose application to the Form 3 declaration relating to income of 2013 is determined in article 4(c) of Regulation no. 365/2013, of 23 December:

In the case at hand, it was not determined whether Annex E was pre-filled, nor whether the Applicants had or did not have income that could be consolidated in Annex E in that or another amount, but the documents submitted by the Applicants, particularly the one that appears to be a printout made on the basis of the Finance Portal with the designation "Queries of Ancillary Obligations – Detail – By Taxpayer", raise, at least, doubts about whether the amount of €693,650.10, which is contained in that Annex E, corresponds to income that should be considered as capital income.

In fact, the fact that the operations relating to securities recorded as effected on 20-05-2013 and 24-05-2013 resulted in a difference of €693,650.10, exactly equal to the amount declared in Annex E, points in the direction that those operations are at the origin of the determination of the said amount and that the thesis presented by the Applicants corresponds to the reality, which is not even minimally contradicted by the Tax and Customs Authority. In fact, the Tax and Customs Authority neither in this arbitral proceeding nor in the gracious complaint proceeding attributes falsity to the documents presented by the Applicants, nor in any of the proceedings makes any allegation in the sense of raising doubts about the movements of shares which the Applicants refer, despite the law recognizing her broad access to banking information, including that relating to the registration or deposit of securities, which are obligatorily provided to her, pursuant to article 125 of the CITC.

Thus, if it is certain that the said documents attached by the Applicants are not of unequivocal interpretation and, therefore, do not permit as proven all the facts affirmed by the Applicants, it is also certain that they raise in the Arbitral Tribunal serious doubts about the qualification of the movements of securities from which resulted the amount of difference of €693,650.10, in any of the categories to which table 4B of Annex E of the Form 3 declaration is destined. In fact, there is no indication whatsoever that that sum comes from "Profits and advances on account of profits due by resident entities (including dividends)", or "Income resulting from sharing or amortization of capital shares without capital reduction" or "Income which the associate derives from the associate at the share and from the associate in participation" which are the categories of income to which, pursuant to the filling instructions, the said table is destined. To the contrary, the documents referred to indicate that the amount of €693,650.10 has its origin in registrations of movements of securities.

For the foregoing, it is concluded that the evidence produced raises well-founded doubts about whether the Applicants obtained in the year 2013 income in the amount of €693,650.10 of any of the types that should be included in the said table 4B of Annex E of the Form 3 declaration.

Thus, by virtue of the provisions of article 100(1) of the CTPP [applicable to tax arbitral proceedings by virtue of the provisions of article 29(1)(c) of the LFATM], which establishes that "whenever the evidence produced raises well-founded doubt about the existence and quantification of the tax fact, the impugned act shall be annulled", those doubts justify the annulment of assessment no. 2014....

3. Decision

In these terms, the Arbitral Tribunal agrees:

a) To judge unfounded the exception of lack of material jurisdiction of this Arbitral Tribunal;

b) To judge unfounded the exception of expiry of the right of action;

c) To judge founded the request for arbitral pronouncement and to annul assessment no. 2014....

4. Value of the Case

In harmony with the provisions of article 306(2) of the CCP, article 97-A(1)(a) of the CTPP and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of €383,584.14 is fixed for the case, indicated in the form for submission of the request for constitution of the arbitral tribunal, which is not contested by the Tax and Customs Authority.

5. Costs

Pursuant to articles 12(2) and 22(4) of the LFATM, the amount of costs is fixed at €6,426.00, pursuant to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 16-05-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(A. Sérgio de Matos)

(Vasco Valdez)

[1] Commentary to the Code of Civil Procedure, volume 2, pages 364-365.

[2] Among others, the following orders may be seen: of 4-10-1995, case no. 019501, Appendix to the Official Gazette of 14-11-97, page 2205 et seq.: of 10-12-1997, case no. 022048, Official Gazette Appendix 30-3-2001, page 3320; of 19-2-2003, case no. 01059/02, Appendix to the Official Gazette of 25-3-2004, page 318; of 14-3-2007, case no. 0907/06; of 26-4-2007, case no. 01202/06.

[3] Order of the Supreme Administrative Court of 4-10-1995, case no. 019501, Appendix to the Official Gazette of 14-11-97, page 2205.

In the same sense, may be seen the orders of the Supreme Administrative Court of 14-3-2007, case no. 0907/06, and of 29-10-2008, case no. 0541/08.

[4] Order of the Supreme Administrative Court of 13-10-2010, case no. 0241/09.

Frequently Asked Questions

Automatically Created

What are capital income (rendimentos de capitais) for IRS purposes in Portuguese tax law?
Capital income (rendimentos de capitais) for IRS purposes encompasses income from invested capital, including dividends, interest, and capital gains from the disposal of securities. Under Article 9(1)(a) of the Portuguese IRS Code (CIRS), capital gains constitute the positive balance between gains and losses from the disposal of shares and other securities realized in the same tax year. The calculation follows Article 43 of CIRS, requiring determination of the difference between the disposal value and the acquisition cost. Income is taxed either separately or, at the taxpayer's option, consolidated with other income categories.
How can taxpayers challenge an IRS tax assessment through CAAD arbitration?
Taxpayers can challenge IRS assessments through CAAD (Centro de Arbitragem Administrativa) by filing a request for constitution of an arbitral tribunal under Article 2(1)(a) of the Legal Framework for Tax Arbitration (RJAT - Decree-Law 10/2011). The request must identify the contested tax act, present legal grounds for annulment, and be submitted within the statutory time limits. After acceptance, the CAAD President notifies the Tax Authority, and the Deontological Council appoints arbitrators. The Tax Authority files a response, potentially raising preliminary exceptions. The arbitral tribunal, once constituted, conducts proceedings that may include written arguments and hearings, ultimately issuing a binding decision on the legality of the assessment.
What happens when there are doubts about the existence of a taxable event in IRS proceedings?
When doubts exist about whether a taxable event occurred, the burden falls on the Tax Authority to demonstrate that the legal requirements for taxation are met. In IRS proceedings, not every transaction involving securities constitutes a taxable event. Transfers of shares between depositaries or financial institutions without consideration (mere changes in custody) do not generate capital gains or losses for tax purposes. The relevant taxable event is the actual disposal of securities for consideration, not administrative transfers. If the Tax Authority relies on third-party declarations (such as bank reports under Article 125 CIRS) that mischaracterize non-taxable transfers as taxable disposals, taxpayers can challenge the resulting assessments by demonstrating the true nature of the transaction and the absence of a taxable event.
Can the Tax Authority be required to annul a tax assessment that substantially harms taxpayer rights?
Yes, under Portuguese tax law principles, the Tax Authority has a duty to annul tax assessments that are illegal or substantially harm taxpayer rights, even without taxpayer initiative in certain circumstances. Article 78 of the Tax Procedure Code (LGT) establishes the Tax Authority's power and duty to review and correct illegal acts. When an assessment is based on manifest errors—such as incorrect characterization of non-taxable transfers as taxable disposals, or reliance on erroneous third-party declarations—the Tax Authority must rectify the assessment. This duty exists independently of whether enforcement proceedings (such as account seizures) have commenced. Taxpayers can compel such annulment through administrative complaints, hierarchical appeals, or arbitration proceedings, demonstrating the illegality and prejudice caused by the erroneous assessment.
What are the grounds for requesting annulment of an IRS Model 3 declaration through arbitral proceedings?
Grounds for requesting annulment of an IRS Form 3 declaration through arbitral proceedings include: (1) material errors in the declaration itself or in pre-filled data provided by the Tax Authority based on third-party information; (2) incorrect legal characterization of transactions—such as treating non-taxable transfers as taxable disposals; (3) erroneous calculation of taxable income, including misapplication of acquisition costs or disposal values; (4) absence of a taxable event despite the declaration of income; (5) violation of legal requirements for tax assessment; and (6) substantial prejudice to taxpayer rights resulting from the erroneous assessment. In this case, the taxpayers invoked the absence of capital gains (claiming instead a capital loss), erroneous pre-filling based on misleading bank declarations, and incorrect treatment of a share transfer as a taxable acquisition, all constituting grounds for annulment under RJAT.