Capital Gains Tax on Share Sales 2010: Retroactivity of Tax Law Ruled Illegal (CAAD 770/2014-T)

ENGLISH TRANSLATION

Case no. 770/2014 - T

Claimants: A.. and B…

Respondent: Tax and Customs Authority

Subject Matter: Taxation of capital gains from the alienation of shareholdings in the year 2010. Retroactivity of tax law.

ARBITRAL AWARD

I – Report

1. The taxpayers A… (TIN: …) and … (TIN: …), married to each other (hereinafter "Claimants"), presented, on 17 November 2014, a request for the constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of Articles 2(1)(a) and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "LRAT"), in which the Tax and Customs Authority is respondent (hereinafter "TCA", or "Respondent").

2. The Claimants seek an arbitral pronouncement on the illegality of the additional Personal Income Tax assessment no. 2014…, of 2 July 2014, and corresponding compensatory interest assessment no. 2014…, relating to the year 2010 and totalling €68,778.55.

3. The Claimants request the annulment of such assessments based on violation of Article 12(2) of the LGT, and further compensation for the provision of undue guarantee.

4. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the TCA on 17 November 2014.

5. Pursuant to Article 6(2)(a) and Article 11(1)(b) of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of their appointment within the applicable timeframe, and notified the parties of such designation.

6. The Collective Arbitral Tribunal was constituted on 30 January 2015; it was regularly constituted and is materially competent, pursuant to Articles 2(1)(a), 5, 6(1), and 11(1) of the LRAT (as amended by Article 228 of Law no. 66-B/2012, of 31 December).

7. Pursuant to Articles 17(1) and (2) of the LRAT, the TCA was notified on 9 February 2015 to submit its response.

8. The TCA submitted its response on 6 March 2015, accompanied by the documentation comprising the corresponding Administrative File; and in that response it alleges, in summary, the total lack of merit of the Claimants' claim, requesting the rejection of all claims.

9. The Arbitral Procedural Order of 13 March 2015 determined the waiver of the meeting referred to in Article 18 of the LRAT and of the parties' submissions; and set 31 March 2015 as the date for the issuance of the final decision.

10. The Parties have legal personality and capacity and possess standing, pursuant to Articles 4 and 10(2) of the LRAT, and Article 1 of Ordinance no. 112-A/2011, of 22 March.

11. The Parties are duly represented.

12. The proceedings do not suffer from nullities and no prior or subsequent issues prejudicial or exceptive in nature have been raised that would prevent consideration of the merits of the case, showing that the conditions are met for the issuance of a final decision.

II – Substantiation: The Facts

II.A. Facts Considered Proven

a) On 30 April 2010, the Claimants alienated to C… – Funeral Agencies, S.A., 998 shares representing 19.96% of the capital of the company Funeral Agency …, S.A., at a price of €310,000.00, thereby obtaining €308,998.00 in capital gains.

b) The Claimants, who had held these shares since 2005, did not include any reference to this capital gains income in their Personal Income Tax Return for the year 2010.

c) The Claimants were notified of the additional Personal Income Tax assessment no. 2014…, of 2 July 2014, and of the corresponding compensatory interest assessment no. 2014…, relating to the year 2010 and totalling €68,778.55.

d) Such additional assessment resulted from an audit action during which the Claimants exercised their Right of Prior Hearing; and the results, in the Final Report, had been notified to the Claimants, through their Representative, on 11 June 2014.

e) In the tax enforcement proceeding no. …2014…, for which such additional Personal Income Tax assessment is the subject, the Claimants, in order to obtain the suspension of enforcement while they contest the assessments, offered as guarantee the constitution of a voluntary mortgage on a real property; the Finance Service of …, accepting as suitable the guarantee offered, in a response dated 30 October 2014, notified the Claimants to, within 15 days, constitute upon the said property a voluntary mortgage in favor of the National Treasury, in the amount of €87,640.93 (calculated by the sum: amount due for enforcement + default interest + costs + 25% increase).

II.B. Facts Considered Not Proven

a) The evidence presented was documentary in nature and was incorporated in the proceedings.

b) No matter proven in the records had its authenticity or correspondence with the facts questioned.

c) It is not proven that any guarantee was actually constituted in favor of the State, as stated in Article 77 of the TCA's Response.

d) There are no other unproven facts of relevance to the decision of the case.

III – Substantiation: The Law

III.A. Position of the Claimants

a) The Claimants allege that they included nothing regarding capital gains income in their Personal Income Tax Return for the year 2010 because they understood that, at the date of alienation – 30 April 2010 – such income was excluded from taxation (since it concerned assets held since 2005, that is, for more than the 12 months required by Article 10(2)(a) of the Personal Income Tax Code).

b) The Claimants further allege that the entry into force of Law no. 15/2010, of 26 July, which occurred on 27 July 2010, means that the prior period of 2010 is not covered by the respective regime – by virtue of Article 12(2) of the LGT, which expressly prohibits, even for tax facts of successive formation, any form of retroactivity or retrospectivity.

c) Accordingly, the repeal, by Law no. 15/2010, of 26 July, of the regime excluding the taxation of capital gains would not, according to the Claimants (supported by doctrine and by court and arbitral case law), have the capacity to make retroactively taxable what was not taxable at the moment of its occurrence, what was not taxable at the moment of generation of the income that became, for the future, taxable: namely, in this case, "long-term capital gains".

d) On the other hand, the Claimants derive their claim for compensation for the provision of undue guarantee from the fact that they had to constitute a voluntary mortgage based on what they consider to be an error attributable to the services – which, by the combined application of Articles 1 and 2 of the LGT, would make compensable the losses arising from the provision of such guarantee (namely the costs of constitution, maintenance and release), in proportion to success in contesting the secured debt.

III.B. Position of the Respondent

a) In response, the TCA maintains that the Claimants have no basis whatsoever, and that, on the contrary, the basis for the assessments rests on the correct interpretation and application of the relevant legal framework.

b) The Respondent contends that capital gains obtained in 2010, but prior to 27 July of that year (the date of entry into force of Law no. 15/2010, of 26 July) contribute to the net amount referred to in Article 43 of the Personal Income Tax Code, and that there can therefore be no discrimination of income of that category, nor any taxation "pro rata temporis" thereof.

c) Based on what it alleges to have been the "legislative intent", and on certain doctrine and case law, the TCA maintains that the taxation of capital gains under Personal Income Tax can only be framed within the proper functioning of this taxation of individual income, which is to incide, in a unitary and comprehensive manner, on annual net amounts of flows of wealth – whereby the contract of 30 April 2010 would only truly become a taxable event on 31 December 2010: after the entry into force of Law no. 15/2010, of 26 July, fully subject, therefore, to the respective regime of taxation of capital gains (the TCA admitting that, thereby, a "weak" or "inauthentic" retroactivity occurred, a "retrospectivity").

d) Any contrary understanding, the Respondent alleges, would distort not only the annuality of Personal Income Tax, its essential characteristic; but would also undermine the proper method of calculation of the income to be taxed in the various categories, distorting it or making it impracticable – in this case, preventing the consideration of capital gains and losses that will go to make up the final net amount from spreading across the entire period of a year (forcing an isolated and singular, non-periodic consideration, which, in the end, could result in prejudice to the taxpayer himself).

e) On the other hand, the TCA points out the fact that the LGT is a statute without enhanced force, whereby its rules cannot be invoked to the detriment of superior, subsequent, or special law – thus responding to the invocation, by the Claimants, of the rule contained in Article 12(2) of the LGT, which the TCA maintains should yield to the rules of the Personal Income Tax Code.

f) Against the claim for compensation for the provision of undue guarantee, the TCA counter-argues that it does not perceive any "error of the services" that, pursuant to Article 53(2) of the LGT, would dispense with verification of the 3-year period established in Article 53(1) of the same; and that, more decisively, the guarantee in question was not even constituted, but merely offered, whereby obviously no prejudice could have occurred in the meantime.

IV On the Law

The crux of the disputed matter consists in determining which law is applicable to the onerous transfer of shares effected on 30 April 2010 by the Claimants, held since 2005.

Recalling the grounds invoked by the parties, the Claimants' perspective is that the tax fact is constituted solely by the alienation of the shares, being exhausted at that moment, consolidating in the sphere of the subject to taxation the right to taxation by the law in force at the date of such alienation. The application of legislation published 3 months after the date of occurrence of the facts, Law 15/2010, of 26 July, which repealed the prior regime, expressed in Article 10(2) of the Personal Income Tax Code, would be affected by illegality and unconstitutionality by violation, respectively, of Article 12 of the LGT and Article 103 of the Constitution.

The Respondent, on the other hand, maintains that the Claimants have no basis whatsoever, and that, on the contrary, the basis for the assessments rests on the correct interpretation and application of the relevant legal framework.

The Respondent further contends that capital gains obtained in 2010, but prior to 27 July of that year (the date of entry into force of Law no. 15/2010, of 26 July) contribute to the net amount referred to in Article 43 of the Personal Income Tax Code, and that there can therefore be no discrimination of income of that category, nor any "pro rata temporis" taxation thereof.

Based on what it alleges to have been the "legislative intent", and on certain doctrine and case law, the TCA maintains that the taxation of capital gains under Personal Income Tax can only be framed within the proper functioning of this taxation of individual income, which is to incide, in a unitary and comprehensive manner, on annual net amounts of flows of wealth – whereby the contract of 30 April 2010 would only truly become a taxable event on 31 December 2010: after the entry into force of Law no. 15/2010, of 26 July, fully subject, therefore, to the respective regime of taxation of capital gains (the TCA admitting that, thereby, a "weak" or "inauthentic" retroactivity occurred, a "retrospectivity").

Any contrary understanding, the Respondent alleges, would distort not only the annuality of Personal Income Tax, its essential characteristic; but would also undermine the proper method of calculation of the income to be taxed in the various categories, distorting it or making it impracticable – in this case, preventing the consideration of capital gains and losses that will go to make up the final net amount from spreading across the entire period of a year (forcing an isolated and singular, non-periodic consideration, which, in the end, could result in prejudice to the taxpayer himself).

On the other hand, the TCA points out the fact that the LGT is a statute without enhanced force, whereby its rules cannot be invoked to the detriment of superior, subsequent, or special law – thus responding to the invocation, by the Claimants, of the rule contained in Article 12(2) of the LGT, which the TCA maintains should yield to the rules of the Personal Income Tax Code.

Against the claim for compensation for the provision of undue guarantee, the TCA counter-argues that it does not perceive any "error of the services" that, pursuant to Article 53(2) of the LGT, would dispense with verification of the 3-year period established in Article 53(1) of the same; and that, more decisively, the guarantee in question was not even constituted, but merely offered, whereby obviously no prejudice could have occurred in the meantime.

It is necessary to decide.

Article 10 of the Personal Income Tax Code – in the wording in force at the date of alienation – reads as follows:

"1. Capital gains consist of gains obtained that, not being considered business and professional income, capital income or real property income, result from:

(…)

b) Onerous alienation of shareholdings, including their redemption and amortisation with capital reduction, and other securities (…)

2 – Excluded from the foregoing are capital gains from the alienation of:

a) Shares held by their holder for more than 12 months

(…)

1. Gains are considered obtained at the moment of performance of the acts provided for in no. 1, without prejudice to the following provisions:

(…)

1. The exclusion established in no. 2 does not apply to capital gains from shares of companies whose assets consist, directly or indirectly, in more than 50%, of real property or real rights over real property situated in Portuguese territory".

Law no. 15/2010, of 26/07:

"Article 1

Amendment to the Personal Income Tax Code

Articles 10, 43, 72… of the Personal Income Tax Code shall have the following wording:"

"Article 10

…

2 – (Repealed)"

Article 72

"…

4 – The positive net amount between capital gains and losses, resulting from the operations provided for in sub-paragraphs b), e), f) and g) of no. 1 of Article 10, is taxed at the rate of 20%".

"Article 2 (of Law 15/2010)

Repeal of provisions within the Personal Income Tax Code

Numbers 2 and 12 of Article 10 of the Personal Income Tax Code, approved by Decree-Law no. 442-A/88, of 30 November, are hereby repealed".

"Article 5

Entry into Force

This law enters into force on the day following its publication".

From which it follows that the cited Law no. 15/2010 is silent regarding any special rules for the application of law in time, although this issue was addressed in the parliamentary debate that preceded its approval.

Article 12 of the LGT provides that:

"1 – Tax rules apply to facts occurring after their entry into force, and no retroactive taxes can be created.

2 – If the tax fact is of successive formation, the new law applies only to the period elapsing from its entry into force.

(emphasis is ours)

3 – Rules on tax procedure and process are of immediate application, without prejudice to previously constituted guarantees, rights and legitimate interests of taxpayers.

4 – The provisions of the foregoing number do not apply to rules which, although integrated in the process of determining the taxable matter, have the function of developing rules of tax incidence."

We initiate our consideration with the moment at which the tax fact occurs – a matter in which we avail ourselves of Decision no. 85/2010 of the Constitutional Court, which dealt with the non-deductibility for corporate income tax purposes – of 50% of the net negative amount between capital gains and losses determined through onerous transfer of shareholdings.

Specifically, Law no. 32-B/2002, of 30 December, amended the prevailing tax rules, proceeding to restrict, to half, the tax deductibility of the net annual negative amount arising from the onerous transfer of shareholdings by corporate income tax subjects.

In such terms the question arose of determining what regime applied to capital shares acquired at a moment prior to the entry into force of the said law, but alienated after its effectiveness. All this, within the framework of a periodic tax, of complex and successive formation, whose tax fact occurs on the last day of the fiscal year (as stated in Article 8(9) of the Corporate Income Tax Code).

A factual situation analogous to the disputed situation, which is why the Constitutional Court's decision merits reading when it expresses itself in the following manner:

"As regards the problematic of the prohibition of retroactivity, it seems clear that the hypothesis of any retroactive application of the provision of Article 42(3) of the Corporate Income Tax Code, in the concrete case and within the terms prohibited by Article 103(3) of the Constitution – authentic or proper retroactivity, that is, application of new law to facts prior to the entry into force of the new law – cannot be raised. In fact, on the one hand, the taxable event – the alienation – undoubtedly occurs under the new law. On the other, it is not sustainable to assert the existence of a complex tax-legal fact of successive formation. In fact, it is not enough that an acquisition prior and an alienation subsequent occur for one to be able to assert the existence of a single fact, although complex. If it were thus, any acquisition which, in the future, near or distant, gave rise to an alienation would be a complex fact, notwithstanding that the first seller and the second buyer are different, notwithstanding that the content of the contract is diverse in the first and second alienation, notwithstanding that a more or less prolonged period of time elapses between such operations. The merely accidental intermediation of a person (in this case, the first buyer/second seller) cannot be a sufficiently capable element to produce the union of facts which are juridically distinct, both from the point of view of the parties involved, and, above all, from the point of view of their substance"..

(emphasis is ours)

An identical understanding – as to the moment of occurrence of the tax fact – was already contained in the Decision of 20 May 2009 of the Administrative Supreme Court (process no. 0204/09).

This judgment dealt with the restriction of the deductibility of losses obtained (in 2003) from the alienation of capital shares acquired in a prior fiscal year. A case entirely coincident with the factual matter on which the Constitutional Court pronounced itself, in the following year, in its Decision no. 85/2010.

The Administrative Supreme Court tells us that "we are not faced with a complex tax fact. The tax fact relevant here is indeed the sale. (…) Retroactivity would presuppose that we were faced with a complex fact of successive formation, which has no basis in the hypothesis of the case".

(emphasis is ours)

At first sight, it could be understood that the case law of the Constitutional Court does not adhere to the disputed case. After all, it would be merely a matter of pointing out the obvious: the absence of a causal nexus between the moments of acquisition and transfer of capital shares.

When what is at issue in the records is not the applicability of the law in force at the date of acquisition of the capital shares. But rather the applicability of the old law or the new law in the very fiscal year in which the alienation occurs.

We believe, however, that the reasoning has its primary emphasis on the fixing of the moment at which the taxable event occurs: the onerous transfer of capital shares. It is at this moment, defined by Article 10(3) of the Personal Income Tax Code, that the tax fact occurs, by which the subjection to tax or not will be governed.

And which is in no way confused with the rule of quantification of income subject to tax, via the addition of gains and losses for the purpose of determination of a given net amount, positive or negative.

Because such net amount can only be composed of taxable gains and deductible losses. In other words, the assessment of tax on a given net amount requires the prior subjection to that tax of the previously executed operations (which contribute to the formation of that net amount).

Given that some of such operations are excluded from the determination of the net amount, as is the case with the exclusion from taxation of capital gains – and, it must be borne in mind, of losses – arising from the alienation of shares held for more than 12 months.

It should be noted that the Constitutional Court maintains uniform case law over time. Encompassing both the deduction of losses from the net annual negative amount, and the deduction of losses which are subtracted from the net annual amount (positive or negative).

Case law which is posterior to Decision 399/2010, which dealt with the unconstitutionality of Laws no. 11/2010, of 15 June and no. 12-A/2010, of 30 June, which modified the Personal Income Tax brackets and the corresponding marginal rates.

Here it offers no doubt that the Constitutional Court characterized Personal Income Tax as a periodic tax and of complex and successive formation over time. Whereby "the tax fact which the new law intends to regulate in its entirety did not occur entirely under the old law, but rather continues to form itself in the validity of the new law, as happens in the present case".

The Constitutional Court continues that "the legal relationship underlying the tax obligation is based on stable situations that extend over time".

And "pursuant to Article 22(1) of the Personal Income Tax Code, taxable income for Personal Income Tax purposes is that which results from the aggregation of income from the various categories earned in each year, after deductions and allowances have been made. In other words, it is an annual tax, in which each income received is not taxed individually (although tax withholding may, at times, obscure this reality), but rather the aggregation of all income received in a given year. Which means that only at the end of the year 2010 can the tax rate be determined, as well as the bracket in which the taxpayer is placed".

(emphasis is ours)

Decision 399/2010 focuses on the succession of law in time with regard to the definition of income brackets and respective marginal and progressive rates. Rejecting the temporal division of the tax fact and enshrining the birth of the same at the end of the fiscal year.

Having arrived here, what should we conclude regarding the genesis of the tax fact arising from a capital gain obtained through the onerous transfer of capital shares?

First, Personal Income Tax – notwithstanding its designation as a single tax – incides on the annual value of income from the various taxable categories (ex vi of Article 1(1)).

Each of these categories of income is governed by an autonomous rule, as regards:

(i) The moment at which the income is obtained.

By way of example, it suffices to note the different moments at which income from categories A and B is considered to be obtained (respectively, payment and exigibility of VAT). Or further regarding capital income, which may be considered earned, depending on the cases, on payment, maturity or determination.

(ii) The rules and criteria for quantification of the income.

Again, by way of example, let us note the specific deductions intended for taxation by net income and whose scope varies according to the different categories.

It is precisely this systematic division that the Personal Income Tax Code adopts: first the rule of incidence (subjection to tax) of a tax fact is fixed, followed by the criteria for quantification of the taxable income of each category.

Finally, it should be noted the rules for aggregation of taxable income from different categories.

Now, by preventing such aggregation, via the non-communicability of losses from certain categories (contrasted with the possibility of carrying forward those losses to future income from that category). Or by avoiding the aggregated taxation of income, through the establishment of liberatory, special and autonomous rates. With or without an option for aggregation.

Let us apply this structural organization of the Personal Income Tax Code to gains or losses resulting from the onerous transfer of capital shares.

Beginning with incidence, and pursuant to Article 9(1)(a), capital gains constitute patrimony increments subject to Personal Income Tax (category G), provided they are not considered as income from other categories.

Indeed, a capital gain constitutes the product of an irregular operation not foreseen by the subject at the moment of acquisition of the asset. In sum, a casual and unexpected gain (brought by chance, in the Anglo-Saxon parlance).

Contrary to the reiterated practice of buy and sell operations of assets, which is susceptible of classification in category B, given that the assets are no longer fixed assets, but rather inventories acquired for the purpose of subsequent resale.

Article 10 defines, in its no. 1, the concept of taxable capital gain, which is headed by sub-paragraph b): "Onerous alienation of shareholdings, including their redemption and amortisation with capital reduction, and other securities (…)".

Now the moment at which the gain subject to tax is considered obtained is stated in Article 10(3) as referred to the date "of performance of the acts provided for in no. 1".

It offers no doubt that the taxable event occurs at the moment at which the capital shares are the object of onerous transfer.

Having clarified the genesis of the taxable event – the onerous transfer of capital shares – which is consistent with the case law of the Constitutional Court, we may proceed to the rules for quantification of the corresponding income.

Here too the variability of the rules set forth in the Personal Income Tax Code is notable. Because if it is true that the rules for quantification of the tax obligation differ according to the different categories of income, it is no less true that it is within the scope of the gains that make up category G that such differences are magnified.

Thus, pursuant to Article 43, gains and losses resulting from the various operations subject to tax are added for the purpose of determination of a net amount, positive or negative.

Such net amount is, however, not unique for capital gains determined by the subject. Indeed, the onerous transfer of capital shares is segregated from other income equally qualified as capital gains.

From this division result two consequences relevant for capital gains not arising from onerous transfer of capital shares: (i) the positive or negative value of the net amount is considered in 50% and (ii) such income is subject to mandatory aggregation and consequent assessment of tax at the marginal rates provided for the different income brackets.

For capital gains and losses resulting from the onerous transfer of capital shares a diametrically opposite end is reserved: (i) the net amount, positive or negative, is relieved by its full value and (ii) such net amount is taxed at a special rate, that is, is withdrawn from the aggregation rule.

And if it is true that the subject is permitted the option for aggregation, it must be stressed that non-aggregation constitutes the supplementary regime and – until the 2015 Tax Reform – the exercise of such option implied the aggregation of capital income. It is further added that the option was a necessary condition for the carrying forward (to the two following fiscal years) of the net negative amount.

In light of the foregoing, we conclude that, despite Personal Income Tax presenting itself as a periodic tax, the same contains different taxable events of subjection to tax according to the various categories of income.

In the case of onerous transfer of capital shares, the taxable event which determines the exigibility of the tax (and subsequent quantification of the taxable income) is referred precisely to the date of such transfer act.

We would thus have, in a given fiscal year, as many taxable events as there are onerous transfers of capital shares. Which shall be aggregated for the purpose of determination of a net amount, positive or negative. Which, if positive, shall be subject to a special rate, except if the subject opts for aggregation.

We thus have that a tax of a periodic nature, such as Personal Income Tax, is compatible and even composed of income of instantaneous formation and others of successive formation.

Indeed, some income is – by the nature of its tax fact – of successive formation over time. It suffices to note the income from categories A, B, F or H, in which income and respective deductions succeed one another over time, and the tax is assessed in function of the brackets and marginal rates which result from the aggregation of these categories.

Conversely, capital gains arise from operations carried out in isolation – instantaneous – in which each taxable event presents itself as autonomous and complete, i.e. without the requirement of any fact or event occurring afterwards – which may or may not exist.

This means that the alienation of the shares by the Claimants, effected on 30 April 2010, constitutes an autonomous and complete taxable event. Which requires no subsequent event occurring after the validity of the new law.

On pain of a rule for quantification of a tax obligation and/or assessment of tax via the application of a special rate of 20% (by subtraction from mandatory aggregation), being transformed into an authentic rule of incidence (taxable event).

And in the disputed situation it must be stressed the fact that the Claimants realized a single gain, arising from a single onerous transfer of capital shares.

Whereby it would not be understood that such single operation should be relevant for the determination of an annual net amount, inasmuch as both would come down to the same reality and identical quantum.

In fact, the existence of a single operation reinforces the instantaneous nature of the taxable event, in so far as it removes any sense and relevance to the temporal scope of the new law.

With no remaining fact, reality or moment that – after the validity of the new law – presents itself as necessary to complete the taxable event (onerous alienation of capital shares) occurred under the old law.

It is insisted that the quantification of the tax obligation to be carried out at the end of the year and under the new law, cannot be extended to a taxable event – the onerous transfer – temporally verified in the period of validity of the old law.

We thus have that the application of the new law to a taxable event entirely under the old law, does not fall within the concept of retroactivity in the third degree, designated as retrospectivity.

Moreover, when we are faced with the practice of a single operation carried out in April 2010.

But we would always say that even if it were not so – and multiple alienation operations occurred under the old and new laws – each taxable event would be integrated in the law in force at its respective date of occurrence.

Not identifying, furthermore, any obstacles which support the alleged impracticability of some in the quantification of taxable income. Given the simplicity inherent in the restriction of the determination of the final net amount to operations occurring under the new law.

It is an argument which, in addition to being meritless, could not be wielded with the purpose of overriding the principle of non-retroactivity embraced in the constitutional framework, in the Personal Income Tax Code and in the LGT.

And on the principle of non-retroactivity of Tax Law, the Constitutional Court has clarified it in the following terms:

"The Constitutional Court has followed the understanding that this prohibition of retroactivity, in the field of tax law, is directed only to authentic retroactivity, covering only those cases in which the tax fact which the new law intends to regulate has already produced all its effects under the old law, excluding from its scope of application situations of retrospectivity or improper or false retroactivity, that is, those situations in which law is applied to facts in the past but whose effects still endure in the present, as occurs when tax rules which produced an aggravation of the tax position of taxpayers in relation to tax facts which did not occur entirely in the domain of the old law and continue to form themselves, still in the course of the same fiscal year, in the validity of the new law (e.g. Decisions nos. 128/2009, 85/2010 and 399/2010, all accessible at www.tribunalconstitucional.pt)".

"Now it is to be seen that in the case of capital gains from shareholdings, the taxable event of the tax being their onerous alienation, we are not faced with a complex tax fact, of successive formation throughout a year, but rather a tax fact that is instantaneous. The tax fact giving rise to the tax is exhausted in the realization of the capital gain (It should be noted that capital gains tax was already considered as giving rise to a sole obligation – cf. Decision of the Administrative Supreme Court of 18.1.1995, P. 18287)[3]".

V – Decision

Applying the above considerations to the case sub judice, the illegality of the assessment arising from the retroactive application of the tax regime approved by the cited Law no. 15/2010, of 26 July, is immediately evident.

The onerous transfer of capital shares occurred in April 2010. This operation of alienation constitutes, pursuant to Article 10(3) of the Personal Income Tax Code, the moment at which the tax fact occurs and, therefore, the taxable event, to be due. Which presents itself as unique and instantaneous, not bearing the nature of a complex act and/or of successive formation.

Whereby at the date of realization of the fiscal capital gain, which constitutes the taxable event of taxation, the regime of exclusion from taxation set forth in Article 10(2) of the Personal Income Tax Code was in force.

This normative provision is combined with Articles 12(1) and (2) of the LGT, which removes the application of the new law to tax facts fully verified under the old law.

Thus, and contrary to what the Respondent understands, Law no. 15/2010 was permitted only to tax operations effected after its entry into force.

The sense of this decision aligns with the case law of the Constitutional Court and the Administrative Supreme Court as regards the moment of occurrence of the tax fact, and of the Administrative Supreme Court as concerns the same issue to be decided.

An alignment which contributes to uniform interpretation and application of law, reinforcing the corresponding unity of meaning, as postulated in Article 8(3) of the Civil Code.

Nor would it be understandable that an arbitral tribunal, as an alternative means of jurisdictional resolution of disputes in tax matters and which decides de iure constituto, could depart from the case law of superior courts.

Regarding the claim for compensation for the alleged provision of undue guarantee for suspension of the tax enforcement proceeding instituted for coercive collection of the tax and compensatory interest due, for which the Claimants were notified of the Procedural Order of 27-10-2014 of the Head of the Finance Service of …, such exigible guarantee (voluntary mortgage) was not concretized, as stated in the TCA's Response submitted on 13/03/2015.

Thereby, the claim for compensation payment requested by the Claimants is rejected, as undue, for the reasons expressed.

In such terms it is decided:

a) To uphold the claim for arbitral pronouncement; and

b) To annul the Personal Income Tax assessment act and corresponding compensatory interest.

c) To reject the claim for compensation requested, concerning the alleged provision of guarantee (voluntary mortgage), as it is not proven in the records that it was provided.

Notify the parties.

VI. Value of the Case

The value of the case is fixed at €68,778.55, pursuant to Article 97-A of the Administrative Procedure Code on Tax Proceedings, applicable ex vi Article 29(1)(a) of the LRAT and Article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

VII. Costs

Costs charged to the Respondent, the Tax and Customs Authority, given that the present claim was upheld in full, in the amount of €2,448.00, pursuant to Table I of the Regulation on Costs in Tax Arbitration Proceedings, and in compliance with Articles 12(2) and 22(4), both of the LRAT.

Lisbon, 31 March 2015

The Arbitrators

José Poças Falcão
(President)

Fernando Borges Araújo

José Rodrigo de Castro

[1] Summary: The amendments introduced to the regime of taxation of moveable capital gains by Law no. 15/2010, of 26 July apply only to tax facts occurring after the date of its entry into force (27 July 2010 – Article 5 of Law no. 15/2010).

II – In capital gains resulting from onerous alienation of securities subject to Personal Income Tax as patrimony increments the tax fact occurs at the moment of alienation (Article 10(3) of the Personal Income Tax Code), this being the relevant moment for purposes of application in time of the new law, in the absence of an express provision of the legislator to the contrary (Articles 12(1) of the LGT and of the Civil Code).

III – As the annual income for Personal Income Tax purposes is a complex fact of successive formation, in the absence of express rule to the contrary, the new law may be applied, without proper or authentic retroactivity, to facts composing it occurring from its entry into force (Article 12(2) of the General Tax Law).

[2] Cfr. cited Decision of the Administrative Supreme Court.

[3] Idem.