Process: 771/2014-T

Date: April 30, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

This Portuguese tax arbitration case (Process 771/2014-T) addresses a fundamental question of tax law temporal application: whether Law 15/2010, which modified the IRS (Personal Income Tax) regime for capital gains, can be applied retroactively to share sales completed before its entry into force. The claimant sold 998 shares in Funeral Agency B... S.A. on May 18, 2010, for €310,000, generating significant capital gains. However, the Tax Authority issued an additional IRS assessment applying the new taxation regime introduced by Law 15/2010 (which entered into force on July 27, 2010), resulting in a tax liability of €69,130.26. The core legal dispute centers on Article 12(2) of the Lei Geral Tributária (General Tax Law), which establishes the principle of non-retroactivity in Portuguese tax legislation. The claimant argues that applying the new law to a transaction completed before its effective date violates this fundamental principle of legal certainty and taxpayer protection. Supporting this position, the claimant cites favorable precedents from CAAD arbitration (cases 25/2011-T and 135/2013-T) and the Superior Tax Court (case 1582/13). The Tax Authority contends that Law 15/2010 repealed the previous regime without establishing transitional provisions to safeguard prior transactions. The case was brought before CAAD under the RJAT (Regime Jurídico da Arbitragem Tributária), established by Decree-Law 10/2011, which provides taxpayers an alternative dispute resolution mechanism for challenging tax assessments. A collective arbitral tribunal was constituted on January 30, 2015, to decide whether the principle of non-retroactivity prevents the application of new, more onerous capital gains taxation rules to transactions completed under the previous legal regime. This case has significant implications for understanding the temporal limits of Portuguese tax legislation and the protection afforded to taxpayers who complete transactions in reliance on existing law.

Full Decision

ARBITRAL AWARD

I – REPORT

A..., married, taxpayer number ..., resident at Street ..., ... .... no. ..., ... ... ..., hereinafter referred to as Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for an arbitral pronouncement, under the provisions of articles 2 no. 1 a) and 10 no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, abbreviated as RJAT), requesting a declaration of illegality of the additional assessment of Personal Income Tax (IRS) of 2 July 2014, with number 2014 ..., corresponding interest assessment demonstration with numbers 2010 ... and 2014 ... and account settlement statement, made by the Director General of Taxes, concerning the year 2010 and in the total amount payable of €69,130.26.

As grounds for the request filed, the Claimant alleges, in summary, that the assessment in dispute violates the norm contained in article 12, no. 2 of the General Tax Law.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 18-11-2014.

Pursuant to the provisions of article 6, no. 2 a) and article 11, no. 1 b) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 15-01-2015 the parties were duly notified of this appointment, and did not express a desire to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1 a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of article 11, no. 1 c) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 30-01-2015.

The Tax and Customs Authority replied, defending itself by objection and arguing that the request should be ruled unfounded.

Considering that none of the legally assigned purposes were met in this case, the parties waived the holding of the meeting provided for in article 18 of the RJAT, as well as the presentation of arguments, which were accordingly dispensed with.

The arbitral tribunal was regularly constituted and is materially competent, in accordance with the provisions of articles 2, no. 1 a) and 30, no. 1 of Decree-Law no. 10/2011, of 20 January.

The parties possess legal personality and capacity, are properly constituted and represented (arts. 4 and 10, no. 2, of the same decree and art. 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are free of defects and no exceptions were raised.

Therefore, there is no obstacle to the substantive consideration of the case.

Having considered everything, the following award is issued:

II. AWARD

A. FACTS

A.1. Facts established as proven

1- The assessment that is the subject of this arbitral proceeding originates from a purely arithmetical correction to the taxable base of Personal Income Tax for 2010, due to the omission from the income return of capital gains obtained from the sale of shares on 18/05/2010, which had been held by the Claimant for more than 12 months.

2- The Tax Authority determined an increase in the taxable base in the amount of €308,498.00, on which it applied the autonomous taxation rate of 20% provided for in article 72, no. 4 of the Personal Income Tax Code (in the version in force on 31/12/2010).

3- As the basis for this assessment, the Tax Authority considered that the amendment to the Personal Income Tax Code introduced by Law no. 15/2010 of 26 July is applicable to capital gains from share sales obtained before its entry into force, namely with respect to the repeal of article 10, no. 2 of the Personal Income Tax Code and the modification of the taxation rate provided for in article 72, no. 4.

4- The assessment in question was issued following an internal inspection procedure carried out by the Financial Directorate of ... of the Tax Authority.

5- Since the assessment whose legality is discussed here was not paid, the Tax Authority initiated the corresponding tax enforcement proceedings at the Finance Office of ..., with number ... 2014 ....

6- Following service in that proceeding, the taxpayer, against whom execution was sought, filed a request for suspension of the tax enforcement proceeding, expressing the intention to contest the legality of the enforceable debt and offering as adequate security a voluntary mortgage on real property.

7- On 30/04/2010, the Claimant held 998 shares, each with a nominal value of 10 euros, representing 19.96% of the capital stock of the company Funeral Agency B..., S.A..

8- The joint stock company called Funeral Agency B..., S.A., Tax ID ..., had, at that date, a capital stock of €50,000.00, consisting of 5000 shares with a nominal value of €10 each.

9- On 30/04/2010 the Claimant disposed of all the holdings he had in the company Funeral Agency B..., S.A., corresponding to 998 shares, each with a nominal value of €10, which were acquired by the company C... – Funeral Agencies, S.A., Tax ID ..., for the amount of €310,000.00.

10- These holdings had been acquired by the Claimant in 2005.

11- Said disposition of shares was the only one carried out by the Claimant in the year 2010.

12- The Claimant did not declare any capital gains resulting from the disposition of those shareholdings.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning regarding the facts established as proven and not proven

With respect to the facts, the Tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish established facts from unestablished facts (see art. 123, no. 2, of the Tax Procedure Code and article 659, no. 2 of the Civil Procedure Code, applicable pursuant to article 29, no. 1, a) and e), of the RJAT).

Thus, the facts relevant to the decision of the case are selected and delimited in accordance with their legal relevance, which is established having regard to the various plausible solutions to the legal question(s) at issue (see article 511, no. 1, of the Civil Procedure Code, applicable pursuant to article 29, no. 1, e), of the RJAT).

Accordingly, having regard to the positions taken by the parties, the documentary evidence and the procedural file attached to the case record, the facts listed above were considered established as relevant to the decision, and were moreover consensually recognized and accepted by the parties.

B. LAW

The question before the Tribunal is singular and straightforward: it is to determine whether capital gains resulting from the disposition of shares, obtained through a transfer occurring in 2010, prior to the entry into force of the amendments to the Personal Income Tax Code introduced by Law no. 15/2010, of 2 July (which occurred on 27/07/2010), do or do not contribute to the balance referred to in article 43 of that Code.

Let us therefore proceed.

The Claimant submits that the answer to the question posed should be in the negative.

He submits that, given the content of article 12, no. 2 of the General Tax Law, the regime resulting from the new law (in this case Law no. 15/2010, of 2 July) will not be applicable to him.

The Claimant cites, in support of his thesis, arbitral jurisprudence (awards issued in cases 25/2011T and 135/2013T of CAAD) and from tax courts (award of the Superior Tax Court of 03/12/2013, issued in case 1582/13).

Meanwhile, the Tax Authority, contradicting the Claimant, argues that Law no. 15/2010, of 26 July, repealed the previously existing regime without creating any transitional law provision that would safeguard potential tax facts still in formation.

The Tax Authority also notes that the income in question in this case constitutes one of the categories of income that form part of the real or objective scope of Personal Income Tax, such that the taxable event occurs on 31 December of each year, thereby explaining the unitary and comprehensive character of income taxation, although there is an analytical breakdown of the various income categories according to their source.

The same Authority concludes that the taxable event is not even the gain resulting from the disposition but rather the net gain calculated in a given taxable period between realized gains and losses.

The Tax Authority relies on the awards issued in cases 340/2014T and 107/2014T of CAAD.

If the question to be resolved in this case is simple to formulate, no less complex is the exposition of the two paths to be followed in its resolution.

Indeed, fundamentally, it must first be determined whether the tax event underlying the taxation of capital gains resulting from the onerous disposition of shares is an instantaneous event or, rather, a continuous event.

The Superior Tax Court, in the award cited by the Claimant, concludes that the tax event in question is of an instantaneous nature, such that the regime under Law no. 15/2010, of 26 July, would only be applicable to capital gains occurring after its entry into force.

This is indeed the touchstone of the solution to the question at issue, as expressed in the aforementioned award(s).

With all due respect, however, it is submitted that the tax event under consideration is not of an instantaneous nature, contrary to what the aforementioned jurisprudence holds, but rather a complex event of successive formation, and given the essential nature of this question, we must necessarily diverge from that jurisprudence.

Indeed, it is submitted that the situation before us (taxation of capital gains) is similar to that ruled upon by the Constitutional Court in Decision 399/10 (amendment of Personal Income Tax rates in the course of the very year to which the amendment applies) and distinct from that ruled upon by the same Court in awards relating to autonomous taxation.

Each realized capital gain would thus be analogous, for example, to a salary and not to an expense subject to autonomous taxation, which results from the fact, for example, that the net gain of capital gains and losses is taxed, not each individual capital gain separately and disconnected from other variations in patrimony of the same nature.

Consider, for example, that in autonomous taxation, no balance is taxed to which the expenses subject to it contribute; rather, each individual expense is taxed separately and independently of others. If the regime for capital gains and losses were of the same nature, each capital gain would have to be taxed individually, independent of other gains and, especially, losses recorded in the same period.

In other words, in summary, if the situation were in fact analogous to autonomous taxation, then each capital gain would always be taxed, regardless of any losses there might be, which is not the case.

What has just been said will be further evidenced by the possibility of aggregation. Indeed, in that circumstance (if the taxpayer opts to aggregate the income from capital gains with his other income subject to Personal Income Tax), it would not be clear how—for example—the income from salaries earned at the beginning of the year would be subject to the increased rate applied midyear, while the capital gains aggregated with those salaries would escape the "retroactive" application of that rate and the delimitation of the taxable base.

And it may be noted that there is no reason to distinguish between aggregated capital gains and those that are not, since, moreover, the option to aggregate only occurs at the end of the year/period, which would mean "conditioning" the nature (instantaneous or continuous) of the tax event to a choice made after its occurrence.

It is thus concluded, also in the same line of reasoning, that the legislator's choice to tax the capital gains of 2010 realized before the entry into force of the amendment to that regime, given the non-instantaneous nature of the corresponding tax event, will not be unconstitutional, fundamentally for the same reasons that the application of increased rates to other income subject to Personal Income Tax, on the same terms, was not.

The reasoning just expounded, however, is limited to the constitutional plane, which is that which was naturally the subject of pronouncement by the Constitutional Court. That is, it is concluded, in summary, by the same grounds that supported Constitutional Court Decision 399/10, that the application of the regime resulting from the repeal of article 10, no. 2 of the Personal Income Tax Code in the course of 2010 to capital gains realized in the course of that same year will not be contrary to the Constitution.

Not being unconstitutional, it remains to determine whether such application is lawful.

The first question that may arise now derives from article 10 of the Personal Income Tax Code, which provides: "Gains are considered obtained at the moment of the execution of the acts provided for in no. 1".

This provision, however, should be understood as having solely the purpose of fixing the tax period to which the gain should be attributed, and not of taking a position on the nature of the underlying tax event, being, for example, analogous to article 24, no. 4 of the Personal Income Tax Code, which has a similar wording to article 10, no. 3, but with respect to which it will surely not be questioned that it applies to tax events of the same nature as other income subject to Personal Income Tax, and not instantaneous events.

Another, more substantive concern may arise from article 12, no. 2 of the General Tax Law, which provides: "If the tax event is of successive formation, the new law applies only to the period from its entry into force".

Indeed, the alternative to considering that the income in question in the present case is an instantaneous tax event (as the Superior Tax Court considered in the terms discussed above) is to consider it an income tax event analogous to other income subject to Personal Income Tax, that is, a tax event of successive formation.

If that is the case, as there appear to be no reasonable doubts, the statutory condition of article 12, no. 2 of the General Tax Law would be met.

However, upon proper interpretation of the legal regime for the taxation of capital gains resulting from the entry into force of the amendments to the Personal Income Tax Code introduced by Law no. 15/2010, of 2 July, as explained in the dissenting opinion issued in case 135/2013T of CAAD, it is concluded that it was the legislator's intent to tax the balance resulting from all capital gains and losses realized in the tax period in progress on the date of entry into force of that law.

As was written, moreover, in the aforementioned dissenting opinion, "The text of the draft law corresponds, in this respect, entirely to the text adopted that became Law no. 15/2010. It must therefore be concluded that the legislator's objective was to subject all capital gains obtained from the disposition of shareholdings in 2010 to the new regime (taxation and exemption)". Indeed, reinforcing all the carefully developed arguments in that same opinion, it should be said that it would make no sense and would be incoherent for the legislator to intend, as has been peacefully accepted since the publication of Constitutional Court Decision 399/10, that the Personal Income Tax rate introduced in the course of 2010 would have "retroactive" effect, and yet not treat in the same manner the matter before us, produced precisely in the same context and with the same objectives.

It is thus concluded, here as there, that "that provision of article 12, no. 2 enters into contradiction with the determination resulting from article 43, no. 1 of the Personal Income Tax Code", in the sense emerging from the regulatory framework resulting from the entry into force of the amendments to the Personal Income Tax Code introduced by Law no. 15/2010, of 2 July, "as well as with the general principle of article 1, no. 1 of the Personal Income Tax Code itself", that is, that such norms "collide in their prescriptive meaning or in the legal consequences they produce", thus detecting a normative antinomy.

Acknowledging this, and having regard to the doctrinally well-established criteria of hierarchy, speciality, and chronology, it will be concluded, as is demonstrated in detail once again in the cited dissenting opinion, that only the criterion of speciality may resolve the normative antinomy encountered, since neither is there any hierarchical relationship between the General Tax Law and the Personal Income Tax Code, nor does article 12, no. 2 of the General Law post-date the legal regime for the taxation of capital gains in Personal Income Tax resulting from the entry into force of Law no. 15/2010, of 2 July.

Now, in light of that mentioned criterion—speciality—there will be no doubt that the regime of the Personal Income Tax Code is special in relation to that of the General Tax Law, such that the application of the norm of that law must be displaced.

In this manner—in conclusion—understanding that the legal regime for the taxation in Personal Income Tax of capital gains resulting from the amendments to that Code introduced by Law no. 15/2010, of 2 July, was intended to subject all capital gains realized in 2010 to the new regime, and that such legislative command suffers no unconstitutionality and is not displaced by any other legal norm with which it stands in an antinomous relationship, the tax act that is the subject of this proceeding must be upheld, and the arbitral requests must be entirely rejected.

C. AWARD

In these terms, this Arbitral Tribunal awards:

a) The arbitral requests filed are entirely rejected;

b) The Claimant is sentenced to pay the costs of proceedings in the amount of €2,448.00, taking into account amounts already paid.

D. Value of the Proceedings

The value of the proceedings is fixed at €69,130.26, pursuant to article 97-A, no. 1 a), of the Tax Procedure Code, applicable by virtue of article 29, no. 1 a) and b) of the RJAT and article 3, no. 2 of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €2,448.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, payable by the Claimant, since the request was entirely unsuccessful, pursuant to articles 12, no. 2 and 22, no. 4, both of the RJAT, and article 4, no. 4 of the cited Regulations.

Notice is given.

Lisbon

30 April 2015

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator

(Carlos Baptista Lobo - dissenting)

The Arbitrator

(Manuela Roseiro)

DISSENTING OPINION

I do not agree with the decision of this award for the following reasons:

  • Regardless of the question whether, in the case of capital gains, we are faced with tax events of an instantaneous nature or of successive formation, the fact is that the transaction in question was executed at a moment prior to the publication of the norm of incidence;

  • Regardless of whether it is understood that Personal Income Tax is imposed on the annual value of income in the various legally provided categories (art. 1 of the Personal Income Tax Code) including capital gains in the category of increases in patrimony (arts. 9 and 10 of the Personal Income Tax Code), the tax event of their realization occurs at the moment of their disposition, and not on 31 December of each year, as is the case with Corporate Income Tax;

  • The intensity of the retroactivity of the application of the new norm of incidence to the specific case is more serious than in the case of the Superior Tax Court and Constitutional Court decisions relating to autonomous taxation on charges for light passenger vehicles and representation expenses, where the tax event is created, by legal determination, on 31 December. As for these, the fact that it is understood that the taxation in question is imposed on the expense and not properly on the income taxable in Corporate Income Tax is merely a judicial construction that serves only to clarify the effect of retroactivity;

  • The comparison with the situation of changes in brackets and rates in Personal Income Tax, also analyzed by the Constitutional Court and the Ombudsman, is not relevant, since, in the case of rates, we are speaking of a general norm that operates on the generality of taxable matters and that, concretely, is not applicable in a concrete category of incidence; and, in this case, for reasons of simplicity and efficiency in calculating the tax payable it would be unreasonable to apply a pro rata rule to the generality of income. In the concrete case, all elements of incidence that triggered the tax event occurred at a moment prior to the publication of the innovative norm;

  • The arguments that the principles of legal certainty and confidence, urgency in the existing financial emergency situation, relative injustice, and others fail in the face of the express prohibition of the principle of non-retroactivity of tax norms provided for in article 103, no. 3 of the Constitution. Thus, if these questions could have been weighed before the constitutional revision that expressly introduced this norm, at a later moment this is no longer possible.

  • The situation is even more pertinent when we are dealing with a legislative amendment that meant a radical change in the paradigm of Personal Income Tax, given that the previous situation of non-taxation of capital gains on securities constituted a structural element of the tax.

In this context, my position aligns with that adopted by the Superior Tax Court in awards relating to cases nos. 1582/13 and 1078/12, and by CAAD in the award relating to case 135/2013-T, where it is concluded that the tax event in question is of an instantaneous nature, such that the regime under Law no. 15/2010, of 26 July, would be applicable only to capital gains occurring after its entry into force.

Carlos Baptista Lobo

Frequently Asked Questions

Automatically Created

What are the tax implications of real estate capital gains (mais-valias imobiliárias) under Portuguese IRS?
Under Portuguese IRS law, real estate capital gains (mais-valias imobiliárias) are taxable income subject to specific rules under Articles 10 and 43 of the IRS Code. While this case involves share sales rather than real estate, similar principles apply. Capital gains taxation depends on factors including the holding period, acquisition and sale values, and applicable exemptions. Law 15/2010 significantly modified the capital gains regime, changing taxation rates and eliminating certain exemptions. For real estate, special rules may apply for primary residences and reinvestment scenarios. The timing of when the gain is realized determines which legal framework applies, making the temporal application of tax law crucial for determining tax liability.
How does Article 12(2) of the Lei Geral Tributária regulate the temporal application of tax law?
Article 12(2) of the Lei Geral Tributária (General Tax Law) enshrines the principle of non-retroactivity in Portuguese tax law. This fundamental principle provides that new tax laws cannot be applied to facts, acts, or legal situations that occurred or were completed before the law entered into force. The purpose is to protect legal certainty and taxpayers' legitimate expectations by preventing the retroactive application of new, potentially more burdensome tax obligations. However, exceptions exist: procedural laws generally apply immediately, and substantive laws can apply retroactively if they are more favorable to the taxpayer (lex mitior principle). The non-retroactivity principle is essential for maintaining confidence in the tax system and preventing arbitrary taxation of past transactions.
Can a taxpayer challenge an additional IRS tax assessment through CAAD arbitration?
Yes, Portuguese taxpayers can challenge additional IRS assessments through CAAD (Centro de Arbitragem Administrativa) arbitration under the RJAT (Regime Jurídico da Arbitragem em Matéria Tributária), established by Decree-Law 10/2011. Article 2(1)(a) grants jurisdiction for declaring the illegality of tax acts, including additional assessments, interest calculations, and enforcement procedures. Arbitration provides an alternative to traditional tax courts, offering faster resolution, specialized arbitrators with tax expertise, and procedural flexibility. Taxpayers must file a formal request for constitution of an arbitral tribunal, which triggers the appointment of arbitrators and the formal arbitration process. This mechanism has become increasingly popular for resolving Portuguese tax disputes.
What is the procedure for constituting an arbitral tribunal under the RJAT (Decreto-Lei 10/2011)?
The procedure for constituting an arbitral tribunal under RJAT involves several steps: First, the taxpayer files a request for constitution of the arbitral tribunal with CAAD, specifying the challenged tax act and legal grounds. Second, the CAAD President reviews and accepts the request, then notifies the Tax Authority. Third, under Articles 6(2) and 11(1) of RJAT, the Ethics Council appoints the arbitrator(s) - either a single arbitrator or a collective tribunal of three arbitrators depending on the case value and complexity. Fourth, the appointed arbitrators accept their mandate. Fifth, parties are notified and have 15 days to object to the appointments under Articles 6 and 7 of the Code of Ethics. Finally, if no objections are raised, the tribunal is formally constituted 30 days after notification, as specified in Article 11(1)(c) of RJAT. The tribunal then proceeds to hear arguments and issue an arbitral award.
When does the principle of non-retroactivity apply to Portuguese tax legislation on capital gains?
The principle of non-retroactivity applies to Portuguese capital gains taxation when a new tax law would govern taxable events or transactions completed before the law's entry into force. In this case, the crucial question was whether Law 15/2010, effective July 27, 2010, could apply to share sales completed on May 18, 2010. Under Article 12(2) of the Lei Geral Tributária, the answer is generally no - the law in force at the time the taxable event occurred (the share sale) should govern the taxation. The principle protects taxpayers who structured transactions based on existing law from unexpected tax consequences due to subsequent legislative changes. Exceptions include: when transitional provisions explicitly extend the new regime to pending cases, when the new law is procedural rather than substantive, or when the new law is more favorable to the taxpayer. The timing of capital gains realization is therefore critical for determining applicable taxation rules.