Process: 784/2014-T

Date: April 20, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 784/2014-T addresses the controversial issue of retroactive taxation of capital gains from share disposals under Portuguese IRS law. The taxpayers sold their shareholdings in a funeral services company in April 2010 for €930,000, having acquired them in 2005. At the time of sale, they reasonably believed the capital gains were exempt from taxation under article 10(2)(a) of the IRS Code then in force. Consequently, they did not declare these gains in their 2010 tax return. However, the Tax and Customs Authority issued an additional IRS assessment of €207,872.01 in 2014, following an internal inspection. The tax authority's position centered on a critical temporal argument: since IRS is an annual tax and capital gains are determined on a net basis throughout the entire tax year, the taxable event only crystallizes on December 31st of each year. By that date in 2010, legislative changes had eliminated the capital gains exemption for share disposals. This created a retroactivity problem - applying a law that came into effect after the transaction occurred but before year-end. The taxpayers challenged this assessment through CAAD arbitral proceedings, arguing against the retroactive application of the amended tax rules. The case highlights fundamental principles of Portuguese tax law, including the prohibition on retroactive taxation, the annual nature of IRS assessment, and the determination of when taxable events occur. It raises important questions about taxpayer legal certainty and legitimate expectations when conducting transactions based on laws in force at the time. The arbitration demonstrates how taxpayers can challenge additional assessments through the Administrative Arbitration Centre, providing an alternative to traditional court litigation for resolving tax disputes involving IRS assessments and questions of law interpretation.

Full Decision

Case No. 784/2014-T

The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Carla Castelo Trindade and Dr. André Bacelar Gonçalves, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 30-01-2015, hereby agree as follows:

1. Report

A..., TIN ..., and B..., TIN ..., married to each other, resident at Road ... no. ..., ..., ..., filed a request for constitution of a collective arbitral tribunal, articles 2nd and 10th of Decree-Law no. 10/2011 of 20 January (hereinafter RJAT), in which the REQUEST is against the TAX AND CUSTOMS AUTHORITY.

The Applicants seek a declaration of illegality of the additional income tax assessment (IRS), dated 02-07-2014, with the number 2014 ..., corresponding assessment of compensatory interest, with the number 2014 ..., and statement of account settlement, carried out by the Director General of Taxes, concerning the year 2010 and in the total amount to be paid of € 207,872.01 (documents nos. 1 to 3 attached with the request).

The REQUEST is against the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 24-11-2014.

Pursuant to the provision in paragraph a) of no. 2 of article 6th and paragraph b) of no. 1 of article 11th of RJAT, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable timeframe.

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

In accordance with the provision in paragraph c) of no. 1 of article 11th of RJAT, the collective arbitral tribunal was constituted on 30-01-2015.

The Tax and Customs Authority responded, defending the inadmissibility of the request for arbitral pronouncement and its absolution from the claim.

By order of 03-03-2015, it was decided to dispense with the meeting provided for in article 18th of RJAT and that the proceedings continue with written submissions.

The parties did not submit any written submissions.

The Tribunal is competent and the parties enjoy legal personality and capacity, are legitimate and are duly represented (arts. 4th and 10th, no. 2, of the same statute and art. 1st of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and there is no obstacle to the examination of the merits of the case.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

a) On 30-04-2010, the taxpayer A... was the holder of 2,495 shares, with a nominal value of 10 euros each, representing 49.90% of the share capital of the company Agência Funerária C..., S.A.;

b) On the same date, the taxpayer B... was the holder of 499 shares, with a nominal value of 10 euros each, representing 9.98% of the share capital of the company Agência Funerária C..., S.A.;

c) The company named Agência Funerária C..., S.A., NIPC ..., had, on that date, share capital of € 50,000.00, constituted by 5,000 shares with a nominal value of € 10 each.

d) On 30-04-2010 the taxpayers disposed of all their shareholdings in the company Agência Funerária C..., S.A., corresponding to 2,994 shares, with a nominal value of € 10 each, which were subsequently acquired by the company D... - Agências Funerárias, S.A., NIPC ..., for the amount of €930,000.00;

e) The Applicants had acquired the referred shareholdings in 2005 which they subsequently disposed of;

f) The referred disposition of shares was the only one carried out by the Applicants in the year 2010;

g) The Applicants did not declare any capital gains resulting from the disposition of those shareholdings, as they understood that, pursuant to the provision in paragraph a), of no. 2, of article 10th of the IRS Code, in force at the date of the disposition, such income was excluded from taxation;

h) On 30-07-2014 the Applicants were notified of the additional IRS assessment with no. 2014 ... and respective statement of assessment of interest and statement of account settlement, for the year 2010, in the total amount to be paid of € 207,872.01;

i) The referred assessment was prepared following an internal inspection procedure promoted by the Finance Department of Coimbra of the Tax and Customs Authority;

j) On 26-05-2014, the Applicants exercised their right to be heard on the draft Report of the Tax Inspection;

k) In the Report of the Tax Inspection, whose contents are hereby reproduced, the following is stated, among other things:

Based on information collected from the company D... - Agências Funerárias, S.A., with NIPC ..., it was found that this company acquired, on 30-04-2010, from A..., with TIN ... and B..., with TIN ..., a quantity (2,495 and 499, respectively) of shares held by them in the company Agência Funerária C... S.A., hereinafter abbreviated as Agência C..., with NIPC ..., for €775,000.00 and €155,000.00, respectively. Upon consultation of the annual income tax return of the sellers of the shares, relating to the year 2010, it is found that they did not proceed with the submission, as required, of Annex G (capital gains and other increases in assets) of that return (IRS Form 3). Thus, and given that there is a lack of submission of that annex, which resulted in an omission from the IRS Form 3 return of income from capital gains obtained with the taxable disposition of shares, it was proposed, in order for those transfers to be taxed, an internal inspection procedure with temporal scope to the year 2010, with the subject-matter of the Income Tax of Individuals (IRS).

III - Description of Facts and Grounds of Purely Arithmetic Corrections to Taxable Matter

III -1) Tax Classification of the Transactions in Question

The possible gains obtained by A... and B..., with the taxable disposition, on 30-04-2010, of 2,994 shares which they held in the company Agência C..., constitute a capital gain subject to IRS, pursuant to the provision in paragraph a) of no. 1 of article 9th and paragraph b) of no. 1 of article 10th of the Code for Income Tax of Individuals (IRS Code).

(...)

Pursuant to the provision of article 43rd, no. 1 of the IRS Code, the value of income qualified as capital gains subject to taxation is that corresponding to the balance determined between the capital gains and capital losses realized in the same year, and, notwithstanding the fact that the gain is considered obtained at the moment of performance of the act (disposition), see article 10th, no. 3, the taxable event subject to tax is only complete on the last day of the tax period, since the tax period is the calendar year, as provided in article 143rd and as is inferred from the provisions of articles 1st, no. 1, 22nd, no. 1, 57th, no. 1, all of the IRS Code.

Indeed, as IRS is an annual tax, through which, pursuant to article 22nd of the IRS Code, the aggregation of all income received in a given year is taxed, the tax period only stabilizes at the end of the fiscal year, on 31 December of each year.

In accordance with the provision of article 72nd, no. 4, of the IRS Code, these income items (capital gains) are taxed autonomously at the special rate of 20%, and the value to be determined, subject to tax, results from a balance which is formed throughout the year, so that the effects of assessment and payment relating to capital gains realized are only exhausted at the end of each year, which means that the taxable event occurs only on 31 December, thus making relevant the legislation in force on that same date.

Thus, and because on this date (31/12/2010) the exclusion from taxation of capital gains obtained with the disposition of shares held by their owner for more than 12 months is no longer in force, (previous wording of article 10th, no. 2, para. a) of the IRS Code, repealed by article 1st of Law 15/2010 of 26/07), no other solution remains but for its taxation.

l) On 24-11-2014, the Applicants filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Facts Not Proven

There are no facts relevant to the decision that have not been proven.

2.3. Justification for the Determination of Facts

The facts were taken as proven based on the documents attached with the request for arbitral pronouncement and in the administrative proceedings, with no controversy about them.

3. Legal Issues

3.1. Question to be Decided and Positions of the Parties

On 30-04-2010, the Applicants disposed of shares in a company held by them for more than twelve months.

In view of the wording of the IRS Code in force on that date, article 10th of the IRS Code established, insofar as it is relevant here, the following:

Article 10th

Capital Gains

1 - Capital gains are constituted by gains obtained which, while not being considered as business and professional income, capital or real property income, result from:

(...)

b) Taxable disposition of shares, including their redemption and amortization with capital reduction, and other securities and, as well, the value attributed to shareholders as a result of the distribution which, pursuant to article 75th of the Corporate Income Tax Code, is considered as a capital gain; (as worded by Law no. 109-B/2001, of 27 December)

(...)

2 - The following are excluded from the provision in the preceding number capital gains from the disposition of:

a) Shares held by their owner for more than 12 months; (As worded by Decree-Law no. 228/2002, of 31 October)

Law no. 15/2010, of 26 July, repealed this no. 2.

Based on this legislative context, the Tax and Customs Authority understood that the gains resulting from that disposition, which occurred before the entry into force of this Law, are subject to taxation in IRS in the year 2010.

The Applicants understand that the gains they obtained are not subject to taxation as the exclusion from taxation foreseen in paragraph a) of no. 2 of the referred article 10th applies to them, arguing, in summary, the following:

– Article 5th of that Law establishes that it enters into force on the following day, 27-07-2010;

– There is no other provision regarding the application of Law no. 15/2010 in time;

– No. 2, article 12th, of the General Tax Law provides that "If the taxable event is of successive formation, the new law only applies to the period elapsed from its entry into force";

– On the date of the disposition of the shares by the taxpayers the taxation of capital gains obtained by the disposition of shares held for more than 12 months was excluded from taxation, pursuant to paragraph a), of no. 2, of article 10th. IRS Code.

– The repeal of this norm only operates for the future, in relation to dispositions of shares that occur after its entry into force;

– There was only one disposition of shares by the Applicants in the year 2010;

The Tax and Customs Authority defends the position assumed in the Report of the Tax Inspection, stating, in summary, the following:

– The taxable event is not the gain resulting from the disposition but the positive balance determined in a given tax period between the capital gains and capital losses realized;

– The positive balance determined for that year 2010 was not generated at the moment of the gain of the capital gains, but rather on 31 December 2010;

– On pain of distorting the characteristic of the annuality of the tax, and the very formation of income to be taxed;

– If not, in the limit, situations would occur where whoever had obtained a capital loss until 27 July could not also offset it with a possible capital gain obtained later and within the same year;

– The discipline of no. 1 of article 43rd of the IRS Code goes in the unequivocal sense that the possible existence of capital gains is conditioned by the verification of a positive balance between these and the possible capital losses that occurred in the period of the same year;

– The situation is one of inauthentic or improper retroactivity in which the actual facts do not occur entirely under the force of the old law, but rather prolong effects within the scope of the new law;

– The IRS Code, or at least the generality of normative statements contained therein, constitutes special regulation for the purposes of fixing the criterion of temporal application of the relevant law in the context of taxation in IRS, so it prevails over the provision in article 12th no. 2 of the General Tax Law, by force of the principle that special law repeals general law, the provision in article 43rd, no. 1, of the IRS Code, which establishes that "the value of income qualified as capital gains is that corresponding to the balance determined between the capital gains and capital losses realized in the same year, determined in accordance with the following articles";

– Furthermore, we must still take into account the context (social/financial situation of the country) of this legislative change, that is:

"- The law was approved in the context of a serious financial crisis of the Portuguese State;

  • In the same context other fiscal measures were also approved retroactively (Law no. 11/2010 and Law no. 12-A/2010, also "weak retroactivity") in the context of IRS;

  • These measures had been discussed publicly for many months;

  • The exclusion from taxation of capital gains on shares, even if held for more than 12 months, is a norm that puts into question the constitutional principles of tax capacity and tax equality among citizens, since it leaves out of taxation unequivocal manifestations of wealth, and therefore has a nature in conflict with [the] fair distribution of tax burdens;

  • This strange nature can be perceived by any "average citizen", inasmuch as the awareness is sufficiently rooted in society that any income is, in principle, taxed;

  • The maintenance of this exclusion from taxation has for many years been a controversial situation having been the object of many critical observations in doctrine and in working groups of governmental initiative;

  • In the report of the working group for the study of fiscal policy of 3.10.2009 (...) it can be read

"This regime of taxation of securities capital gains configures a situation that violates frontally the equity of taxation";

  • The program of the XVIII Constitutional Government established that, to improve equity in the obtaining of resources and obtain a fairer distribution of the fiscal burden among taxpayers, should "bring closer to the regime of taxation of securities capital gains practiced in the generality of OECD countries";

  • The program of stability and growth for 2010-2013 also provides for the taxation of real property capital gains as a measure of fair and equal distribution of the effort to recover the economy and consolidate public accounts".

3.2. Decision

3.2.1. Jurisprudential Background

The question that is the object of the present proceedings has been decided by the Supreme Administrative Court in the sense defended by the Applicants, namely in the judgments of 04-12-2013, given in case no. 01582/13, and of 08-01-2014, given in case no. 01078/12.

Arbitral jurisprudence is not uniform on this question, as, while in cases 25/2011-T, and 135/2013-T the decision was in the sense defended by the Applicants, in arbitral cases nos. 107/2014-T and 340/2014-T the contrary understanding was applied.

The thesis defended in that jurisprudence of the Supreme Administrative Court is, in synthesis, as follows:

"Law no. 15/2010, of 26 July, established nothing regarding its application in time except that it would enter into force on the following day of its publication (see its article 5th), reason for which it should be understood, in accordance with the provision of no. 1 of articles 12th of the General Tax Law and of the Civil Code, that the alterations it introduced to the tax regime in IRS of securities capital gains apply only to taxable events that occurred on a date after its entry into force.

It is true that IRS applies to the annual value of income of the various legally foreseen categories (article 1st of the IRS Code), including capital gains in the categories of increases in assets (articles 9th and 10th of the IRS Code), and there being that, for determination of the collectible income of capital gains, the balance between capital gains and capital losses realized in the same year is to be determined (article 43rd no. 1 of the IRS Code).

Hence, having the appellees also obtained taxable capital gains resulting from the disposition of shares that occurred on a date after the entry into force of Law no. 15/2010, such gains will already be fully subject to the tax regime instituted by Law no. 15/2010, since, as the annual income for the purposes of IRS is a complex fact of successive formation, in the absence of an express norm to the contrary, the new law may be applied, without proper or authentic retroactivity, to the facts that integrate it which occurred after its entry into force (article 12th no. 2 of the General Tax Law)".

3.2.2. The Occurrence of the Taxable Event and the Formation of the Tax Legal Relationship

The tax legal relationship is comprised of the rights and obligations indicated in no. 1 of article 30th of the General Tax Law: a) The tax credit and tax debt; b) The right to accessory benefits of any nature and the corresponding duty or subjection; c) The right to deduction, reimbursement or refund of tax; d) The right to compensatory interest; e) The right to indemnitory interest.

Pursuant to article 36th, no. 1, of the General Tax Law "the tax legal relationship is constituted with the taxable event."

Thus, first and foremost, it is necessary to determine when the taxable event is constituted.

ALBERTO XAVIER teaches:

"For a fact to trigger tax effects it is therefore indispensable its correspondence to one of the types or models of tax created by the legislator. Thus, what characterizes typicality in Tax Law is not so much the need for the conformity of the fact to the norm so that the effect is produced (...) but rather the fact that tax effects are not produced without this conformity reporting to norms expressly formulated with the force and under the form of law.

The taxable fact is necessarily a typical fact: and for it to have this nature it is indispensable that it conforms, in all its elements, to the abstract type described in the law.

The typicality of the taxable fact presupposes, therefore, a rigorous description of its constitutive elements, whose complete verification is indispensable for the production of effects: - the non-verification of one of them is enough for there to be, by the absence of typicality, no place for taxation. The taxable fact, while being a typical fact, only exists as such, from the moment that in reality all the legally foreseen presuppositions are verified which, by this new perspective, are converted into elements of the fact itself"

(...)

The legal types of taxes contain in themselves the indispensable or necessary elements for taxation: it is, as we have already seen, the rule of numerus clausus; the legal types of tax enclose in themselves the elements sufficient for taxation: it is (...) the principle of exclusivity.

By way of this principle, the legal types of tax contain a complete description of the elements necessary for taxation: and, if in truth it is affirmed that only the facts foreseen in law trigger tax effects, in no less truth will it be affirmed that these same facts are sufficient for the said triggering, with the exclusion of any others (and hence the designation by the principle of exclusivity). That is to say: each tax type contains a definitive valuation of the legal situations that are its object, for certain purposes. ([1])

In this vein, it should be understood, as is correctly concluded in the judgment of the Central Administrative Court of the South of 22-05-2012, case no. 5232/11, that "the tax act always has at its base a concrete factual situation, which is found foreseen abstractly and typically in tax law as generating the right to tax. That factual and concrete situation is defined as a taxable event, which only exists from the moment that all the legally foreseen presuppositions for such are verified. The tax norms that contemplate the taxable event are those relating to real incidence, which define its objective elements (see Alberto Xavier, Concept and Nature of the Tax Act, p.324; Nuno de Sá Gomes, Manual of Tax Law, II, Tax Science and Technique Notebooks, 1996, p.57; A. José de Sousa and J. da Silva Paixão, Annotated and Commented Tax Process Code, 3rd edition, 1997, p.269). Only with the practice of the taxable event is born the tax obligation. The existence of the taxable event constitutes, therefore, a "sine qua non" condition for the determination of taxable matter and the assessment made".

In the context of IRS, the taxable event is, as a rule, complex, having as its object the annual income, resulting from a series of facts occurring in each year, to which a global rate is applied.

However, there are several situations in which IRS applies to autonomous facts, with rates different from the global rate, although, as a rule, the possibility of choosing for aggregation is granted.

One of these situations is, precisely, that of the positive balance between capital gains and capital losses obtained in each year deriving from facts that can be framed in paragraphs b), e), f) and g) of no. 1 of article 10th of the IRS Code ([2]), which are autonomized for the purposes of taxation, pursuant to article 72nd, no. 4, of the IRS Code, even in relation to the remaining capital gains and capital losses of other types provided for in no. 1 of the same article 10th. In fact, only by option of the taxpayers that balance is aggregated in the general IRS income, pursuant to no. 7 of that article 72nd, the which did not happen in the case at hand.

However, as follows from this no. 4 of article 72nd and also from no. 1 of article 43rd of the IRS Code, the taxable event is constituted by the possible positive balance that is determined at the end of each year and not by each one of the operations effected throughout the year that provide capital gains, since these, by themselves, do not generate any tax obligation, only possibly arising a taxable event, at the end of the year, if the sum of all the capital gains obtained from facts that can be framed in paragraphs b), e), f) and g) of no. 1 of article 10th exceeds the sum of the capital losses of the same types.

This regime does not change in cases, as in the case at hand, in which only one fact that can be framed in those b), e), f) and g) of no. 1 of article 10th occurred that generated capital gains: also here, only at the end of the year can it be concluded by the existence of a positive balance that constitutes a taxable event for the purposes of taxation pursuant to article 72nd, no. 4, of the IRS Code.

Thus, as was understood in the judgment of CAAD given in case no. 340/2014-T:

"The taxable event is not translated into the capital gain generated and considered in an isolated and singular way, through the act of disposition, but as a fact of successive formation, not being found in the disposition of the shares in question any fact generating possible tax incidence, since, as said, the same will result from a balance determined in a given tax period, in accordance with the characteristic of annuality of the tax, which obviously is present in the scope of the income tax of individuals.

In the same way by effect of the rule of annuality of income tax on individuals, it is to be understood that the taxable event occurred on 31 December 2010, given the complex incidence of the tax in question, and the requirement which the same carries in terms of unitary and global vision, not being compatible with such characteristics any autonomization or division by temporal periods within the same fiscal year. [3]"

In this light, Law no. 15/2010, of 26 July, by repealing no. 2 of article 10th of the IRS Code, which excluded from IRS taxation capital gains from the disposition of shares held by their owner for more than 12 months, regulates the formation of a taxable event relating to the year 2010 which is constituted by the balance between capital gains and capital losses with autonomous taxation, before it occurs, since it is only determined at the end of that year, so that its application to all capital gains and capital losses of those types generated in 2010 does not involve retroactivity, in view of the restricted sense which the Constitutional Court has attributed to the prohibition of retroactive taxes contained in article 103rd, no. 3, of the Constitution, which has understood only to cover authentic proper retroactivity, which comes down to the application of the law to facts whose constitutive effects of legal situations have already been produced in the past, integrating all other situations in which there is a weighing of past facts in a benevolent concept of retrospectivity. ([4])

With regard to retrospectivity SÉRGIO VASQUES teaches:

"A phenomenon distinct from the retroactivity of tax law is that which among the doctrine is sometimes designated by the retrospectivity of tax law. As we have seen, retroactivity is produced when the law disposes about past taxable events, whether those that have already been fully formed, or those whose formation is still underway. The phenomenon of retrospectivity of tax law, on the other hand, occurs when the new law, while disposing about future facts, harms expectations founded in the past. (...) The problem of retrospectivity of tax law poses itself with even greater acuity in cases of elimination of tax benefits. Through the creation of benefits the legislator directly encourages certain behavior on the part of the taxpayer, considered meritorious for various reasons of an extrafiscal nature. The taxpayer cannot have the expectation that tax benefits remain untouched forever, binding the legislator to a principle of continuity (Kontinuitätsgebot) incompatible with the evolution of the economy, society and the political system itself. But it is true that the sudden elimination of tax benefits can cause serious harm to the expectations of taxpayers, with relevant economic consequences[5].

Indeed, this is a problem which the Constitutional Court has already dealt with more than once, always sustaining that this problem escapes the prohibition of retroactivity and should instead be evaluated in light of the principle of legal certainty resulting from article 2nd of the Constitution.

On the analysis of the Constitutional Court with regard to this subject Sérgio Vasques refers:

"In light of this principle, the harm to the expectations of taxpayers should be considered inadmissible whenever (a) we are faced with an alteration of the legal order with which the addressees of the norms cannot reasonably count and (b) that alteration is not dictated by the necessity to safeguard rights or interests constitutionally protected that should be considered as prevalent. Based on this test of proportionality, the court has understood that for a measure to be censured based on article 2 it is necessary "first, that the state (particularly the legislator) has undertaken behaviors capable of generating in private parties 'expectations' of continuity; thereafter, must such expectations be legitimate, justified and founded on good reasons; thirdly, must the private parties have made life plans taking into account the prospect of continuity of the 'behavior' of the state; lastly, it is still necessary that there occur no reasons of public interest that justify, in weighing, the non-continuity of the behavior that generated the situation of expectation. [in a footnote the same Author emphasizes that: "Thus in the judgment of the Constitutional Court no.128/2009, of 12 March, underlining the non-existence of "a right to the non-frustration of juridical expectations or to the maintenance of the legal regime in lasting juridical relationships", or in judgment no.85/2010, of 3 March, of the greatest interest, relating to the introduction of an alteration in the Corporate Income Tax Code by Law no.32-B/2002, of 30 December, pursuant to which "the negative difference between the capital gains and capital losses realized through the taxable transfer of capital shares (...) concurs for the formation of taxable profit in only half of its value". It was then argued that the application of this rule to shareholdings acquired before its entry into force violated the constitutional principle of non-retroactive application of tax law as well as the principle of legal certainty, established in article 2nd of the Constitution of the Republic, inasmuch as "the taxpayers acquired shareholdings based on a given legal framework, which was, moreover, the normal or typical framework, according to which the gains from the disposition of those shareholdings were taxed and the losses were deductible". The Constitutional Court rules out retroactivity, by not finding even a complex fact of successive formation, and refuses the violation of the principle of legal certainty, by the non-existence of clear encouragement by the state and by the refusal of any "prohibition of retrogression" in matters of tax deductions. The decision seems to us correct, concise and materially just."]".[6]

Thus, the only obstacle to considering for the annual balance of capital gains and capital losses those concretized before the entry into force of Law no. 15/2010 can only result from the norm of article 11th, no. 2, of the General Tax Law, which establishes that "if the taxable event is of successive formation the new law only applies to the period elapsed from its entry into force".

However, from the combination of the rule of coincidence of the fiscal year with the calendar year, which prevails as to IRS (article 143rd), with no. 1 of article 43rd of the IRS Code, in which it is established that "the value of income qualified as capital gains is that corresponding to the balance determined between the capital gains and capital losses realized in the same year, determined in accordance with the following articles", it is concluded that the entire annual period cannot cease to be considered, there being no minimum legal support for taxation based on more than one balance nor based on a balance of dimension inferior to the year.

In fact, the norm of article 43rd, no. 1, of the IRS Code clearly consecrates the annual taxation of the balance of capital gains and capital losses realized in each year, by, thus explicitly ruling out the application of the pro rata temporis principle, provided for in article 11th, no. 2, of the General Tax Law, constitutes a special norm that derogates it in its specific domain of application.

This interpretation, which results from the literal wording of article 43rd, no. 1, of the IRS Code, is corroborated by the discussion of Bill no. 16/XI, which gave rise to Law no. 15/2010, in which the Government explicitly assumed the intention to apply the new regime to the balance of capital gains and capital losses of the entirety of the year 2010, as is seen by the following excerpts from the general discussion which are contained in the Record of the Assembly of the Republic 1st Series, No. 55/XI/1, of 08-05-2010, referring to the intervention of the Secretary of State for Tax Affairs, Professor Sérgio Vasques:

"the revenue to be collected with this proposal depends, above all, on the regime of application of the law in time and that, in that matter, we insist on a regime of application of the law in time that prevents the 'washing' of capital gains, so that, in the end, instead of a system of taxation, we have a new system of exemption to be in force henceforth" (page 17);

"the main factor of evasion that can be created here would result, that is yes, from a regime of application of the law in time that only subjected capital gains that were produced with shareholdings acquired after the entry into force of the law. That, for us, is the crucial point, that is, it is to avoid that, from these rules, does not result an immediate 'washing' of latent capital gains (pages 17-18);

"For a long time now modern doctrine, somewhat following German doctrine and also the jurisprudence of our Constitutional Court, has come to understand that there is a difference — that, clear — between retroactivity and retrospectivity of tax law. And that difference is explained quickly: retroactive tax law is that which applies to past facts; retrospective is that which applies to future facts, yet putting into question expectations founded in the past.

This means, very simply, that, when we look at the proposal here formulated by the Government, it is not, evidently, retroactive, because it applies to the balance determined between capital gains and capital losses that are verified at the end of the year. And it is to that balance, moreover, that the exemption of 500 € also applies, which figures in the proposal.

But there is something even clearer, Sr. Deputy, than what is contained in article 103rd of the Constitution: it is that, if any party or if the Government were to propose to this Chamber the taxation of capital gains produced with the disposition of shareholdings acquired after the entry into force of this law, certainly, when the law entered into force, there would already be no capital gain to tax. And, Sr. Deputy, that is a request to which the Government, certainly, is not willing to respond" (pages 20-21)

On the other hand, the intervention of Deputy Assunção Cristas explicitly defended the opposite position, saying "For the sake of legal certainty, for the sake of legislative stability, it is prudent and safe to consider that the law only applies to acquisitions made after its entry into force. Or, at the limit, it is imperative to consider that, at least, the law cannot apply to securities sold before its entry into force" (page 28 of the referred Record of the Assembly of the Republic), which confirms that the Government's intention was immediate application. ([7])

The final wording of the statute does not consecrate any of these proposals for restricting the effects of immediate application of the new law, so that the entry into force on the following day of its publication which remained in its article 5th, which already appeared in the Bill, has unequivocally the scope of expressing the intention of application of the new regime to the balance of capital gains and capital losses generated in the year 2010.

In fact, if that were not the legislative intention, surely a special regime of application of the law in time would be established, as had long been usual in relation to norms on the taxation of capital gains. ([8])

On the other hand, in the context of acute financial crisis that was being experienced in 2010, it cannot but be concluded that the conditions in which the law was drawn up explain the adoption of a solution of this type.

Furthermore, it is to be noted that, if it is true that the relevance for formation of the balance of capital gains obtained before the entry into force of Law no. 15/2010 could configure a violation of the constitutional principle of confidence, if it were unexpected and unforeseeable at the moment in which the disposition of the shares took place, it cannot be understood that that violation exists when the disposition occurred after approval in Council of Ministers of the proposal that gave rise to that Law, since that approval was widely publicized by the media, as is usual and is notoriously known.

In the case at hand, the approval of the proposal occurred on 22-04-2010 (as is seen from the date that appears in Bill no. 16-XI) and had the usual immediate publicity, through a statement of the same date, in which it is stated, insofar as it is relevant here:

I. The Council of Ministers, meeting today at the Office of the Prime Minister, approved the following statutes:

  1. Bill Introducing a regime of taxation of securities capital gains at a rate of 20% with an exemption regime for small investors, and altering the Code for Income Tax of Individuals and the Status of Tax Benefits

This Bill, to be sent to the Assembly of the Republic, alters the Code for Income Tax of Individuals and the Status of Tax Benefits, introducing a regime of taxation of securities capital gains at a rate of 20% with an exemption regime for small investors who obtain gains annually, determined annually resulting from the balance between the capital gains and capital losses, up to 500.00 euros.

With this statute the norm of exclusion from taxation that has existed until now is repealed, which was directed at capital gains resulting from the taxable disposition of shares held for more than 12 months, as well as bonds and other debt securities. ([9])

Therefore, in relation to those who made dispositions of shares as from this date, it cannot be understood that the taxation of capital gains that would be obtained in the very year 2010 would be unforeseeable, since the application in that year was the only reasonable justification for such matter not being included in the Budget Proposal of the State for the following year.

In the case at hand, the disposition of the shares occurred on 30-04-2010, when it was already public that there would occur in the short term an alteration of the regime of taxation applicable to capital gains obtained in the year 2010, so that there is no configuration of a violation of the principle of confidence.

It is thus concluded that the assessment of IRS whose declaration of illegality is sought in the present proceedings, does not suffer from the defect that the Applicants impute to it.

The same applies to the assessment of compensatory interest, since the only defect that is imputed to it affects the act of assessment of IRS.

4. Compensation for Undue Security

Since the acts of assessment of IRS and compensatory interest do not suffer from the defect that the Applicants impute to them, there is no ground for awarding compensation resulting from the security provided to suspend fiscal execution, since the security is only undue when there has been an error attributable to the services in the assessment of the tax or if it is maintained for a period of more than three years (article 53rd, nos. 1 and 2, of the General Tax Law), which did not happen.

The request for compensation for undue security is thus dismissed.

5. Decision

In accordance with the foregoing, the members of this Arbitral Tribunal agree:

Accordingly, the members of this Arbitral Tribunal agree in:

a) Declaring inadmissible the request for arbitral pronouncement, regarding the request for declaration of illegality of the IRS assessments no. 2014 ... and compensatory interest no. 2014 ... and respective statement of account settlement;

b) Declaring inadmissible the request for compensation for undue security.

6. Value of the Case

In accordance with the provision of article 306th, no. 2, of the Code of Civil Procedure and 97th-A, no. 1, paragraph a), of the Code of Tax Procedure and 3rd, no. 2, of the Regulation of Costs in Arbitration Proceedings in Taxation the value of the case is fixed at € 207,872.01.

7. Costs

Pursuant to article 22nd, no. 4, of RJAT, the amount of costs is fixed at € 4,284.00, pursuant to Table I attached to the Regulation of Costs in Arbitration Proceedings in Taxation, to be borne by the Applicant.

Lisbon, 20 April 2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Carla Castelo Trindade)

(André Bacelar Gonçalves)

DISSENTING OPINION

With all due respect, which is considerable, I do not adhere to the understanding above referred to. I therefore dissented, and voted in dissent, for the essential reasons which I now proceed to summarize.

In this matter, I follow the conclusions of the Supreme Administrative Court, within the scope of case 1582/13, of 04/12/2013 and case 1078/12, of 08/01/2014, as well as the understanding reflected in the judgments of CAAD, given within the scope of cases 25/2011-T and 135/2013-T, highlighting, in particular, the understanding supported in case 25/2011-T.

Even considering that the taxable event only occurs on the last day of the year and with article 43rd, no. 1 of the IRS Code consecrating the annual taxation of the balance of capital gains and capital losses realized in each year, I understand that, considering the norm of article 12th, no. 2 of the General Tax Law, being IRS a periodic tax of successive formation, in the absence of a norm of the new law that disposes otherwise it can only be applied "to the period elapsed from its entry into force".

I follow the understanding given within the scope of case 25/2011-T, regarding the applicability of the taxation denominated "pro rata temporis", in which, after various references to doctrine on this matter, it is referred that "there will thus be difficulties in the application of article 12th, no. 2 of the General Tax Law, but it does not seem, therefore, that the impracticability of its application has been demonstrated, at least in all cases. It seems to us that, regarding such difficulty or impracticability, it will be incumbent on the legislator to formulate such judgment on a case-by-case basis (by establishing specific rules of transitional law) or, then, to formulate a global negative judgment on the norm and repeal it, which at the date had not happened".

It also seems to me important to refer that the legislator voluntarily chose to say nothing regarding the force of the law from the beginning of the year, which to me, at the minimum, raises doubts whether that was its intention.

Considering what has been set out, I understand that the new law is not applicable to the capital gains in the case at hand, reason for which I would vote for the annulment of the tax acts complained of.

André Bacelar Gonçalves

[1] Concept and Nature of the Tax Act, pages 323-324 and 325-326.

[2] Balance this for which losses determined are not relevant when the counterparty of the operation is subject in the country, territory or region of domicile to a clearly more favorable tax regime, contained in the list approved by ordinance of the Minister of Finance, as results from no. 5 of article 43rd of the IRS Code.

[3] Article 143rd of the IRS Code: For the purposes of IRS, the fiscal year coincides with the calendar year.

[4] In this sense, the judgment of the Constitutional Court no. 523/2010, of 27-10-2010, given with regard to alterations to the IRS of 2010 introduced in the course of the year, in which it is concluded:

In sum, from the preparatory works of the constitutional revision of 1997 it is drawn, on the one hand, that the legislator of the revision only intended to include, in no. 3 of article 103rd of the Constitution, the prohibition of authentic, proper or perfect retroactivity of tax law, which is not contradicted by the letter of the provision, since the constitutional text only refers to the retroactive nature tout court. On the other hand, it equally results from the preparatory works, in a crystal-clear manner, that it was not intended to integrate in the provision situations in which the taxable event that the new law intends to regulate did not occur entirely under the force of the old law, but rather continues to form itself in the force of the new law, at least, when direct taxes relating to income are at issue (as is clearly the case in the present proceedings).

In the same vein, the judgments of the Constitutional Court nos. 28/2009, 85/2010, 524/2010 and 399/2010 may be seen.

[5] Sérgio Vasques – Manual of Tax Law, Almedina, pages 299 and 300.

[6] SÉRGIO VASQUES, Manual of Tax Law, Almedina, pages 300 and 301.

[7] It follows, in some points, the dissenting vote given by Mr. Dr. João Menezes Leitão in the case of CAAD no. 135/2012-T.

[8] For example:

– article 2nd, §§ 1st and 2nd of Decree-Law no. 46373, of 09-06-1965, which approved the Code for Capital Gains Tax, which establish that the gains to which nos. 1st and 2nd of article 1st of the code are subject only become subject to tax when the land has been acquired or the taxable transfer has occurred after the date of this statute;

– article 5th of Decree-Law no. 442-A/88, of 30 November, in establishing that "the gains that were not subject to the capital gains tax, created by the code approved by Decree-Law no. 46373, of 9 June 1965, only become subject to IRS if the acquisition of the goods or rights from whose transfer they originate will have been made after the entry into force of this Code";

– article 3rd, no. 5, of Law no. 30-G/2000, of 29 December, in which it is established that "The new wording of articles 10th, 41st and 75th of the IRS Code is only applicable to shareholdings and other securities acquired after the date of entry into force of the present law, with the previous regime of taxation being maintained for capital gains and capital losses of shareholdings and other securities acquired before that date";

– in Decree-Law no. 228/2002, of 31 October, it was established, in article 3rd which had effects as from 1 January 2003.

[9] Available on the Internet at:

http://www.portugal.gov.pt/pt/o-governo/arquivo-historico/governos-constitucionais/gc18/comunicados-cm/cm-2010/20100422.aspx

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of company shares taxed under Portuguese IRS?
Capital gains from the sale of company shares are taxed under Portuguese IRS as Category G income (capital gains and other asset increases). Under article 10(1)(b) of the IRS Code, gains from the disposal of shareholdings constitute taxable capital gains. The taxable amount is calculated as the net balance between all capital gains and losses realized during the tax year, pursuant to article 43(1) of the IRS Code. These gains are generally subject to autonomous taxation at a special rate of 20% under article 72(4) of the IRS Code. However, exemptions have existed at various times - before legislative changes in 2010, certain share disposals were excluded from taxation under article 10(2)(a). The gain is considered realized at the moment of the disposal transaction, but since IRS is an annual tax assessed on the calendar year basis, the complete taxable event and final determination occur on December 31st of the relevant tax year.
Can a tax law be applied retroactively to capital gains on share disposals in Portugal?
The retroactive application of tax laws to capital gains on share disposals in Portugal is legally prohibited under the principle of non-retroactivity of tax rules. Article 103(3) of the Portuguese Constitution establishes that no tax may be created or increased retroactively. Additionally, article 12 of the General Tax Law (LGT) expressly prohibits retroactive application of tax laws. However, the tax authority in this case argued that no true retroactivity existed because, although the share sale occurred in April 2010 under exempt rules, the taxable event for IRS only completes on December 31st of the tax year. Since the law removing the exemption was in force by year-end 2010, they contended it should apply. This interpretation conflicts with principles of legal certainty and legitimate expectations - taxpayers who conducted transactions based on laws in force at the transaction date should not be subjected to unexpected tax consequences from subsequent legislative changes within the same year, as this violates the constitutional prohibition on retroactive taxation.
What was the outcome of CAAD arbitration process 784/2014-T regarding the additional IRS assessment?
While the excerpt does not provide the final decision, the arbitral tribunal in CAAD case 784/2014-T was constituted to decide whether the additional IRS assessment of €207,872.01 issued in 2014 for the 2010 tax year was legal. The taxpayers requested a declaration of illegality of the assessment, arguing they had legitimately relied on the exemption in force when they sold their shares in April 2010. The tax authority defended the assessment, claiming the taxable event occurred on December 31, 2010, when the exemption had been removed. The tribunal had to determine whether applying the year-end law to a transaction completed months earlier constituted prohibited retroactive taxation. The proceedings followed the formal arbitration process established by Decree-Law 10/2011, with the tribunal constituted on January 30, 2015, and both parties submitting their positions. The case required interpretation of fundamental tax law principles including when taxable events crystallize, the annual nature of IRS, and constitutional limits on retroactive taxation.
How can taxpayers challenge an additional IRS tax assessment through CAAD arbitral proceedings?
Taxpayers can challenge additional IRS assessments through CAAD (Centro de Arbitragem Administrativa) by filing a request for constitution of an arbitral tribunal under articles 2 and 10 of Decree-Law 10/2011 (RJAT - Administrative Arbitration Regime). The process requires: (1) filing a written request identifying the contested tax act and grounds for illegality; (2) payment of the initial arbitration fee; (3) designation of arbitrators by the CAAD Deontological Council; (4) constitution of the arbitral tribunal; (5) submission of a response by the Tax Authority; (6) possible written submissions and hearings; and (7) issuance of the arbitral award. This alternative dispute resolution mechanism provides taxpayers with a faster, more specialized forum than traditional administrative courts for resolving tax disputes. In case 784/2014-T, the taxpayers successfully initiated arbitration against an assessment issued following a tax inspection, requesting declaration of its illegality. The tribunal was constituted within months, demonstrating the efficiency of the CAAD system compared to conventional litigation. Taxpayers must typically file within the legal deadline after notification of the contested assessment.
What are the legal limits on retroactive application of tax rules under Portuguese tax law?
Portuguese tax law establishes strict limits on retroactive application of tax rules through constitutional and statutory provisions. Article 103(3) of the Portuguese Constitution prohibits creating or increasing taxes with retroactive effect. Article 12(1) of the General Tax Law (LGT) reinforces this by stating that tax laws only apply to future situations and cannot have retroactive effect, except when more favorable to taxpayers. The law in force at the time the taxable event occurs governs taxation. For IRS capital gains, the critical question is when the taxable event crystallizes - at the transaction date or year-end. While tax authorities may argue that annual taxes only complete on December 31st, applying mid-year legislative changes to earlier transactions violates taxpayer legal certainty and legitimate expectations. Taxpayers must be able to evaluate tax consequences when conducting transactions based on laws then in force. Retroactive application undermines legal security, a fundamental principle of the rule of law. Courts and arbitral tribunals generally interpret these provisions strictly, protecting taxpayers from unexpected tax burdens arising from legislative changes to transactions already completed under prior law.