Process: 787/2015-T

Date: September 16, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision addresses a Corporate Income Tax (IRC) dispute concerning the 1996 financial year, where the taxpayer challenged a tax assessment of €46,491.03 on two primary grounds: expiry of the statutory limitation period (caducidade) and violation of the right to prior hearing (audição prévia). The core issue centers on determining when the taxable event occurred for real estate capital gains under the reinvestment regime. The Claimant, a company in liquidation, argued that the taxable event triggering IRC liability occurred no later than December 31, 1993, when the reinvestment regime rules under Article 44(2) of the IRC Code applied to unreinvested realization values. Consequently, the 2015 tax assessment would exceed the statutory limitation period. The Tax Authority (Respondent) contended that the taxable event occurred in 1996, when fiscal losses from 1991 were deducted, making the assessment timely within the five-year limitation period counted from the end of the taxable year. The Claimant further argued that it was never notified of additional assessments from inspection actions covering 1992-1993, preventing any opportunity to contest the capital gains calculation that reduced initially determined fiscal losses. The arbitral tribunal, constituted under the Legal Framework for Arbitration in Tax Matters (RJAT), also addressed a preliminary procedural issue regarding legal representation, which was resolved through ratification after the Claimant submitted proper documentation showing dual manager signatures and insolvency administrator approval. The case illustrates critical timing issues in Portuguese tax law, particularly regarding when taxable events crystallize under reinvestment regimes, the calculation of limitation periods for tax assessments, and the procedural safeguards required including prior hearing rights before tax liquidation acts become final.

Full Decision

ARBITRAL DECISION

Carla Castelo Trindade, Arbiter appointed by the Deontological Council of the Centre for Administrative Arbitration to form this arbitral tribunal hereby delivers the following:

ARBITRAL DECISION

I – REPORT

On 28 December 2015, the company "A…, Lda, In Liquidation", holder of tax identification number…, with registered office at the place of …, in …-… … (hereinafter Claimant), filed a request for constitution of a single arbitral tribunal, in accordance with and for the purposes of the provisions of Articles 2 and 10 of the Legal Framework for Arbitration in Tax Matters, approved by Decree-Law 10/2011, of 20 January (RJAT).

Not accepting the tax assessment act number…, which fixed the IRC (Corporate Income Tax) due in the amount of € 46,491.03 (forty-six thousand, four hundred and ninety-one euros and three cents), relating to the financial year 1996, the Claimant now, by means of the request for constitution of the arbitral tribunal and for arbitral pronouncement, seeks the annulment of said act.

The Claimant contends the illegality of the tax assessment act referred to above on the grounds of: first, breach of the statutory limitation period for the right to assess; and second, breach of an essential procedural formality for failing to grant the right to prior hearing.

With the petition, seven documents were attached.

As the Claimant did not opt for the appointment of an arbiter, in accordance with the provisions of paragraph a) of Article 6, paragraph 2, and paragraph b) of Article 11, paragraph 1, of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed Dr. Carla Castelo Trindade as arbiter of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

The parties were notified of this appointment, and no request for challenge of the appointment of Dr. Carla Castelo Trindade as arbiter was presented.

Thus, in accordance with the provisions of paragraph c) of Article 11, paragraph 1, of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the single arbitral tribunal was constituted on 4 January 2016.

On 19 April 2016, the Tax and Customs Authority (hereinafter "Respondent") filed a reply in which it alleged, first, irregularity in the legal representation of the Claimant and, second, total lack of merit of the request for arbitral pronouncement, defending the maintenance of the tax assessment act on the grounds that the statutory limitation period had not expired and that the exercise of the right to prior hearing was not essential. With the Reply, two documents were attached.

Given that, in this case, none of the purposes legally assigned to the meeting referred to in Article 18 of the RJAT were present, and taking into account the position taken by the parties in the pleadings, by virtue of the provisions of Articles 16 paragraph c) and 19 of the RJAT, as well as the principles of procedural economy and prohibition of futile acts, the holding of this meeting was dispensed with and the parties were notified to present arguments in writing.

Both the Claimant and the Respondent presented written arguments.

In its final arguments, the Claimant protested to attach ratification of proceedings, further stating that "the taxpayer now claimant was never notified of the additional tax assessment resulting from the conclusions of the inspection action for the years 1992 and 1993 and, being thus, never had the opportunity to discuss the legality of the increase in value (…) relating to the taxable gain corresponding to the unreinvested realization value, in accordance with paragraph 2 of Article 44 of the IRC Code, in force at the time, which has the consequence of reducing the value of the fiscal losses initially determined by the taxpayer" and that "in the specific case under analysis, the taxable event giving rise to the tax, by virtue of the application of the rules of the realization value reinvestment regime, occurs – at the latest – on 31 December 1993 and never in 1996 as the Tax Authority contends". In this sense, the Claimant concludes that the assessment act is illegal for violation of Articles 33, paragraph 1, of the CPT and 79 of the IRC Code.

The Respondent filed a counter-argument, reiterating the total lack of merit of the request for arbitral pronouncement, defending that the notification of the tax assessment act occurred within the five-year period counted from the end of the taxable event which, according to the Respondent, occurred in 1996 – the year in which the fiscal losses determined in 1991 were deducted – and not before.

II. CASE MANAGEMENT

The arbitral tribunal was duly constituted.

In its Reply to the request for arbitral pronouncement, the Respondent invoked irregularity in the representation of the Claimant by B…, in his capacity as manager, rather than by the liquidator, as the Claimant is a company in liquidation.

In light of the foregoing, on 30 June 2016 the tribunal issued a ruling inviting the Claimant to, within 10 days, (i) present proof of the legal status of its representative, (ii) attach to the file a properly executed judicial power of attorney in accordance with legal requirements, and (iii) attach ratification of proceedings, under penalty of verification of a dilatory exception and consequent dismissal of the Respondent from the arbitral proceedings.

On 6 July 2016, the Claimant requested the attachment of three documents to the file.

It was verified that the insolvency of the Claimant was declared with limited scope, under Article 39 of the Insolvency and Corporate Recovery Code (CIRE), for which reason, and in accordance with paragraph 7 of that provision, the Claimant was not deprived of its administrative powers, with the insolvency administrator's functions limited to the issuing of the opinion referred to in Article 188, paragraph 2, of the CIRE. Procedural standing therefore belongs to the administration of the Claimant.

Nevertheless, the power of attorney attached with the request for constitution of the arbitral tribunal had been granted only by one of the managers of the Claimant, whereas the Claimant is bound only by the signature of two managers (as per the Permanent Commercial Certificate attached to the file). Accordingly, the Claimant attached, with the aforementioned request, a properly executed power of attorney granted by two managers, with ratification of the previously conducted proceedings.

Notified to pronounce, in respect of the principle of contradiction, the Respondent declared it had no objection to the ratification of the proceedings.

In this way, the defect of irregularity in representation is cured.

The proceedings contain no nullities.

The parties possess legal personality and capacity and are properly represented.

All being considered, it remains to decide.

III. FACTS

III.1. PROVEN FACTS

Regarding the facts, it must first be noted that the tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts relevant to the decision and distinguish proven from unproven matters, in accordance with Article 123, paragraph 2, of the Tax Procedure and Process Code and Article 607, paragraphs 2, 3, and 4 of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, paragraphs a) and e), of the RJAT. Thus, the facts pertinent to the judgment are selected and determined in function of their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see Article 596 of the Code of Civil Procedure applicable by virtue of Article 29, paragraph 1, paragraph e), of the RJAT).

Now, considering the positions taken by the parties, the documentary evidence, and the Administrative File attached to the record, the following facts with relevance to the decision are considered proven:

  1. The Claimant acquired a mixed-use property on 4 January 1990 for the amount of 55,000,000$00 (corresponding to € 274,338.84).

  2. On 31 March 1991, the Claimant proceeded to sell the aforesaid property for the amount of 125,000,000$00 (corresponding to € 623,497.37), with a public deed dated 4 March 1992.

  3. In the IRC Return Form 22 for the financial year 1991, the Claimant declared a fiscal loss in the amount of 52,655,911$00 (corresponding to € 262,646.58).

  4. In the Return Form 22 for that year, the Claimant also stated the intention to reinvest the entire realization value resulting from the aforesaid sale, having deducted on line 29 of Schedule 17 the amount of 121,424,997$00 (€ 605,665.33), relating to the accounting gain, and not having added any amount relating to the taxable gain.

  5. In 1997, the Claimant was subjected to an inspection action covering the financial years 1992 and 1993, by the competent departments of the General Tax Directorate (DGCI, now the Tax and Customs Authority).

  6. As a result of that inspection action, an inspection report was drawn up on 17 June 1997, in which the then DGCI concluded that:

"2 - Financial Year 1993

2.1. For IRC purposes

2.1.1 – The company A…, Lda., deducted in the Return Form 22 of 1991 (line 29 of Schedule 17) the Accounting gain in the amount of 121,424,997$00, without adding the corresponding Taxable gain.

The Gain referred to results from the sale of Fixed Assets in which the realization value totaled 180,000,000$00. The company under analysis did not reinvest in Tangible Fixed Assets by 31.12.93 the entire realization value, thereby contravening paragraph 1 of Article 44 of the IRC Code. The reinvestment value over the three years was 96,606,925$00. The taxable gain corresponding to the unreinvested realization value totals 56,255,577$00, in accordance with paragraph 2 of Article 44 of the IRC Code. There is no IRC to assess, in accordance with paragraph 5 of Article 44 of the IRC Code, for the financial year 1991 because the taxable income is nil given the company's right to deduct fiscal losses. Thus, the value of the fiscal losses will be corrected, in accordance with Article 46 IRC Code, recording a reduction of 56,255,577$00"

  1. The Claimant was notified of the contents of the aforesaid inspection report, and requested suspension of the infraction proceedings, intending to discuss, through proper channels, the legality of the tax act.

  2. The Claimant was not notified, up to the present date, of any acts assessing additional IRC for the financial years 1992 and/or 1993.

  3. In April 1999, an additional tax assessment act for IRC relating to the financial year 1996 was issued, with the amount due of 9,320,616$00 (corresponding to € 46,491.04) the grounds of which provided:

"In the verification performed on this date to the accounting records of the company A… relating to the financial years 1992 and 1993, it was detected that this company did not proceed with the total reinvestment of the realization value, in accordance with Article 44 of the IRC Code, in the financial years 1991, 1992 and 1993, with the respective Taxable gain not having been taxed. Thus, the fiscal loss declared in 1991 of 52,655,911$ was corrected to the taxable income of 3,596,666$00, with the taxable base being nil due to loss carryforward from 1990.

In the financial year 1996, the company proceeded with the improper deduction of losses relating to the financial year 1991, and in this year, is entitled to deduction of the following losses for corrected tax purposes in the 1st assessment or 2nd assessment:

Deduction of losses from 1992: 2,724,358$

1993: 1,215,175$

1994: 15,528,006$

Total: 19,467,538$

It should be noted that in the financial year 1995 the company is entitled to deduction of losses declared relating to the financial year 1990."

  1. On 6 July 1999, the Claimant filed a gracious reclamation against the additional tax assessment act for IRC relating to the financial year 1996 on the grounds of (i) breach of an essential procedural formality, for failing to grant the right to prior hearing; and (ii) expiration of the statutory limitation period for the right to assess.

  2. On 8 August 2002, a ruling denying the gracious reclamation filed was issued by the Assistant Finance Director of the … Finance Directorate of Lisbon, in which the following can be read:

"(…)

24 – During the inspection action performed for the financial years 1992 and 1993, it was found that the claimant did not reinvest the entire realization value, in accordance with paragraph 1 of Article 44 of the IRC Code. By proceeding with partial reinvestment, the gain obtained corresponding to the differential was not taxed.

(…)

26 – Thus, the fiscal loss declared in the financial year 1991 of € 262,646.58 (52,655,911$00) was corrected to the taxable income of € 17,940.09 (3,596,666$00).

27 – Thus, regarding the expiration of the limitation period for assessment that the claimant invokes, it will be said that:

27.1. Given the provisions of Articles 44 and 46 of the IRC Code and in light of the corrected value for the financial year 1991, which emerges from analysis of the two subsequent years - 1992 and 1993 - and which results from the partial taxation of the gain obtained, the first financial year in which these corrections take effect is the year under analysis, namely 1996.

27.2. This is because in the previous years and as stated in the grounds for assessment, the situation of fiscal losses is maintained.

27.3. Thus, and in light of the successive corrections made, only in 1996 does the claimant show taxable income, and thus the corresponding assessment was made to it.

27.4. For these reasons we find that the expiration of the limitation period for the assessment in question does not apply, as the period established in Article 33 of the CPT, applicable to the specific case, has not been exceeded."

  1. On 13 September 2002, the Claimant filed an administrative appeal, again contending the illegality of the additional tax assessment act for IRC on the grounds of (i) breach of an essential procedural formality, for failing to grant the right to prior hearing; and (ii) expiration of the statutory limitation period for the right to assess.

  2. On 16 September 2015, a ruling denying the administrative appeal was issued by the Director of Tax Justice Services, which was notified to the Claimant on 2 October 2015, stating the following:

"(…) In the present case, the taxpayer's choice was to DEDUCT the fiscal losses it determined in the financial year 1991 (€ 195,628.99) from the TAXABLE INCOME of the financial year 1996, which was precisely the 5th year following the year in which the losses had been determined.

And for that reason, when the Tax Authority concluded that from the TAXABLE INCOME of 1996 fiscal losses in the amount of € 195,628.99 (1991) had been improperly deducted, when in fact only the amount of € 97,103.67 (1992, 1993 and 1994) could have been deducted, it proceeded with the respective correction in accordance with paragraph 3 of Article 46 of the IRC Code.

And thus from this correction resulted the taxable base of € 110,428.75 and, "ultimately" the IRC Assessment of/1996, now being appealed.

And thus being so, that is, verifying that:

  • the TAXABLE INCOME to which DEDUCTIONS (of losses) were made by the taxpayer, subsequently altered by the Tax Authority, is from the year 1996;

  • the taxpayer was validly notified of the IRC Assessment/1996, on 12 April 1999 (…);

We must conclude that the notification of the IRC Assessment/1996 occurred within the five-year period relating to that taxable income, in accordance with paragraph 3 of Article 46 of the IRC Code, with the expiration of the limitation period for the right to assess not applying. (cf. section 5.1.1. of the grounds)."

III.2. UNPROVEN FACTS

As stated, regarding the facts deemed established, the tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts relevant to the decision and distinguish proven from unproven matters, as provided by Article 123, paragraph 2, of the Tax Procedure and Process Code, applicable by virtue of Article 29, paragraph 1, paragraphs a) and e), of the RJAT. Thus, the facts pertinent to the judgment of the case were, as stated above, selected and determined in function of their legal relevance, with no other factual matter alleged being relevant to the proper resolution of the dispute.

IV. LAW

Considering the positions taken by the parties in the pleadings presented, the central issue to be resolved by this arbitral tribunal consists of assessing the legality of the additional tax assessment act for IRC relating to the financial year 1996, specifically determining whether: (i) the expiration of the statutory limitation period for the right to assess occurred or not; and/or whether (ii) a violation of the right to prior hearing occurred or not.

As the Claimant has attributed various defects to the challenged tax acts, the order of examination of such defects must be determined, with the order provided in Article 124 of the CPT, applicable by virtue of Article 29, paragraph 1, paragraph a) of the Legal Framework for Tax Arbitration, being observed.

The merit of any of the defects invoked by the Claimant will result in annulment of the tax acts. The defect of violation of law due to expiration of the limitation period for the right to assess will be analyzed first, as it is the one that will result in the "more stable or effective protection of the offended interests," since its potential merit will entirely prevent renewal of the act, which is not the case with annulment resulting from other defects.

Accordingly, the tribunal will first assess the issue of possible expiration of the limitation period for the right to assess.

Expiration of the Right to Assess

The issue at hand thus consists of determining whether the additional tax assessment act for IRC relating to the financial year 1996 was issued after the expiration of the limitation period for the right to assess, which, if verified, would establish the illegality of the act for violation of law.

First, however, it is important to highlight the legislation in force at the time relevant to the decision of the case.

With respect to the regime for deduction of fiscal losses, Article 46 of the IRC Code in force at the time permitted taxpayers, in its paragraph 1, to deduct losses determined in a given financial year to taxable income, if any, in one or more of the five subsequent financial years, an operation commonly referred to as "carryforward."

In turn, paragraph 3 of that Article 46 provided that "when corrections are made to fiscal losses declared by the taxpayer, the deductions made shall be altered accordingly, however, no annulment or assessment, even if additional, of IRC shall be made if more than five years have elapsed relative to the financial year to which the taxable income relates."

As for expiration, the transitional provisions contained in Article 5, paragraph 5 of Decree-Law No. 398/98, which approved the General Tax Law (LGT), provide that the new limitation period for the right to assess applies to taxable events occurring from 1 January 1998 onwards.

While there may be doubts as to whether the taxable event generating IRC occurred in 1991, 1993, or 1996, it is beyond dispute that said event occurred prior to 1 January 1998, for which reason the legal regime applicable, with respect to expiration, shall not be that of the LGT, but rather Article 33 of the prior CPT.

Thus, the right to assess periodic taxes (such as IRC) expires if not exercised, or the assessment is not notified to the taxpayer within five years counted from the end of the financial year in which the taxable event occurs, in accordance with Article 33 of the CPT in force at the time.

Thus, the answer to the question of whether the additional tax assessment act for IRC relating to the financial year 1996 was or was not issued outside the limitation period depends, first, on determining when the taxable event generating the tax occurred, so that it may subsequently be determined from when the said limitation period begins to run.

The Taxable Event

As stated in the Judgment of the Central Administrative Court, dated 22 May 2012, case number 05232/11 (available at http://www.dgsi.pt/), every tax act always has at its basis a concrete factual situation, which is typically provided in abstract form in tax law as generating the right to the tax.

The taxable event is thus the factual and concrete situation that gives rise to the tax obligation.

In the specific case, the Claimant, by reason of the sale of a mixed-use property, realized a gain in 1991.

Article 44 of the IRC Code in force at the time, under the heading "Reinvestment of Realization Values," permitted the taxpayer, if it so wished, to avoid taxation of gains obtained in the sale of fixed assets, being able, until the end of the second financial year following the year of realization, to effect the reinvestment of the respective realization value obtained. Pursuant to paragraph 4 of that provision, the taxpayer should mention the intention to effect the reinvestment in the tax return for the year of realization and, in the returns for the two subsequent years, the reinvestments effected.

Now, it is not disputed that, in the case sub judice, the taxpayer stated, in the Return Form 22 for IRC, relating to the financial year 1991, the intention to proceed with the reinvestment of the gain realized.

In turn, paragraph 5 of then Article 44 of the IRC Code provided that if the reinvestment was not completed, to the amount of IRC assessed relative to the second financial year following the year of realization would be added the IRC that ceased to be assessed, by virtue of the provisions of paragraph 1, plus the corresponding compensatory interest.

The question thus arises: does the taxable event occur with the realization of the gain or only with the failure of its reinvestment, that is, at the end of the second financial year following the year of realization?

Now, returning to the definition of taxable event provided above, it is readily understood that, in the case under analysis, with the realization of the gain occurring in the financial year 1991, the taxable event will occur precisely with the realization of the gain, in that it is this factual and concrete situation that will give rise to the tax obligation. The taxable event is thus a taxable event for IRC purposes, independent of its relation to the reinvestment (or lack thereof) of a gain.

Nevertheless, by virtue of the regime provided in then Article 44 of the IRC Code, when the taxpayer declares its intention to proceed with reinvestment, the taxation of the gain remains suspended during the period in which reinvestment is permitted. Once that period expires, taxation will or will not take place, depending on the verification of that reinvestment and in the measure of such reinvestment.

In the same sense, see the Judgment of the Central Administrative Court – South, dated 18 February 2016, case number 06385/13 (available at http://www.dgsi.pt):

"VI - In light of the legal regime provided in Article 44 of the IRC Code, the taxpayer, if it so intended and in order to avoid taxation of gains obtained in the sale of fixed assets, had a period of three financial years (consecutive to the year of sale) to effect the reinvestment of the respective realization value(s) obtained. Upon mention of the intention to reinvest, the gains thus became, under the conditions defined in law, suspended from taxation until the third financial year following the year of realization, at which time the verification of its actual reinvestment (or lack thereof) would be assessed and a conclusion reached as to its subjection to taxation or avoidance thereof."

And also the Judgment of the Supreme Administrative Court, dated 16 January 2013, case number 01124/11 (also available at http://www.dgsi.pt/):

"I – What results from paragraph 1 of Article 44 of the IRC Code, in the wording given by Law No. 52-C/96, of 27 December, is that if the taxpayer manifests the intention to reinvest the gain amount realized, in whole or in part, during the three subsequent financial years, the respective taxation is suspended during that period, after which taxation will or will not occur depending on the verification of that reinvestment and in the measure thereof."

Thus, it is established that, on one hand, the taxable event generating the tax occurred on 31 December 1991, the financial year in which the Claimant realized the gain. On the other hand, taxation remained suspended until the end of the period permitted by law for reinvestment, that is, until 31 December 1993.

Thus, in light of the foregoing, the period for exercise of the right to assess the tax on the gain realized in 1991, in the event that reinvestment was not completed, in whole or in part, began to run from 31 December 1993, the date on which, pursuant to the provisions of Article 44, paragraph 5, of the IRC Code in force at the time, the amount of IRC that ceased to be assessed in 1991 should have been assessed, plus the corresponding compensatory interest.

Thus, and with a limitation period of 5 years being at issue, the assessment and corresponding notification to the taxpayer should have occurred by 31 December 1998.

Now, the Claimant's declaration of intention to reinvest the gain realized in 1991, and the exclusion of its taxation during the two subsequent years, resulted in the Claimant not obtaining taxable income in 1991, permitting the deduction of its losses to the taxable income of one or more of the five subsequent financial years.

Thus, the Claimant opted to deduct the fiscal losses relating to the financial year 1991 to the taxable income obtained in 1996, that is, in the fifth and final year in which such deduction was possible.

Nevertheless, as was determined in an inspection action conducted in 1997, the Claimant did not reinvest, by 31 December 1993, the entire realization value, thus contravening the provisions of then Article 44 of the IRC Code. This was because, pursuant to the provisions of Article 44 of the IRC Code in force at the time, if the reinvestment was not completed, in whole or in part, the amount of IRC assessed relative to the second financial year following the year of realization would have added the IRC that ceased to be assessed by virtue of the suspension of taxation of the gain, plus the corresponding compensatory interest.

In other words, in light of the failure to complete the reinvestment, the Respondent should have made corrections to the IRC for the financial year 1993, adding thereto the IRC that had not been assessed in 1991. Assessment that should have been made and notified to the taxpayer within the said limitation period of 5 years, that is, by 31 December 1998.

Given that the Claimant was subjected to an inspection action in 1997, relating to the financial years 1992 and 1993, it is now necessary to determine (i) whether corrections to the taxable income resulted from it; (ii) whether such corrections were materialized in a tax assessment act; and (iii) whether the Claimant was notified thereof.

Regarding the Corrections to Taxable Income for the Financial Year 1993

It is not disputed that in 1997 the Claimant was subjected to an inspection action for the financial years 1992 and 1993, by the competent departments of the then DGCI.

And that as a result of that inspection action, an inspection report was drawn up, on 16 June 1997, in which it was concluded that "the company under analysis did not reinvest by 31 December 1993 the entire realization value" with the "reinvestment value over the three years being 96,606,925$00."

The inspection report further concluded that the unreinvested realization value totaled 56,255,577$00, in accordance with the provisions of Article 44, paragraph 2, of the IRC Code in force at the time.

The same inspection report, finally, further states that "Thus, the value of the fiscal losses will be corrected, in accordance with Article 46 of the IRC Code, recording a reduction of 56,255,577$00."

Now, as is established in the facts, the Claimant was never notified of the additional tax assessment act for IRC relating to the financial year 1993, as a result of the aforesaid inspection action.

Nevertheless, the Respondent contends, as stated in Article 15 of its Reply, that the "Claimant was notified of the corrections made for the financial years 1992 and 1993 through the aforesaid inspection report and the inspection procedure report," and that, as there was no tax to assess relative to that year, there being only a correction of the fiscal losses deducted, there would be no need for any additional IRC assessment for that year.

Indeed, the Respondent defends the position that "the additional assessment is that which the Tax Administration issues, verifying that by reason of an omission, in a prior assessment act, a lower amount was fixed than would be due under law, thus fixing a quantitative increase to what was previously fixed, in accordance with what results from the law."

However, the Respondent is not correct.

In fact, an additional assessment, as the very term indicates, follows other administrative assessment acts – simple or official – or self-assessment, and must occur whenever the Tax Administration concludes that the amount of tax assessed through the operations of administrative assessment, official assessment, or self-assessment is incorrect, by being lower or higher than what is due. The fact that the taxable base is nil, or that there is a fiscal loss to deduct and, by reason thereof, no tax is computed as due, does not exempt the Respondent from notifying the taxpayer of the corrections made.

In fact, as stated above, an additional assessment must be made whenever an error in the value declared by the taxpayer is determined, whether it is higher or lower than what is due. This is so much the case that, as correctly alleged by the Claimant, Article 111, paragraph 6, of the IRC Code in force at the time provided that "taxpayers may claim or contest the taxable income that is determined and that does not give rise to IRC assessment." If the Respondent's position were followed, such provision would become devoid of useful purpose, in that the Tax Administration would only issue an additional notification, and would notify taxpayers when the aforesaid corrections resulted in tax due.

Now, as stated in a Judgment of the Central Administrative Court – South, dated 9 February 2010, case number 02859/09 (available at http://www.dgsi.pt/):

"- This is precisely what occurs with situations of correction of taxable income, by reference to financial years in which taxable income was not determined and, for that reason, did not give rise to any assessment, in which it is not understood that such correction can operate in a manner to be reflected in subsequent financial years, by the effect of the exercise of the loss carryforward right, if such correction were not possible, by reason of untimeliness, in the case where, rather, a tax act of assessment occurred in that referred financial year sought to be corrected.

  • In these situations it is understood that the Tax Administration, even though the financial year sought to be corrected did not give rise to any assessment, cannot fail to make those same corrections and notify them to the taxpayer, within the period of the institute in question, a period which, in cases of carryforward, may be equal to that of the respective financial year.

  • It must not be forgotten, also, that, in the aforesaid cases of determination of taxable income that does not give rise to subsequent taxation, as has always been understood and today is expressly stated in law (cf. Article 97/1/b, of the Tax Procedure and Process Code), as an exception to the regime of the principle of unitary challenge, the respective act in which it is embodied constitutes a severable act for purposes of judicial challenge, by the taxpayer, in defense of its rights; And if such act is challengeable, it necessarily presupposes its notification, primarily for purposes of assessing the timeliness of the use of such procedural means, for which reason it does not appear that in this set of circumstances the Tax Administration can, at any time, correct the results of the financial year that did not give rise to assessment, to the detriment, not only, of the stabilization of the legal relationships in tax matters between taxpayer and the Tax Administration, but more than that, with possible and disproportionate impediment of the full defense of the taxpayer's rights."

Thus, the Respondent should have notified the Claimant of the corrections made for the financial year 1993 within the respective limitation period, even though those corrections, by reason of deductible losses from prior years, did not result in (additional) tax assessment.

Nor can the thesis of equating the inspection report with notification of the additional tax assessment act here be sustained.

In fact, as alleged by the Claimant, the inspection report and the additional tax assessment act produce different effects, one serving as the basis for the infraction proceedings, the other being the act through which the Tax Administration fixes the quantitative amount to add to or subtract from the amount initially determined, in the present case, in the context of self-assessment of tax.

Regarding the Additional Tax Assessment Act for the Financial Year 1996

It has been seen that, in light of the failure to complete the reinvestment of the gain realized in 1991, the Respondent should have made corrections to the IRC for the financial year 1993, adding thereto the IRC not assessed in 1991.

And that such assessment should have occurred, under penalty of expiration, within the 5-year period, that is, by 31 December 1998.

The Respondent contends, however, that the taxable event is embodied in the improper deduction of losses to taxable income and the subsequent correction, which occurred only in the year 1996, thus supporting the legality of the additional assessment act now being challenged.

However, the Respondent is not correct.

For all that has been written above, the taxable event is embodied in the taxation of the gain realized, with its taxation remaining suspended until 31 December 1993, by virtue of the provisions of Article 44 of the IRC Code in force at the time.

The taxable event is not embodied, as the Respondent would have it, in the improper deduction of losses to taxable income. Indeed, for the deduction of losses to taxable income determined in 1996 to be considered improper, there must be a correction in the financial year whose losses are being carried forward.

Such correction must occur, under penalty of illegality, within the limitation period established by law, and must be notified to the taxpayer within that same period.

In fact:

"1. The expiration of the right to assess is connected with the need for certainty of rights and legal relationships within a period of time deemed adequate;

  1. The foundations of the institute of expiration, in situations in which correction of the taxable income of a financial year that did not give rise to any assessment is at issue, in order to be reflected in subsequent financial years, by the effect of carryforward, are only achievable insofar as such correction were possible if, rather, the financial year to be corrected had given rise to a tax assessment act.

  2. As the financial year to be corrected did not give rise to any assessment, the Tax Administration is not for that reason exempted from making the corrections and notifying them to the taxpayer within the limitation period, under penalty of stabilization of the taxable income underlying the assessment act."

A position endorsed in the already referenced Judgment of the Central Administrative Court – South, dated 9 February 2010, case number 02859/09, which is subscribed to.

For the foregoing, the additional tax assessment act for IRC relating to the financial year 1996 – issued in April 1999 – is illegal, because, insofar as it relates to corrections that should have been made to the financial year 1993, by reason of the failure to reinvest the gain realized in 1991, it was not issued and notified to the taxpayer within the limitation period of 5 years, that is, by 31 December 1998.

Breach of Essential Procedural Formality – Violation of the Right to Prior Hearing

As previously decided in arbitral proceedings in case No. 91/2012-T: "The full merit of defects of violation of law prejudices the examination of defects of form and procedural defects, as results from the order of examination of defects provided in paragraph 2 of Article 124 of the Tax Procedure and Process Code, subsidiarily applicable by virtue of the provisions of paragraph a) of paragraph 1 of Article 29 of the Legal Framework for Tax Arbitration."

In fact, the establishment of an order of examination of defects is justified only by the potential merit of prioritized defects rendering unnecessary the examination of the remainder, for, if it were always necessary to examine all defects, the order of their examination would be irrelevant.

For the foregoing, given the merit of the defect of violation of law, by expiration of the right to assess, the examination of the defect of breach of an essential procedural formality for failure to grant the right to prior hearing relative to the additional IRC assessment for the financial year 1996 is prejudiced.

V. DECISION

For the foregoing reasons, this arbitral tribunal decides:

a) To uphold the request for arbitral pronouncement;

b) To declare the illegality of the additional tax assessment act for IRC number…, relating to the financial year 1996;

c) To order the Tax Administration to pay the statutory interest that may be due should payment of the tax have been made or, in the alternative, to pay compensation for security provision that was improper in the event of any tax enforcement proceedings.

VI. COSTS

The arbitration fee is fixed at € 2,142.00 in accordance with Table I of the Regulations for Costs of Tax Arbitration Proceedings, to be paid by the Respondent, given that the request was fully upheld, in accordance with Articles 12, paragraph 2, and 22, paragraph 4, both of the Legal Framework for Tax Arbitration, and Article 4, paragraph 4, of the cited Regulations.

Let notification be made.

Lisbon

16 September 2016

The Arbiter

(Carla Castelo Trindade)

Text drawn up by computer, in accordance with Article 138, paragraph 5 of the Code of Civil Procedure (CPC), applicable by referral from Article 29, paragraph 1, paragraph e) of the Legal Framework for Tax Arbitration.

The present decision is written in the old orthography.

[1] Jorge Lopes de Sousa, Commentary on the Legal Framework for Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, p. 202.

Frequently Asked Questions

Automatically Created

What is the expiry period (caducidade) for the right to issue an IRC tax assessment in Portugal?
In Portugal, the statutory limitation period (prazo de caducidade) for the Tax Authority's right to issue an IRC assessment is generally four years, counted from January 1st of the year following the one in which the taxable event occurred, as established in Article 45 of the General Tax Law (Lei Geral Tributária). However, this period extends to eight years in cases involving unjustified tax losses or when there has been no tax return filed. In cases involving fiscal losses carried forward for deduction, determining when the taxable event occurs is critical—whether it's the year the gain was realized or the year the loss was actually deducted—as this fundamentally affects whether the assessment was issued within the legal deadline.
Can a taxpayer challenge an IRC assessment based on failure to provide a prior hearing (audição prévia)?
Yes, a taxpayer can challenge an IRC assessment based on failure to provide prior hearing (audição prévia). The right to prior hearing before tax assessment acts are finalized is a fundamental procedural guarantee enshrined in Article 60 of the General Tax Law and Article 60 of the Tax Procedure Code (Código de Procedimento e de Processo Tributário). Violation of this right constitutes a breach of an essential procedural formality that can lead to annulment of the tax assessment. However, the Tax Authority may argue that prior hearing is not required in certain circumstances or that the defect was cured through subsequent procedural opportunities. The arbitral tribunal must evaluate whether the absence of prior hearing constituted a substantive violation affecting the taxpayer's defense rights.
How are real estate capital gains (mais-valias imobiliárias) treated for IRC tax loss deduction purposes?
Real estate capital gains (mais-valias imobiliárias) under Portuguese IRC law are subject to special treatment when calculating fiscal losses available for deduction. Under the reinvestment regime previously provided in Article 44(2) of the IRC Code, capital gains from real estate sales could be excluded from taxation if the proceeds were reinvested within specific timeframes and conditions. However, any unreinvested portion of the realization value becomes taxable, creating a capital gain that increases taxable income and consequently reduces available fiscal losses. The timing of when this taxable gain is recognized—whether in the year of sale, the year reinvestment deadlines expire, or the year losses are deducted—is crucial for determining both the correct tax liability and whether assessment limitation periods have been respected. This affects the amount of fiscal losses that can be carried forward and deducted in subsequent years.
What is the CAAD arbitral procedure for disputing an IRC tax assessment in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitral procedure for disputing IRC assessments in Portugal is governed by the Legal Framework for Arbitration in Tax Matters (RJAT - Regime Jurídico da Arbitragem em Matéria Tributária), approved by Decree-Law 10/2011. Taxpayers can file a request to constitute an arbitral tribunal within 90 days of notification of the contested tax act or omission, as an alternative to judicial court proceedings. The taxpayer may appoint an arbiter or request appointment by the Deontological Council. The Tax Authority files a reply within 30 days, after which the tribunal may hold hearings if necessary and allows written arguments. The procedure is typically faster than traditional court litigation, with decisions generally rendered within six months. Arbitral decisions have the same binding force as court judgments and can only be challenged on limited grounds through court annulment proceedings.
What are the legal consequences when the tax authority exceeds the statutory deadline for issuing an IRC liquidation?
When the Tax Authority exceeds the statutory deadline (prazo de caducidade) for issuing an IRC liquidation, the legal consequence is the definitive loss of the right to assess that tax debt. Caducidade is an automatic, objective defense that operates by law and must be recognized by courts and tribunals even if not invoked by the taxpayer. If the limitation period has expired, the tax assessment act is illegal and must be annulled, with any amounts already paid being subject to refund with compensatory interest. Unlike prescription (prescrição), which extinguishes the right to collect an already-established debt, caducidade prevents the very constitution of the tax obligation. The determination of when the limitation period begins depends on correctly identifying when the taxable event occurred, which in complex cases involving reinvestment regimes, loss carryforwards, and multi-year transactions can be disputed between taxpayers and the Tax Authority.