Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Paulo Lourenço and Dr. José Rodrigo de Castro, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Court, constituted on 26-02-2015, agree as follows:
- REPORT
A, NIF …, domiciled in Rua …, in …, …, …, 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), and 95th, 99th and 102nd of the CPPT, in which the TAX AUTHORITY AND CUSTOMS AUTHORITY is the Respondent.
The Claimant seeks that the non-existence or nullity or annulment of the assessment of Personal Income Tax and compensatory interest with number 2014 …, of 08-08-2014, be declared, as well as compensation for costs incurred with the eventual establishment and maintenance of a guarantee intended to suspend a tax enforcement proceeding arising from the said assessment or indemnity interest, in the event that the Claimant opts for payment of the assessed amount.
The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the Tax Authority and Customs Authority on 23-12-2014.
Pursuant to the provisions of paragraph a) of item 2 of Article 6th and paragraph b) of item 1 of Article 11th of the RJAT, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.
On 10-02-2015 the parties were duly notified of this appointment, having not expressed their will to refuse the appointment of the arbitrators, pursuant to the combined terms of Article 11th item 1, paragraphs a) and b) of the RJAT and Articles 6th and 7th of the Deontological Code.
In accordance with the provisions of paragraph c) of item 1 of Article 11th of the RJAT, the collective arbitral tribunal was constituted on 26-02-2015.
The Tax Authority and Customs Authority responded, defending the groundlessness of the request for arbitral decision and its absolution from the claim.
By order of 20-04-2015, it was decided to dispense with the meeting provided for in Article 18th of the RJAT and that the case proceed with submissions.
The parties submitted their arguments.
The Court is competent and the parties have legal personality and capacity, are legitimate and are duly represented (Articles 4th and 10th, item 2, of the same decree and Article 1st of Ordinance No. 112-A/2011, of 22 March).
The case does not suffer from nullities and there is no obstacle to consideration of the merits of the case.
- STATEMENT OF FACTS
2.1. Proven Facts
The following facts are considered proven:
a) An internal inspection action was conducted by the inspection services of the Finance Directorate of ..., in which a report was drawn up that is part of the administrative file whose content is given as reproduced, which contains, among other things, the following:
However, when the income declaration of the shares seller (with reference to the year 2010) was consulted, it was found that there was no indication therein of any sale of shares.
Thus, through official document No. …, of 2014-05-15, elements were requested from A requesting the following, within 10 days:
"Proof document of the date of acquisition of the quotas that gave rise to the shares resulting from the transformation of company B…, from quotas into"
"Copy of the sales contract for the 9,920 share holdings of B…, in the amount of €2,590,913.09"
This document sent by registered mail, was received at the taxpayer's address on 21 April, as per "search of objects at CTT". These documents are attached in Annex III. The taxpayer to date has not complied with what was requested of him, nor has he established any contact with the TA to provide any clarification.
III - 2) Tax Framework
The gain obtained from the onerous sale of 9,920 shares of B…, SA, constitutes a capital gain/capital appreciation, under the terms of paragraph a) of item 1 of Article 9th and paragraph b) of item 1 of Article 10th of the IRS Code, considering the same obtained at the moment of its sale: 15-01-2010 (item 3 of Article 10th of the IRS Code).
(...)
III - 3) Realization Value
Under the terms of item 1 of Article 43rd of the IRS Code, the value of income qualified as capital gains is the amount corresponding to the balance determined between the gains and losses realized in the same year, with the realization amount corresponding to the value of the respective consideration (paragraph f) of item 1 of Article 44th of the IRS Code).
The sale of shares in return for monetary consideration represented a gain constituted by the difference between the realization value and the acquisition value, as defined in paragraph a) of item 4 of Article 10th of the IRS Code).
The realization value corresponds, in case of sale, to the value of the respective consideration. In this way, the realization value of the 9,920 shares sold on 15-01-2010, corresponded to the amount received of €2,590,913.09, in accordance with the aforementioned contract which we attach in Annex II.
III - 4) Acquisition Value
As for the acquisition value of the shares sold, the same correspond to the cost incurred for their acquisition, under the terms of Article 48th of the IRS Code:
"In the case of paragraph b) of item 1 of Article 10th, the acquisition value, when it has been effected for onerous consideration, is the following:
(...)
b) In the case of quotas or other securities not listed on a stock exchange, the documented cost or, in its absence, the respective par value;"
As described in section III - 1.1), the taxpayer was notified to exhibit proof document of the cost of the shares sold.
She did not provide any answer that proves the acquisition value of the shares sold as requested by official document.
In accordance with Article 48th, paragraph b) of the CIRS, in the case of quotas or other securities not listed on the stock exchange, the acquisition value is the documented cost.
(which is not the case) or in its absence, the par value.
However, through the Finance Directorate of the Guard, which conducted the inspection action against C…, the document of the registration of the shares that is attached in Annex IV was obtained. In this, the date of the first registration of ownership and identification of the respective holder and the par value of €5.00 appear.
III - 5) Calculation of Capital Gain
Given the foregoing, the undeclared capital gain resulting from the sale of 9,920 shares of B... SA, corresponds to the difference between the realization value and acquisition value of the shares in question, which totals €2,541,313.09.
In this way, she earned in 2010 an undeclared capital gain of €2,541,313.09 € but according to Article 72nd of the Tax Benefits Code (EBF) (with the wording applicable to the year 2010) is exempt from IRS, up to the amount of € 500.00, the positive balance between the gains and losses resulting from the sale of shares and when resulting from operations provided in paragraph b) of item 1 of Article 10th of the CIRS, is taxed at the special rate of 20% under the terms of item 4 of Article 72nd of the CIRS, so the amount to be corrected for income tax (IRS) for the year 2010 is € 205,775.00, as shown in the following calculations:
€ 2,541,313.09 - €500.00 = €2,540,813.09 X 20% = €508,162.62
(...)
So that
There be no doubt as to the date of acquisition and respective value of the quota(s) that were at the origin of the shares resulting from the transformation of the company from quotas into joint-stock company, a fact fundamental by virtue of the provisions in paragraph b) of item 4 of Article 43rd of the CIRS (Capital Gains), it was requested, within the scope of the present right of hearing from the Commercial Registry Office of ..., the records of amendments to the corporate pact and other events, having been sent to the TA, various documents,
With relevance to the following information:
In the deed of constitution in 1983, it is stated that the capital stock of company B…, Ltd. is 1,100,000$00, fully paid in cash and represented by two quotas, one of 1,075,000$00 belonging to the partner D and another, of 25,000$00 belonging to the partner, daughter thereof, A.
In 1993, the partner D, foreseeing her death, made a will - registered at the notary office of..., leaving to this daughter, A, her quota of 1,075,000$00 and to her husband, E, the usufruct thereof. Death is indeed declared on 06/05/1993. The husband, E renounced the usufruct of the quota gratuitously on 17/03/1998, as recorded in the Real Estate Registry Office of..., of 01/07/1998.
Regarding the situation now described,
The quota of 25,000$00 that came to belong to the taxpayer on the date of the constitution of the company in 1983, is excluded from taxation, by virtue of the provisions in Article 5th transitional regime of category G - of Decree-Law No. 442-A/88, of 30 November, a situation that was not considered in the draft sent to the taxpayer but which will now be taken into account.
As a result,
In the ... Notary Office of..., on 17/03/1998, the taxpayer, Dr. A, had drawn up the deed of Unification and Transformation, in which she states that she is the sole partner and manager of the commercial company in quotas, B…, Ltd., and that she participates with two quotas, one of 1,075,000$00 and another of 25,000.00 which she unifies and concentrates in her ownership in one of nominal value 1,100,000$00 (€5,486.78) and also that the company becomes Single-shareholder, Ltd.
Therefore,
It is considered that the quota in the value of 1,075,000$00 (€5,362.08) was acquired in 1998 and, since it is after Decree-Law No. 442-A/88, does not benefit from the transitional regime.
Finally,
And as regards the value of the quota as a consequence of the transformation of the company from quotas into joint-stock company, to comply with the provisions of Article 276th of the Commercial Companies Code, the capital stock of €5,486.78 had to be increased to €50,000.00, which, in accordance with the Justificative Report of the Transformation, in its paragraph F) is carried out in two ways: incorporation of free reserves, in the amount of €5,825.10 and of legal reserves, of €38,288.12, for a total of €44,113.22.
Thus,
Final quota = Initial quota: €5,486.78 + increase in capital stock of €44,113.22 = €49,600.00.
Being that,
The remainder, € 400.00 subscribed by cash contributions from new partners.
In point 5 of the same report, each of the partners receives from the new company shares of par value equal to the value of the quotas they will hold after the increase in capital stock and each share will have a par value of €5.00, being that the partner, Dr. A received 9,920 shares, in a total value of €49,600.00,
A value,
Equal to that determined by the TA, in point III.4).
Only with the difference that,
For the purposes of calculating capital gains (MV), the part corresponding to the sale of the quota of 25,000$00 (= €124.70) must be purged from the value of the capital gain that was determined, which, having been acquired before 1988, is outside the taxation when it is sold.
And this new fact, leads us to recalculate the capital gain and the tax owed, which leads us to the following point:
IX.2.3. Calculation of capital gain, taking into account the provisions of Article 5th - transitional regime of category G of DL No. 442-A/88, of 20 November
Considering that:
-
In the transformation of company from quotas to joint-stock company, they proceeded to increase the capital stock to €50,000, mandatory by law, by incorporation of free and legal reserves.
-
That the capital stock relating to the quotas of the taxpayer, €49,600.00 equals the sum of the initial quota (sole) with increase in capital stock, that is = €5,486.78 + €44,113.22.
-
That the sale of the part of the shares that has as its origin a quota in the value of €124.70, the sale of which is not subject to IRS, then the MV that corresponds to it must be purged from the total.
In this way, there is a need to distinguish the values of realization, acquisition and capital gain, corresponding to the part of the quota subject to and not subject to taxation.
Starting from the known values - column of the total of the following tables - the values of the subject and non-subject part are obtained, through the proportion between the parts:
[Tables would follow here in the original]
This calculation method was chosen because it highlights the acquisition and realization values that will go to Annex G of the model declaration 3 - correction document, instead of a more direct method, but whose conclusion would be the same.
It is thus concluded that the CG corresponding to the sale of the shares that had origin in the part of the subject quota is €2,483,565.60. This is the value to be considered in point 1.4.1., for the purposes of calculating the IRS owed.
All of the aforementioned documents are attached in Annex V to this report in the order in which they were mentioned.
IX.3 - Conclusion
The right of hearing submitted by the taxpayer, did not present any new fact, with the exception of the deed of constitution of company B…, from which we extracted the information on the distribution of quotas that constituted the initial capital stock of B... and that gave rise to the shares, upon the transformation of the company from quotas into joint-stock, being that we used this information to alter the value of the tax owed, in favor of the taxpayer.
Therefore,
The proposal to tax the sale of the shares in question, in the context of IRS, remains, although with the alteration in the value of the tax determined, as results from the previous point and which changes from €508,102.62 to €496,611.12.
b) It is also mentioned in the Tax Inspection Report:
Although the income under analysis are capital gains that may be taxed at a special fixed rate - Article 72nd of the IRS Code -, being included by choice, the value to be determined subject to tax results from a balance that is being formed, so the effects of assessment and payment relating to capital gains realized are only exhausted at the end of each year.
Were this not the case, it would also mean that anyone who had obtained a loss up to 27 July, could not offset it with any eventual gain obtained later and within the same year.
It is thus concluded that IRS is a periodic tax with annual periodicity, with income determination being effected at the end of the year in which the capital gain occurred, with the income corresponding to the balance determined between the gains and losses realized in the same year, which means that the taxable event occurs only on December 31, with the legislation in force on that same date being relevant.
Since Law No. 15/2010, of 26 July, was fully in force on 31-12-2010, it is understood that the repeal of the normative provision under analysis, which excluded from income the capital gains obtained from the sale of shares held by their holder for more than 12 months, applies to the gains/losses occurring during the entire year 2010.
It is further added that,
Having applied to the entire year the new IRS rates approved by Law No. 11/2010, of 15 June, effective on 16 June, and Law No. 12-A/2010, of 30 June, effective on 01 July, the same will also apply to the repeal of the exclusion of taxation of capital gains from the sale of shares held by their holder for more than 12 months.
c) On 15-01-2010, by public deed executed on that date, the Claimant sold the 9,920 shares held by her to the company "C..., Ltd.", with registered office in the parish of..., municipality of Gouveia, simultaneously renouncing the position of manager;
d) The overall price of that sale corresponds to:
– 200,000.00 € settled and paid on 16-12-2009 when the respective promise contract was signed,
– 2,390,913.90 € that the Claimant received on the date of the public deed;
e) The company in question originated from the limited partnership "B... Ltd.", which was constituted by public deed in 1983, with capital stock of 1,100,000 escudos, distributed in two quotas: one of 25,000 escudos belonging to the now Claimant A and another of 1,075,000 escudos, belonging to her mother D;
f) On 07-04-1993, the Claimant's mother D left in her will the bare ownership of her quota to the now Claimant and the usufruct of the same to her son-in-law E, husband of Isabel at the time;
g) The testatrix died on 26-05-1993 and the usufructuary waived his right by deed of 16-03-1998;
h) The Claimant did not declare the sale of the shares referred to in the IRS declaration for the year 2010;
i) Following the aforementioned inspection, an assessment of IRS and compensatory interest No. 2014 … was prepared, a copy of which was attached with the request for arbitral decision, whose content is given as reproduced;
j) The Claimant did not sell any other share holdings in the year 2010;
k) Notification of the assessment was made in the manner set forth in document No. 1 attached with the request for arbitral decision, whose content is given as reproduced, indicating, as means of response, that the Claimant "may claim or challenge in accordance with the terms and deadlines established in Articles 140th of the CIRS and 70th and 102nd of the Tax Procedure and Process Code (CPPT)";
l) On 24-11-2014, the Claimants filed the request for constitution of the arbitral tribunal that gave rise to the present case.
2.2. Facts Not Proven
It was not proven that the Claimant paid the assessed amount nor that she provided any guarantee to suspend tax enforcement proceedings related to the assessment referred to in the case file.
2.3. Justification for Determination of Facts
The facts were given as proven based on the documents attached with the request for arbitral decision and on the administrative file, with no controversy about them.
As for the facts not proven, no document was attached proving that the assessed amount had been paid or that a guarantee had been provided.
- MATTERS OF LAW
3.1. Question of Illegality of the Application of the Amendments Introduced by Law No. 15/2010, of 26 July
3.1.1. Question to be Decided
On 15-01-2010, the Claimant sold shares of a joint-stock company that she had held for more than twelve months.
In the wording of the CIRS in force at that date, Article 10th established, as far as is relevant here, the following:
Article 10th
Capital Gains
1 - Capital gains consist of gains obtained that, not being considered as business and professional income, capital or real property income, result from:
(...)
b) Onerous sale of share holdings, including their redemption and amortization with capital reduction, and other securities and, as well, the value attributed to partners as a result of division which, pursuant to Article 75th of the IRC Code, is considered as a capital gain; (wording of Law No. 109-B/2001, of 27 December)
(...)
2 - The following are excluded from the foregoing:
a) Shares held by their holder for more than 12 months; (Wording of Decree-Law No. 228/2002, of 31 October)
Law No. 15/2010, of 26 July, repealed this item 2.
Based on this legislative context, the Tax Authority and Customs Authority understood that the gains resulting from said sale, which occurred on 15-01-2010, before the entry into force of this Law, are subject to IRS taxation in the year 2010.
The Claimant understands that the gains she obtained are not subject to taxation because the exclusion from taxation provided for in paragraph a) of item 2 of the cited Article 10th applies to them, defending, in summary:
– that this gain occurred before the entry into force of Law No. 15/2010 and there was no any other gain in the same year;
– that the taxable event generating capital gains for IRS purposes is constituted only by the transmission, with it constituting the tax legal relationship and that, in this case, the law in force at the moment it occurred that regulated the real incidence of IRS did not subject the gains obtained to taxation;
– that the regime of Law No. 15/2010, of 26 July only applies for the future, pursuant to Articles 103rd, item 3, of the CRP and 12th, item 2, of the LGT;
– that the Tax Authority and Customs Authority considers that standards of determination of taxable matter and standards of incidence are the same thing and that the prohibition of retroactivity applies, in terms of substance, not form, to the process of determination of taxable matter (LGT, Article 12th, items 1, 2 and, above all, its item 4);
– that the Tax Authority and Customs Authority also clearly violates the prohibition of item 2 of Article 36th of the LGT, according to which "the essential elements of the tax legal relationship cannot be altered by the will of the parties";
– that Law No. 15/2010 establishes that its entry into force occurs on 27-07-2010 and not 01-01-2010, there being no interpretative elements that allow attributing retroactive effects to it;
– that Article 12th, item 2, of the LGT in referring that "if the taxable event is of successive formation, the new law only applies to the period elapsed from its entry into force" only applies to standards of determination of taxable matter;
– that doctrine, case law of the Supreme Administrative Court and of Arbitral Courts, is in the sense defended by the Claimant.
The Tax Authority and Customs Authority defends, in summary, the position assumed in the Tax Inspection Report.
3.1.2. Jurisprudential Background
The question that is the subject of the present case has been decided by the Supreme Administrative Court in the sense defended by the Claimants, namely in the rulings of 04-12-2013, handed down in case No. 01582/13, and of 08-01-2014, handed down in case No. 01078/12.
Arbitral case law is not uniform on this question, as, while in cases 25/2011-T, and 135/2013-T the decision was made in the sense defended by the Claimants, in arbitral cases Nos. 107/2014-T and 340/2014-T the contrary understanding was applied.
The thesis defended in that case law of the Supreme Administrative Court is, in summary, the following:
"Law No. 15/2010, of 26 July, established nothing as to its application in time except that it would enter into force on the day following its publication (see its Article 5th), which is why it should be understood, in accordance with the provisions of item 1 of Articles 12th of the General Tax Law and of the Civil Code, that the amendments it introduced to the tax regime in IRS of moveable property capital gains apply only to taxable events occurring on a date after its entry into force.
It is true that IRS is incident upon the annual value of income from the various legally provided categories (Article 1st of the IRS Code), with capital gains being included in the categories of capital appreciation (Articles 9th and 10th of the IRS Code), and there is a need, for the determination of the taxable income from capital gains, to determine the balance between the gains and losses realized in the same year (Article 43rd item 1 of the IRS Code).
Hence, since the appellees also obtained taxable capital gains resulting from the sale of shares occurring on a date after the date of entry into force of Law No. 15/2010, to such gains the tax regime established by Law No. 15/2010 will already be fully applicable, since, being annual income for IRS purposes a complex fact of successive formation, in the absence of an express rule to the contrary, the new law may be applied, without proper or authentic retroactivity, to the facts that compose it occurring as from its entry into force (Article 12th item 2 of the General Tax Law)".
3.1.3. The Occurrence of the Taxable Event and the Formation of the Tax Legal Relationship
The tax legal relationship is composed of the rights and obligations indicated in item 1 of Article 30th of the LGT: a) The tax credit and debt; b) The right to accessory services of any nature and the corresponding duty or subjection; c) The right to deduction, reimbursement or restitution of tax; d) The right to compensatory interest; e) The right to indemnity interest.
Pursuant to Article 36th, item 1, of the LGT "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 that it correspond 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 necessity of conforming the fact to the rule so that the effect is produced (...) rather it is the fact that tax effects do not occur without this conformity being reported to rules expressly formulated with the force and in the form of law.
The taxable fact is necessarily a typical fact: and for it to have this nature it is indispensable that it conform, 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 failure to verify one of them is sufficient for there to be no, due to the absence of typicality, place for taxation. The taxable fact, being a typical fact, only exists as such, since in reality all the legal requirements that, by this new perspective, convert into elements of the fact itself are verified."
(...)
The legal types of taxes contain in themselves the indispensable or necessary elements for taxation: it is, as we have seen, the rule of numerus clausus; the legal types of tax enclose in themselves the elements sufficient for taxation: it is (...) the principle of exclusivism.
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 provided for in the law trigger tax effects, in no lesser truth will it be affirmed that these same facts are sufficient for the said triggering, to the exclusion of any others (and hence the designation by the principle of exclusivism). In other words: each tax type contains a definitive valuation of the legal situations that are its object, for certain purposes.
In this line, it should be understood, as well concluded in the ruling 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 provided for abstractly and typically in tax law as a generator of the right to tax. This concrete factual situation is defined as a taxable event, which only exists since all the legally provided requirements are verified for such. The tax rules that contemplate the taxable event are those relating to real incidence, which define its objective elements (cf. Alberto Xavier, Concept and Nature of the Tax Act, p. 324; Nuno de Sá Gomes, Manual of Tax Law, II, Tax Science and Technique Books, 1996, p. 57; A. José de Sousa and J. da Silva Paixão, Annotated and Commented Tax Procedure Code, 3rd edition, 1997, p. 269). Only with the performance of the taxable event is the tax obligation born. The existence of the taxable event is, therefore, a 'sine qua non' condition of the determination of taxable matter and of the assessment made".
In the context of IRS, the taxable event is, as a rule, complex, having as its object annual income, resulting from a series of facts occurring in each year, to which a global rate is applied.
But, there are several situations in which IRS is incident upon autonomous facts, with rates different from the global rate, although, as a rule, the possibility of choice for inclusion is granted.
One of these situations is, precisely, the balance between gains and losses obtained in each year derived from facts framed in paragraphs b), e), f) and g) of item 1 of Article 10th of the CIRS, which are separated for taxation purposes, pursuant to Article 72nd, item 4, of the CIRS, even in relation to the remaining capital gains and losses of other types provided for in item 1 of the same Article 10th. In fact, only by choice of the taxpayers is that balance included in the general IRS income, pursuant to item 7 of that Article 72nd, which did not happen in the case at hand.
But, as results from this item 4 of Article 72nd and also from item 1 of Article 43rd of the CIRS, the taxable event is constituted by the eventual positive balance that is determined at the end of each year and not by each one of the operations carried out during the year that provide capital gains, since these, by themselves, do not generate any tax obligation, only eventually arising a taxable event, at the end of the year, if the sum of all the capital gains obtained from facts framed in paragraphs b), e), f) and g) of item 1 of Article 10th exceeds the sum of the losses of the same types.
This regime does not change in cases, such as those in the case file, in which a single fact framed in those b), e), f) and g) of item 1 of Article 10th occurred that generated capital gains: here too, only at the end of the year can it be concluded that there is a positive balance that constitutes a taxable event for taxation purposes under Article 72nd, item 4, of the CIRS.
Thus, as understood in the ruling of CAAD handed down in case No. 340/2014-T:
"The taxable event does not translate into the capital gain generated and considered in an isolated and singular manner, through the act of sale, but as a fact of successive formation, not being seen in the sale of the shares in question any fact generating eventual impact of tax, since, as stated, the same will result from a balance determined in a given tax period, in accordance with the characteristic of annuality of the tax, which is obviously present in the scope of the tax on the income of natural persons.
In the same way, by effect of the rule of annuality of the tax on the income of natural persons, it will have to be understood that the generating fact occurred on 31 December 2010, given the complex incidence of the tax in question, and the requirement that it carries in terms of unitary and global vision, not accommodating such characteristics with any autonomization or scission by time periods within the same tax year."
To this extent, Law No. 15/2010, of 26 July, by repealing item 2 of Article 10th of the CIRS, which excluded from IRS taxation capital gains from the sale of shares held by their holder for more than 12 months, regulates the formation of a taxable event relating to the year 2010 that is constituted by the balance between gains and losses with autonomous taxation, before it occurs, since it is only determined at the end of that year, so its application to all gains and losses of those types generated in 2010 does not involve retroactivity, in light of the narrow sense that the Constitutional Court has attributed to the prohibition of retroactive taxes contained in Article 103rd, item 3, of the CRP, which has understood to cover only retroactivity in the proper sense, which is reduced to the application of law to facts whose constitutive effects of legal situations have already occurred in the past, integrating all other situations in which there is a weighing of past facts in a benevolent concept of retrospectivity.
Regarding retrospectivity SÉRGIO VASQUES teaches that:
"A phenomenon distinct from the retroactivity of tax law is that which among doctrine is sometimes designated by retrospectivity of tax law. As we have seen, retroactivity occurs when the law disposes on past tax events, whether those that have already been completely formed, or those whose formation is still ongoing. The phenomenon of retrospectivity of tax law, on the other hand, occurs when the new law, while disposing of future facts, harms expectations grounded in the past. (...) The problem of retrospectivity of tax law arises with greater acuity still in cases of elimination of tax benefits. Through the creation of benefits the legislator directly encourages a certain behavior by the taxpayer, considered meritorious for various reasons of extrafiscal nature. The taxpayer cannot have the expectation that the benefits from which he profits 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 consequences of significance."
Indeed, this is a problem with which the Constitutional Court has dealt more than once, always sustaining that this problem escapes the prohibition of retroactivity and should rather be evaluated in light of the principle of legal certainty resulting from Article 2nd of the CRP.
On the analysis of the Constitutional Court regarding this matter Sérgio Vasques refers that:
"In light of this principle, the harm to the expectations of taxpayers must be considered inadmissible whenever (a) we are faced with an alteration of the legal order with which the recipients of the rules cannot reasonably count on and (b) that alteration is not dictated by the necessity to safeguard rights or constitutionally protected interests that must be considered prevalent. Based on this proportionality test, the court has understood that for a measure to be censured based on Article 2 it is necessary 'in the first place, that the state (especially the legislator) has undertaken behaviors capable of generating in private parties 'expectations' of continuity; then, such expectations must be legitimate, justified and grounded in good reasons; thirdly, must the private parties have made life plans taking into account the prospect of continuity of the 'state behavior'; finally, it is still necessary that there are no reasons of public interest that justify, in a balancing, the non-continuity of the behavior that generated the situation of expectation. [in a footnote note the same Author that: 'Thus in the ruling of the Constitutional Court No. 128/2009, of 12 March, underlining the non-existence of 'a right to non-frustration of legal expectations or to the maintenance of the legal regime in durable legal relationships', or in ruling No. 85/2010, of 3 March, of greater interest, relating to the introduction of an amendment to the IRC Code by Law No. 32-B/2002, of 30 December, under which 'the negative difference between the gains and losses realized through the onerous transmission of capital parts (...) contributes to the formation of taxable profit in only half its value'. It was then argued that the application of this rule to share holdings 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 2 of the Constitution of the Republic, insofar as 'the taxpayers acquired share holdings based on a given legal framework, which was, moreover, the normal or typical framework, according to which the gains from the sale of these shares were taxed and the losses were deductible'. The Constitutional Court dismisses retroactivity, as it does not even find a complex fact of successive formation, and refuses the violation of the principle of legal certainty, as there is no clear encouragement by the state and it is necessary to refuse any 'prohibition of retrocession' in the matter of tax deductions. The decision seems to us correct, concise and materially fair.']"."
Being so, the only obstacle to considering for the annual balance of gains and losses those concretized before the entry into force of Law No. 15/2010 can only result from the rule of Article 11th, item 2, of the LGT, 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 tax year with the calendar year, which governs as to IRS (Article 143rd), with item 1 of Article 43rd of the CIRS, in which it is established that "the value of income qualified as capital gains is the amount corresponding to the balance determined between the gains and losses realized in the same year, determined in accordance with the following articles", it is concluded that the full annual period cannot fail to be considered, there being no minimum legal support for taxing based on more than one balance nor based on a balance of less than annual dimension.
In fact, the rule of Article 43rd, item 1, of the CIRS clearly establishes annual taxation of the balance of the gains and losses realized in each year, thus, explicitly excluding the application of the pro rata temporis principle, provided for in Article 11th, item 2, of the LGT, constitutes a special rule that derogates it in its specific field of application.
This interpretation, which results from the literal content of Article 43rd, item 1, of the CIRS, is corroborated by the discussion of the Bill No. 16/XI, which gave rise to Law No. 15/2010, in which it was explicitly assumed by the Government the intention to apply the new regime to the balance of the gains and losses of the entirety of the year 2010, as is seen from the following excerpts from the discussion at large that are contained in the Journal of the Republic Assembly I series, No. 55/XI/1, of 08-05-2010, relating 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 prevail from now on" (page 17);
"the main factor of evasion that can be created here would result, indeed, from a regime of application of the law in time that only subjected capital gains that were produced with share holdings acquired after the entry into force of the law. That, for us, is the crucial point, that is, to prevent that, from these rules, there does not result an immediate 'washing' of latent capital gains (pages 17-18);
"For a long time modern doctrine, somewhat following German doctrine and also the case law of our Constitutional Court, has been understanding 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, putting, however, in question expectations grounded 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 gains and losses that occur at the end of the year. And it is to that balance, moreover, that the exemption of the 500 € is also applied, which appears in the proposal.
But there is something even clearer, Mr. Deputy, than what appears in Article 103rd of the Constitution: it is that, if any party or if the Government were to propose to this House the taxation of capital gains produced from the sale of share holdings acquired after the entry into force of this law, surely, when the law came into force, there would be no more any capital gain to tax. And, Mr. Deputy, that is a request to which the Government, surely, is not willing to respond" (pages 20-21)
Furthermore, the intervention of Deputy Assunção Cristas was expressly defended the contrary 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 be applied to securities sold before its entry into force" (page 28 of the aforementioned Journal of the Republic Assembly), which confirms that the Government's intention was immediate application.
The final wording of the statute does not establish any of these proposals to restrict the effects of the immediate application of the new law, so the entry into force on the day following its publication that 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 gains and losses generated in the year 2010.
In fact, if that was not the legislative intention, surely a special regime of application of the law in time would be established, as had been usual for a long time regarding rules on the taxation of capital gains.
Furthermore, in the context of sharp financial crisis that was being experienced in 2010, one cannot fail to conclude that the conditions in which the law was drafted explain the adoption of such a solution.
It is thus concluded that the IRS assessment whose decision of illegality is sought in the present case, does not suffer from the defect that the Claimant attributes to it.
The same applies to the assessment of compensatory interest, since the only defect attributed to it is that which affects the act of IRS assessment.
3.2. Question of Preterition of Legal Formalities
The Claimant imputes to the impugned act the illegality of preterition of legal formalities which consists in the notification to the now Claimant, contained in page 2 of Document No. 1 attached to the request for arbitral decision, not containing reference, in addition to the means of defense mentioned therein (claim and challenge), to the possibility of requesting the constitution and decision of an Arbitral Tax Court, understanding the Claimant that Article 2nd of item 2 of Article 36th of the CPPT was violated, which establishes that the notification must contain, among other things, "the means of defense and deadline to react against the notified act".
Irregularities of a formal nature, namely those committed during the procedure of assessment of taxes, may have repercussions on these acts, affecting their validity.
But, as is obvious, the irregularities of acts subsequent to the performance of the acts of assessment cannot affect their validity, since the notified act has the content that it has, legal or illegal, independently of the notification.
In fact, as results from the provisions of Articles 77th, item 6, of the LGT and 36th, item 1, of the CPPT, notification is intended to ensure the effectiveness of acts of assessment, the production of effects in relation to taxpayers, having no influence on the legality or illegality of the acts that must be notified.
On the other hand, Article 37th, item 1, of the CPPT provides for a specific regime for the relevance of the defects of acts of notification, including for cases of omission of indication of the means of reaction against the notified act, which is that the interested party, within 30 days or within the deadline for claim, appeal or challenge or other judicial remedy that follows from this decision, if shorter, request the notification of the requisites that have been omitted or the passage of a certificate containing them, free of any payment.
If the recipient of the act does not request (within 30 days or within the deadline for reaction against the notified act, if shorter) the notification of the elements omitted or the passage of a certificate containing them, the defect of the notification will cease to be relevant, and the recipient cannot take advantage of its invalidity, namely cannot invoke it to defend that the act is ineffective because it was invalidly notified.
Moreover, having the Claimant actually exercised the right to request the constitution of an arbitral tribunal, the alleged defect of the notification would always be irrelevant by having achieved the purpose to which the omitted formality was intended, which was to inform the Claimant of such possibility.
Therefore, the omission referred to has no effect on the level of the legality of the notified act, for which reason the request for arbitral decision fails, to the extent that it seeks the legal elimination of the assessment act on this ground.
- INDEMNITY INTEREST AND COMPENSATION FOR UNDUE GUARANTEE
Since the acts of assessment of IRS and compensatory interest do not suffer from the defect that the Claimants attribute to them, there is no ground for granting compensation arising from the guarantee provided to suspend tax enforcement proceedings nor indemnity interest, since indemnity interest and compensation for undue guarantee depend on the act of assessment suffering from error attributable to the services (Articles 43rd, item 1, and 53rd, items 1 and 2, of the LGT), which did not occur.
The requests for indemnity interest and compensation for undue guarantee are therefore dismissed.
- DECISION
In accordance with the foregoing, this Arbitral Court agrees;
In these terms, this Arbitral Court agrees to:
a) Judge the request for arbitral decision ungrounded, as to the request for declaration of illegality of the assessments of IRS No. 2014… and of compensatory interest No. 2014… and respective demonstration of account correction;
b) Judge the request for compensation for undue guarantee ungrounded.
- VALUE OF THE CASE
In accordance with the provisions of Article 306th, item 2, of the CPC and 97th-A, item 1, paragraph a), of the CPPT and 3rd, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 557,403.78.
- COSTS
Pursuant to Article 22nd, item 4, of the RJAT, the amount of costs is set at € 8,568.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.
Lisbon, 20 May 2015
The Arbitrators
(Jorge Manuel Lopes de Sousa)
(Paulo Lourenço)
(José Rodrigo de Castro)
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