Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
The arbitrators Counsel Jorge Lopes de Sousa (arbitrator-president), Professor Doctor Paulo Jorge Varela Lopes Dias and Professor Doctor Rita Calçada Pires (arbitrators-members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 23-04-2019, agree as follows:
1. Report
A..., S.A., with the single identification and tax number ..., with registered office at ..., n.º..., in Lisbon, hereinafter designated as "Claimant", filed, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), a request for arbitral pronouncement with a view to the annulment of the decision of express dismissal of the Hierarchical Appeal no. ...2016... (case no.....), filed with a view to the annulment of the decision dismissing the Administrative Complaint presented, in turn, against the acts of assessment of Corporate Income Tax ("IRC") with nos. 2015... and 2015..., referring to the tax years 2012 and 2013.
The TAX AND CUSTOMS AUTHORITY is the Respondent.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 13-02-2019.
Pursuant to the provisions of letter a) of paragraph 2 of article 6 and letter b) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.
On 02-04-2019 the parties were duly notified of this designation, and did not manifest any intention to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, letters a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.
Thus, in accordance with the provisions of letter c) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 23-04-2019.
The Tax and Customs Authority submitted a response in which it contended that the request should be judged to lack merit.
By order of 05-06-2019 it was decided to dispense with the meeting provided for in article 18 of the RJAT and with submissions.
The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, letter a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January, and is competent.
The parties are duly represented, have legal personality and capacity, and have legitimacy (articles 4 and 10, paragraph 2, of the same legislative act and article 1 of Ordinance no. 112-A/2011, of 22 March).
The proceedings are not affected by any nullities.
2. Facts
2.1. Proven Facts
The following facts are considered proven:
A) The Tax and Customs Authority conducted a tax inspection of the Claimant relating to IRC for the tax years 2011, 2012 and 2013;
B) With respect to the tax years 2012 and 2013, to which the assessments challenged in the present arbitral proceedings relate, corrections were made, among others, in the amounts of €328,099.59 and €1,029,416.67, respectively, with respect to losses from fair value reductions in financial instruments;
C) In the Tax Inspection Report, which is contained in document no. 6 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced, in which it is referred, among other things, the following:
III.1.1. Losses from fair value reductions of financial investments
III.1.1.1. Losses from fair value reductions of financial investments in the tax years 2011 to 2013 are recorded in account "662 - Losses from fair value reductions - Financial investments" and amounted to the sums indicated in the following table:
III.1.1.2. Losses from fair value reductions relate to the negative variation in the quotation of shares held by the taxpayer in the listed company B... (B...) with registered office in Kuwait.
The number of shares held by the taxpayer in B... represents a share in capital of approximately 1% of the capital or voting rights of that company in the tax years 2011 and 2012 and less than 1% of the capital or voting rights of that company in the tax year 2013, as evidenced in the following table:
The financial investment in company B... is measured using the fair value method through profit or loss, in accordance with NCRF 27, since it corresponds to an equity instrument with publicly disclosed quotations, specifically in the Kuwait ... .
III.1.1.3. Under the provisions of letter a) of paragraph 9 of article 18 of the IRC Code, "Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated, except when:
a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a share in capital equal to or greater than 5% of the respective capital".
Under the provisions of letter a) of the said article, the losses incurred in the tax years 2011 to 2013 contribute to the formation of taxable profit, since the financial investment in question meets all the requirements established in that letter.
However, paragraph 3 of article 45 of the IRC Code, in the wording in effect at the time of the facts, establishes that "The negative difference between capital gains and capital losses realized through onerous transmission of share capital, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to share capital or other equity components, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value." (emphasis added)
Thus, from the combination of letter a) of paragraph 9 of article 18 with paragraph 3 of article 45 (in the wording in effect at the time of the facts), both of the IRC Code, only 50% of the loss from fair value reduction contributes to the formation of taxable profit.
III.1.1.4. The taxpayer considered that the full amount of the loss contributed to the formation of taxable profit, and therefore made no increase in section 07 of the Income Statement Form Mnd.22/IRC, for purposes of determining taxable profit for the tax years 2011 to 2013, as can be seen in the corresponding income statements attached in Annex 3.
The Doctrinal Sheet relating to Case no. 39/2011, with order dated 24/02/2011 from the Director-General of Taxes, concerning a company holding shares in companies listed on the Stock Exchange, representing less than 5% of the respective capital, whose corresponding quotation trend was negative, in its paragraphs 5 and 6, states the following:
"5. In the event that a loss from fair value reductions is determined, article 45, no. 3 of the CIRC establishes that '...other losses ...relating to share capital ,... contribute to the formation of taxable profit in only half of their value.'
6. Since the fair value reductions of these share capitals are qualified as losses, they should be considered, in accordance with article 45, no. 3 of the CIRC, at 50% of their value."
Taking into account that the Tax Administration, in accordance with paragraph 1 of article 68-A of the LGT and article 55 of the CPPT, is bound by the understanding contained in this Doctrinal Sheet, it is proposed that 50% of the losses from fair value reductions sustained in the tax years 2011 to 2013 be corrected, in accordance with the combined provisions of letter a) of paragraph 9 of article 18 with paragraph 3 of article 45 of the IRC Code, for purposes of determining taxable profit for the respective tax years, as summarized in the following table:
D) Following the inspection, on 21-09-2015, the Claimant was notified of the IRC Assessment no. 2015..., relating to the tax year 2012, as well as the Account Reconciliation Statement no. 2015..., in which the tax loss of €6,587,427.73 is determined (instead of the loss of €6,915,527.32 declared by the Claimant) (Documents nos. 7 and 9, attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);
E) On the same date, the Claimant was notified of the IRC Assessment no. 2015..., relating to the tax year 2013, as well as the Account Reconciliation Statement no. 2015..., in which the tax loss of €607,005.94 is determined (instead of the loss of €1,636,422.61 declared by the Claimant) (documents nos. 8 and 10 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);
F) Not accepting the IRC assessments relating to the tax years 2012 and 2013, the Claimant filed, on 18 January 2016, an Administrative Complaint with a view to the annulment of the referred tax acts (document no. 12 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);
G) The administrative complaint was dismissed by order of 26-07-2016, which manifests agreement with information contained in document no. 15 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced;
H) The Claimant filed a hierarchical appeal against the decision dismissing the administrative complaint (document no. 16 attached with the request for arbitral pronouncement);
I) Following the issuance of the arbitral decision in the context of arbitral case no. 77/2016-T, which concerned the correction relating to the tax year 2011, which was judged to have merit, on 29 November 2016 the Claimant attached that same decision to the hierarchical appeal procedure (document no. 17 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);
J) The Sub-Director General of the Tax and Customs Authority dismissed the hierarchical appeal, by order of 14-11-2018, manifesting agreement with information contained in document no. 18, the contents of which are hereby reproduced;
K) On 12-02-2019, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.
2.2. Unproven Facts
There are no facts of relevance for the consideration of the merits of the case that have not been proven.
2.3. Proven Facts and Justification for the Establishment of the Facts
The proven facts are based on the documents attached by the Claimant and those contained in the administrative file.
There is no controversy regarding the facts.
3. Legal Issues
The Claimant attributes to the challenged assessments, relating to the tax years 2012 and 2013, as well as to the decision on the hierarchical appeal, a defect due to violation of article 45, paragraph 3, of the CIRC.
Additionally, with respect to the decision on the hierarchical appeal, the Claimant attributes a defect due to the omission of the right to a hearing.
Article 124 of the CPPT establishes rules regarding the order of consideration of defects in judicial challenge proceedings, which are subsidiarily applicable to arbitral proceedings, by force of the provisions of article 29, paragraph 1, letter c), of the RJAT.
In the case of defects generating voidability, letter a) of paragraph 2 of that article 124 establishes that priority should be given to defects whose validation, according to the prudent discretion of the judge, would determine more stable or effective protection of the offended interests.
The defect of omission of the right to a hearing is of a procedural nature which, in case of annulment, does not necessarily prevent the renewal of the annulled act with elimination of the defect.
Thus, in the case at hand, that article 124 of the CPPT imposes priority consideration of the defect of violation of law.
3.1. Question of the Application of the 50% Percentage Provided for in Article 45, Paragraph 3, of the CIRC (in the wording in force in 2012 and 2013) to Losses from Fair Value Reductions of Financial Investments
3.1.1. Identification of the Concrete Object of Analysis
At issue in the present proceedings are corrections to the IRC taxable income for the tax years 2012 and 2013, made because the Claimant did not apply the 50% reduction provided for in paragraph 3 of article 45 of the CIRC, with regard to the tax deductibility of losses from fair value reductions that "relate to the negative variation in the quotation of shares held by the taxpayer in the listed company B... (B...) with registered office in Kuwait".
The question to be considered is whether paragraph 3 of article 45 of the IRC Code is or is not applicable to negative fair value variations determined in the tax period, in accordance with letter a) of paragraph 9 of article 18 of the same Code.
It is not disputed by the Parties that the financial interests in question should be accounted for in accordance with the fair value criterion, that the adjustments were recognized through profit or loss and their quantification, so that the requirements referred to in paragraph 9 of article 18 of the CIRC are met.
In the analysis of this question, close attention will be paid to the reasoning of the arbitral decision of 25-11-2013, rendered in case no. 108/2013-T. ( )
3.1.2. Identification of the Relevant Normative Framework
For the case at hand, the following standards are relevant:
Article 45, paragraph 3, of the CIRC, in the wording given by Decree-Law no. 159/2009, of 13 July, established the following:
3 – The negative difference between capital gains and capital losses realized through onerous transmission of share capital, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to share capital or other equity components, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value.
The general rule on the determination of IRC taxable profit is article 17 of the CIRC, which establishes the following:
1 – The taxable profit of corporate bodies and other entities mentioned in letter a) of paragraph 1 of article 3 is constituted by the algebraic sum of the net result for the period and the positive and negative patrimonial variations verified in that same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code.
Regarding adjustments resulting from the application of fair value, paragraph 9 of article 18 of the same Code provides that:
9 – Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated, except when:
a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a share in capital greater than 5% of the respective capital; or
b) This is expressly provided for in this Code.
Article 20, paragraph 1, of the CIRC specifies the concept of "income" establishing, as far as is relevant here, the following:
"Income shall be considered as resulting from operations of any nature, as a consequence of a normal or occasional action, basic or merely accessory, in particular:
(...)
f) Income resulting from the application of fair value in financial instruments;
(...)
h) Realized gains;".
Article 23, paragraph 1, of the CIRC defines the concept of "expenses", establishing the following:
"1 – Expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the revenue source, in particular:
(...)
i) Expenses resulting from the application of fair value in financial instruments;
(...)
l) Realized losses;".
With regard to positive patrimonial variations, article 21, paragraph 1, of the CIRC provides that:
"Positive patrimonial variations not reflected in the net result of the tax period also contribute to the formation of taxable profit, except:
(...)
b) Potential or latent gains, even if expressed in accounting, including revaluation reserves under tax legislation;".
Regarding negative patrimonial variations, article 24, paragraph 1 of the CIRC states that:
"Under the same conditions as those referred to for expenses, negative patrimonial variations not reflected in the net result of the tax period also contribute to the formation of taxable profit, except:
(...)
b) Potential or latent losses, even if expressed in accounting;".
With respect to gains and losses, article 46, paragraph 1 of the same Code provides that:
"1 – Realized gains or losses are considered to be gains obtained or losses suffered through onerous transmission, whatever the title by which it is effected, and likewise those resulting from losses or resulting from permanent allocation to purposes other than the activity exercised, relating to:
(...)
b) Financial instruments, with the exception of those recognized at fair value in accordance with letters a) and b) of paragraph 9 of article 18;".
3.1.3. Successive Legislative Changes and Their Impact on the Standards in Question
The aforementioned article 45, paragraph 3 of the CIRC results from the renumbering of the previous article 42, paragraph 3, carried out by Decree-Law no. 159/2009, of 13 July.
This paragraph 3 of article 42, in turn, was introduced by Law no. 32-B/2002, of 30 December, with the following wording:
"The negative difference between capital gains and capital losses realized through onerous transmission of share capital, including their redemption and amortization with capital reduction, contributes to the formation of taxable profit in only half of its value."
In accordance with the Report of the Ministry of Finance for the State Budget of 2003 (p. 33), the legislative intervention in the area in question (IRC) was guided by "two priorities, namely combating tax fraud and evasion and expanding the tax base", with the alteration of interest here fitting within the scope of "Expanding the tax base and measures for moralization and neutrality" (p. 51).
The final wording of the rule in question resulted from the amendment implemented by Law no. 60-A/2005 of 30 December, and in accordance with the corresponding Report of the Ministry of Finance (page 31), the measure in question fit within the scope of "Combating Tax Evasion and Fraud and Other Measures Aimed at Budgetary Consolidation".
Paragraph 9 of article 18 of the CIRC obtains its justification directly in the preamble of Decree-Law no. 159/2009, of 13 July, which introduced it into the said Code, where it can be read:
"Still in the context of the approximation between accounting and taxation, the application of the fair value model in financial instruments is accepted, whose counterpart is recognized through profit or loss, but only in cases where the reliability of the determination of fair value is in principle assured. Thus, equity instruments that do not have a price formed in a regulated market are excluded. Moreover, the application of the realization principle was maintained regarding financial instruments measured at fair value whose counterpart is recognized in equity, as well as share capital exceeding 5% of capital, even if recognized at fair value through profit or loss. (...)
In the same sense, assets covered by the regime of capital gains and losses for tax purposes are identified as tangible fixed assets, intangible assets, investment properties, financial instruments, with the exception of those in which adjustments resulting from the application of fair value contribute to the formation of taxable profit in the tax period.
These expressed intentions correspond to that rule in paragraph 9 of article 18, as well as to the introduction, by the same legal instrument, of letters f) and i) of paragraph 1 of articles 20 and 24 of the CIRC, as well as of letter b) of paragraph 1 of article 46.
Within the set of amendments introduced by the aforementioned Decree-Law no. 159/2009, of 13 July, it is also worth noting that where previously one spoke of revenues and gains (article 20), one now speaks of income, and where previously one spoke of costs or losses (article 23), one now speaks of expenses.
Prior to the adoption of fair value for shares with the characteristics of the case sub judice, through the entry into force of the SNC, patrimonial variations relating to financial instruments were irrelevant from the point of view of the formation of taxable profit for each period, due to the effect of the rule in article 21, paragraph 1, letter b), of the CIRC, which established that "potential or latent gains, even if expressed in accounting, including revaluation reserves legally authorized" did not contribute to the formation of taxable profit. Only at the moment of realization of the gain or loss did the patrimonial variation verified assume tax relevance.
This fiscal framework, which led to a single taxation (which occurred only once throughout the entire period of holding the financial instruments), dependent on a voluntary action of the taxpayer (in that the transaction of instruments generating patrimonial variation, a condition of its tax relevance, would only occur if and when the taxpayer alienated the assets), and in which the valuation of the patrimonial variation was fixed according to the concrete transaction that triggered its tax relevance, provided fertile ground for accounting and fiscal manipulations, since the taxpayer could seek to trigger the tax relevance at the moment and on the terms that would be fiscally most advantageous to it.
On the other hand, and given the relevance of the taxpayer's voluntary will in the mechanism of tax relevance of the patrimonial variation, the system established was suitable for the adoption of mechanisms to condition that will, to align it with economically more desirable behavior, which in this case amounts to the preference for the realization of gains over the realization of losses.
It is in this context that the emergence of the rule of the previous article 42, paragraph 3 of the CIRC which precedes the then article 45, paragraph 3, of the same is explained.
Such a rule, whether in its primitive wording, resulting from Law no. 32-B/2002, of 30 December, or in the one given to it by Law no. 60-A/2005 of 30 December, is explained objectively and subjectively (that is, in light of the motivation expressed by the legislator) by needs linked to combating tax fraud and evasion and expanding the tax base, directed at the desired consolidation of public finances.
The acceptance of the application of the fair value model in financial instruments, effected by Decree-Law no. 159/2009, of 13 July, introduced, in the part covered, a radically different model, both in terms of valuation and of tax relevance of patrimonial variations relating to the holding of such instruments.
In effect, the legislator's intention when adopting the fair value model, duly evidenced, was, assumed and expressly, to maintain "the application of the realization principle regarding financial instruments measured at fair value whose counterpart is recognized in equity, as well as share capital exceeding 5% of capital, even if recognized at fair value through profit or loss".
On the other hand, with respect to "financial instruments" that correspond to less "than 5% of capital", "whose counterpart is recognized through profit or loss, (...) in cases where the reliability of the determination of fair value is in principle assured", the legislative intent was to accept "the application of the fair value model", excluding the realization principle.
In keeping with this legislative intent, article 18, paragraph 9 of the CIRC came to provide that, as a rule, "Adjustments resulting from the application of fair value do not contribute to the formation of taxable profit, being allocated as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated", which constitutes an evident and deliberate surfacing of the assumed realization principle.
However, the same rule, in its letter a), establishes the exception to this regime, "when: a) They relate to financial instruments recognized at fair value through profit or loss, provided that, in the case of equity instruments, they have a price formed in a regulated market and the taxpayer does not hold, directly or indirectly, a share in capital greater than 5% of the respective capital".
That is, when "income or expenses (...) Relate to financial instruments recognized at fair value", such "contribute to the formation of taxable profit", "provided that":
• They are recognized "through profit or loss";
• It is a matter of "equity instruments";
• "they have a price formed in a regulated market"; and
• "the taxpayer does not hold, directly or indirectly, a share in capital greater than 5% of the respective capital".
When these conditions are met:
• they are considered as income resulting from the application of fair value in financial instruments [article 20, paragraph 1, letter f), of the CIRC]; and
• they are considered as expenses resulting from the application of fair value in financial instruments [article 23, paragraph 1, letter i) of the CIRC].
In this way, where previously we had a unique tax relevance, upon transaction of such instruments, we now have continuous tax relevance. That is, given the new rules comprising the tax relevance regime for fair value accounting of financial instruments, income or expenses resulting from the application of fair value now directly affect the formation of taxable profit [article 20, paragraph 1, letter f), and article 23, paragraph 1, letter i), of the CIRC] of the very year in which they occur, provided that certain conditions are met as aforementioned with respect to article 18, paragraph 9, of the CIRC.
Within this framework, there no longer appear to be any needs related to combating tax fraud and evasion, not only because the tax relevance of patrimonial variations ceases to be conditioned by an act of will of the taxpayer, but also because the valuation is objectively fixed, leaving room for the realization of the constitutional command of enterprise taxation fundamentally by its actual profit.
Despite the amendments introduced by Decree-Law no. 159/2009, of 13 July, the previous article 42, paragraph 3, of the CIRC, renumbered then to article 45, paragraph 3, maintained its validity, with its wording unchanged.
Hence the question arises, as occurs in this case, whether such a rule will or will not apply to depreciations relating to financial instruments that contribute to the formation of taxable profit, in accordance with article 18, paragraph 9, letter a), of the CIRC.
3.1.4. The Function and Value of Interpretation: on the Importance of Hermeneutics, Systematic Interpretation and Teleological Interpretation of the Fiscal Rules in Question
In a first analysis, based exclusively on the literal text of paragraph 3 of article 45 of the CIRC, an affirmative answer to this question is suggested, given the broad scope of the provision of this rule.
However, a careful and systematic interpretation of the relevant normative provisions for the analysis of the question, which were indicated, leads to a different conclusion. As follows.
Article 45, paragraph 3, of the CIRC states that:
The negative difference between capital gains and capital losses realized through onerous transmission of share capital, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to share capital or other equity components, in particular supplementary contributions, contribute to the formation of taxable profit in only half of their value.
The analysis of the normative text reveals with clarity, given the presumption of good legislative technique, that the legislator chose to include, for inclusion therein, three types of situations that should be considered distinct, namely:
a) "The negative difference between capital gains and capital losses realized through onerous transmission of share capital";
b) "other losses (...) relating to share capital or other equity components";
c) "other (...) negative patrimonial variations relating to share capital or other equity components".
Let us then see whether the situation in the present case falls into any of the listed situations.
The situation alluded to under letter a) above would be manifestly inapplicable, not only because there was no realization effected through onerous transmission, but also because article 46, paragraph 1, letter b), of the CIRC excludes the situations described in article 18, paragraph 9, letter a), from the concept of realized gains.
Thus, the possibilities for integrating the situation in the present case into some of the above-listed situations in letters b) and c) remain.
The apparent indiscriminate breadth of the provisions in question may, however, be reasonably mitigated by noting that "losses" and "other negative patrimonial variations" would be concepts, not redundant, but endowed with their own and distinct meaning.
To understand this fact, it will be necessary to go back to articles 23 and 24 of the same Code, paying attention to the terminological evolution effected by Decree-Law no. 159/2009, of 13 July.
In effect, before the entry into force of the latter legal instrument, the articles referred to of the CIRC referred, respectively, to:
– "Costs or losses are considered to be those demonstrably necessary for the realization of revenues or gains subject to tax or for the maintenance of the revenue source, in particular the following: (...)";
– "Under the same conditions referred to for costs or losses, negative patrimonial variations not reflected in the net result of the fiscal year also contribute to the formation of taxable profit, except: (...)".
It is thus verified that at the time of the establishment of the wording of article 45, paragraph 3, of the CIRC in force in 2013, this Code expressly distinguished, for what is relevant here, three types of situations, namely:
a) Costs;
b) Losses;
c) Negative patrimonial variations not reflected in the net result of the fiscal year.
The provision of the article then 42, paragraph 3 of the CIRC (predecessor of article 45, paragraph 3, in the wording given by Decree-Law no. 159/2009, of 13 July), should thus be considered as relating to these concepts, defined in articles 23 and 24, in the wordings prior to this Decree-Law.
Thus, and for obvious reasons, the provision of that rule should exclude costs relating to "share capital or other equity components", including therein only losses (as defined in article 23) and negative patrimonial variations (as defined in article 24), relating to such shares.
And that it is so, that is, that the expression "other losses or negative patrimonial variations" used in article 45, paragraph 3, of the CIRC, in the wording in force in 2012, does not have an indiscriminately broad meaning, but rather a precise meaning, defined in articles 23 and 24, is evident from the fact that the legislator used the same distinction.
Moreover, the inclusion within the scope of the rule in question not only of losses (as defined in article 23) and negative patrimonial variations (as defined in article 24), but also of costs (as defined in article 23 in the wording prior to Decree-Law no. 159/2009, of 13 July), would lead to, for example, the cost of acquisition of share capital only contributing half of the respective value to the determination of taxable profit, which would be obviously inconceivable to a minimally reasonable legislator and consequently an interpretation to be rejected, by force of the rule in article 9, paragraph 3, of the Civil Code, which requires that it be presumed that the legislator established the most appropriate solutions.
The regulatory amendment implemented by Decree-Law no. 159/2009, of 13 July, will not have changed anything of relevance in the matter in question. In effect, despite the body of article 23 now referring only to expenses, the fact is that the CIRC, even in its current version, continues to use the expression "losses", including in article 23 itself (cf. paragraph 1, letter h)). This occurs in coherence, moreover, with the SNC, which in accordance with point 2.1.3.e) of the annex to Decree-Law no. 158/2009, of 12 July, maintains the distinction between "expenses" and "losses".
Thus, it is concluded that article 45, paragraph 3, of the CIRC will relate to:
a) negative differences between capital gains and capital losses realized through onerous transmission of share capital;
b) other losses relating to share capital or other equity components; and
c) other negative patrimonial variations relating to share capital or other equity components.
With "losses" to be understood as facts qualifying as such in light of the CIRC, and by "negative patrimonial variations" should be understood negative patrimonial variations not reflected in the net result of the fiscal year, as defined in article 24.
Given this faithful portrayal of the rules and their evolution, the facts qualifying as "expenses" in light of the CIRC, even if relating to share capital or other equity components, will not be included within the scope of the rule in question.
The Tax Authority itself seems to recognize this very thing, since in the "Manual for Completion of Section 07, Form 22" ( ), with respect to field 737, it states that "In this field are entered, at 50%, the amounts relating to other losses (other than losses, since these are subject to the 'mechanism' of gains and losses) relating to share capital or other equity components. For example, the amounts corresponding to 50% of losses from fair value reductions are increased in this field 737, when these fall within the scope of article 23, paragraph 1, letter i), by force of the provisions of article 18, paragraph 9, letter a)". The invocation of the expression "expenses" does not appear. And note that article 23, paragraph 1, letter i), of the CIRC does not refer to the amounts in question as "losses", but as "expenses", so their entry in the field in question would be incorrect.
Moreover, and if there were any doubt, if the legislator, upon the entry into force of Decree-Law no. 159/2009, of 13 July, intended to include, within the scope of article 45, paragraph 3 of the CIRC, the situations listed in article 18, paragraph 9, letter a), of the CIRC, it would have been careful to expressly include the terminology "expenses", i.e., it would have introduced a specific letter, containing "Expenses resulting from the application of fair value in financial instruments", not in article 23, but in article 24 of the CIRC ( ).
Let it also be considered that, if the legislator intended by assuming that such situations would be losses and not expenses, it would have expressly referred in articles 18, paragraph 9 and 23, paragraph 1, letter i), both of the CIRC, to such situations as being "losses resulting from the application of fair value in financial instruments", not qualifying them as "expenses", which is what happened.
Within the framework just presented, it should then be considered that Decree-Law no. 159/2009, of 13 July, introduced, with respect to the part covered by the acceptance of the application of the fair value model in financial instruments, a special regime of relevance for computing taxable profit, justified both by its inherent objectivity and by the confessed intention of approximating accounting to taxation.
This circumstance is not, in light of the wording of the CIRC resulting from Decree-Law no. 159/2009, of 13 July, susceptible to generating any kind of doubts, as verified, in particular, by the wording of articles 20, paragraph 1, letters f) and h), 23, paragraph 1, letters i) and l), and especially 46, paragraph 1, letter b), all of the CIRC. These articles clearly evidence the legislator's intention to distance adjustments resulting from the application of the fair value criterion in financial instruments, in accordance with the CIRC, from the regime of capital gains and losses.
On the other hand, the regime resulting from the combination of articles 45, paragraph 3, and 46 of the CIRC only makes sense from the perspective of the acceptability of the patrimonial variations in question under the prism of the said realization principle. For, in the case of such principle, the assessment of the patrimonial variation according to a transaction will always involve a voluntary factor in relation to it.
That is, in the regime for which the rule of article 45, paragraph 3 was conceived and instituted, the realization of losses and other situations listed was dependent on a voluntary action corresponding to their realization. Now, in this context, it will be understandable that the legislator establish mechanisms to discourage an action susceptible of being considered as undesirable, in this case the realization of losses or other negative patrimonial variations. In providing that such situations will only be relevant at 50% of the accounted amount, the fiscal legislator is, objectively, conditioning the actions covered by the legal provision, imposing a negative incentive on them.
On the other hand, and in the case of financial instruments of not objectively quantifiable value, the non-consideration of 50% of the negative patrimonial variations verified would also have a function to "compensate" the natural tendency of economic operators to, at the fiscal level, inflate losses.
However, those aspects will not be verified in the situations covered by article 18, paragraph 9, letter a). Here, in the case of adjustments resulting from fair value accounting, determined by objective criteria (with "a price formed in a regulated market"), there is no doubt or intervention of the taxpayer's will in the verification of the negative or positive patrimonial adjustment. That is, these will occur, or not, independently of the action and will of the taxpayer, becoming fiscally relevant at the moment they actually occur.
Now, penalizing, in these cases, the taxpayer with a non-consideration of 50% of the expense incurred would be entirely unjustified, both from an economic and from a legal point of view.
For, as must be recalled, this situation of contingent unjustified penalization would only occur by force of the exception of the situations covered by article 18, paragraph 9, letter a), of the CIRC to the regime of the realization principle. That is, if with respect to those situations the general regime of the body of article 18, paragraph 9 were applied, according to which the same would not contribute "to the formation of taxable profit, being allocated as income or expenses in the tax period in which the elements or rights that gave rise to them are alienated, exercised, extinguished or liquidated", the pointed out inconsistency would not be verified, since the fact that would trigger the contribution to the formation of taxable profit would only occur by will of the taxpayer, so it would be up to this to choose whether to realize the negative patrimonial variation, with the consequent fiscal penalization, or defer it to a moment when it would be less voluminous or even positive, reducing or eliminating the penalization resulting from the operation for itself and for the Public Treasury.
The exception of letter a), by removing the situations provided for therein from the scope of the realization principle, justifies the new regime of relevance for taxable profit.
3.1.5. The Necessity of Analyzing the Effective Impact of Rules in Interpretation. The Duty to Require Quality of Tax Rules
The judge, in the name of the effective protection of the interests brought to justice, cannot limit itself to a merely literal interpretation, detached from the systematic element and, very relevant as well, the teleological element. That is, it is the judge's competence, through his examination and analysis, to guarantee a complete analysis of the situation. Guaranteeing practical and effective protection of the right to property, not assuming such protection a merely theoretical and illusory component.
To achieve this type of balanced and effective protection of the two interests at issue, it is fundamental for the judge to give attention to integrated interpretation and application. That is, systematic and teleological interpretation must be taken into account. This implies that the issues must be analyzed in all their aspects, so as to guarantee that the real impact of the application of the tax rule is considered, both for the taxpayer and for the Tax Administration. The consistency of public intervention is required and is owed, both through administrative and judicial channels.
In this regard, note that the quality of the tax rule is a determining requirement to guarantee both adequate protection of the taxpayer and proper application of the rule. For this reason, the European Court of Human Rights (ECHR), in multiple case law persistent over time ( ), in addressing the analysis of the legality of tax rules, affirms the need for the tax rule to have quality. This concept is assessed in the ECHR, considering accessibility, precision and foreseeability, promoting the absence of inconsistencies. The objective is to not result from the tax rule the possibility of ambiguous interpretation, but rather to generate single interpretation.
On the basis of this construction, the tribunal must consider that the legislator sought the quality of the tax rule. That is, the tribunal must consider that the letter of the law is indeed what the legislator intended, promoting a balanced interaction between the letter of the law and its spirit.
An important way to implement such purpose, after integrated reading of the rules in question, is to ascertain what impact the application of the rule has on the sphere of those involved in its application.
This necessary exercise and guarantee of adequate legal protection is even more necessary in the case where interpretive divergences are invoked by the subjects involved in the fiscal legal relationship, as in the case at hand. The Tribunal should then conduct a comparative analysis between the application of the rule of article 18, paragraph 9, letter a) in isolation and the application of the rule of article 18, paragraph 9, letter a) in combination with article 45, paragraph 3, so as to determine, in terms of result, whether any new data occurs that could change the interpretive construction presented so far.
Take into account the data presented in the following table - which has been recurrently used by CAAD jurisprudence on this matter:
Year Financial Investment Value Annual fair value variation Application of article 45/3 of CIRC
0 Acquisition value (V.A.) 0 0
1 V.A.+ 40 + 40 +40
2 V.A.+ 20 -20 -10
3 V.A -20 -10
4 V.A.-40 -40 -20
5 V.A. +40 +40
6 V.A. -20 -20 -10
Let this be explained.
The non-application of the rule of article 45, paragraph 3, of the CIRC to expenses, and concretely to "Expenses resulting from the application of fair value in financial instruments", with the full consideration of the patrimonial repercussions verified, whether positive or negative, - values contained in the middle column "annual fair value variation" - leads to a coherence of taxation, regardless of when the alienation of the financial instrument is made. That is, whenever one chooses to proceed with the alienation of the financial instrument, the positive and negative patrimonial alterations offset one another, so that, ultimately, the taxpayer only has increased or decreased its taxable profit by the difference between the acquisition value and the alienation value.
On the other hand, if the rule of article 45, paragraph 3, of the CIRC were to be applied, as the Tax and Customs Authority claims – expressed in the values obtained in the last column - from the moment a negative patrimonial alteration was verified, there would be a discrepancy between the tax relevance of negative and positive patrimonial variations, without any justification, as stated, since such variations occur objectively and independently of the action or will of the taxpayer. Thus, if, at the end of the second year, the taxpayer in the above example were to proceed with the realization of the financial instrument in question, despite having realized a capital gain of only 20 (which would be taxed as such under the realization principle), it would, in fact, have paid tax on 30 (40-10). Similarly, if it were to proceed with that realization at the end of the third year, it would have paid tax on 20, despite having had no patrimonial increase with the operation. And if it were to proceed with the same realization at the end of the sixth year, it would have paid tax as if it had had a patrimonial increase of 30 (80-50), despite having had an effective patrimonial variation of -20, which, under the realization principle established in the CIRC, would be acceptable, albeit at only 50% of the respective value (-10). Now, such results, besides being unjust, would move away from the constitutional imperative of article 104, paragraph 2, of the CRP, which promotes the taxation of enterprises fundamentally on their actual income.
From the foregoing results the unreasonableness of the application of the rule of article 45, paragraph 3 of the CIRC to the situations covered by article 18, paragraph 9, letter a) of the same Code.
Based on the foregoing, the inappropriateness of a hypothetical legislative solution to which a certain interpretation leads is certainly a decisive argument for rejecting that interpretation, for, in good hermeneutics, it must be presumed that the legislator established the most appropriate solution for a given legal situation and not an absurd and logically groundless solution, as indeed determined by article 9, paragraph 3 of the Civil Code.
Furthermore, Tax Law has interpretive specificities and one of them is that, in the case of a situation of doubt, one must consider "the economic substance of the tax facts" (by imposition of article 11, paragraph 3, of the LGT). Now, in the case at hand, even if it were affirmed that there is doubt as to the scope of article 45, paragraph 3, of the CIRC - as some minority arbitral decisions do regarding this aspect – this interpretive rule would have to be observed. Note that, in situations where, at the end of the period of holding share capital, no realization of gains occurred or there was even realization of losses, article 11, paragraph 3 of the LGT inevitably leads to the interpretation that avoids the incidence of tax on income and not the one that leads to taxing the loss as if it were income. Note also that Tax Law is marked by a principled approach that equally justifies this solution.
The now presented justifies the assertion that the Courts, in analyzing cases, must also give attention to the effective impact of the rules they apply, at least in the following dual sense:
• interpretations cannot be accepted that lead to inappropriate solutions, because article 9, paragraph 3 of the Civil Code opposes such;
• nor are interpretations admissible that lead to the taxation of non-existent income.
This element is essential, having in mind, as seen, the teleological guidelines that emanate from article 11, paragraph 3 of the LGT, but mainly because it is an inevitable consequence of the principles underlying it, i.e., of material justice, equality and taxation fundamentally based on contributive capacity (articles 4, paragraph 1, and 5, paragraph 2 of the LGT), all principles with constitutional support, concretizing the basic principle of the democratic rule of law (articles 2, 13, and 104, paragraph 2, of the CRP). That is, the principled matrix aforementioned.
It is true that the alternative solution, which excludes the application of article 45, paragraph 3 of the CIRC leads to, in the case where, ultimately, a loss is verified, this ends up having been considered at 100%, not at 50%, as would occur under the realization principle. This would be the case if, in the example of the table above presented, the realization occurred in years 4 or 6. However, this positive discrimination (or rather, non-negative discrimination) of choice for the fair value criterion could be justified, first and foremost, because in the regime of article 18, paragraph 9, letter a) of the CIRC it no longer makes sense to have any disincentive to the realization of losses, since the same will have tax relevance, regardless of their actual realization. Nor should it be overlooked that, on the one hand, fair value accounting is considered more in accordance with the approximation between accounting and taxation, a purpose confessedly pursued by the legislator of Decree-Law no. 159/2009, of 13 July, and, on the other, the circumstance that we are dealing with objectively assessed realities, without significant room for fiscally convenient manipulations.
3.1.6. Supplementary Reference to Teleological Aspects
The absence of significant room for fiscally convenient manipulations now invoked is indeed highly relevant. Moreover, as has already been defended in this decision and had been previously in the cited arbitral decision in case no. 108/2013-T, of 25-11-2013, the basis of the argument presented here. But it warrants further reflection.
It can be affirmed that "the certainty and objectivity of the value found in the market, even if regulated, is not entirely immune from manipulations, as is evidenced by episodes that the international press has reported" ( ). However, such an argument does not succeed. It is relevant to recognize that, not only is fair value an internationally and nationally accepted reference valuation criterion as adequate and desirable, revealing a criterion of justice and economic realism, but also the link to a regulated market is what is today assumed as a peace-making reference for balancing public, collective and individual interests. The fact that market functioning is marked by volatility and constant changes in the measurement of assets and liabilities is a result of the type of society and dominant economic organization which, regardless of agreement or value judgments, is the basis of the construction of the existing tax system. That is, the contemporary tax system is designed and applied for existing realities. If there is disagreement with the organizational and functional base of the market, this should be refined by public authorities, so as to reorient existing mechanisms, having to be revealed in legislation in an appropriate manner. Now, even with the potential criticisms that exist, the current basis of public action and regulation is that of market regulation, with no indication, to date, of generic changes or changes that are reflected in the tax framework. For this reason, assuming as legally relevant the determination of value in accordance with the regulated market, with this rule also being absorbed by the tax rule, it is by this rule that the law enforcer should be guided, regardless of whether he agrees or disagrees with it. One is in the realm of what is and not what ought to be.
Based on this context, it is understood that, as was already advanced, the reasons for combating tax fraud and evasion that demonstrably lay at the genesis of the rule of article 45, paragraph 3, of the CIRC, are not valid for an opposite position.
It is emphasized. In the case at hand, the taxpayer's will is not relevant, and cannot plan hypothetical and undue reductions in tax to be paid. Changes in the value of the financial instruments in question do not depend on an act of will, but on the free and regulated functioning of the market, where multiple and dispersed are the agents and factors to be considered. Add also that the interests in question are equal to or less than 5% of the capital. This demonstrates that the economic influence on the decision of the valued entity tends to be very reduced, not constituting, by itself, dominant influence. And add further. It is not certain that the legislator's objective was to protect only very small investments. Even if the percentage up to 5% of capital can represent, in cases of large companies, significant sums, this is not a relevant element. What is judged to be at issue in the legislator's choice is the absence of influence on changes in the value of financial instruments, which tends to happen when the share in capital is small.
Another aspect that equally deserves note for the absence of justification for a position different from the one defended in this arbitral decision are the reasons for budgetary consolidation, which also lay at the genesis of the rule of article 45, paragraph 3, of the CIRC.
Although such a need for consolidation of public finances was, as seen, part of the justification for the amendments made to the CIRC, note that, at no time, can such an objective condition the letter of the law and what results from it. Putting it more clearly.
Although the legislator's spirit must inform the interpretation of the rule, with interpretation not being sufficient by the literal element (article 9, paragraph 1 of the Civil Code), note that "the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, cannot, however, be considered by the interpreter". As seen, in light of the diversity of concepts used, in light of successive legislative amendments and their conceptual reflection, as well as in light of the comparative analysis resulting from the different application of the rules in question, this does not happen.
In light of the foregoing, situations in which its raison d'être does not hold must be moved away from the field of application of article 45, paragraph 3 of the CIRC, in harmony with the old maxim "cessante ratione legis cessat eius dispositio (where the raison d'être of the law ends there ends its scope)". ( ) The need for balance between the letter of the law and the spirit of the legislator who creates it is indispensable and should occur in an appropriate manner and motivated by a rational and objective application of the rule. For this reason, it has long been affirmed that "the teleological method has been increasingly moving to the foreground in relation to literal interpretation. According to the long-known principle: cessante ratione legis, cessat lex ipsa, what should matter more is the purpose and raison d'être than the respective literal meaning. The ratio should be imposed, not only within the limits of a literal text often equivocal, but even breaking the constraints of that literal text or restricting a legal formula with an overly broad scope". ( ) It cannot be forgotten that the tax system and, consequently, the rules that also compose it, is based on guiding principles that must be considered in interpretation, with the unity of that system having to be safeguarded.
3.1.7. Non-application of the Constitutional Court Decision 85/2010 to the Case
The respondent states: "As noted, we refer that also the Constitutional Court17 had the opportunity to pronounce on this matter, judging constitutional the rule of paragraph 3 of article 42 of the CIRC (the rule that preceded paragraph 3 of article 45 resulting from the renumbering carried out by article 7 of Decree-Law no. 159/2009 of 13 July), in the wording modified by paragraph 1 of article 44 of Law no. 60-A/2005, of 30 December when it came to establish that the negative difference between capital gains and capital losses realized through onerous transmission of share capital contributes to the formation of taxable profit in only half of its value."
Indeed, the Constitutional Court, in its Decision no. 85/2010, of 3 March 2010, in the context of Case no. 653/09, declared not to violate the Constitution "a tax regime that results in lesser weighting, for tax purposes, of certain losses accounted for by companies. Moreover, the impossibility of full deduction of some costs or losses, as such accounted for by taxpayers, for purposes of determining the tax base, not only results from various paragraphs of the current article 45 of the CIRC, but has already been the subject of appeal to this Court, namely in cases decided by Decisions nos. 418/2000 and 451/2002 (available on the Internet page of the Constitutional Court at http://www.tribunalconstitucional.pt/), which did not judge the solution found to be unconstitutional. Jurisprudence which is now understood to be equally reiterated."
With due respect, such a case has no validity for the situation under analysis. What is not at issue, as seen, is the denial of the application of article 45 of the CIRC, but rather knowing whether, in light of the letter of the law and attending to teleological and systematic elements, the rule established in article 18, paragraph 9, letter a) of the same Code should be complemented with what is provided for in the then article 45, paragraph 3 of the CIRC. That is, what is not at issue is any constitutionality problem, only an interpretation problem in conformity with the letter and spirit of the law.
It is emphasized. By assuming that the Court should attend to the effective impact of the application of the rule – cf. point 3.1.5. of this decision – one is not, with that, proceeding to any correction of the rule, nor overstepping judicial competences. Rather, one is attending to the fact that the reality of a tax rule is integrated in the tax system, generating the need to balance the interests at issue. The guarantee of such balance must also pass through the determination of the existing and applicable normative framework. And for that purpose the use of interpretive instruments is due, whether those existing in general terms (Civil Code, via article 11, paragraph 1 of the LGT) or those specific to taxation (article 11, paragraph 3 of the LGT). That is, what is not at issue is a constitutionality problem nor an undue disregard for an express legislative choice.
3.1.8. Conclusion
Thus, and in sum, in obedience to the hermeneutical requirements of article 9 of the Civil Code, according to which "Interpretation shall not be limited to the letter of the law, but shall reconstruct from the texts the legislative thought, having particular regard to the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied" (paragraph 1), and "In determining the meaning and scope of the law, the interpreter shall presume that the legislator established the most appropriate solutions and knew how to express his thought in adequate terms"(paragraph 3), article 45, paragraph 3, of the CIRC is to be interpreted in the sense that its provision does not include expenses resulting from the application of fair value in financial instruments, which are relevant for the formation of taxable profit, in accordance with letter a) of paragraph 9 of article 18. This is equivalent to considering that article 18, paragraph 9, letter a) of the CIRC imposes contribution "to the formation of taxable profit", without reservations or limitations, of "income or expenses" that "(...) relate to financial instruments recognized at fair value", "provided that" they are recognized "through profit or loss"; they are a matter of "equity instruments"; "have a price formed in a regulated market"; and "the taxpayer does not hold, directly or indirectly, a share in capital greater than 5% of the respective capital", with article 45, paragraph 3, of the said Code not being applied in these cases, to the extent that they are not covered by the normative provision of the same.
Based on the foregoing, it is understood that the request merits approval.
Consequently, the corrections made regarding adjustments resulting from the application of fair value are illegal.
The decision on the hierarchical appeal, which maintained the assessments, is affected by the same defect, so its annulment is justified, in accordance with article 163, paragraph 1, of the Code of Administrative Procedure, subsidiarily applicable, in accordance with article 2, letter c), of the LGT.
3.2. Uniform Application of Law
There is no rule of precedent in Portugal. However, what is expressed by the legislator in article 8, paragraph 3 of the Civil Code merits consideration. There is expressed that "in the decisions he renders, the judge shall take into account all cases that merit analogous treatment, in order to obtain an interpretation and uniform application of law". Thus, in the name of legal certainty and security, as well as in the name of the unity of the legal system and, equally, and no less importantly, in the name of fiscal equity, existing decisions on the facts in question, their argument and justification should be considered.
In this domain, take into account that, since the aforementioned Arbitral Decision of 25-11-2013, rendered in Case no. 108/2013-T, the jurisprudence developed in CAAD on comparable cases has given rise to a preponderant jurisprudential line. As the Supreme Administrative Court (STA) affirms, there is firm arbitral jurisprudence on this matter. ( ) As examples, the following arbitral decisions are mentioned: 25-9-2015, Case no. 208/2015-T; 5-10-2015, Case no. 59/2015-T; 9-12-2015, Case no. 231/2015; 11-1-2016, Case no. 396/2015-T; 1-2-2016 Case no. 126/2015-T; 22-4-2016, Case no. 563/2015-T; 17-6-2016, Case no. 738/2015-T; 14-10-2016, Case no. 89/2016-T; 14-12-2016, Case no. 393/2016-T; 8-3-2017, Case no. 556/2016-T; 20-3-2017, Case no. 437/2016-T; 12-1-2018, Case no. 155/2017-T. While not unanimous, it is widely preponderant.
On the other hand, considering the position of the taxpayer in question in this case under analysis, it should be noted that, with respect to the same economic reality, but on a different tax year – that of 2011 - there was already an arbitral decision – on 28-10-2016, in the context of Case no. 77/2016-T - whose orientation follows the direction of the decision expressed by this arbitral tribunal.
It is also noted that the STA has also expressly pronounced on the matter. The Superior Court assumes that "the rule of article 45, paragraph 3 of the CIRC is not applicable when the determination – at Fair Value – of the value of assets subject to a regulated market by official entities occurs, because the reason for its existence, combating evasion and fiscal avoidance, has no justification, the value of the assets – the financial position – ends up being 'strange' and unrelated to the taxpayer's will which, ultimately, has no relevance for the valuation or devaluation of the respective asset» (Decision of 06-06-2018, Case no. 0582/17).
In the same sense, on the scope of article 45, paragraph 3 of the CIRC, though with respect to another issue, the STA decision of 17-02-2016, rendered in Case no. 01401/14, also pronounced itself.
For the foregoing, in harmony with the preponderant jurisprudence, both of the STA and of various tax arbitral tribunals, it is reinforced that the challenged assessments are affected by a defect of violation of law, due to incorrect interpretation of article 45, paragraph 3, of the CIRC, so its declaration of illegality is justified.
3.3. Question of Prejudiced Knowledge
Resulting from the foregoing the declaration of illegality of the assessments that are the subject of the present proceedings, by a defect that prevents the renewal of the acts, the knowledge of the defect of omission of the right to a hearing invoked by the Claimant is prejudiced, by being futile, in accordance with articles 130 and 508, paragraph 2, of the Code of Civil Procedure, subsidiarily applicable by force of the provisions of article 29, paragraph 1, letter e), of the RJAT.
In truth, article 124 of the CPPT, subsidiarily applicable by force of the provisions of article 29, paragraph 1, of the RJAT, when establishing an order of consideration of defects, presupposes that, once a defect is judged to have merit which assures the effective protection of the rights of the challengers, it is not necessary to consider the rest, because if it were always necessary to appreciate all the defects imputed to the act challenged, it would be indifferent the order of their consideration.
For the foregoing, no knowledge is taken of the remaining defects imputed by the Claimant to the acts whose declaration of illegality they requested.
4. Decision
In accordance with the foregoing, the members of this Arbitral Tribunal agree to:
a) Judge the request for arbitral pronouncement to have merit;
b) Annul the IRC assessments nos. 2015... and 2015..., relating to the tax years 2012 and 2013;
c) Annul the order of 14-11-2018 that dismissed the hierarchical appeal.
5. Value of the Proceedings
In accordance with the provisions of article 305, paragraph 2, of the CPC and 97-A, paragraph 1, letter a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are assigned the value of €1,357,516.26.
6. Costs
In accordance with article 22, paragraph 4, of the RJAT, the amount of costs is set at €18,360.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.
Lisbon, 25 June 2019
The Arbitrators
(Jorge Lopes de Sousa)
(Paulo Jorge Varela Lopes Dias)
(Rita Calçada Pires)
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