Process: 98/2017-T

Date: September 25, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 98/2017-T addresses the calculation of capital gains (mais-valias mobiliárias) on share sales for IRS purposes. Taxpayers sold 7,160,961 shares of Bank C in 2014 for €602,200.77, which they had acquired between 2007-2014 for €4,334,289.27, resulting in a capital loss of €3,732,088.50. The Portuguese Tax Authority (AT) issued an official IRS assessment of €170,565.88, apparently treating the sale as generating capital gains without considering acquisition costs. The taxpayers failed to declare these share sales in their original IRS return. The AT relied on Form 13 declarations from the bank and issued an official assessment based solely on the sale value. The taxpayers argued that the AT illegally ignored acquisition costs, while the AT contended that taxpayers failed to provide adequate proof of acquisition values during administrative proceedings. The case highlights critical issues regarding burden of proof in capital gains taxation, the obligation to declare securities transactions, the calculation methodology for mais-valias mobiliárias under Article 10 of the IRS Code, and procedural requirements for challenging official tax assessments through the administrative complaint process and subsequent CAAD arbitration.

Full Decision

ARBITRAL DECISION

I – REPORT

A…, taxpayer no. …, and B…, taxpayer no. …, married, with tax residence at Rua…, no. …, …, …-… Póvoa de Santa Iria, hereinafter referred to as "Applicants", came to request, in accordance with articles 2, no. 1, paragraph a), and 10 of the so-called Legal Framework for Tax Arbitration (RJAT), which is part of Decree-Law no. 10/2011, of January 20, the establishment of a collective arbitration tribunal and to present a request for arbitral pronouncement, with a view to the annulment of the decision denying the administrative complaint no. …2016… and, consequently, the annulment of the official assessment of Personal Income Tax no. 2016 …, of 06/01/2016, relating to Personal Income Tax for 2014, from which resulted an amount of tax payable in the total sum of € 170.565,88.

The defendant is the Tax and Customs Authority (hereinafter referred to only as "Respondent").

The petition for establishment of the arbitration tribunal was accepted by the President of CAAD and automatically notified to the Respondent on 06-02-2017.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of January 20, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31, the Deontological Council of CAAD appointed as arbitrators of the collective arbitration tribunal Judge José Poças Falcão, Prof. Doctor Pedro Soares Martínez and Prof. Doctor Paulo Nogueira da Costa, who communicated acceptance of the mandate within the applicable time period.

On 21-03-2017 the Parties were duly notified of this appointment, and did not manifest any intention to reject the appointment of the arbitrators, in accordance with the provisions of article 11, no. 1, paragraphs a) and b) of the RJAT, in conjunction with articles 6 and 7 of the Deontological Code.

In compliance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the Arbitration Tribunal was constituted on 05-04-2017.

The Applicants allege, in summary, that:

a) They acquired, between the years 2007 and 2014, 7,160,961 shares, issued by C…, for the total value of € 4.334.289,27;

b) Between July and August 2014, the said shares were disposed of for the total value of € 602.200,77;

c) From the disposition of the aforementioned shares, there resulted, therefore, a loss quantified at € 3.732.088,50;

d) The Tax Authority, in calculating capital gains or losses, did not take into consideration the acquisition value of the shares;

e) The decision denying the administrative complaint, notified to the Applicants by Official Letter dated November 15, 2016 should be annulled and, in consequence, the Personal Income Tax assessment no. 2016 …, of January 6, 2016, relating to the year 2014, in the amount of € 170.565,88 should be annulled, with all legal consequences.

The Respondent presented a Reply, in which it defends by contesting, alleging, to the effect that the claim is unfounded, in summary, the following:

The Applicants have not substantiated the allegation that the disposition of the shares in question did not generate capital gains, but rather losses, which, according to them, "is due to the fact that the Tax Authority did not include in its respective calculation the acquisition value, ignoring the fact that the Applicants acquired the shares for valuable consideration, at a value substantially higher than that of the disposition";

The Applicants have provided no evidence regarding the acquisition value of the said shares;

Pursuant to the combined provisions of paragraph a) of no. 1 of article 9 and paragraph b) of no. 1 of article 10, both of the Personal Income Tax Code, the Applicants were obliged to declare the income obtained from the disposition of the shares of C…, which they did not;

It is only in these arbitration proceedings, for the first time, that the Applicants invoke the existence of losses, attaching a bank statement relating to the sale of shares in the course of 2014;

This document does not have the capacity to provide the evidence sought by the Applicants, since it is a document that is not even signed and whose content does not permit, in unambiguous manner, the cross-checking with the information from Form 13 submitted by Bank C…;

This document was not presented in the context of the administrative complaint;

Without conceding, even if it were understood that the proof of the loss had been made, it is certain that the costs of the arbitration proceedings could never be charged to the Respondent, because it was not the Respondent that gave rise to them.

The Parties presented final written submissions, in which they reiterate, in essence, the arguments set forth in the Initial Application and in the Reply.

II – PROCEDURAL RULINGS

No objections were raised.

The Parties have legal personality and capacity, are properly interested parties as to the request for arbitral pronouncement and are duly represented, in accordance with the provisions of articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of March 22.

No irregularities have occurred, therefore it is necessary to address the merits.

III - MERITS

III.1 - FACTS

§1. Proved Facts

The Tribunal finds as proved the following facts:

In accordance with Form 13 declarations presented by financial institutions, and, in the specific case, by Bank C…, the Applicants, in the course of 2014, disposed of the following securities:

| Security Code | Transaction Date | Number of Securities | Transaction Value (in euros) |
|---|---|---|---|
| PTB CPO … | 2014/07/17 | 3,503,422 | 224,219.00 |
| PTB CPO … | 2014/07/21 | 3,022,860 | 317,784.24 |
| PTB CPO … | 2014/08/15 | 75,628 | 6,609.89 |
| PTB CPO … | 2014/08/19 | 559,051 | 53,587.65 |
| | TOTAL | 7,160,961 | 602,200.78 |

On 28/05/2015, the Applicants submitted Form 3 of the Personal Income Tax declaration for the year 2014, accompanied by schedules A, G1 and H, having not declared the aforementioned dispositions of securities;

The aforementioned declaration gave rise to a divergence process – "Capital Appreciation - Income Divergence", which was notified to the Applicants;

The Applicants, on 16/07/2015, requested, through the Tax Portal, "that you indicate to me more specifically what this concerns, as I am unable to identify what income it relates to";

On 28/06/2015, the notification was generated: "Income from capital appreciation is lower than that known";

On 20/11/2015 and 30/11/2015, the Applicants were notified for prior hearing – "IT IS PROPOSED TO CORRECT FORM 3 DECLARATION TO INCLUDE INCOME RESULTING FROM THE DISPOSITION OF SECURITIES CARRIED OUT BY THE TAXPAYER IN 2014 ACCORDING TO THE DECLARATION OF C…, S.A.";

The Applicants did not submit an amended declaration, nor justified the Form 13 from C…;

An official assessment was issued in accordance with the elements known to the Tax Authority, namely, the existence of a sale, by the Applicants, of shares in Bank C…, for the value of € 602.200,77;

The Applicants filed an administrative complaint against the official assessment;

The Applicants were notified of the draft decision in the context of a prior hearing, but did not exercise the right to make submissions (notifications of 26/09/2016 and 12/10/2016, sent to the Applicants' tax address);

By decision of 27/10/2016, the administrative complaint was dismissed;

The Applicants were notified of that decision by Official Letter …, of 17/11/2016, from the Lisbon Tax Service;

Not accepting the decision, the Applicants presented a petition to CAAD for the establishment of an arbitration tribunal, which gave rise to the present proceedings;

The shares disposed of in the course of 2014 [described above, in paragraph a)] were acquired between the years 2007 and 2014 for the total value of € 4.334.289,27, as shown in the signed bank statement attached to the proceedings by the Applicants;

The document referred to in the preceding paragraph was not presented to the Tax Authority in the context of the administrative complaint.

§2. Facts Not Proved

With relevance to the decision, there are no unproved facts.

§3. Reasoning as to the Facts

Concerning the facts proved and not proved, the conviction of the Tribunal was based on the free appreciation of the positions taken by the Parties in terms of facts, in the Administrative Procedure and on the substance of the documents attached to the proceedings, not contested by the Parties.

III.2 - LAW

§1. Question to be Decided

In the present proceedings, it is important to determine whether the valuable disposition of the securities in question (shares of C…) generated capital gains for the Applicants that consequently justify their taxation under Personal Income Tax, or whether, on the contrary, that transaction generated a loss for the Applicants, as alleged by them. This means that the dispute in the present proceedings is based on a divergence as to the facts, with particular significance being attached to the evidence provided by the Parties relating to the same.

§2. Consideration of the Question to be Decided

The Applicants challenge the illegality of the official assessment of Personal Income Tax no. 2016 …, of 06/01/2016, relating to Personal Income Tax for 2014, on the ground that the disposition of the shares did not generate capital gains, but rather losses, "which is due to the fact that the Tax Authority did not include in its respective calculation the acquisition value, ignoring the fact that the Applicants acquired the shares for valuable consideration, at a value substantially higher than that of the disposition …" (cf. article 5 of the initial petition).

The documentation attached to the proceedings permits proof of the acquisition values (€ 4.334.289,27) and realization values (€ 602.200,77) of the shares in question.

Thus, by application of the provisions of article 10, no. 4, paragraph a) of the Personal Income Tax Code, it is concluded that there is no capital gain that originated the assessment in question, but rather a loss in the amount of € 3.732.088,50.

However, the proof of the existence of the aforementioned loss was only made in the present proceedings, without it having been made in the context of the administrative complaint.

The making of the official assessment was not due to any error by the Tax Authority services, but rather to the failure to comply with the declarative obligation by the Applicants, as is apparent from the facts found to be proved.

In this manner, the annulment of the express dismissal of the administrative complaint in question and the annulment of the Personal Income Tax assessment, which is a consequence of the non-existence of the capital gain that justified this assessment, do not entail any duty of compensation of the Applicants by the Respondent.

IV – DECISION

On these grounds, and with the reasons set forth, this Arbitral Tribunal decides to find the request for arbitral pronouncement founded, annulling the express dismissal of the administrative complaint and the annulment of the Personal Income Tax assessment contested.

V - VALUE OF THE PROCEEDINGS

In accordance with the provisions of article 306, no. 2 of the Code of Civil Procedure and 97-A, no. 1, paragraph a), of the Code of Tax Procedure and 3, no. 2 of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 172.256,56.

VI – COSTS

The Respondent submits in its Reply and in the final submissions presented that "even if it were understood that the proof of the loss had been made, it is certain that the costs of the arbitration proceedings could never be charged to the Respondent, because it was not the Respondent that gave rise to them."

The general rule in matters of costs is that "[t]he decision judging the action or any of its incidents or appeals condemns in costs the party that has given rise to them or, if the action has not been won, whoever benefited from the proceedings" (article 527, no. 1 of the Code of Civil Procedure), it being considered that "[t]he losing party gives rise to the costs of the proceedings, in the proportion in which it is" (article 527, no. 2 of the Code of Civil Procedure).

It is provided, however, in no. 1 of article 535 of the Code of Civil Procedure that "[w]hen the defendant has not given rise to the action and does not contest it, the costs are paid by the plaintiff."

In the present case, the Applicants only provided evidence of the non-existence of the capital gain by the attachment to the proceedings of a signed bank statement, at the time of presentation of the final submissions.

The Respondent pronounced on the new documentation attached to the proceedings by the Applicants, contesting the suitability of the same to provide the evidence sought by them.

The Respondent submits that "[t]he documents now presented, in particular the document from Bank C… (which already formed part of these proceedings, and now bears a stamp from the banking institution) do not permit determination of whether we are dealing with the securities listed in Form 13."

It is concluded that the Respondent contested the action, despite not having given rise to it, therefore the cumulative requirements provided for in article 535, no. 1 of the Code of Civil Procedure are not met – a case in which the costs would be paid by the Applicants.

Thus, on the basis of the provisions of article 527, nos. 1 and 2 of the Code of Civil Procedure, and article 22, no. 4 of the RJAT, the amount of costs is fixed at € 3.672,00, in accordance with Table I annexed to the Regulation on Costs in Tax Arbitration Proceedings, charged to the Respondent.

Lisbon, 25-9-2017

The President Arbitrator

(José Poças Falcão)

The Member Arbitrator

(Pedro Soares Martínez)

The Member Arbitrator

(Paulo Nogueira da Costa)

Frequently Asked Questions

Automatically Created

How are capital gains and losses on share sales (mais-valias mobiliárias) calculated for IRS purposes in Portugal?
Capital gains and losses on share sales (mais-valias mobiliárias) for IRS purposes in Portugal are calculated as the difference between the sale value and the acquisition value of the shares, as established in Article 10 of the IRS Code (CIRS). Taxpayers must declare these transactions in their annual IRS return using the appropriate schedules. The gain or loss is determined by subtracting the documented acquisition cost from the sale proceeds. Financial institutions report share sales to the Tax Authority through Form 13 declarations, creating an information trail that the AT uses to verify taxpayer compliance.
Can the Portuguese Tax Authority (AT) ignore the acquisition value of shares when calculating capital gains?
The Portuguese Tax Authority cannot arbitrarily ignore the acquisition value of shares when calculating capital gains. However, when taxpayers fail to declare share sales in their IRS returns and do not provide substantiated evidence of acquisition costs, the AT may issue an official assessment (liquidação oficiosa) based on the information available, primarily the sale value reported by financial institutions. The burden of proof rests on the taxpayer to demonstrate acquisition costs through reliable documentation such as bank statements, purchase confirmations, or broker records. Without such evidence presented during administrative proceedings, the AT may calculate gains assuming zero or minimal acquisition cost.
What is the procedure to challenge an IRS tax assessment through CAAD arbitration in Portugal?
To challenge an IRS assessment through CAAD arbitration in Portugal, taxpayers must first file an administrative complaint (reclamação graciosa) with the Tax Authority within the legal deadline. If the complaint is denied, taxpayers can petition the Administrative Center for Tax Arbitration (CAAD) under Article 10 of Decree-Law 10/2011 (RJAT) to establish an arbitration tribunal. The CAAD President accepts the petition and notifies the AT. A collective arbitration tribunal of three arbitrators is appointed, the tribunal is constituted, parties present their arguments through written submissions, and the tribunal issues a binding arbitral decision on the tax dispute.
What happens when the sale of shares results in a capital loss instead of a capital gain for IRS taxation?
When share sales result in a capital loss instead of a capital gain for IRS taxation purposes, the loss can generally be offset against capital gains from other securities transactions in the same year or carried forward to future tax years, subject to specific limitations under Portuguese tax law. No IRS tax should be due on transactions that generate losses. However, taxpayers must properly declare these losses in their IRS returns and substantiate them with appropriate documentation showing both acquisition and disposition values. Failure to declare losses or provide supporting evidence may result in the Tax Authority disregarding them when issuing assessments.
How can taxpayers dispute an official IRS tax assessment (liquidação oficiosa) through a gracious complaint (reclamação graciosa) and arbitration?
Taxpayers can dispute an official IRS assessment (liquidação oficiosa) by first filing a gracious complaint (reclamação graciosa) with the Tax Authority within 120 days of notification of the assessment. During this administrative phase, taxpayers should present all evidence supporting their position, including documentation of acquisition costs, transaction records, and legal arguments. The AT conducts a prior hearing (audiência prévia) before deciding. If the complaint is denied, taxpayers may escalate to CAAD arbitration by filing a petition within 90 days of notification of the denial. The arbitration process provides an independent judicial review of the tax dispute, with the arbitral tribunal having authority to annul or modify the contested assessment.