South Central Administrative Court

Judgment of 7 May 2013

Case No. 06579/13

The focus of this Judgment is the application of tax law in time, as well as the rules of taxation of signs of wealth, in particular, in terms of the burden of proof – i.e., evidence provided by the taxpayers lodging an appeal of the source of income for the acquisition of a property in Portugal in an amount exceeding EUR 250,000.00, where they did not submit in Portugal their tax return for personal income tax purposes in respect of the year of acquisition.

Referring to the personal and property connection factors within the conceptualisation of the principle of territoriality, the Court ruled that, for personal income tax purposes, the personal connection factor "residence" becomes particularly meaningful since it qualifies as taxable persons individuals who have, alternatively, "remained in Portuguese territory for more than 183 consecutive or non consecutive days, or who, having remained for a shorter period, own in the Portuguese territory, as at 31 December, a residence in such conditions as to suggest an intention to maintain and occupy it as usual residence".

As regards the source of signs of wealth, the court ruled that where external signs are out of proportion with the declared income, the Tax Administration may make an official tax assessment, unless the taxpayer proves that the declared income is correct and that there is another source for those signs of wealth.

on that basis, the court ruled that the procedure of determination of the taxable income subject to personal income tax by indirect methods is only possible where the Tax Administration proves that there have been acquisitions in a value higher than the one set out in the General Tax Law (Lei Geral Tributária ("LGT")), the taxpayer only having the burden to prove the source of the signs of wealth (that is, the source of income that made it possible for the taxpayer to acquire the goods that amount to «signs of wealth») so that it can be determined if the same were left out of the personal income tax returns (or not).

Finally, the court concludes that, in situations in which the taxable person only provides partial evidence of the signs of wealth, it is permitted to partially exclude the presumption of the existence of income subject to taxation as "increase of assets" for personal income tax purpose, in which case only the difference between the standard income (in this case 20% of the property’s purchase price) and the unjustified increase of assets is taken into account to establish by presumption the amount of the «unjustified increase of assets».

South Central Administrative Court

Judgment of 7 May 2013

Case No. 06418/13

In this Judgment, the Court, in addition to examining the question of the nullity of a decision due to the failure to rule and a mistake in the finding of facts, and verifying compliance with the inquisitorial principle and the principle of material truthfulness, rules on the burden of proof in connection with the exercise of the right to deduct VAT in the case of simulation of transactions.

The court observes that the exercise of the right to deduct VAT – enshrined in the Sixth Directive 1977 – is one of the main characteristics of this tax, which cannot, however, be based on simulated transactions or where the price included in the invoice is simulated.

In accordance with the Court, "substantiated indicators" that the invoices do not correspond to the reality do not allow to apply the presumption of truthfulness and good faith established in favour of the taxpayer, and it will not be for the Tax Administration to prove the non-existence of the tax facts in respect of which it considers tax was unduly deducted, rather it will be for the taxpayer to prove the existence of the tax facts based on which the tax was deducted in the relevant tax returns.

North Central Administrative Court

Judgment of 10 May 2013

Case No. 00515/10.2 BEPRT

In this Judgment, the Court was requested to rule on an error in the form of process, which implied the discharge of the National Treasury from the proceedings, as a result of the non-compliance with the order of the court to correct the statement of claim with the means considered adequate.

The court argues that taxpayers’ rights may be recognised not only through courts’ decisions but also through decisions of the Tax Administration in favour of the taxpayers.

Accordingly, in case of a definitive administrative act not subject to any appeal that establishes a right of a private person, which is not duly implemented by the Tax Administration, or where there is another enforcement instrument against it, the taxpayer may have recourse to the relevant enforcement proceedings in order to obtain the corresponding judicial enforcement.

The court argues that the adequate means to order the Tax Administration to perform an act, which cannot be appealed, is the procedure of enforcement of decisions, provided for in Código de Processo nos Tribunais Administrativos (Procedural Law in Administrative Courts), rather than the order to adopt a behaviour, therefore concluding that, in the present case, there was no error in the form of process.

Administrative and Tax Arbitration Centre

Arbitration award of 3 May 2013

Case No. 150/2012-T

The Court ruled on the lawfulness of the assessments of Imposto Municipal sobre Imóveis ("IMI") (Municipal Tax), by reference to the application of the exemption provided for in article 49 of the Tax Benefits Statute ("EBF").

The Court sustained that the tax benefit set out in that provision, applicable to property investment funds, pension funds and pension saving funds, has a structural nature, and does not benefit from any pre-determined duration term, in spite of the general lapse period to which it is subject by virtue of article 3 of the said Statute.

The Court argued that the nature of reinforced law of a provision that terminates the above mentioned exemption contributes to exclude the application of article 11(1) setting out that "The provisions that amend conventional, conditional or temporary tax benefits, do not apply to taxpayers who already benefit from the right to the relevant tax benefit".

Finally, confirming its position, the Court concluded that there is no breach of the principles of trust, protection, good faith and legal security in a situation in which the tax event occurs when the provision that provided for the exemption was no longer in force, highlighting the cyclic and changing nature of the exemption.

Administrative and Tax Arbitration Centre

Arbitration Award of 9 May 2013

Case No. 123/2012-T

The subject matter of this decision is to determine the compliance with the requirements for the application of the general antiabuse clause, in connection with abusive tax planning, as grounds for the illegality of the assessment of personal income tax.

Examining the elements of the general antiabuse clause, in connection with tax planning, the Court Tribunal sustained that a tax advantage occurs in a situation of transformation of a private limited liability company into public limited liability company and the subsequent sale of shares, as it benefits from a more advantageous tax framework than a situation of maintenance of the company as private limited liability company and subsequent sale of the stakes, since the former is not taxed in accordance with article 10(2) of the personal income tax code, as amended by Decree-Law No. 228/2002 of 31 October, while the latter is considered as a taxable gain, in accordance with article 10(1)(b) of the personal income tax code.

However, the Court considered that such situation of transformation of a private limited liability company into a public limited liability company and the subsequent sale of shares amounts to a planning and structure of legal acts and transactions, relating to corporate reorganisation and to the underlying investment, has an economic justification, and are not assumed as central acts of a structure of legal acts and transactions essentially aimed to obtain a tax advantage.

Finally, the Court ruled that even if the reasons for the transformation were exclusively of a tax nature, it is the lawmaker that chooses to tax the sale of the stakes of the private limited liability company but not those of the public limited liability company, for which reason the requirements for the application of the general antiabuse clause, leading to the ineffectiveness of the legal transactions in the tax context, are not fulfilled.