Decision n. º 275/15, of Constitutional Court
A decision of the Constitutional Court on an issue of unconstitutionality of the rule contained in n. º 12 of article 10 of the Portuguese Personal Income Tax Code (“CIRS”), on the grounds of violation of the principle of equal treatment, was published, on 28 July 2016, in the Portuguese Official Gazette.
The appeal to the Constitutional Court was brought by the Portuguese Tax Authority (“AT”) and the Public Prosecutors, after receiving knowledge of the arbitral decision of the Administrative Arbitration Board (“CAAD”), of 29 April 2009, Process 703/2014-TO, which has refused the application of n.º 12 of article 10 of the CIRS (introduced by Law 39-A/2005, of 29 July), on the grounds of unconstitutionality by the violation of the principle of equal treatment.
The above mentioned article 10 delimited the incidence of the taxation of capital gains and n. º 2 of the same article excluded from taxation the capital gains resulting from the sale of shares held for more than 12 months. However, the rule contained in nº. 12 of the same article established that the exclusion set out on n.º 2 did not cover the capital gains resulting from the shares of a company whose assets were constituted, directly or indirectly, in more than 50% by real estate located in Portuguese territory. Therefore, CAAD has considered that the rule was unconstitutional, arguing that the same rule has created situations of discrimination without any reasonable justification.
In contrast, the AT has argued that the referred rule was a specific anti abuse provision, called sniper’ s approach, aiming to prevent that, by the transmission of shares, the taxation of real estate was excluded. The Public Prosecutors has also argued that the rule was not unconstitutionality since there was no discrimination based on the quality of resident or non-resident, as all the companies were free to hold real estate abroad and the Portuguese State had no competence, nor legitimacy to tax the income of real estate located outside Portugal, according to the lex rei sitae principle.
In the appeal, the Constitutional Court confirms that the rule contained in n. º 12 of article 10 of CIRS, introduced by Law 39-A/2005, of 29 July and, in the meantime, together with the referred n. º2, revoked by Law 15/2010, of 26 July, is a special anti-abuse rule that if did not exist, would encourage the transmission of shares of the companies who owned real estate, instead of the transmission of the real estate.
The Constitutional Court has refuted the understanding that the rule created situations of discrimination without a reasonable justification, particularly because, for the legislator, the limit of 50% of the value of the company’s assets is a sufficient indication that the respective activity’s object is the management and valuation of its real estate, therefore the eventual assets’ valuation will always lead, regardless of any real estate transaction, to a valuation of the shares, which easily may generate capital gains. The Constitutional Court has also added that the limit of 50% is also set out both in the OECD Model Convention (OCDE 2000/2005 – Model Convention) and in the Statute of Tax Benefits, approved by Decree-Law n. º 251/89, of 1 July.
For these reasons, the Constitutional Court has not judge unconstitutional the rule contained in n.º 12 of article 10 of CIRS, especially because, bearing in mind that the main goal of the legislator was to prevent the abuse resulting from the replacement of the transmission of real estate which generate capital gains subject to tax by the transmission of shares of the companies who owned the same real estate which generate capital gains not subject to taxation, the localization in Portugal of the real estate would appear as the decisive connecting factor.
Jorge Costa Martins, Partner CTSU