Process: 10/2015-T

Date: June 30, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 10/2015-T) concerns the reinvestment of capital gains from residential property sales under Portuguese IRS law. The taxpayer sold a property in 2010 for €150,000 (acquired in 2002 for €80,000) and sought to exclude the capital gains from taxation by reinvesting in a new property purchased in 2012 for €240,000. The central dispute involves calculating the reinvested amount. The claimant argued that €115,131.23 was reinvested (sale price of €150,000 minus outstanding mortgage debt of €34,868.77). However, the Tax Authority (AT) determined only €108,500 qualified as reinvestment. The controversy arose because the new property was financed through a €120,000 mortgage, an €11,500 additional loan, and €120,000 in own capital. The AT contended that both bank loans (totaling €131,500) constituted financing for the acquisition, meaning less own capital was actually reinvested. The claimant maintained the €11,500 loan served other purposes (IMT tax, stamp duty, and deed expenses), making the actual own capital investment €120,000—exceeding the reinvestment requirement. This case highlights critical issues in Portuguese tax law: whether reinvestment refers exclusively to sale proceeds versus borrowed funds, how to treat multi-purpose loans when calculating reinvestment, and whether taxpayers can exclude ancillary acquisition costs financed separately. The taxpayer filed an administrative appeal (reclamação graciosa) which received partial deferral, prompting this arbitration request under Decree-Law 10/2011 to challenge the remaining assessment and seek full capital gains exemption.

Full Decision

ARBITRAL DECISION

  1. REPORT

1.1 A…, taxpayer no. …, resident at Av. …, no. … – 5th Floor, …-… Lisbon, hereinafter also referred to as "Claimant", submitted a request for arbitral pronouncement, in accordance with the provisions of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Tax Arbitration, hereinafter "LRTA"), with the "Respondent" being the Tax and Customs Authority (hereinafter "TCA").

1.2 The Claimant seeks a declaration of illegality and corresponding annulment of the decision of partial (non-)deferral of the administrative appeal presented, in the part that denies its request, notified through Official Notice no. …, of 19-12-2014, from the Distinguished Head of Division of the Finance Directorate of Lisbon, and the consequent annulment of the corresponding assessment of Personal Income Tax (IRS) and compensatory interest no. 2014…., as well as the condemnation of the TCA to refund the amounts voluntarily paid by the Claimant.

1.3 As grounds for its request, the Claimant alleges in summary that:

(a) On 11 November 2002, the Claimant acquired the property consisting of the autonomous fraction designated by the letter "I", registered in the property register of the parish and municipality of …, under article no. .., for the price of € 80,000.00.

(b) On 21 January 2010, the Claimant sold the said property for a price of € 150,000.00.

(c) When presenting Form 3 of IRS relating to the year 2010, replaced on 31 May 2011, the Claimant entered in field 401 of table 4 of Annex G the values of sale price of € 150,000.00 and acquisition price of € 80,000.00.

(d) The Claimant further entered, in fields 505 (amount of debt on the loan at the date of sale of the property) and 506 (sale value intended for reinvestment), of table 5 of the said annex, the amounts of € 34,868.77 and € 115,131.23, respectively.

(e) On 26 June 2012, the Claimant acquired a new property, namely, the fraction "AT" of the article registered in the urban property register under no. …, located in the parish of .., municipality of …, for the value of € 240,000.00.

(f) On 17 July 2014, the Claimant was notified of the tax assessment act relating to IRS, for the tax year 2010, materialized in the additional assessment note no. 2014…. and compensatory interest in the total amount of € 11,926.95.

(g) Disagreeing entirely with the said assessment, the Claimant filed an administrative appeal attempting to demonstrate that the assessment was undue, given the full reinvestment of the capital gains obtained and duly declared, from the sale of the previous property.

(h) The administrative appeal was subject to partial deferral.

(i) The TCA wrongly considered as reinvested the amount of € 108,500 and not the amount indicated by the Claimant: € 115,131.23.

(j) The Claimant obtained a bank loan in the amount of € 120,000 for the acquisition of the new property, having requested additional financing of € 11,500 which was not used to finance the acquisition of the new property.

(k) It can be observed both from the preliminary purchase and sale agreement (CPCV) and from the deed itself, that the new property was acquired for € 240,000, its acquisition being accomplished through financing in the amount of € 120,000 and with own capital in the amount of € 120,000, an additional loan of € 11,500 having been made, with the indication of other purposes in the deed, due to the expenses that would be incurred with IMT and stamp duties in addition to the deed itself, which amounted to approximately € 10,500.

(l) The Claimant considers incorrect the TCA's understanding that the bank loans were intended for the same purpose, the purchase of the new property.

(m) This does not correspond to the truth, because the TCA itself admits that the Claimant issued 3 bank cheques to the seller of the property subject to reinvestment and to Bank ... in the total value of € 120,000.

(n) It is undeniable that the Claimant invested € 120,000 in own capital in the purchase of the house, and therefore reinvested an amount greater than the sale price of the old property, the fact having resulted in a shortage of funds that forced the Claimant to resort to new financing to be able to pay the IMT, stamp duties and deed for the acquisition of the new property.

(o) If the TCA's understanding is to consider any and all loans as housing credit/mortgages, not considering additional loans for other purposes, as being necessary to pay the taxes due from the acquisition of the new property, never will a person be able to apply all the capital gains obtained from the sale of the house, unless they already have other means of financing that allow them to pay the taxes relating to the purchase of the new house without resorting to a bank loan.

(p) The Claimant therefore considers that the entire sale price obtained from the sale of the old property (€150,000 which deducted from the amount of debt on the loan at the date of sale of the property, the amount of €34,868.77, which totals €115,131.23) was reinvested in the acquisition of the new property, and therefore the administrative appeal should be subject to full deferral.

1.4 The Tax and Customs Authority contested alleging in summary that:

(a) One of the conditions for the exclusion of the tax charge and for what now matters, the gains from the onerous transfer of properties intended for residential use must be reinvested in the acquisition of another property with the same purpose.

(b) In the present case, given the factuality set forth as well as the applicable law, it results that the amount to be reinvested would be € 115,131.23, the value as such declared by the Claimant in Form 3 of IRS relating to the year 2010 (sale value deducted from the amortization of the loan obtained, that is, € 150,000.00 - € 34,868.77).

(c) For the acquisition of this new property, in the total value of € 240,000, the Claimant obtained the following loans:

i. Loan of € 120,000.00 from Bank ..., as stated in the purchase and sale agreement and loan contract with mortgage of the property acquired on 26 June 2012;

ii. Loan for multiple purposes, also from Bank ..., in the amount of € 11,500.00, as per the loan contract with mortgage concluded on the same date;

(d) However, the reinvestment referred to in subparagraph a) of article 5 of the IRS Code is solely and exclusively the reinvestment of the sale proceeds and not the investment through bank loan.

(e) However, the proof presented by the Claimant in the administrative appeal does not allow for verification that the credit obtained from BPI in the amount of € 11,500.00 was not used in the acquisition of the new dwelling.

(f) On the contrary, from the analysis of the bank statements attached and the contents of the Purchase and Sale Agreement and Loan Contract with Mortgage presented by the Claimant, it results that the total amount of the loan granted amounts to € 131,500.00, an amount to be considered for purposes of the capital gains exemption now under consideration.

(g) Concluding that the objection raised by the Claimant should be judged groundless.

1.5 Since the Parties did not request the production of any evidence and no exceptions were raised, the holding of the meeting of art. 18 LRTA was dispensed with. The parties waived oral or written submissions.

1.6 The Arbitral Tribunal is regularly constituted, is substantively competent, the proceedings do not suffer from defects that invalidate it, and the Parties have standing and legal capacity, showed themselves to be legitimate, the Claimant is regularly represented by a lawyer and no exceptions were raised, it is therefore necessary to consider and decide.

  1. FACTS

2.1. Facts Deemed Proven

(a) On 11 November 2002, the Claimant acquired the property consisting of the autonomous fraction designated by the letter "I", registered in the property register of the parish and municipality of …, under article no. .., for the price of € 80,000.00.

(b) On 21 January 2010, the Claimant sold the said property for the price of € 150,000.00.

(c) From the value of €150,000 was deducted the amount of debt on the loan at the date of sale of the property, in the amount of €34,868.77.

(d) When presenting Form 3 of IRS relating to the tax year 2010, replaced on 31 May 2011, the Claimant entered in field 401 of table 4 of Annex G the values of sale price of € 150,000.00 and acquisition price of € 80,000.00.

(e) The Claimant further entered, in fields 505 (amount of debt on the loan at the date of sale of the property) and 506 (sale value intended for reinvestment), of table 5 of the said annex, the amounts of € 34,868.77 and € 115,131.23, respectively.

(f) On 26 June 2012, the Claimant acquired a new property, namely, the fraction "AT" of the article registered in the urban property register under no. …, located in the parish of …, municipality of …, for the value of € 240,000.00.

(g) For the acquisition of this new property, in the total value of € 240,000, the Claimant obtained the following loans:

i. Loan contract with mortgage in the amount of € 120,000.00, for acquisition of the new property, concluded with Bank ... on 26 June 2012; and

ii. Loan contract with mortgage in the amount of € 11,500, for multiple purposes, concluded with Bank ... on 26 June 2012.

(h) For the acquisition of this new property the Claimant paid IMT (Municipal Property Transfer Tax) in the amount of € 7,712.81 and stamp duty in the amount of € 1,920.00, having borne costs with the Land Registry of Lisbon in the amount of € 585.

(i) The Claimant used own resources, of at least € 120,000 for purposes of the acquisition of the new property, detailed as follows:

i. € 24,000, with the celebration of the CPCV, through a cheque issued to the order of the seller of the property;

ii. € 37,646.39, on the date of the celebration of the deed, through a bank cheque issued to the order of Bank ...; and

iii. € 58,353.61, on the date of the celebration of the deed, through a bank cheque issued to the order of the seller of the property.

(j) The actual provision of funds in the Claimant's bank account, associated with the loan contract, in the amount of € 11,500, for multiple purposes, only occurred on 27 June 2012.

2.2 Facts Deemed Not Proven and Respective Reasoning

There are no facts relevant to the decision that are deemed not proven.

2.3 Reasoning of the Proven Facts

The proven facts are based on the documents attached to the proceedings, whose authenticity and correspondence were not questioned.

  1. LEGAL MATTERS - REINVESTMENT – BANK LOANS

Pursuant to article 10, no. 1, subparagraph a), of the IRS Code, capital gains are constituted by gains obtained which, not being considered business and professional income, capital income or property income, result from the onerous sale of real rights over real property and the allocation of any assets of the private patrimony to business and professional activity carried out in individual name by its owner.

Being that, pursuant to no. 4, subparagraph a) of the aforementioned normative provision, the gain subject to IRS, in the case in question, is constituted "by the difference between the sale value and the acquisition value, net of the part qualified as capital income, if applicable".

However, it follows from subparagraph a) of no. 5 of the referred rule (in the wording given by Law no. 64-A/2008, of 31 December), that gains from the onerous transfer of properties intended for the taxpayer's own permanent residence or that of his family unit are excluded from taxation, if "within 36 months from the date of sale, the sale value, deducted from the amortization of any loan obtained for the acquisition of the property, is reinvested in the acquisition of the ownership of another property, of land for the construction of a property, or in the construction, enlargement or improvement of another property exclusively with the same purpose located in Portuguese territory or in the territory of another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is exchange of information on tax matters".

With regard to the use of financing for purposes of acquiring the new property, the case law is unanimous and clear in the sense of its non-consideration for purposes of determining the amount subject to reinvestment.

As can be read in the Decision of the Portuguese Supreme Administrative Court of 12 March 2003, rendered in the context of Case no. 1721/02, to whose reasoning we adhere for its quality and mastery of the respective argumentation and which, for that reason, is now reproduced, "the law did not refer, exclusively, to reinvestment, which in itself was sufficient to conclude that this reinvestment was of the PROCEEDS OF THE SALE, with the exclusion of the bank loan. However, the law was more precise, to end the doubts: what is reinvested is THE PROCEEDS OF THE SALE".

In the same sense, reference is made to the Decision of the Portuguese Supreme Administrative Court of 24 March 2010, rendered in the context of Case no. 1241/09, when it refers that "For that capital gain to be excluded from taxation under the IRS regime, it is essential that the taxpayer prove that the proceeds of the sale were used in the acquisition of a new property intended for his residence. The law requires the proceeds of the sale to be reinvested and not any other amounts, in particular those obtained through recourse to bank credit".

The crucial question here therefore consists of determining whether the sum, eligible for purposes of the exclusion of taxation in question, which the Claimant derived from the sale of his old residence in 2010 - € 115,131.23 (€ 150,000 net of the amount owed on the existing loan at the date of sale of the property) - was reinvested in a manner that would legitimize the exclusion of taxation of the gains that the Claimant obtained from this sale.

It being established that to acquire the new property the Claimant resorted to a bank loan from Bank ... in the amount of € 120,000, which expressly referred as its purpose the acquisition of that same property, as regards this financing there can be no doubt – as, moreover, the Claimant does not contest - of its exclusion for purposes of determining the amount subject to reinvestment.

As regards the additional financing concluded with the same bank, on the same date and which likewise includes a mortgage on the property, but whose declared purpose is "multiple purposes", we disagree with the TCA when it states that "the proof presented by the Claimant in the administrative appeal does not allow for verification that the credit obtained from BPI in the amount of € 11,500.00 was not used in the acquisition of the new dwelling".

The decisive element for this purpose is the fact that this amount was only made available in the Claimant's bank account on a date subsequent to the celebration of the deed of purchase and sale of the property, on 27 June 2012 (as results from the consultation of the Claimant's bank statement attached to the proceedings).

Now, if the deed was executed on 26 June 2012 and expressly states that the seller had already received the price, the Claimant could not have used the amount of this second financing – only made available on 27 June 2012 - for the acquisition of the new property.

On the day of the celebration of the deed of purchase and sale of the property, the funds resulting from the additional financing were not yet available for use by the Claimant, which makes it impossible to use them for purposes of payment of the property price.

Furthermore, from the documentation attached to the proceedings, three payments by the Claimant are clearly identified, in the total value of € 120,000, used for purposes of the acquisition of the property.

It is, therefore, unequivocally clear to this Tribunal that (i) the Claimant used own resources, of at least € 115,131.23 for the acquisition of the new property, and (ii) that the additional financing in the amount of € 11,500 was not used for payment of the price of the new property, because it was only made available to the Claimant on a date subsequent to the celebration of the deed of purchase and sale of the property.

It is concluded by the recognition of the reinvestment of the sale value in the amount declared by the Claimant in the IRS declaration, Form 3, in the amount of € 115,131.23.

  1. DECISION

In light of the foregoing, the Arbitral Tribunal decides to judge the Claimant's request as founded and, thus, to annul the decision of partial (non-)deferral of the administrative appeal and, likewise, the assessment of IRS and related compensatory interest, with the due legal consequences, in particular the full restitution of the values assessed and paid by the Claimant.

  1. VALUE OF THE PROCEEDINGS

In accordance with the provisions of art. 315, no. 2, of the Code of Civil Procedure and 97-A, no. 1, subparagraph a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 3,000.

  1. COSTS

The value of the arbitration fee is fixed at €612.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, in accordance with articles 12, no. 2, and 22, no. 4, both of the LRTA, and article 4, no. 4, of the aforementioned Regulation.

Notify.

Lisbon, Administrative Arbitration Center, 30 June 2015

The Arbitrator,

André Gonçalves

Frequently Asked Questions

Automatically Created

How is the reinvestment of capital gains from property sales calculated for IRS purposes in Portugal?
Reinvestment of capital gains for IRS purposes in Portugal is calculated by determining the net sale proceeds actually applied to acquire the new residential property. According to Article 5 of the IRS Code, taxpayers start with the gross sale price of the original property and deduct any outstanding mortgage debt at the time of sale. This net amount represents the proceeds available for reinvestment. To qualify for capital gains tax exclusion, this amount must be reinvested using the taxpayer's own capital (sale proceeds) rather than new bank financing. The calculation excludes amounts financed through mortgages or loans for the new property acquisition, as these do not represent reinvestment of the original sale proceeds. In this case, the claimant calculated €115,131.23 as the reinvestment amount (€150,000 sale price minus €34,868.77 mortgage balance), but the Tax Authority disputed whether additional loans should be excluded from the financing calculation.
What qualifies as valid reinvestment of sale proceeds to exclude capital gains from IRS taxation?
Valid reinvestment to exclude capital gains from IRS taxation requires that the actual sale proceeds (own capital from the sale) be applied toward acquiring a new residential property within specified timeframes. Portuguese law requires the reinvestment to be made in property with the same residential purpose. Critically, only the taxpayer's own funds—derived from the original sale after clearing any mortgage debt—qualify as reinvestment. New bank loans, mortgages, or other financing obtained for the new property purchase do not count as reinvestment of sale proceeds. The Tax Authority's position is that reinvestment must be exclusively from sale proceeds, not investment through bank loans. Therefore, taxpayers must demonstrate that their own capital contribution to the new property equals or exceeds the net proceeds from the original sale. Documentation such as purchase agreements, loan contracts, bank statements, and payment records are essential to prove which portion of the new property's price was funded by reinvested sale proceeds versus new financing.
Can a taxpayer deduct the outstanding mortgage balance from the reinvestment amount when selling a property?
Yes, a taxpayer can and must deduct the outstanding mortgage balance from the sale price when calculating the amount available for reinvestment. Under Portuguese IRS law, the reinvestment amount is the net proceeds from the sale—the gross sale price minus any mortgage debt that must be paid off from the sale. In this case, the claimant correctly calculated the reinvestment amount as €115,131.23 by subtracting the €34,868.77 mortgage balance from the €150,000 sale price. This reflects the actual capital the taxpayer received from the transaction that could be applied to a new property. The Tax Authority accepted this methodology in principle; the dispute centered on whether the full €115,131.23 was actually reinvested in own capital or whether some of the new property's financing should be attributed to the sale proceeds. The deduction of outstanding mortgage debt is declared in Table 5, field 505 of Annex G of the IRS tax return (Form 3).
What is the procedure for filing a gracious complaint (reclamação graciosa) against an IRS capital gains assessment?
The procedure for filing a reclamação graciosa (administrative appeal/gracious complaint) against an IRS capital gains assessment begins when the taxpayer receives notification of an additional tax assessment. In this case, the claimant was notified on July 17, 2014, of an additional assessment for the 2010 tax year totaling €11,926.95 (including compensatory interest). The taxpayer must file the reclamação graciosa within the legal deadline (typically 120 days from notification) with the appropriate tax authority office, presenting arguments and evidence demonstrating why the assessment is incorrect. The complaint should include supporting documentation such as purchase agreements, loan contracts, bank statements, and property registration documents. The Tax Authority reviews the complaint and issues a decision, which may result in full deferral (complete acceptance), partial deferral (partial acceptance), or rejection. In this case, the administrative appeal received partial deferral, with the AT accepting some but not all of the claimant's arguments. If unsatisfied with the decision, taxpayers can then pursue arbitration through CAAD (Centro de Arbitragem Administrativa) under Decree-Law 10/2011.
How does CAAD arbitration resolve disputes over partial deferral of capital gains reinvestment claims?
CAAD (Centro de Arbitragem Administrativa) arbitration resolves disputes over partial deferral of capital gains reinvestment claims through an independent arbitral tribunal process established under Decree-Law 10/2011. When a taxpayer receives a partial deferral decision on their administrative appeal—meaning the Tax Authority accepted some but not all of their arguments—they can request arbitration under Article 10 of the LRTA (Legal Regime of Tax Arbitration). The taxpayer files a request seeking declaration of illegality and annulment of the partial deferral decision and the underlying tax assessment. In this case, the claimant challenged the decision that recognized only €108,500 as reinvested instead of the claimed €115,131.23. The arbitration process involves: submission of the request, appointment of arbitrators, exchange of written arguments (the Tax Authority files a response), evaluation of evidence (documents, contracts, bank records), and issuance of a binding arbitral decision. The tribunal analyzes whether the Tax Authority correctly applied the law regarding what constitutes reinvestment of sale proceeds versus new financing, and determines the proper amount of capital gains exemption. This provides an alternative to lengthy judicial court proceedings.