Process: 124/2015-T

Date: October 27, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 124/2015-T addresses critical procedural and substantive issues in IRS arbitration involving property transfers through dação em cumprimento (dation in payment). The taxpayer challenged a 2011 IRS assessment of €124,018.88 relating to capital gains from transferring property valued at €607,500.00. The Tax Authority calculated gains using an acquisition value of €31,110.02 from the 2005 land registry, rejecting the taxpayer's construction cost documentation from 1993-1994 due to alleged lack of essential elements and truthfulness concerns. The taxpayer filed a gracious complaint (reclamação graciosa) in June 2014 and a hierarchical appeal in September 2014, receiving no response to the latter before requesting arbitration in February 2015. The Tax Authority raised three key procedural defenses: (1) untimeliness under Article 102 of CPPT, arguing the challenge was filed outside the legal deadline for contesting either the original assessment notification or the complaint dismissal decision; (2) active illegitimacy based on necessary joint interest (litisconsórcio necessário) under Article 34 of CPC, since both spouses were jointly taxed under Article 13(2) and 13(3)(a) of CIRS but only one filed the arbitration request; and (3) substantive grounds regarding the validity of construction cost documentation. The case illustrates fundamental principles of Portuguese tax arbitration including strict compliance with procedural deadlines, proper party configuration in joint taxation scenarios, the burden of proof for acquisition costs under Article 46(3) of CIRS, and the scope of the duty to provide reasoning under Article 77 of LGT. The arbitral tribunal addressed whether presumed denial of hierarchical appeals permits arbitration, how untimeliness affects the right of action, and the interplay between formal reasoning requirements and the taxpayer's effective participation in administrative proceedings through prior hearing rights.

Full Decision

ARBITRAL AWARD

I – Report

  1. On 23 February 2015, A…, with Tax Number … came, in terms of Articles 1st, 2nd, no. 1, subsection a), and 10th, no. 1, subsection a) and no. 2, subsection c) of Decree-Law no. 10/2011, of 20 January (RJAT) and of article 99º of CPPT applicable ex vi article 10th, no. 2, subsection c) of RJAT, to request the constitution of an arbitral tribunal for examination of the legality of the assessment of Personal Income Tax (IRS) and respective compensation adjustments, relating to the year 2011, in the total amount of € 124,018.88 (one hundred twenty-four thousand eighteen euros and eighty-eight cents), requesting that the IRS assessment and respective compensation adjustments be annulled or declared null with the legal consequences ensuing. With the initial Application were attached, in addition to the powers of attorney and proof of payment of the fee, four documents.

  2. In the Request for arbitral pronouncement, the Applicant chose not to designate an arbitrator, having been appointed by decision of the President of the Deontological Council, in terms of no. 1 of article 6th of RJAT, as arbitrators to compose the Collective Tribunal, Mr Judge José Poças Falcão, Ms Dr Carla Castelo Trindade and Ms Dr Maria Manuela Roseiro, all of whom accepted the office under legal and regulatory terms.

  3. The arbitral tribunal was constituted on 30 April 2015.

  4. The Tax and Customs Administration (AT or Respondent) sent, on 2 June 2015, its Response as well as the administrative file (PA).

  5. Following a notification order to respond to exceptions raised by the Respondent, to which the Applicant did not respond, the Tribunal decided to waive the holding of the meeting provided for in article 18th of RJAT as well as the production of testimonial evidence, and opened a period for possible presentation of allegations. It indicated 19 October 2015 as the date for communication of the decision.

  6. Applicant and Respondent presented applications, respectively on 10 September and 14 September 2015, limiting themselves to adhering to the statements and arguments contained in their previous documents, as to matters of fact and law.

7. The Request for Pronouncement

In the initial Request, the Applicant sustained, in summary, that:

  • Not conforming with the IRS assessment relating to the year 2011, in the amount of € 124,018.88, which was notified to her on 15 January 2014, the Applicant and her husband successively lodged a gracious complaint (reclamation) of the assessment (on 13 June 2014) and a hierarchical appeal (on 24 September 2014) of the decision dismissing the complaint, issued on 11 August 2014.

  • Having obtained no response to the hierarchical appeal, and presuming its dismissal, she comes to challenge the assessment, and the act of dismissal – which confirms the challenged assessment – failed to comply with the fundamental duties of reasoning (article 77th of LGT).

  • Regarding the immovable property subject to performance in kind (dação em cumprimento) on 31 May 2011 for the value of € 607,500.00, the AT considered as the acquisition value the amount of € 31,110.02, patrimonial value determined on the date of its registration in the land registry in the year of 2005[1], despite the Applicant having presented documents proving the construction value of the property, built by the Applicant and her husband.

  • The AT disregarded the said documents based on an alleged lack of essential elements, violating article 46th, no. 3 of CIRS.

  • Violated, as to reasoning, article 268th of CRP and article 36th of CPPT; the assessment act contains no grounds, either factual or legal, for the assessed values in question, containing only vague expressions, and the verification of the requirements upon which the exigibility of the tax in question depends has not been proven.

  • The Applicant sustains that no taxable fact was constituted, whereby AT could not demand the amounts irrespective of the demonstration and verification of the requirements legally established, the act being null for having created taxes not permitted by law [articles 133rd, 2nd, subsections a) and d) of CPA and articles 103rd, no. 2 and 165, no. 1, subsection i) of CRP].

  • The quantification of the taxable fact raises well-founded doubts, whereby it would always be voidable (articles 99th/1/a) and 100th of CPPT).

  • Whereby, in the Applicant's view, the Application should be considered well-founded, with annulment or declaration of nullity of the IRS assessment.

8. The Response

The Respondent replied, in summary, alleging that:

  • The application is time-barred, in terms of the combined provisions of subsection a) of no. 1 of article 10th of RJAT and of nos. 1 and 2 of article 102nd of CPPT, because the Applicant imputes the defect of lack of reasoning to the act of dismissal issued by the Director of Finance of … without clarifying whether she refers to the act dated 02.12.2013, which does indeed substantiate the assessment now under review, and whose illegality is ultimately sought, or to the act dismissing the gracious complaint, of 11.08.2014; in any case, the arbitral challenge of either of these acts is time-barred (nos. 1 and 2 of article 102nd of CPPT), which leads to the lapse of the right of action and dismissal of the case.

  • Being in question the 2011 IRS assessment of the Applicant, married to B…, and both spouses being taxable subjects not judicially separated as to persons and property (no. 2 and subsection a) of no. 3 of article 13th of CIRS), this is a situation of necessary joint interest (litisconsórcio), in accordance with article 34th of CPC, verifying lack of active legitimacy, which also leads to dismissal of the case.

  • As to the matters of fact articulated in the initial application as support for the applicant's claim do not correspond to the truth, or legal effects claimed cannot be drawn from them.

  • In 2012, the Applicant filed the IRS form mod.3 (2011), omitting income relating to the transfer of an urban immovable property, article … of the extinct parish of …, in ….

  • The said property was registered in the land registry in 1995 for the value of € 31,110.02, resulting from the joining of two construction land lots, acquired by the Applicant by donation from her parents, and was transferred by performance in kind, by deed of 31.05.2011, for the amount of € 607,500.00.

  • Having identified discrepancies between the IRS declaration and the mod.11 declarations issued by Notarial Offices, the declared elements were inspected and the Applicant was notified to exercise the right to be heard, she coming to indicate that the property had been built during the years 1993 and 1994, annexing copies of invoices relating to such construction, and other additional elements, which being subject to data cross-checking led to the conclusion that they lacked truthfulness.

  • Having drawn up an official declaration of income for the year 2011 (box 4 of Annex G), an official IRS assessment no. 2014…. was issued, with tax to pay in the amount of € 123,796.18, including compensatory interest in the amount of € 7,037.50.

  • The gracious complaint presented by the Applicant to contest the criteria used for determining the acquisition value of the property in question was dismissed by decision of 11.08.2014 of the Director of Finance of …, followed by submission of a hierarchical appeal, on 24.09.2014.

  • None of the acts issued by the Director of Finance of … suffer from the defect of lack of reasoning in accordance with the established and unanimous case law of administrative and tax courts because throughout the administrative process, within the scope of the inspection procedure (determination of capital gains), or in the course of the gracious complaint presented, the Applicant exercised the right to prior hearing and explanation of the reasons substantiating the AT's decision, reasons which were amply understood, referenced and attacked by the Applicant who always showed to have precise knowledge of the grounds that led to the determination of the acquisition value of the property in the amount of € 31,110.02.

  • However, should a situation of lack or insufficiency of reasoning occur, it was incumbent on the Applicant to avail herself of the mechanism provided for in article 37th of the Code of Tax Procedure and Process (CPPT) and request its respective notification or issuance of the certificate in conformity, a faculty which she did not exercise and any possible defect was thereby cured.

  • The Applicant, through the present request for arbitral pronouncement (as previously in the gracious complaint) demonstrates to have fully understood the factual and legal framework on which the Respondent's decision rested, but even were the act sub judice to suffer from deficiencies at the level of reasoned discourse, these would degrade into mere non-essential irregularities, by application of the principle of utilization of administrative acts, since the deficiencies allowed full clarification of its recipient, enabling her to challenge them, as, indeed, the Applicant did through the present request for arbitral pronouncement.

  • The tax assessment act and compensatory interest adjustment does not suffer from any defect of reasoning, or otherwise, is in compliance with the law and leads to dismissal of the application.

9. Subject Matter of the Application

The questions to be decided in this case are:

  • Existence of exceptions raised by the Respondent, of lapse of the right of action and active legitimacy.

  • Whether the tax act suffers from the defect of lack of factual and legal reasoning as invoked by the Applicant.

10. Preliminary Examination

The collective arbitral tribunal is materially competent, in terms of the provisions of articles 2nd, no. 1, subsection a) of the Legal Framework for Arbitration in Tax Matters.

The parties have legal personality and capacity and have legitimacy in terms of articles 4th and 10th, no. 2, of the Legal Framework for Arbitration in Tax Matters (RJAT) and of article 1st of Ordinance no. 112-A/2011, of 22 March.

The case does not suffer from any nullity nor have any exceptions been raised by the parties which prevent examination of the merits of the case, whereby the conditions are met for the issuance of the arbitral decision.

II. Reasoning

11. Proven Facts

11.1. On 31 May 2011, the Applicant and her husband proceeded to performance in kind (dação em cumprimento) of an urban property registered in the land registry under no. … of the parish …, …, in …, for the amount of € 607,500.00 (articles 1st and 4th of the Gracious Complaint – Doc. no. 2 attached with the Application and article 18th of the Response).

11.2. On 30 May 2012, the Applicant, A…, filed, jointly with her husband B…, the IRS form mod.3 for 2011, containing only annexes A, B and H, with no mention whatsoever of the transfer referred to in the previous number, with attachment of annex G (article 16th of the Response, PA, RG 6, sheets 152).

11.3. On 21 August 2013, a general internal inspection action regarding the Applicant's and her husband's IRS 2011 (OI 2013 …) was undertaken, resulting in a Report (proc. 233/2013) drawn up in the Taxation and Collection Division of the Finance Directorate of … and dispatched, on 2 October 2013, by the Director of Finance, which: confirmed the existence of a deed of performance in kind, by deed of 31 May 2011, for the amount of € 607,500.00 of a property identified under the land registry article …, belonging to the extinct parish of … in … and considered that the gains obtained from the transfer of the said property should have been included in the IRS declaration, in annex G, as "onerous transfer of real rights in immovable property", calculating the capital gain obtained as 562,390.47, taxable at 50% (€ 281,195.24), a value to be subject to correction in an income declaration, and giving rise to a corrective assessment (PA, RG 6, sheets 160 et seq.).

11.4. The said property was registered in the land registry in 1995 for the value of € 31,110.02, resulting from the joining of two construction land lots, acquired by the Applicant by donation from her parents on 21 August 1991 (article 17th of the Response, RG 6, sheets 143 and RG7, sheet 179).

11.5. In the donation deed it is stated that the two parcels of land were donated for the patrimonial value of 2,360,600$00 and 3,180,000$00, totalling € 5,540,600$00, a value stated in the respective land registries (RG 6. sheets 143 to 149).

11.6. The Applicant was notified, in October 2013, through office no. … of the DF of …, to exercise the right to be heard regarding the proposals for correction of the values indicated to appear in the IRS form mod.3 for 2011 (article 20th of the Response and P.A., RG 6 sheets 136 and 137 and 140 to 141v).

11.7. On 23 October 2013, the Applicant submitted a response, indicating that the property had been built during the years 1993 and 1994, and annexing copies of invoices Z004568, Z002468 and Z001325, in the amounts of € 6,927.757,00, € 23,934.895,00 and € 51,639.782,00, respectively (article 21 of the Response; PA, RG 6, sheets 136, 164 et seq of the gracious complaint file).

11.8. On 1 November 2013, through office …, she was requested to provide the originals of invoices no. Z004568, Z002468 and Z001325, work budget, invoice receipts and measurement records (article 22nd of the Response and PA, RG7, information at sheet 168).

11.9. On 18 November 2013, originals of those referred to in the previous numbers were provided, and copies of cheques nos …, … and …, issued by the female taxpayer to C… Lda. (PA, RG7, information at sheet 168).

11.10. Information from the Taxation and Collection Division of the Finance Directorate of … of 29 November 2013, analyses the elements delivered, considering them insufficient, and refers to the consultation of the file of company C… Lda. with information cross-checking to ascertain the material truth of the documentation in question, concluding by the existence of elements strongly indicative of the lack of truthfulness of those invoices and converting into definitive the previous draft decision as the grounds of fact and law remain valid (information of 29/11/2013, RG 6, sheets 136 and 137).

11.11. On 2 December 2013, a decision of the Director of Finance of … converts into definitive the previous draft decision and orders the alteration of the declared elements, (PA, RG sheets 137) which is followed by issuance, dated 26 December 2013, of an official income declaration for the year 2011, containing in box 4 of Annex G, the following elements: Value and acquisition date: € 31,110.02 in December 1995; Value and realization date: € 607,500.00 in May 2011 (PA, RG 6, sheets 129 to 132).

11.12. In accordance with the collection note and account settlement statement from which resulted the assessment no. 2014 … of 08-08-2012, in the amount of € 116,981.38, and the compensatory interest assessment no. …, in the amount of € 7,037.50, all in the value of € 124,018.88 (PA, RG6, sheets 134 and 149).

11.13. The assessment was notified on 15 January 2014, for payment by 17 February 2014 (Documents 1 and 2 attached with the Application and PA, RG 6, sheet 149).

11.14. On 13 June 2014, the Applicant submitted a gracious complaint of the said assessment and tax, which gave rise to the Gracious Complaint File no. … 2014 … (PA 7, sheet 151 and RH1).

11.15. Upon information of 17 June 2014 from the Finance Office of … (PA, RG 6, sheet 149) and the Tax Justice Division of the Finance Directorate of … of 10 July, considering to dismiss the gracious complaint, a superior decision of agreement was issued, ordering prior hearing to be conducted, which was done through office …, of 10.07.2014 (PA, RG 7, sheets 181 to 183).

11.16. After the period elapsed without exercise of the right to be heard, the Gracious Complaint was dismissed by decision, of 11 August 2014, of the Director of Finance of …, in substitution, with notification to the Applicant through office no. … received on 25 August 2014 (Doc. no. 3 and PA, RG7, sheets 184 to 186), the file being returned on 4 September 2014 to the Finance Office of … for filing, through office … (PA, RG 7, last sheet).

11.17. On 24 September 2014, the Applicant submitted, at the Finance Directorate of …, Tax Justice Division, addressed to the Minister of Finance, a hierarchical appeal of the act dismissing the gracious complaint, practised by the Director of Finance of … in file no. … 2014 … (PA, RH, 1, sheets 1 et seq.).

11.18. On 26 September 2014, in office no. …, the Tax Justice Division of the Finance Directorate of …, addressed to the Head of the Finance Office of …, informed that it had instituted the appeal process in SICAT, in accordance with instruction no. 1 of DSJT of 30/11/2011, and requested from the Finance Office of … the sending of the gracious complaint file, as well as the return of the hierarchical appeal (PA, RH 3, sheet 58).

11.19. On 2 October 2014, through office no. …, the Head of Finance Office of … sent the gracious complaint file and returned to the DF/DJT the hierarchical appeal file no. … 2014 … (PA, RH 3, sheet 59).

11.20. By decision of 12 November 2014, issued in information from the Tax Justice Division of the Finance Directorate of …, the Director of Finance, did not revoke the act, confirmed the opinion in the sense of dismissal of the hierarchical appeal, and ordered it to be elevated in terms of no. 3 of article 66th of CPPT (PA, RH 3, sheet 64).

11.21. On 12 November 2014, the hierarchical appeal was sent, through office no. …, to the Director of IRS Services, being received in this office on 14 November 2014 (PA, RH 3, sheet 67).

11.22. An enforcement proceeding no. … 2014 … was instituted for collection of € 124,018.88, with the property being for sale at the time of the information of 10/7/2014 (PA, RG 6, sheets 149/150, and RG7, sheets 177 et seq).

11.23. The present Request for arbitral pronouncement was submitted on 23 February 2015.

12. Unproven Facts

It was not proven in which period the construction works of the property undertaken on the land donated to the Applicant took place nor what the amount of the respective cost was (cf. proven facts 11.4 to 11.10).

13. Reasoning for Proven and Unproven Facts

The facts were deemed proven and unproven based on the evaluation made by the tribunal of the procedural documents delivered by the Parties and on the analysis of the documents attached to the case, particularly the administrative file, as referenced regarding each of the points of the factual matter established.

It is considered that the matter deemed proven is sufficient for examination of the legal question.

14. Application of Law

14.1. Exceptions

14.1.1. Lapse of the Right of Action

The Respondent seems to argue that the Request for pronouncement does not challenge the dismissal of the hierarchical appeal but the illegality (lack of reasoning) of the assessment act and the act dismissing the gracious complaint, whereby it should be considered an attack on one of these acts long since practised, having thus the right of action lapsed.

We are once again in that case where it seems the material scope of arbitration (article 2nd of RJAT) is confused with the date from which the request for arbitral pronouncement may be filed (article 10th of RJAT) and also, once more, this concerns the approach of the question of challengeability, through arbitration, of acts of second or third degree. The problem of acts of second and third degree in tax arbitration relates, as it appears, to at least two distinct questions: a first, to ascertain whether, having an administrative gracious remedy been pursued, the subject matter of the arbitral process shall be the decision to be issued by the Tax Administration – by way of gracious complaint, hierarchical appeal or official revision request – or, conversely, the act of assessment, self-assessment, withholding at source or payment on account; a second, which interlinks questions of competence and questions of timing, and which is to ascertain whether the tribunal shall have competence – and, if so, to what extent – to examine an act of first degree when the application is presented following a tacit dismissal of a gracious complaint, hierarchical appeal or official revision request previously submitted.

Regarding the first question, even within the scope of judicial challenge, it was debatable whether, faced with an express decision of gracious complaint, hierarchical appeal or official revision request, the taxpayer was directly challenging the assessment act previously complained of, appealed or revised (the first degree act) or the very decision (of dismissal) of complaint, appeal or official revision request which, in turn, examined the (il)legality of the challenged act – the second degree act. The Supreme Administrative Court (STA) pronounced itself on the question, in judgment dated 18 May 2011, issued within the scope of proceeding no. 0156/11[1], allowing that "(…) the real subject matter of the challenge is the assessment act and not the act that decided the complaint, whereby it is the defects of that and not of this decision which are truly at issue(…)."

"(…) the challenge is not, therefore, limited by the grounds invoked in the gracious complaint, and may have as its basis any illegality of the tax act.(…)"

This is the first question that must be clear: the subject matter of the arbitral process is the IRS assessment act.

A different question from this is whether the request for arbitral pronouncement was filed within the time period. Here the Tribunal understands that the legislator on arbitration was clear in compartmentalizing questions of competence and questions of timing.

Thus it is that as to competence or material scope, the subject matter of arbitration is, as concluded, the examination of the illegality of the IRS assessment acts.

As to timing, the taxpayer may resort to arbitration immediately upon notification of the assessment acts, self-assessment, withholding at source and payment on account or, having resorted to the administrative remedy, after notification of the decision dismissing or the formation of tacit dismissal. This answer is found, in turn, in article 10th. From this norm should not be drawn the competence for direct examination of second degree acts. This is a norm that concerns solely and exclusively the dies a quo of the deadline for presentation of the request for arbitral pronouncement. It is a norm that therefore concerns the moment from which the counting of the deadline to request the constitution of the arbitral tribunal begins.

Indeed, article 2nd, no. 1, subsection a), determines that arbitral tribunals have competence to examine "the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account". There is, therefore, no reference to acts dismissing gracious complaints, hierarchical appeals or official revision requests, i.e., it does not mention the arbitrability of decisions dismissing, express or tacit, the prior administrative remedies used. There is not, and there need not be.

It is understood in this respect that acts of second or third degree may always be arbitrable, insofar as they themselves contain, and only to this extent, the (il)legality of the assessment acts in question. Underlying this understanding will be, for part of Doctrine, a teleological interpretation, particularly as subsection a) of no. 1 of article 10th expressly refers to the "decision of hierarchical appeal" and it is also, as it appears, the fact that the act of second or third degree is examining the act of assessment, self-assessment, withholding at source or payment on account subject to arbitration.

It is defended here, therefore, an interpretation whereby the defects inherent to acts dismissing gracious complaints, hierarchical appeals or revision requests of the tax act are not arbitrable because they fall outside the material scope of tax arbitration. In other words, these dismissal acts may only be "brought" to arbitral jurisdiction, under the strict condition that they themselves have examined the (il)legality of the tax act which the passive subject, truly and effectively, intends to challenge by way of arbitration.

In this sense, see the arbitral decision issued within the scope of proceeding no. 272/2014-T]:

"65 - The dismissal of gracious complaint embodies, within the scope of judicial challenge, the case provided for in no. 2 of article 102nd of CPPT, raising the question of whether, given the competences legally entrusted to arbitral tribunals, the same shall be competent to, in any circumstances, examine acts dismissing gracious complaints.

66 - Being the competence of arbitral tribunals, which function beside the CAAD, circumscribed and limited, as already referred to above, to the declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account, the examination of acts dismissing gracious complaints, by the said tribunals, must be conditioned on the actual knowledge which such acts had of the legality of the assessment acts with which they are related.

67 - The decision dismissing the gracious complaint, issued in the aforementioned circumstances, reaffirms the legality of the assessment act in question and reconfirms it, as it had been initially configured.

68 - The dismissal of the gracious complaint is an injurious act susceptible to challenge by the interested party, which, insofar as it proceeds to the reaffirmation of the underlying primary assessment act and which is inseparable from it, cannot fail to have its examination entrusted to arbitral tribunals, which, as already referred to, have their competences fundamentally centered on the declaration of illegality of tax assessment acts.""

Subsuming:

According to the proven facts (11.13), the Applicant was notified on 15 January 2014 of the assessment, dated 4 January, for payment by 17 February 2014. She complained graciously, on 13 June 2014, therefore timely, in accordance with article 70th of CPPT (11.14).

From the dismissal of the gracious complaint, notified on 25 August 2014, she filed a hierarchical appeal to the Minister of Finance, on 24 September 2015, therefore timely, presenting the respective application to the Director of Finance of …, the competent authority to receive it and who should have elevated it within 15 days, with the file or extract[2] (11.17.).

The file was subject to a decision of 12 November 2014, from the Director of Finance in the sense of not revoking the appealed decision[3] and ordered to be elevated in terms of article 66th, no. 3, of CPPT (11.19).

Taking into account the provision of no. 5 of article 66th of CPPT, the hierarchical appeal should have been decided within 60 days.

This provision is, precisely, the one indicated by the Applicant in the Request for constitution of the arbitral tribunal, when she invokes that the silence of the administration and presumption of tacit dismissal permits access to the judicial remedy for continuation of the discussion of the legality of the assessment (articles 8th to 10th).

Even though there is some lack of precision in the articulation of some points of the Application (cf. article 11th), what is fundamental in the examination of the case is to bear in mind that the competence of the CAAD arbitral tribunals extends to acts deciding gracious complaints and hierarchical appeals (acts of second and third degree) but is limited to the examination of the illegality of the assessment, whereby only those acts dismissing complaint or hierarchical appeal that effectively know of that legality shall be included in it.[4]

Thus, although access to the judicial remedy is, in the present case, effected based on the tacit dismissal of the hierarchical appeal, this is not the subject matter of the request for declaration of illegality but rather the assessment act and the administrative act (2nd degree) that dismissed (tacitly) the examination of that illegality.

And the Applicant does not act incorrectly in attacking the assessment act and the act dismissing the gracious complaint, the latter insofar as it pronounced implicitly on the legality of the assessment, reconfirming it.

As to the question of how the deadline of 90 days (underlined herein) provided for in no. 5 of article 66th should be counted, the wording of this provision seems to suggest that it includes all the time elapsed since the procedure (underlined herein) of the hierarchical appeal was initiated which, according to the entirety of article 66th, includes presentation to the author of the act, analysis by him so as to be able to revoke the act and sending to the superior hierarchy for pronouncement.

The deadline for decision of the hierarchical appeal provided for in article 66th, no. 5 of CPPT (60 days) is superior to the general deadline, of 30 days, provided for in article 175th, no. 1, of CPPT.

At the level of the Tax Administration and given the complexity and convenience of uniform treatment of tax questions, it is normal for files to be sent for decision to a superior level through the central services, which also pronounce themselves on them. This would have been what happened (proven facts 11.21.), with no information in the file about sending to the ministerial office for decision.

In any case, it is to be understood that the deadline for decision of the hierarchical appeal has elapsed, permitting access to the judicial remedy, or alternatively, the path of tax arbitration, in terms of Decree-Law no. 10/2011, of 20 January.

To understand otherwise, as the Respondent argues, would "frustrate the objective of the institute of tacit dismissal, which is to protect those administered against the inaction of the Administration, allowing them recourse to the courts in certain cases where this occurs. For, understood in purely literal terms, the provision allows the administration to be able to defer indefinitely the presumption of dismissal, sufficing, for example, that the higher authority, when the hierarchical appeal is presented to it, does not send it to the appealed authority for pronouncement, or that this, when the appeal is presented to it, does not send it to the competent body to decide it"[5].

Thus, it is considered that the present request for constitution of an arbitral tribunal submitted on 23 February 2015 is timely given the provisions of article 10th, no. 1, a), of RJAT, because submitted within ninety days following the end of the legal deadline for decision of the hierarchical appeal (article 102nd, no. 1, subsection d), of CPPT).

14.1.2. Active Legitimacy

No. 5 of article 16th of LGT, under the heading "Tax Capacity", establishes that "either spouse may perform all acts relating to the tax situation of the family unit and also those relating to the property or interests of the other spouse, provided that the latter knows of them and has not expressly opposed them". In this regard, note Leite de Campos, Benjamim Silva Rodrigues and Lopes de Sousa that what is provided therein may raise some doubts insofar as "it is difficult to distinguish which acts are relating to the tax situation of the family unit and those relating to the property or interests of the other spouse" and further "raises objections to the possibility of either spouse, even when not having powers of administration, being able to perform acts relating to the property and interests of the other spouse" embodying thus an "interference with the administration powers of the other spouse [which] will violate the provisions on the regime of property, without sufficient justification".

And, in turn, article 9th of CPPT provides: "1 - Those with legitimacy in the tax procedure, in addition to the tax administration, are taxpayers, including substitutes and liable parties, other tax obligated persons, parties to tax contracts and any other persons who prove legally protected interest. 2 - The legitimacy of joint and several liable parties results from the demand in relation to them of performance of the tax obligation or any tax duties, even if jointly with the principal debtor."

It shall then be legitimate to question whether in the concept of "acts relating to the tax situation of the family unit" judicial challenges or arbitral actions should be included. The case law seems to adopt the understanding that, by force of no. 6 of article 16th of LGT, according to which "the knowledge and absence of express opposition [of the spouse] referred to in the previous number are presumed, unless proven otherwise", in the absence of express opposition from the other, one of the spouses shall have tax capacity to, alone, participate in the tax procedure, without need to involve the other.

In the present case what is at issue is the application of the Personal Income Tax (IRS), whose Code provided, at the time of the facts, that with a family unit existing, the tax is due by the aggregate of the income of the persons constituting it, those to whom its direction falls incumbing being considered taxable subjects (article 13th, no. 2, of CIRS), this unit being constituted by spouses not judicially separated as to persons and property and their dependents (subsection a) of no. 3 of article 13th of CIRS), and that the direction of the family fell to both spouses (article 1671st, no. 2, Civil Code) and that, with a family unit existing, a single declaration should be filed by both spouses or by one of them, should the other be incapable or absent (article 59th no. 1 CIRS).

In a situation such as this, where the spouses are jointly and severally liable for the payment of the tax levied on the income of the respective family unit, liability which covers the entirety of the tax debt, interest and other legal charges, in accordance with articles 21st, no. 1, and 22nd, no. 1, of the General Tax Law (LGT), the judicial capacity of either spouse is justified and, consequently, the legitimacy of either will not be questionable.[6]

In these terms it is also considered unfounded the exception of lack of active legitimacy.

14.2. Lack of Factual and Legal Reasoning

The Applicant considers that, although in the prior hearing she provided the tax administration with all documents relating to the realization value, in the amount of € 607,500.00, regarding the performance in kind of the property accomplished on 31.05.2011, the AT chose to consider as the acquisition value the patrimonial value determined on the date of its registration in the land registry, in the year of 2005, in the amount of € 31,110.02.

And that the Tax Administration disregarded the documents presented which prove the construction value of the property built by the Applicant and her husband, it not being understood the reasoning that led to disregarding the content of the presented documents based on an alleged lack of essential elements, and to assess IRS with violation of no. 3 of article 46th of CIRS.

The assessment act would suffer from manifest lack of factual and legal reasoning, or, at least, this is insufficient, obscure and incongruous, in violation of articles 268th, no. 3, of CRP, 124th and 125th of CPA and 77th of LGT, whereby it would be null.

It further argues that, with well-founded doubts existing regarding the quantification of the taxable fact, the assessment act in this case should always be annulled, ex vi articles 99th, no. 1, subsection a) and 100th of CPPT.

Analysing the file, it is verified, with much relevance to the decision, namely that:

  • The Applicant and her husband, heard in prior hearing regarding the proposal for correction of the 2011 IRS assessment made because of a property transfer occurring in that year but omitted in the respective IRS declaration, informed that it was a property built during the years 1993 and 1994 (in the gracious complaint, they would indicate the period between 1991 and 1994) and attached copies of invoices for supply of materials for work, issued in the name of C…, Ltd. (of which the Applicant was managing partner until 23/10/2009), and subsequently, other additional elements requested by the AT.

  • Through a data cross-checking procedure undertaken by the AT, indications emerged of lack of truthfulness of those invoices as well as doubts regarding copies of cheques presented, which led to the decision of the Director of Finance of … confirming the proposed corrections and issuance of the assessment.

  • Against this assessment the Applicant reacted through: gracious complaint, to which she attached more documents; hierarchical appeal, of the dismissal of the complaint, and Request for arbitral pronouncement, always invoking defects of lack of reasoning and obscurity and disregarding the content of the reasoning of the act.

14.3. Legality of the Decision - Examination of Factual and Legal Reasoning

It should, from the outset, be ruled out the hypothesis of the existence of nullity due to lack of reasoning, since it is very evident the existence of an administrative process with attachment of probatory elements, functioning of the right of response, reasoning, conclusions[7].

Let us then examine the Applicant's disagreement as to insufficiency of reasoning, to ascertain the existence of illegality susceptible of leading to annulment of the act.

It occurs that, having reviewed all the documents attached by the Parties, particularly the administrative file attached by the AT, it is recognized that, as invoked by the Respondent:

  • The reasons substantiating the AT's position-taking are evident and the same were being understood, referenced and attacked by the Applicant.

  • In the gracious complaint application itself it is clear that the reasoning was understood when express contestation is made of the elements considered for purposes of setting the acquisition value of the property.

And, as to the copies of invoices sent by the Applicant with the intention of having the value of the property considered in an amount higher than that which the AT had taken into account, it is confirmed that the Director of Finance of … ordered the correction of the elements of the IRS declaration and assessment proceeding by decision of 02.12.2013 issued upon information of 29.11.2013 which made explicit that "From the analysis of the said invoices it was found that they were not issued in conformity with the stipulated in no. 5 of article 35th of CIVA, (…) particularly for not containing the discrimination of labour and materials applied, the indication of the office of the issuer and the mention of "processed by computer". And that "(…) the documents displayed present clear indications of having been issued with the intention of documenting an acquisition value for the transferred property (…) inasmuch as: The logo bears no minimal resemblance; The type of print is completely divergent; The date is inconsistent (invoice no. Z.000177 registered in the accounting records, being cardinally earlier, shows a date later than the now presented invoice no. Z.001325 which displays the date of 1993-03-21); The capital stated in invoice no. Z.001325 is 150.000.000$00 whereas in invoice no. Z.000177 it is 450.000.000$00.(…)" and that "The initial patrimonial value attributed to the property of € 31,110.02, by appraisal, was never contested by the taxpayer.(…). Being so, the acquisition value to be considered, in terms of no. 3 of article 46th of CIRS, is the initial patrimonial value (€ 31,110.02) attributed to the property at the time of its registration in the land registry."

And the final decision dismissing the gracious complaint, issued on 11.08.2014, by the Director of Finance of …, is issued in light of the information of the same date as well as of the information of 10.07.2014 from the Tax Justice Division, which emphasizes namely: "Regarding the construction costs now presented in the gracious complaint, invoices/receipts/delivery notes were presented, finding however that these relate to acquisitions of building materials issued in the name of C… Ltd. NIPC ... between the years 1991 and 1994." And "In this context and given that the documents which the complainant intends to serve as proof as construction costs, were not issued in the name of the work owners/complainants, they cannot be considered, whereby the correct value provided for in no. 3 of article 46th of the IRS Code, shall be the patrimonial value on the date of registration, that is, 31,110.02€."

That is, all the decision orders that led to the challenged assessment or to the confirmation of its correction, were preceded by information from the services containing all the grounds, of fact and law, necessary for full understanding of how the acquisition value of the transferred property and now subject to capital gains was calculated.

Thus, it is verified that the act was practised in a procedural context susceptible to allowing its recipient to know the factual and legal reasons which led the Respondent AT to the decision in question, with that sense and content, the Application being unfounded as to the declaration of illegality and annulment of the assessment act based on lack of reasoning.

15. Decision

With the grounds set out above, the arbitral tribunal decides:

a) To declare unfounded the request for arbitral pronouncement of declaration of illegality of the IRS assessment for the year 2011, and respective compensation adjustments, in the total amount of € 124,018.88 (one hundred twenty-four thousand eighteen euros and eighty-eight cents).

b) To condemn the Applicant to costs.

16. Value of the Proceedings

In accordance with the provisions of no. 2 of article 315th of CPC, in subsection a) of no. 1 of article 97th-A of CPPT and also of no. 2 of article 3rd of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are valued at € 124,018.88 (one hundred twenty-four thousand eighteen euros and eighty-eight cents).

17. Costs

For purposes of the provisions of no. 2 of article 12th and no. 4 of article 22nd of RJAT and no. 4 of article 4th of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at € 3,060.00 (three thousand sixty euros), in terms of Table I annexed to said Regulation, to be borne entirely by the Tax and Customs Authority.

Notification to be made.

Lisbon, 27 October 2015.

The Collective Arbitral Tribunal

José Poças Falcão
(President)

Carla Castelo Trindade
(Member)

Maria Manuela Roseiro
(Member)

[1] There are several references in the proceedings indicating the year 2005 as the registration date in the land registry, whereas in others 1995 is indicated.

[2] According to article 66th of CPPT, "Hierarchical appeals are directed to the highest superior hierarch of the author of the act and filed, within 30 days counted from notification of the respective act, before the author of the appealed act" (no. 2) and "must, except in the case of total revocation of the act provided for in the following number, be elevated within 15 days, accompanied by the file to which the act relates or, when they have merely devolutive effects, with an extract thereof" (no. 3).

[3] "Within the period referred to in the previous number the author of the appealed act may revoke it in whole or in part".(no. 4 of article 66th of CPPT).

[4] cf. Jorge Lopes de Sousa, Guide to Tax Arbitration, Almedina, 2013, pp. 123 to 125.

[5] cf. Judgment of the STA of 20 November 2002, in proceeding no. 046077. This Judgment was issued in a case of challenge of an administrative act, not a tax one, within the scope of CPA, whose article 169th, no. 3, provided that the hierarchical appeal would be filed with the author of the act or with the authority to whom it was directed, fixing the deadline for deciding, when the law did not fix a different deadline, of 30 days, counted from the sending of the procedure to the body competent to decide it (article 175th, no. 1 of CPA). CPA also provided for the deadline of 15 days, within which the author of the appealed act must pronounce itself on the appeal and send it to the entity competent to know of it (article 172nd). In the case then under analysis, it was recalled that the deadline for decision of the hierarchical appeal had begun to run 30 days after the elapsing of the 15-day period for the appealed entity to pronounce itself and send the appeal to the respective Minister (it cites other judgments of the STA, of 17/12/98, 13/1/2000 and 18/2/2000, issued in appeals nos. 43,277, 44,624 and 41,245, respectively) and considers that this deadline (in the CPA) is an autonomous deadline that precedes the 30-day deadline for decision of the hierarchical appeal, beginning this latter from the end of that one or from the sending of the procedure to the higher authority, in case this occurs before the elapsing of that 15-day period (it cites Mário Esteves de Oliveira, Pedro Costa Gonçalves and Pacheco Amorim, Code of Administrative Procedure, 1st edition, Almedina, 1995, page 321, for whom this solution is reached by putting into operation the rules of subsections b) and c) of no. 3 of CPA). And the cited Judgment concludes that "this is, in effect, the only rational understanding that supports no. 1 of article 175th of CPA and which permits not frustrating the objective of the institute of tacit dismissal, which is to protect those administered against the inaction of the Administration, allowing them recourse to the courts in certain cases where this occurs" (underlined herein).

[6] Cf Judgment of the STA of 13 November 2013 (proc. 215/12). This judgment, having in regard the possibility of each of the spouses separated being able to file an autonomous declaration, concluded that the tax regime provided for in CIRS excludes the application of the civil law regime and makes irrelevant the elision of the presumption of communicability of the tax debt, resulting from the declaration signed by the other spouse (article 1691st no. 1 subsection d) and 3 Civil Code). Cf. also Judgment of TCAS, of 19 January 2011 (proc. 04438/10) and Judgment of TCAN of 20 October 2011 (proc. 00342/05.9 BEPRT).

[7] Cf. for all the Judgment of the STA of 14 May 2015, in proceeding no. 833/13: «In effect, while it is true that a distinction must be made between absolute lack of reasoning and deficient, mediocre or erroneous reasoning, it is also true and is settled case law that this nullity covers only the absolute lack of reasoning of the decision itself and not already the lack of justification of the respective grounds; that is, nullity is operative only when there is total omission of the grounds of fact or law on which the decision rests – see, among many others, the judgments of the STA, of 4/3/2015, proc. 01939/13, of 7/1/2009, proc. no. 800/08 and of 10/5/73, BMJ 228, 259; and the judgment of the STJ, of 8/4/75, BMJ 246, 131».

Frequently Asked Questions

Automatically Created

What happens when an IRS tax assessment is challenged for lack of proper reasoning under Article 77 of the LGT?
When an IRS tax assessment is challenged for lack of proper reasoning under Article 77 of the LGT, Portuguese courts and arbitral tribunals apply a substantive rather than purely formal analysis. The defect of insufficient reasoning (falta de fundamentação) must be assessed in light of the entire administrative procedure, not just the final decision document. If the taxpayer exercised the right to prior hearing (audiência prévia) and was informed of the factual and legal grounds during the inspection or gracious complaint proceedings, demonstrating understanding by specifically responding to and contesting those grounds, courts typically find the reasoning requirement satisfied. The reasoning duty aims to enable effective defense and judicial review; if these purposes were achieved through the procedural dialogue, formal deficiencies in the final decision may not constitute grounds for annulment. However, complete absence of reasoning or generic statements without specific factual findings can render the act voidable under Articles 99 and 100 of CPPT.
Can a taxpayer request arbitration after a presumed denial of a hierarchical appeal against an IRS liquidation?
Yes, a taxpayer can request arbitration after a presumed denial (indeferimento tácito) of a hierarchical appeal against an IRS liquidation, pursuant to Article 10(1)(a) of RJAT in conjunction with Article 57(4) of CPPT. When the Tax Authority fails to decide a hierarchical appeal within the legal deadline, administrative silence operates as a presumed denial, allowing the taxpayer to proceed to arbitration. However, strict time limits apply: the arbitration request must be filed within 90 days from when the presumed denial occurs (typically 4 months after filing the hierarchical appeal), not from the original assessment notification. Failure to observe these deadlines results in untimeliness (intempestividade) and lapse of the right of action (caducidade do direito à ação) under Article 102(1) and (2) of CPPT, leading to case dismissal. Taxpayers must carefully track deadlines from each procedural stage to preserve their right to arbitral review.
How does the CAAD assess untimeliness and statute of limitations defenses raised by the Tax Authority in IRS disputes?
The CAAD (Centro de Arbitragem Administrativa) rigorously assesses untimeliness and statute of limitations defenses as threshold issues that preclude substantive analysis. Under Article 102 of CPPT, taxpayers must file arbitration requests within 90 days of notification of the contested act or presumed denial of administrative appeals. The CAAD examines which specific act is being challenged—whether the original assessment, the gracious complaint dismissal, or the hierarchical appeal denial—and calculates deadlines accordingly. When ambiguity exists about which act is contested, the defense typically succeeds because taxpayers bear the burden of clearly identifying the challenged decision and demonstrating timely filing. Untimeliness constitutes a peremptory exception (exceção perentória) that causes lapse of the right of action (caducidade), resulting in mandatory case dismissal without reaching the merits. The CAAD applies these rules strictly to ensure legal certainty and finality in tax assessments, even when substantive arguments appear meritorious.
What are the grounds for active illegitimacy in arbitral proceedings concerning IRS assessments on property transfers?
Active illegitimacy (ilegitimidade ativa) in arbitral proceedings concerning IRS assessments on property transfers arises when the necessary party configuration is incomplete. Under Article 13(2) and 13(3)(a) of CIRS, married taxpayers not judicially separated as to persons and property are jointly taxed, creating a situation of necessary joint interest (litisconsórcio necessário) under Article 34 of CPC (applicable to tax arbitration via Article 29(1)(e) of RJAT). When an IRS assessment encompasses income attributed to both spouses—such as capital gains from jointly-owned property or property transferred during marriage—both spouses must participate as co-applicants in the arbitration request. Filing by only one spouse constitutes active illegitimacy, as that individual lacks standing to challenge an assessment that legally concerns both taxpayers as joint obligors. This defect is not curable through ratification after filing and leads to case dismissal, protecting the non-participating spouse's procedural rights and ensuring complete contradictory proceedings.
How is a property dação em cumprimento (dation in payment) treated for IRS capital gains purposes in Portuguese tax law?
A property dação em cumprimento (dation in payment) is treated for IRS capital gains purposes as an onerous transfer equivalent to sale under Articles 9 and 10 of CIRS. The transfer value equals the debt amount satisfied (in this case, €607,500.00), constituting the property's realization value. Capital gains are calculated as the difference between this realization value and the acquisition value determined under Article 46 of CIRS. For constructed property, Article 46(3) allows taxpayers to prove acquisition costs through invoices and documentation of construction expenses incurred. However, the Tax Authority may reject such documentation if it lacks essential elements, shows inconsistencies upon cross-verification, or raises truthfulness concerns. When rejected, the acquisition value defaults to the patrimonial value (valor patrimonial) from land registry records at the time of acquisition or construction, which can significantly increase taxable gains. Taxpayers bear the burden of providing complete, consistent, and verifiable documentation of construction costs. The timing of construction, invoice authenticity, and correlation between claimed costs and the property's characteristics are all subject to Tax Authority scrutiny during inspection procedures.