Process: 129/2015-T

Date: September 30, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

Case 129/2015-T at CAAD involved a dispute over an IRS assessment for the 2011 tax year regarding capital gains from the sale of real estate properties. The claimant sold a property acquired in February 2010 for €140,000 and sold in January 2011 for €185,000, claiming €37,025.41 in property improvement expenses that were disallowed by the Tax Authority. The claimant raised two main arguments: primarily, that the assessment suffered from a defect of lack of reasoning (falta de fundamentação), preventing him from understanding why the Tax Authority rejected the documented renovation and modernization expenses, violating constitutional and legal requirements under Articles 268(3) of the Portuguese Constitution, 77 of the General Tax Law, and 125 of the Administrative Procedure Code. The claimant argued that proper reasoning only emerged during the gracious complaint procedure, not at the time of assessment. Subsidiarily, if the reasoning defect was not accepted, the claimant requested correction of the assessment to properly deduct the appreciation expenses under Article 51 of the IRS Code. The claimant also requested compensatory interest for errors attributable to the Tax Authority. The Tax Authority raised a procedural exception claiming the arbitration request was filed after the 90-day deadline from the payment due date (March 26, 2014), and defended on the merits that the assessment was properly reasoned and legally sound, following all required procedures including notifications under Article 128 of the IRS Code and the right to prior hearing. The case illustrates important principles regarding the deductibility of property improvement costs in calculating capital gains, the duty of the Tax Authority to provide adequate reasoning for tax assessments, procedural requirements for arbitration claims, and the availability of compensatory interest when taxpayers succeed in challenging unlawful assessments.

Full Decision

ARBITRATION DECISION

CAAD: Tax Arbitration

Case No. 129/2015-T

Matter: IRS, real estate capital gains, expenses with appreciation of assets

I - REPORT

  1. The Claimant requested, on 2 February 2015, pursuant to the provisions of article 95 of the General Tax Law, articles 99, paragraphs a) and c) of the Tax Procedure and Process Code (CPPT), article 140, paragraph 1 of the Personal Income Tax Code (IRS Code), article 2, paragraph 1, letter a) and paragraph 2 article 10 of Decree-Law No. 10/2001, of 20 January, an arbitral pronouncement with a view to declaring the unlawfulness and consequent annulment of the IRS assessment No. 2014..., of 8 February 2014, relating to the year 2011, more specifically, with respect to the assessment of tax on capital gains realized from the alienation of two real estate properties, formulating finally the following claims:

a) declaration of unlawfulness of the said tax act due to the defect of lack of reasoning, with the consequent request for condemnation to pay compensatory interest for error attributable to the Respondent in issuing the assessment;

b) declaration, subsidiarily, insofar as the preceding claim is unsuccessful, of the (partial) unlawfulness of the tax assessment act.

  1. The Claimant previously submitted a gracious complaint with the objective of declaring the unlawfulness of the aforementioned assessment.

  2. In the request for arbitral pronouncement, the Claimant chose not to designate an arbitrator, whereby pursuant to article 6, paragraph 2, letter a) and article 11, paragraph 1, letter b) of the RJAT, the Deontological Council appointed the undersigned arbitrator, who accepted the charge within the legally stipulated period.

  3. The Arbitral Tribunal was constituted on 30 April 2015.

  4. The Tax and Customs Authority presented its response, requesting its dismissal from the proceedings due to lapse of the right of action in arbitration and, should that not be upheld, defending that the request for arbitral pronouncement should be judged favorable.

  5. The meeting provided for in article 18 of the RJAT took place on 9 July 2015, the Claimant responded to the exception raised by the Respondent. On that date, the parties were notified to submit arguments.

  6. The Claimant, on 7 September 2015, submitted written arguments and the Respondent did so on 14 September 2015.

  1. The Claimant alleges, in summary, the following:

a) The additional IRS assessment act No. 2014..., relating to the tax year 2011, is unlawful due to lack of reasoning and defect of violation of law due to error attributable to the tax administration.

b) He alleges that he incurred expenses and charges with the appreciation of the alienated real estate property (fraction "..." described under article ... of the parish of ...) in the amount of € 37,025.41, a value which he entered in the income statement, IRS Form No. 3.

c) That, following an analysis of the statement submitted, initiated by the Tax Administration, he presented documents evidencing those expenses.

d) The analysis of such documents leads to the conclusion that the acquired real estate property and subsequently alienated underwent profound renovation and modernization works, having presented invoices for the costs of such appreciation.

e) He also attached the purchase and sale contracts of another real estate property, which was declared in Annex B because the Claimant and his wife were at that time assessed as a secondary activity in the "purchase for resale of real estate properties", an activity which, due to the financial crisis that subsequently arose, was closed.

f) Being assessed under the simplified regime, only the acquisition value and alienation value were indicated, making unnecessary the presentation of any appreciation expenses of the same.

g) After being notified for a prior hearing, he was notified of the decision of 18-12-2012 that determined corrections to the declared values and that he would be duly notified of the assessment of the corresponding tax.

h) After being notified of the IRS assessment in question in these proceedings, he submitted a gracious complaint, which was rejected.

i) He invokes the defect of lack of reasoning of the decision that led to the assessment, which prevented the Claimant from becoming aware of the specific reasons that led the tax administration to issue the tax assessment act, in particular, the specific reasons that led to disregarding the evidence presented.

j) He concludes, therefore, that such reasoning, at the moment when the assessment act was made, did not exist, which violates the provisions of articles 268, paragraph 3 of the CRP, 77 of the LGT and 125 of the CPA.

k) Only in the context of the gracious complaint did he become aware of the reasons that led to the non-acceptance of appreciation expenses.

l) He concludes, thus, that the challenged act suffers from the defect of lack of reasoning and should, therefore, be annulled.

m) Subsidiarily, he requests that the additional assessment challenged be corrected as to the amounts of appreciation of the alienated real estate property.

n) With regard to the raised exception, he alleges that he identifies the assessment act in question, as he describes the complaint procedure of which he was subject.

o) He thus contends for the unlawfulness of the IRS assessment act, of the tax year 2011, due to lack of reasoning and, subsidiarily, for violation of the provisions of article 51 of the IRS Code.

p) Finally, he requests that the tax administration be condemned to pay compensatory interest.

  1. In turn, the Tax and Customs Authority alleges the following:

a) By exception, it invokes the lapse of the request for arbitral pronouncement, formulated by the Claimant because it understands that when the Claimant submitted the request for arbitral pronouncement against the IRS assessment No. 2014... the 90-day period already had lapsed, calculated from the due date for payment of that assessment which occurred on 26-03-2014.

b) Moreover, it argues that the challenged act does not suffer from the defect of lack of reasoning, nor from the defect of violation of law due to error of the tax administration.

c) That, following an internal analysis of the income statement, the Claimant was notified, pursuant to article 128 of the IRS Code, to present documents evidencing the declared values with the transfer of the real estate properties, as well as their allocation to the activity of the taxpayer B.

d) In light of the documents presented and after the Claimant was notified to exercise the right of prior hearing, it was decided to proceed with corrections to the declared elements.

e) As a consequence, the Finance Service of Lisbon proceeded to the official preparation of Form 3, relating to IRS of 2011, which gave rise to assessment No. 2014..., of 8-02-2014, with additional tax and corresponding compensatory interest in the total amount of € 8,550.78.

f) After the gracious complaint procedure submitted by the Claimant against that additional assessment, the same was rejected as shown in the office No. ..., of 10-11-2014.

g) It argues that the assessment in question should be maintained and, therefore, the request for arbitral pronouncement should be judged unsuccessful, absolving the respondent entity from the claim.

II. PROVED FACTS

  1. Based on the facts alleged by the parties, and not disputed by the Respondent, as well as the documentation attached to the proceedings, the following facts are considered proved:

a) On 01-02-2010, the Claimant, together with his wife B, acquired, by purchase, the autonomous fraction designated by the letter "..." (first floor) of the property located on Rua ... No. ...-..., parish of ..., municipality of Lisbon, registered in the urban property register of that parish under article ..., for the price of € 140,000.00;

b) This fraction was sold on 21-01-2011 for the price of € 185,000.00.

c) On 22-10-2010, the Claimant, together with his wife B, acquired, by purchase, the autonomous fraction designated by the letter "..." (fourth floor right) of the property located on Rua ..., No. ..., letters ............, parish of ..., municipality of Lisbon, registered in the urban property register of the parish of ... under article ..., for the value of € 100,000.00.

d) This fraction was sold on 29-04-2011 for the price of € 187,500.00.

e) On 04-03-2011, at the Finance Service of Lisbon..., the Claimant's wife, taxpayer B, ceased her activity of business income, relating to other service provisions (1519) and purchase and sale of real estate property (68100) with effect from 30-04-2007.

f) The Claimant, in the income tax declaration model 3 for IRS, relating to the year 2011, indicated the capital gains obtained from the alienation of those autonomous fractions as follows:

i. The alienation of the fraction ... (registration article ... of the parish of ...) was declared in Annex G, indicating expenses and charges in the total of € 37,025.42;

ii. The alienation of the fraction "..." (registration article ... of the parish of ... was declared in Annex B, as income of Category B earned by taxpayer B.

g) From the 2011 IRS declaration, processed with No. ..., resulted tax due in the amount of € 10,040.86.

h) On 22-06-2012, the Claimant was notified by the Tax Administration that the income statement relating to the year 2011, with the identification .../..., was selected for analysis for "having detected the following situation(s): Sale of real estate property not declared or proof of the values of expenses, the value of alienation, the date of acquisition of the alienated real estate properties or allocation to professional activity". It was indicated in the notification, among other things, the following: "In view of the above, you are hereby notified that, pursuant to the provisions of article 128 of the IRS Code, within the period of 15 days (...), present at the Finance Service of your tax domicile area, the duplicate of the said declaration and all documents evidencing your personal and family situation, as well as the quantitative elements associated with the flagged situations.

After the mentioned period, without regularization of the detected situation, the procedure will proceed to correction of the declared values.

At the time of presentation of the documents, this notification must be presented.

IRS Services Directorate, 2012-06-18" (cf. doc. 2 attached to Document No. 2 attached to the request for constitution of the arbitral tribunal).

i) On 6-07-2012, the Claimant went to the Finance Service of Lisbon... to obtain clarifications, in which he was informed that it was necessary to attach the elements relating to the acquisition and subsequent sale of the real estate properties, as well as evidence of the expenses mentioned in the statement delivered.

j) On 17-10-2012, the Claimant submitted an explanation substantiated in the document "Clarification of IRS Discrepancies 2011" in which he clarified the values of acquisition and alienation of the real estate properties.

k) To prove the expenses imputed to the fraction "..." in the total declared value of € 37,025.41, the Claimant presented documents Nos. 5 to 23 (attached to Document No. 3 of the request for constitution of the arbitral tribunal), in the total value of € 37,954.82, corresponding to:

i. Stamp duty in the amount of € 1,120.00 (doc. 5);

ii. IMT in the amount of € 2,442.00 (doc. 6);

iii. Deed in the amount of € 290.00 (doc. 7);

iv. Material for renovation work in the amount of € 16,851.82 (doc. 8 and docs. 10 to 22);

v. Labor in the amount of € 12,720.00 (doc. 9);

vi. Commission to Real Estate Agency ... in the amount of € 4,551.00 (doc. 23)

(cf. Documents No. 3 and their respective attached documents identified as documents Nos. 1 to 23).

l) On 12-04-2013, the Claimant was notified by the tax administration for exercise of the right of prior hearing of the existence, after analysis of the documents/elements presented regarding the IRS declaration, Form 3, of the year 2011, of the following errors:

"The alienation of the property U-...-..., parish..., must be registered in annex G.

The amounts of expenses inherent to the acquisition and alienation of the property U-...-..., parish..., are considered up to the amount of € 8,857.41 (includes tax expenses, deed and registration and real estate mediation).

It is further informed that, should you wish to exercise the right of prior hearing referred to in article 60 of the General Tax Law (...)".

m) On 30-04-2013, the Claimant through the electronic declarations platform, formulated a request seeking clarifications, to which the tax administration responded, on 08-05-2013, that the request formulated by the claimant should be formalized in a signed request by the taxpayer or in representation. The Claimant was also warned that the formulation of the request did not suspend the 15-day period for exercise of the right of prior hearing referred to in article 60 of the LGT.

n) By office dated 24-05-2013, the Claimant was notified by the tax administration that "not having proven the elements declared for which by my decision of 2012-12-18 determined the effectuation of the following correction:

a) Correction of the amount mentioned as title of expenses and charges;

b) Mention of the alienation of the property identified under the letter... of article... of the urban property register of...".

o) Subsequently, the Finance Service of Lisbon... proceeded to the preparation of an official declaration model 3, relating to IRS of 2011, considering expenses and charges incurred with the property U-...-... in the amount of € 8,857.41 (tax expenses, deed, registration and real estate mediation) and considering the capital gain obtained from the alienation of the property U-...-... in annex G of that declaration.

p) On 08-02-2014, the tax administration, based on those corrections relating to the alienation of the fractions "..." and "...", additionally assessed the Claimant for IRS, in the amount of € 18,591.64 (assessment No. 2014...).

q) The assessment note contains the following wording: "You may claim or challenge pursuant to the terms and periods established in articles 140 of the IRS Code and 70 and 102 of the Tax Procedure and Process Code."

r) On 17-02-2014, the tax administration issued the Account Settlement Statement, from which a balance of € 8,550.78 was determined in favor of the tax administration and on the same date assessed the Claimant € 321.93 of compensatory interest;

s) The Claimant submitted a gracious complaint regarding the (additional) assessment No. 2014...

t) By office dated 15-10-2014, the Claimant is notified, for purposes of exercise of prior hearing, of the attached proposed decision of the intention to reject the complaint submitted.

u) In the proposed decision it is mentioned, among other things, the following:

"2. Due to discrepancies being detected, the complainant was notified to prove the values of expenses of the alienated property, the value of alienation, the date of acquisition of the same or of allocation to professional activity.

  1. Thus, not having presented the requested elements within the period for this purpose and after notification for exercise of prior hearing, the Finance Service of Lisbon..., proceeded to the preparation of an official declaration, having been registered in Annex G the alienation of the property U-...-..., parish... and the amounts of expenses inherent to the acquisition and alienation of the property U-...-..., parish..., in the amount of € 8,857.41 (includes tax expenses, deed and registration and real estate mediation).

  2. It is from this assessment, which resulted in tax due in the value of € 8,550.78, according to the account settlement statement of 17-02-2014, that the now complainant comes to complain (...).

  3. After analysis of the documents presented, it is verified that the registration of the property U-...-I, parish..., in annex G of the income statement Form 3, and not in annex B relating to taxpayer B, results from the fact that this entity ceased activity from 30-04-2007, having had a Fine Reduction Proceeding opened with No. ..., which is extinct by payment, as can be ascertained from pages 93 et seq. of these proceedings.

  4. Regarding the documents presented with the numbering 8 to 12, relating to labor and material for renovation works, it is verified that the same cannot be accepted because they do not meet the requirements provided for in article 36, paragraph 5 of the Value Added Tax Code, combined with Circular Office No. 181044/91, of 6 December, due to lack of fiscal identification of the recipient or purchaser, the invoicing of the service provision should always quantify and specify the operations, the mere indication "apartment restoration" cannot be accepted, they must mention the applicable rates and the amount of tax due, some do not indicate the place where the works were carried out or the place to which the goods are destined and furthermore, some documents present dates after the alienation of the property in question without being accompanied by the respective receipts – e.g. Doc. 12 and 13.

For the purposes and effects of paragraph 1 of article 75 of the CPPT, I inform that:

1 – The proceeding is the proper means, the complaint is timely (cf. paragraph 1 of article 70) and the complainant has legitimacy for the act (cf. article 65 of the LGT and article 9 of the CPPT).

2 – The documents attached to the proceedings confirm what is alleged."

v) The Claimant responded on 01/11/2014, in which he argues: (i) that there is a contradiction between the conclusions that propose rejection and the proposal that concludes that "the documents attached to the proceedings confirm what is alleged."; (ii) that the defect of lack of reasoning is not addressed, which invalidates what is subsequently processed; (iii) he contends for the acceptance of appreciation expenses.

w) The complaint was rejected containing in the brief information prepared, attached to the same, the following: "It is reiterated that, for the determination of capital gains subject to tax, to the acquisition value are added the charges with the appreciation of the goods duly proven realized in the last five years, and these must have documentary support and meet the requirements set out in article 36, paragraph 5 of the CIVA, combined with Circular Office No. 181044/91 of 6 December.".

III – ASSESSMENT

  1. The Tribunal is competent and is regularly constituted, pursuant to articles 2, paragraph 1, letter a), 5 paragraph 2, and 6, paragraph 1, all of the RJAT.

The parties have legal standing and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10, paragraph 2, of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.

IV. REASONING

  1. The questions to be decided in these proceedings are the following:

  2. Lapse of the request for arbitral pronouncement;

  3. Lack of reasoning of the (additional) IRS assessment relating to the tax year 2011;

And, subsidiarily, insofar as the preceding claims are unsuccessful,

  1. Defect of violation of law relating to charges with appreciation of the asset.

Lapse of the request for arbitral pronouncement

The Claimant challenges the act of additional IRS assessment No. 2004..., of 8 February 2008, relating to 2011, in the amount of € 8,550.76, which had the due date for payment of 26-03-2014.

From the Respondent's perspective, on the date the request for arbitral pronouncement was filed (29-02-2014), the 90-day period for the right of action had already lapsed. It is thus verified that the right of action has lapsed, a dilatory exception that determines the dismissal of the Respondent from the proceedings under letter h) of paragraph 1 of article 89 of the CPTA and letter e), of paragraph 1 of article 287 of the CPC, applicable ex vi article 29 of the RJAT. In support of his thesis he invokes the decisions taken in cases Nos. 261/2013-T and 763/2014-T.

In the response to the exception presented during the arbitral meeting and in the arguments, the Claimant invokes that what is at issue, on the main ground, is the assessment act, which is identified, having described the gracious complaint procedure to which it was subject.

It is undisputed, as has been stressed in CAAD decisions, that although article 2, paragraph 1, letter a) of the RJAT makes express reference to the competence of arbitral tribunals to declare the unlawfulness of assessment acts (primary act), this competence encompasses the declaration of unlawfulness of second-tier acts, of which examples are the acts rejecting gracious complaints.

Both the arbitration process and the challenge process, which serves as its paradigm, have tax acts as their object. The difference is that, in the case of direct challenge of the assessment act, this will be the immediate object of the judicial challenge, whereas in the challenge of the complaint such act will be the indirect object. In both cases the assessment act is the object of the judicial challenge.

In these proceedings, the Claimant graciously complained of the IRS assessment, relating to the year 2011, with No. 2004..., on the grounds of defects of the act, whose annulment he now petitions, as results from the claim formulated finally. The complaint was rejected and, therefore, that complaint also absorbs the defects pointed out to that act. Subsequently, the Claimant came to judicially challenge the assessment act, which constitutes the immediate object of the preceding gracious complaint, which was expressly maintained in the legal order by force of its rejection.

If the immediate object assessed by the complaint decision is the tax act, the challenge of this act, subsequent to that decision, may still take place on the grounds of defects of the tax assessment act.

Now, the gracious complaint procedure, like the judicial challenge process and like the tax arbitration process, have the same object and can be pursued on equal grounds – cf. articles 68, 70, 99 et seq. of the CPPT – and from the rejection of that, apart from the optional hierarchical appeal, judicial challenge is available.

In tax litigation, a period of 3 months is provided to challenge the act and 120 days to graciously complain and subsequently a new period of 3 months to challenge the tax act, should the decision be a rejection.

In the RJAT, equally, a period of 90 days is provided to immediately challenge the act, and subsequently a period of 90 days, subsequent to the decision rendered in a gracious complaint procedure, to challenge the act, should the decision be a rejection – cf. article 10, paragraph 1, letter a) of the RJAT and article 102, paragraph 2 of the CPPT.

It must also be borne in mind that a gracious complaint cannot be submitted when a judicial challenge or request for arbitral pronouncement with the same grounds has been presented, thus seeking to avoid contradictory decisions – cf. article 111 of the CPPT and article 13, paragraph 4 of the RJAT.

In the request for arbitral pronouncement and in the gracious complaint that preceded it, the Claimant invokes defects and errors committed in the tax assessment procedure that are grounds for challenge under article 99 of the CPPT, capable of leading to the annulment of the additional assessment act, to which the taxpayer did not conform and from which he graciously complained.

It should be noted that, when notified of the additional assessment, the Claimant is informed that he may complain or challenge pursuant to the terms and periods established in articles 140 of the IRS Code and 70 and 102 of the Tax Procedure and Process Code.

As Jorge Lopes de Sousa states, "with regard to assessment acts, which are the typical and most numerous harmful acts in tax litigation, in addition to there always being the possibility of immediate contentious challenge, there are reinforced means of challenge that translate into the possibility of graciously filing a complaint and appealing the hierarchical decision thereof with the possibility of contentious challenge of the decisions rendered in any of those procedural means (cf. articles 76, paragraph 2 and 102, paragraph 2 of the CPPT).[1]" The author further adds: "This is not, in any case, a suspension of the period for judicial challenge, but rather autonomous periods for challenging decisions rendered in gracious complaints or hierarchical appeals."

The immediate contentious challenge of the challenge act and the challenge of that act, when preceded by a decision rendered in the context of a gracious complaint procedure, have distinct and autonomous periods for contentious challenge. The same applies with respect to the immediate request for arbitral pronouncement of the assessment act or the request for arbitral pronouncement of the assessment act, duly preceded by a gracious complaint procedure.

The discussion on the lawfulness of the assessment act (object of the request for arbitral pronouncement) may thus occur both with the contentious challenge or immediate request for arbitral pronouncement, and with the contentious challenge or request for arbitral pronouncement subsequent to a decision rejecting the gracious complaint, since in both cases the object of the proceedings and the request for annulment are directed at discussing the lawfulness of the tax act challenged.

As emphasized in the Supreme Administrative Court Decision of 12-10-2011, with rapporteur Dulce Neto, it is stated "as to the question of the period for judicially challenging an assessment act, it is unquestionable that if the taxpayer has chosen to file a gracious complaint against the tax assessment act, the period for judicially challenging it no longer runs from the date due for voluntary payment of the tax, but rather the date of rejection (express or implicit) of that complaint becomes relevant." And, further on, it adds: "if a decision on the complaint is rendered, the complainant has 15 days, counted from the notification of that decision, to file a challenge – paragraph 2 of article 102 of the CPPT.[2]"

Also in the Supreme Administrative Court Decision of 1-10-2003 (case No. 8093/03), with rapporteur Baeta de Queiroz, it is stated that "If the taxpayer chooses to file a gracious complaint against the tax assessment act, the period for judicially challenging it no longer runs from the date due for voluntary payment, but rather the date of rejection of the complaint, or the date of the presumption of such rejection, becomes relevant." In this decision, in which the lapse of the taxpayer's right to challenge the assessment of income tax on legal entities was discussed, it is stated that "if there had not been such a complaint, the judicial challenge, based on a defect that generates the voidability of the act, would be time-barred, because more than 90 days had elapsed (...) – cf. letter a), of paragraph 1, of article 102 of the CPPT. However, and as it had filed a gracious complaint, the taxpayer was afforded a broader period for challenge, since, in this case, its start date is postponed.[3]"

Finally, it should be noted that, even if the Claimant had indicated in the final statement that the request for challenge was directed at the rejection order of the complaint act, this would not prevent the tribunal from ruling on the defects of the assessment act.

As has been emphasized, in cases where the judicial challenge is directed at the immediate decision of rejection, the assessment complained of constitutes its indirect object, thus both constitute the object of such challenge – cf. Court of Administrative Appeals Decision of 16-04-2013, rendered in case 5603/12 and Supreme Administrative Court Decision of 12-10-2011 and 16-11-2011, cases Nos. 463/11 and 723/11.

The Respondent invokes that the object of these proceedings is fixed by the claim and cause of action, it being not irrelevant how it is enunciated in the request for arbitral pronouncement and, then adds that the claim formulated concerns the additional tax assessment.

However, with the (negative) pronouncement effected in a gracious complaint procedure, a new period for challenging the assessment act is opened. It is, moreover, always in the face of the assessment act (object of the challenge proceedings/request for arbitral pronouncement) that the defects of the act are assessed and, if applicable, determined to be subject to annulment.

The additional assessment act is assumed, in these situations, as the object of the gracious complaint and of the subsequent request for challenge. That act can still be challenged, following the rejection of the complaint, since the defects that the taxpayer invoked are the same, and the decision of rejection, effected in a gracious complaint procedure, understood them not to occur and, therefore, maintained the complained act in the legal order.

Subsequently, that act, with which the Claimant did not conform, can still be annulled if the defects (cause of action) invoked in the request for arbitral pronouncement are judged to exist. This is not prevented by the fact that the Claimant believes that the genesis (cause) of annulment resides in the procedural defects, which, in his view, taint the entire assessment process and not in an autonomous defect of the decision rendered in a gracious complaint, which may also constitute the object of judicial challenge or request for arbitral pronouncement.

That is because the rejection of the complaint constitutes, moreover, the maintenance of the tax assessment act which, in these cases, is part of the object of the judicial challenge – cf. Supreme Administrative Court Decision of 07-06-2000, case 21556.

Now, although the Claimant, as the Respondent emphasizes, identified in the claim formulated "request for arbitral pronouncement on the lawfulness of the IRS assessment No. 2014..., of 8 February 2014, relating to the year 2011", that claim has implicit in it, and serving to justify the autonomous period fixed in law, the rejection of the gracious complaint (cf. articles 28 and 29 of the request for arbitral pronouncement, as the Respondent herself recognizes in article 8 of the response presented). The Tribunal can thus rule on the lawfulness of the challenged act.

Consider that what is challenged in these proceedings is the assessment act, which was the subject of a timely gracious complaint. The Claimant graciously complained of the additional assessment, placed in question in these proceedings, so that the Claimant can still benefit from the 90-day period granted to him by article 10, paragraph 1 of the RJAT, by reference to article 102, paragraph 2 of the CPPT, to request its invalidity within the context of these proceedings.

The raised dilatory exception consequent from the untimeliness of the arbitral request, based on the ground that the challenge period for the tax act challenged had already lapsed, lacks legal support.

Thus, the additional assessment act of the IRS assessment relating to 2011 (which, from the Claimant's perspective, is tainted by defects and errors committed throughout the tax assessment procedure, already invoked in a gracious complaint) can be the subject of a request for arbitral pronouncement and pursued after the decision of the gracious complaint procedure, applying the 90-day period fixed in article 10, paragraph 1 letter a) of the RJAT, by reference to article 102, paragraph 2 of the CPPT, subsequently revoked.

In view of the above, the exception of lapse of the right of action invoked by the Respondent is judged unsuccessful.

On the defect of lack of reasoning of the challenged act

The Claimant alleges that the challenged act suffers from the defect of lack of reasoning, which causes its invalidity.

From the request for constitution of the arbitral tribunal, it results that the Claimant imputes the defect of lack of reasoning to the decision contained in the office dated 25-05-2013 (cf. point n) of the proved facts) and, consequently, to the additional assessment of the IRS assessment of the tax year 2011.

The constitutional dignity of the right to reasoning of tax acts has the purpose of rationalizing the decision and creating material conditions for the adequate exercise of the rights of defense of taxpayers. In the tax domain, the general requirements for reasoning of acts are expressed in article 77 of the General Tax Law.

The Supreme Administrative Court has come to understand that the reasoning of an administrative act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that reasoning is only sufficient when it allows a normal recipient to extract the cognitive pathway followed by the agent for its adoption. To this end, see the Supreme Administrative Court Decision of 11-12-2007, case 615/04 "the degree of reasoning must be adequate to the specific type of act and the circumstances under which it was adopted, so as to satisfy the divergence existing between the position of the Tax Administration and that of the taxpayer". And, further on it adds, "sufficient reasoning should not be confused with the accuracy or substantive validity of the reasoning invoked. In fact, the reasoning discourse must be capable of clarifying the determining reasons for the act, for which it must be a clear and rational discourse; but, insofar as its lack or insufficiency entails a formal defect, what is at issue, in assessing the formal correctness of the act, is not the substantive value of the reasoning adduced, but only its existence, sufficiency and coherence, in order to make known the reasons for the decision."

In the matter under consideration, an additional IRS assessment act is at issue, a final act of the tax administrative procedure aimed at determining the IRS to be paid by the Claimant in the tax year 2011, for which the law requires no more than compliance by the Administration in a standardized manner, given the nature of "mass process" of the annual tax assessment.

The procedure that culminated in the challenged additional assessment act had its origin in an internal analysis initiated by the tax administration, and in the course of the procedure, the administration was complying with its duties of information, calling the taxpayer to participate in the procedure at the decisive moments in which acts potentially harmful were being adopted.

Indeed, in the office of the IRS Services Directorate dated 18-06-2012, the Claimant is notified that he must prove, pursuant to article 128 of the IRS Code, the elements declared in the 2011 income statement, regarding the following points: "Sale of real estate property not declared or proof of the values of expenses, the value of alienation, the date of acquisition of the alienated real estate properties or allocation to professional activity."

Subsequently, on 6-07-2012, the Claimant went to the Finance Service where he was given the explanations requested regarding the contents of that office and the documents he should present.

Although in a summary manner, the Claimant was made aware of the documents he should present to prove the elements declared in his IRS statement.

And, to such an extent that – although belatedly and only on 17-10-2012, well beyond the 15-day period that had been granted to him – the Claimant presented the documentation relating to the acquisition and alienation of the fractions, as well as the evidence of the expenses he imputed to the fraction "..." (article 800).

Subsequently, in the context of prior hearing, the Claimant was notified by the office of 12-04-2013, for exercise of the right of prior hearing, with respect to the errors relating to the income statement, in the following terms: "The alienation of the property U-...-..., parish..., must be registered in annex G. The amounts of expenses inherent to the acquisition and alienation of the property U-...-..., parish..., are considered up to the amount of € 8,857.41 (includes tax expenses, deed and registration and real estate mediation).

Before the additional IRS assessment, the Claimant was notified that corrections would be effectuated in the following terms:

a) Correction of the amount mentioned as title of expenses and charges, up to the limit of € 8,857.41 (as results from the offices dated 12-04-2013) and

b) Mention of the alienation of the property identified under the letter... of article 323 of the register, which should be registered in Annex G.

From the offices of 22-06-2012, 12-04-2013 and 25-05-2013 (cf. points h), l) and n) of the proved facts), combined with the fact that, the Claimant's wife ceased, on her own initiative, her activity of other service provisions (1519) and purchase and sale of real estate property on 4-03-2011 (cf. point e) of the proved facts) and, on the other hand, no proof was presented of the "allocation of the real estate properties to professional activity", we can conclude that, although in a synthetic manner, the Claimant was made aware of the grounds from which the additional assessment of the IRS assessment of the tax year 2011 resulted and that the same is contemporaneous with the act.

It is not a question, in assessing the formal correctness of the act, of the substantive value of the reasoning adduced but only of its existence.

After the assessment, the taxpayer submitted a gracious complaint of that act, and in that context, the grounds of the assessment and the corrections effected were made more explicit in a more corporeal manner, making it possible to establish a logical chain between the reasons briefly stated in the preceding offices and the grounds that would lead to the maintenance of the act contained in the proposed decision of 15-10-2014 and subsequent rejection decision (cf. points l), n), u) and p) of the proved facts).

It is certain that the most vulnerable moment lies in what is reported in point l), that is, the disregard of appreciation expenses that the taxpayer presented.

Notwithstanding recognition of some "deficiencies", the fact is that the intended purpose of such reasoning was achieved, that is, the understanding of the content of the act by its recipients and the possibility of reacting against it. That is, the correction of the amount mentioned as title of expenses and charges which was considered up to the limit of € 8,857.41 (includes tax expenses, deed and registration and real estate mediation).

In fact, such circumstances did not prevent the now Claimant from asserting his reasons through the gracious complaint procedure, where he objects to the non-consideration of appreciation expenses in the declared amount of € 37,025.41 and the administration's decision to have only attended to € 8,857.41, requesting that the challenged assessment be corrected in accordance with the declared values and which, in his view, are corroborated in the attached documents.

In the context of the gracious complaint procedure, the Claimant was made aware – in a more developed and clear manner, and in keeping with the preceding offices, making it possible to establish a logical chain with the grounds previously invoked by the tax administration and those developed in the context of the complaint – of the grounds that were at the origin of the additional IRS assessment act of the tax year 2011, as can be seen from the following passage which we transcribe:

"5. After analysis of the documents presented, it is verified that the registration of the property U-...-..., parish..., in annex G of the income statement Form 3, and not in annex B relating to taxpayer B, results from the fact that this entity ceased activity from 30-04-2007, having had a Fine Reduction Proceeding opened with No. ..., which is extinct by payment, as can be ascertained from pages 93 et seq. of these proceedings.

  1. Regarding the documents presented with the numbering 8 to 12, relating to labor and material for renovation works, it is verified that the same cannot be accepted because they do not meet the requirements provided for in article 36, paragraph 5 of the Value Added Tax Code, combined with Circular Office No. 181044/91, of 6 December, due to lack of fiscal identification of the recipient or purchaser, the invoicing of the service provision should always quantify and specify the operations, the mere indication "apartment restoration" cannot be accepted, they must mention the applicable rates and the amount of tax due, some do not indicate the place where the works were carried out or the place to which the goods are destined and furthermore, some documents present dates after the alienation of the property in question without being accompanied by the respective receipts – e.g. Doc. 12 and 13."

It cannot, therefore, be said that from the reasoning of the challenged assessment resulted prejudice to its defense, thus fulfilling one of the main purposes of the duty of reasoning, being contemporaneous with the act.

Thus, the alleged defect of lack of reasoning of the additional IRS assessment of the tax year 2011 does not stand.

Violation of law relating to the determination of appreciation expenses

The Claimant alleges, subsidiarily, that the tax act is unlawful due to violation of articles 10 and 51 of the IRS Code, given that the grounds invoked by the tax administration are not accepted for not accepting appreciation expenses of the real estate property. Specifically, he considers that all expenses from the sale of the fraction "..." should have been included, namely:

a) the expenses contained in document 10 (various construction materials) – (cf. article 63 of the claim)

b) expense on labor with the restoration of the apartment contained in document 9 – (cf. article 64 of the claim);

c) Various material included in the work as results from the expenses presented in documents 8 to 22 – (cf. article 65 of the claim).

And, consequently, he requests that the challenged assessment be corrected.

Letter a) of article 51 of the IRS Code establishes that in the determination of capital gains subject to tax, to the acquisition value are added charges for the appreciation of the assets, duly proven realized in the last five years, and the necessary and actually incurred expenses inherent to the acquisition and alienation, in the situations provided for in letter a) of paragraph 1 of article 10 of the IRS Code.

Charges for the appreciation of assets are expenses that are directed, not merely to preserve the value of the asset, but to increase its value. These are not mere maintenance expenses but are aimed at increasing the value of the asset[4]. As was emphasized in CAAD decision No. 86/2012-T, article 51 of the IRS Code, when referring to "appreciation expenses" of real estate, would refer to works that benefit the real estate, such as, for example, roof improvement, kitchen improvement, introduction of an air conditioning system, etc.[5]

With regard to expenses contained in document 10 (various construction materials), it is verified that invoice No. 14217 dated 1-02-2011, cannot be accepted as charge for appreciation of the real estate, since the same is subsequent to the date of alienation of the real estate (21-01-2011), expenses incurred after alienation cannot be accepted. Now, pursuant to article 51, only charges within the five-year period preceding the alienation are accepted.

The same applies to charges contained in documents 11 (invoice 1208768 of 08-04-2011, document 12 (invoice 23784/N of 1.02.2011) and 15 (receipt of 28/01/20011), which were incurred at a date subsequent to the alienation of the fraction, and as such, do not fall within the temporal limit fixed in article 51 of the IRS Code.

With regard to invoice No. 0087, dated 24 September 2010, presented as document No. 9 (attached to Document 3 of the request) expense on labor with the "restoration of the apartment" the same does not allow documenting the relationship between that charge and the appreciation of the real estate because it does not indicate the real estate that is subject to restoration, also lacking the description of the services provided. Notwithstanding a document entitled "estimate" being on the records, the fact is that, as the Respondent stressed, that document is not signed. Therefore, the connection between the charge contained in the document in question and the appreciation of the fraction "..." is lacking.

As for the supposed charges incurred by documents Nos. 8, 9, 11 and 22 (cf. article 67 of the claim), the same also cannot be accepted because it is not possible to establish a connection between the costs contained in those invoices and the works of improvement or appreciation of the real estate in question.

It further appears that, as for the charges contained in the invoices attached as documents 4, 20 and 21 (cf. article 67 of the petition), they also do not reveal a connection with the real estate that would allow us to conclude that they constitute charges for the appreciation of the fraction in question. On the other hand, the charges invoked constitute acquisitions of goods that do not fall within the concept of "charges for the appreciation of assets", nor can they be framed within the expenses inherent to alienation. In fact, the costs incurred with household appliances (document 4), embellishment of a balcony (doc. 20) or the acquisition of lamps (doc. 21) cannot be considered as charges for the appreciation of assets or even as expenses inherent to alienation because we are facing assets that are autonomous and separable from the fraction, not contributing to its appreciation, being some mere autonomous decorative elements detachable from the alienated real estate.

Thus, the defect of violation of law attributed to the tax act challenged in these proceedings does not stand.

Decision:

For the reasons stated, the arbitral tribunal decides:

a) To judge unsuccessful the exception of lapse of the right of action invoked by the Respondent;

b) To judge unsuccessful the request for annulment of the IRS assessment relating to the tax year 2011, as well as the request for condemnation of the Respondent to pay compensatory interest, absolving the Tax and Customs Authority from the claim.

c) To condemn the Claimant in the costs of these proceedings.

Value of the case:

Pursuant to the provisions of paragraph 2 of article 315 of the CPC, combined with letter a), of paragraph 1, of article 97-A of the CPPT and paragraph 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 8,550.78.

Costs:

For the purposes of the provisions in paragraph 2 of article 12 and paragraph 4 of article 22 of the RJAT and paragraph 4, of article 4 of the Regulation on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 918.00, pursuant to Table I attached to the regulation, to be borne by the Claimant.

Lisbon, 30 September 2015

The Arbitrator

(Alexandra Gonçalves Marques)

[1]Cf. Jorge Manuel Lopes de Sousa (2005), Reflections on the reform of tax litigation, Cadernos de Justiça Administrativa, No. 54, page 62.

[2]Available at www.dgsi.pt.

[3]Available at www.dgsi.pt.

[4]Cf. José Guilherme Xavier de Bastos (2007), IRS - Real Incidence and Determination of Net Income, Coimbra, pp. 461-462.

[5]Available at www.caad.org.

Frequently Asked Questions

Automatically Created

What property valorization expenses can be deducted from IRS capital gains on real estate sales in Portugal?
Nos termos do artigo 51.º do Código do IRS, podem ser deduzidos às mais-valias imobiliárias os encargos com a valorização dos imóveis, nomeadamente despesas com obras de renovação, modernização e beneficiação que comprovadamente tenham valorizado o bem alienado. Para serem aceites, estes encargos devem estar devidamente documentados através de faturas, recibos e contratos que demonstrem a realização efetiva das obras e a sua ligação ao imóvel vendido. No caso concreto do processo 129/2015-T, o reclamante alegou ter incorrido em despesas de valorização no montante de €37.025,41 relativamente a um imóvel adquirido por €140.000 e vendido por €185.000, apresentando documentação que evidenciava obras profundas de renovação e modernização. A dedutibilidade destes encargos depende da demonstração inequívoca de que os mesmos foram efetivamente realizados e contribuíram para a valorização do imóvel alienado.
How does the CAAD assess the deductibility of improvement costs under the Portuguese IRS Code for capital gains?
O CAAD analisa a dedutibilidade dos custos de valorização verificando se os mesmos estão adequadamente documentados e se correspondem efetivamente a encargos que valorizaram o imóvel nos termos do artigo 51.º do Código do IRS. No processo 129/2015-T, a Autoridade Tributária, após análise interna da declaração de rendimentos, notificou o contribuinte ao abrigo do artigo 128.º do Código do IRS para apresentar documentos comprovativos dos valores declarados com a transmissão dos imóveis. Após apresentação dos documentos e exercício do direito de audição prévia, foram efetuadas correções aos elementos declarados. A análise do CAAD centra-se em verificar se a AT fundamentou adequadamente a decisão de não aceitar os encargos apresentados, se os procedimentos legais foram cumpridos, e se os documentos apresentados pelo contribuinte demonstram de forma inequívoca a realização das obras de valorização e a sua relação com o imóvel alienado, avaliando tanto questões formais (fundamentação do ato) como materiais (enquadramento legal das despesas).
What are the grounds for annulling an IRS tax assessment due to lack of substantiation (falta de fundamentação)?
A anulação de uma liquidação de IRS por falta de fundamentação pode ocorrer quando o ato tributário não contém os motivos de facto e de direito que o justificam, violando o artigo 268.º, n.º 3 da Constituição da República Portuguesa, o artigo 77.º da Lei Geral Tributária e o artigo 125.º do Código do Procedimento Administrativo. No caso 129/2015-T, o reclamante alegou que a liquidação sofria do vício de falta de fundamentação porque não lhe permitiu conhecer as razões concretas que levaram a AT a emitir o ato de liquidação, particularmente os motivos específicos que conduziram ao não acolhimento dos elementos de prova apresentados relativos aos encargos de valorização. O contribuinte sustentou que apenas no âmbito da reclamação graciosa tomou conhecimento dos fundamentos que levaram à não aceitação das despesas de valorização, concluindo que a fundamentação, no momento em que foi praticado o ato de liquidação, não existia. A fundamentação adequada é essencial para permitir ao contribuinte exercer cabalmente o seu direito de defesa e compreender as razões da decisão administrativa.
Can a taxpayer claim compensatory interest (juros indemnizatórios) after a successful arbitration against the Portuguese Tax Authority?
Sim, nos termos do artigo 43.º da Lei Geral Tributária, o contribuinte tem direito a juros indemnizatórios quando se determine, em reclamação, impugnação, recurso ou revisão, que houve erro imputável aos serviços na liquidação do tributo. Os juros indemnizatórios visam compensar o contribuinte pelo pagamento indevido de impostos e são devidos desde a data do pagamento indevido até à data da emissão da nota de crédito. No processo 129/2015-T, o reclamante solicitou expressamente a condenação da AT ao pagamento de juros indemnizatórios por erro imputável à Requerida na emissão da liquidação. Para que os juros indemnizatórios sejam devidos em sede de arbitragem tributária, é necessário que: (i) o tribunal arbitral reconheça a ilegalidade total ou parcial da liquidação impugnada; (ii) o erro seja imputável aos serviços da AT; e (iii) tenha havido pagamento indevido do imposto. A existência de vício de falta de fundamentação ou de erro na aplicação da lei pode fundamentar o direito a juros indemnizatórios se resultar em pagamento de imposto superior ao devido.
What is the deadline to file an arbitral claim (pronúncia arbitral) against an IRS capital gains tax assessment at CAAD?
O prazo para requerer a pronúncia arbitral contra uma liquidação de IRS no CAAD é de 90 dias, nos termos do artigo 10.º, n.º 1, alínea a) do Regime Jurídico da Arbitragem em Matéria Tributária (RJAT). Este prazo conta-se a partir da data limite para pagamento voluntário do tributo indicada na nota de liquidação. No processo 129/2015-T, a AT suscitou a exceção de caducidade do direito de ação, alegando que quando o reclamante apresentou o pedido de pronúncia arbitral em 02-02-2015 contra a liquidação de IRS n.º 2014... já tinha decorrido o prazo de 90 dias, calculado a partir do prazo limite para pagamento voluntário daquela liquidação que ocorreu em 26-03-2014. Esta questão procedimental é essencial, pois a intempestividade do pedido de pronúncia arbitral determina a caducidade do direito de ação e consequente absolvição da instância da AT. O cumprimento rigoroso deste prazo é fundamental para aceder à arbitragem tributária, sendo que o pedido deve ser apresentado dentro dos 90 dias sob pena de preclusão do direito.