Non-Resident Entity Without Permanent Establishment: Deductibility of Property Maintenance Expenses for IRC Purposes

ARBITRAL DECISION

Parties

Claimant: A…, NIPC…, with registered office at …–…, …-… Loulé.

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I - REPORT

On 04 March 2017, the company A…, NIPC…, filed a request for the constitution of a singular arbitral tribunal (TAS), in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), against which the Tax and Customs Authority (AT) is named as Respondent.

THE CLAIM

The Claimant challenges the tax acts of additional assessment of Corporate Income Tax (IRC) for the fiscal years 2012, 2013 and 2014, formally issued respectively:

• by the IRC assessment statement No. 2016…, of 7 March 2016, statement of compensatory interest assessment No. 2016…, as well as the respective statement of account adjustment No. 2016…, these two of 9 March 2016 – fiscal year 2012;

• by the IRC assessment statement No. 2016…, of 7 March 2016, statement of compensatory interest assessment No. 2016…, as well as the respective statement of account adjustment No. 2016…, both of 11 March 2016 – fiscal year 2013 – and,

• by the IRC assessment statement No. 2016…, of 7 March 2016, statement of compensatory interest assessment No. 2016…, as well as the respective statement of account adjustment No. 2016…, both of 14 March 2016 – fiscal year 2014;

totalling 24,768.64 euros, of which €23,346.76 is IRC and €1,421.88 is compensatory interest.

The Claimant also challenges the decision that partially denied the administrative complaint it filed against the IRC assessments and compensatory interest, and following a partial approval decision received reimbursements of €354.36, €318.25 and €124.03 for overpaid taxes relating to the fiscal years 2012, 2013 and 2014, respectively.

It concludes by requesting (i) the declaration of illegality of the acts of additional IRC assessment relating to fiscal years 2012, 2013 and 2014; (ii) the declaration of illegality of the act of partial approval of the Administrative Complaint relating to fiscal years 2012, 2013 and 2014; (iii) the reimbursement of the amount of €23,972.00 paid in excess by the Claimant; (iv) the payment of indemnificatory interest calculated on the amount paid in excess.

THE GROUNDS OF CLAIM

The Claimant was subject to an internal tax inspection of partial scope, which resulted in the additional IRC assessments in question here, relating to fiscal years 2012, 2013 and 2014, concerning the procedures adopted in the determination of IRC.

It states "... although the AT accepted the tax deductibility of the majority of the expenses claimed by the Claimant for the 2014 fiscal year, it did not accept the tax deductibility of the following expenses in this fiscal year: Income tax preparation services - €239.85; Real property registration preparation services - €147.60; Mutual aid/housing - €30.75; Composting/waste parks/gardens - €33.89 + €14.52; and annual property owners' association dues …- €200.00".

And continues "... although the Claimant provided documentary support for all these expenses that were not now accepted, as appears in the documents attached to the Administrative Complaint, these expenses were not accepted for tax purposes because they were considered current expenses and not maintenance and conservation expenses".

And concludes "... the AT maintained the application of a proportionality coefficient for expenses based on the number of days of property rental".

It argues that the decision denying its administrative complaint in part and the reasoning of the inspection report (which supports the acts of additional assessment) suffer from the defect of form due to lack of proper reasoning and the defect of error regarding the factual and legal assumptions.

Regarding the lack of proper reasoning, it states that "... the Inspection Report abstains from indicating which specific expenses are non-deductible when the description does not permit the classification of the asset/service rendered, those that are non-deductible because they are 'current expenses' or the other non-deductible expenses", "particularly, a clear limitation to understanding supposedly followed by the AT to reach the decision it reached". And concludes: "... the AT bases the tax obligation it claims is borne by the Claimant on an alleged proportionality that should exist between the expenses incurred and the periods in which the Claimant's property generates income".

Adding: "a reasoning that, first of all, should include the obligation to justify – in the inscrutable understanding of the AT –, which served as the basis for the correction made", for which reason "... is obscure and insufficient, because its content is not sufficient to explain the true reasons why the acts now challenged were taken", being that "... there is no element in the Inspection Report that is consistent and adequate to the conclusion that proportionality is authorized by law."

Therefore "... all the assessment statements now challenged, as well as the final decision of partial approval of the Administrative Complaint should be considered as lacking proper reasoning, pursuant to No. 2 of Article 153 of the Administrative Procedure Code ("CPA") – applicable by force of subparagraph d) of Article 2 of the CPPT".

Regarding error regarding factual and legal assumptions, it states that the AT seeks to unjustifiably restrict the concept of "maintenance expenses", advocating the definition referred to in the CAAD arbitral decision in case 435/2014: "maintenance expenses are those that concern the day-to-day operation of the building, such as, by way of example, those for energy, water, elevator maintenance, cleaning, caretakers, and all routine administration expenses". This interpretation of the law would thus be in non-conformity with the principle of contributory capacity set forth in No. 1 of Article 104 of the CRP.

Regarding the claimed "proportionality of expenses based on the number of days of property rental" it argues that it violates the principle of legality (No. 2 of Article 103 of the CRP, expressed in No. 1 of Article 8 of the LGT) and is not in accordance with the CAAD arbitral decisions in cases 210/2015-T and 294/2015-T, concluding: "... it has been demonstrated that the application of a proportionality method has no legal basis...".

THE SINGULAR ARBITRAL TRIBUNAL (TAS)

The request for constitution of the TAS was accepted by the President of the CAAD and automatically notified to the AT on 20-03-2017.

By the CAAD's Deontological Council, the undersigned arbiter was appointed, and the parties were notified of this on 05.05.2017. The parties did not manifest a desire to refuse the designation, in accordance with Article 11, No. 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal (TAS) has been regularly constituted since 22.05.2017 to examine and decide the subject matter of this dispute (Articles 2, No. 1, subparagraph a) and 30, No. 1, of the RJAT).

All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 22.05.2017, which is hereby reproduced.

On 22-05-2017 the AT was notified in accordance with Article 17-1 of the RJAT. It responded on 27.06.2017, submitting the Administrative Process (PA) composed of the following electronic files: 0-Credentials.pdf; Doc. Attachments PRI (1-Inspection Report Draft.pdf); ONR (2 Official Notice and Notification of Draft RIT.pdf); RIT (3 Tax Inspection Report.pdf); ONRIT (4_Official Notice_of_RIT.pdf); NRIT (5 RIT Notification.pdf); RG0 (0 RG 1 50.pdf); RG1 (1 RG 51 100.pdf); RG2 (2 RG 101 150.pdf); RG3 (3 RG 151 200.pdf); RG4 (4RG 201 250.pdf);RG5 (5 RG 251 300.pdf); RG6 (6 RG 301 350.pdf); RG7 (7 RG 351 400.pdf); RG8 (8 RG 401 450.pdf); RG9 (9 RG 451 500.pdf); RG10 (10 RG 501 550.pdf); RG11 (11 RG 551 609.pdf).

No meeting of the parties was held in accordance with Article 18 of the RJAT taking into account the concordant position (implicitly) of the parties.

The parties were given a deadline by order of 21.07.2017 to submit successive written arguments, neither of them making use of this option.

PROCEDURAL REQUIREMENTS

Legitimacy, capacity and representation – The parties are legitimate, have legal personality, procedural capacity and are represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March).

Principle of contradictory – The AT was notified in accordance with subparagraph s) of this Report. All procedural documents and all documents joined to the process were made available to the counterparty in the CAAD's Case Management System. Both parties were always notified of their joining.

Dilatory exceptions – The arbitral procedure does not suffer from nullities and the request for arbitral pronouncement is timely as it was submitted within the prescribed deadline in subparagraph a) of No. 1 of Article 10 of the RJAT. Moreover, the AT did not put into question the timeliness of submission of the present request for arbitral pronouncement.

SUMMARY OF THE CLAIMANT'S POSITION

The Claimant, a non-resident legal entity without a permanent establishment in Portugal, disagrees with the additional assessments of IRC and compensatory interest carried out by the AT, based on an Inspection Report, first because it did not consider that the expenses referred to in subparagraph f) of this Report were maintenance expenses, deductible from category F income earned during 2014, in accordance with No. 1 of Article 56 of the CIRC and No. 1 of Articles 8 and 41, both of the Income Tax Code.

That is, it argues that these expenses are not "current" (as the AT considers) and therefore are deductible in accordance with Article 41 of the IRS Code, as maintenance expenses in the definition given to it in the CAAD arbitral decision Case 435/2014-T.

Second, the Claimant argues that there is no legal basis for the application of a proportionality coefficient for expenses based on the number of days of property rental (as the AT considered for carrying out the additional assessments).

It thus argues on the basis of the CAAD arbitral decisions Cases 201/2015-T and 294/2015-T, citing the following excerpts:

Regarding the first decision: "... the (gross) income earned in each year constitutes the positive elements that contribute to determining annual taxable income, and it is also necessary to consider the negative elements of the same period, which are deductions and allowances. It can therefore be concluded that the general rule of the IRS states that the tax is annual in nature and it is for each calendar year that the elements that permit determination of the tax incidence must be considered, namely gross income, deductions and allowances". "... It does not seem that this Article 41 [of the Income Tax Code], or any other, could lead to a regime of exception to the aforementioned general rule of the annuality of the IRS. In fact, this provision does nothing more than affirm the general rule: from gross income deductions are made for maintenance and conservation expenses (...). It is clear that nothing is said as to the period to be considered, as this was already stated in Article 1; it is the annual period". "There are thus no doubts that there is no need to make any other temporal correspondence between the gross income and the expenses to be deducted. There is only a need to ensure that the deductions relate to the calendar year in which the real property income was paid or made available."

Regarding the second decision: "As regards the reduction of expenses and charges through the application of an 'occupancy coefficient', such procedure cannot be accepted, because all expenses incurred, such as cleaning of homes and pools and their respective health treatment, water, electricity, insurance, IMI and others, will always have to be borne, regardless of the occupancy rate". "Such 'occupancy coefficient', as referred to, a 'sui generis' basis which apparently had not previously been used by the Inspection, has, in the view of this tribunal, no legal basis whatsoever".

It considers that the assessments and the decision denying the administrative complaint suffer from lack of proper reasoning for the reasons stated in j) to l) of this Report and error regarding factual and legal assumptions, for the reasons stated in m) of this Report.

Finally, it argues that the legal requirements for the assessment of compensatory interest are not met, expressing: "... one of the legal requirements for the assessment of compensatory interest lies in the requirement, provided for in law, that the delay in the assessment of the tax is due to a fact attributable to the taxpayer (see No. 1 of Article 35 of the LGT)". "Now, the Inspection Report does not refer to the existence of fault attributable to the Claimant, a fundamental requirement of the claim for assessment of compensatory interest".

It cites in its favour the decision of the Supreme Administrative Court, Judgment of 1 July 1998, issued in Case No. 043812 and the Judgment of the Supreme Administrative Court of 11 November 1998, issued in Case No. 31339, to conclude "... the Inspection Report abstains from indicating which elements it bases itself on to proceed with the assessment of compensatory interest sub judice, not even making any mention of the Claimant's fault in the alleged delay in the assessment of the tax, and much less proceeding to demonstrate such fault" and that "... such omission does not permit the Claimant to understand the cognitive and evaluative path followed to reach the present assessment of compensatory interest, and the absence of proper reasoning constitutes a formal defect which determines the voidability of the respective assessment act".

In summary it states: "It is therefore imperative to conclude that there is an absence of proper reasoning for the assessment of compensatory interest, namely as regards the Claimant's fault in the alleged delay in the assessment of tax, which violates the provisions of No. 1 of Article 35 and Nos. 1 and 2 of Article 77, both of the LGT, as well as the provisions of No. 3 of Article 268 of the CRP".

It concludes by requesting in the manner referred to in subparagraph d) of this Report.

SUMMARY OF THE RESPONDENT'S POSITION

The Respondent has a different reading of the facts and the law and argues for the dismissal of the request for arbitral pronouncement.

As regards the alleged lack or insufficiency of proper reasoning of the impugned acts, it concludes: "In the present case, the reasoning is sufficient, clear and unequivocal, all the more so as the Claimant demonstrates, in face of the arguments it has explained throughout its request for arbitral pronouncement, that it has fully understood the factual and legal framework in which the Respondent's decision was based, since it attempts to refute all of its action, recognizing that it perfectly understood the cognitive path that led the Respondent to decide as it did". And that "... even if the act sub judice suffered from deficiencies at the level of the reasoning discourse - which is only admitted as a mere academic hypothesis - such deficiencies would degrade into mere inessential irregularities", "since, even so, such deficiencies permit the full clarification of its recipient, enabling him to protest against them, as, in fact, the claimant did through the present request for arbitral pronouncement".

It cites in defence of its point of view the Judgment of the SAC of 17-06-2009, issued in Case No. 0246/09, available at www.dgsi.pt and the judgments: of 1989-07-13, appeal No. 18.270, in Appendix to the Official Gazette of 1991-04-30; of 1997-12-17, in appeal No. 36.001, in Bulletin of the Ministry of Justice No. 472, page 246; of 1997-11-20, in appeal No. 47.719, in Notebooks of Administrative Justice No. 13, page 14; of 2001-10-03, in appeal No. 36.037, in Appendix to the Official Gazette of 2003-10-23.

Regarding the alleged error regarding factual and legal assumptions, it states that: "... there are deductible, in accordance with Article 41 of the CIRS, maintenance and conservation expenses that are necessary for the conservation and maintenance of properties generating income", therefore "... it is legally justified the understanding of the AT that are not accepted as maintenance or conservation expenses: the commissions owed for the acquisition of clients, electricity bills, water, gas and property cleaning services, which are considered as current expenses, from the perspective of asset management and exercise of its activity".

And concludes: "Therefore, in 2014, they do not meet the conditions to be accepted in accordance with Article 41 of the CIRS, as they are considered current expenses and not maintenance and conservation expenses, those relating to: income tax preparation services, in the amount of €239.85; real property registration preparation services, in the amount of €147.60; mutual aid/housing, in the amount of €30.75; composting/waste, parks/gardens, in the amount of €33.89+€14.52; and annual property owners' association dues …, in the amount of €200.00".

Regarding the proportionality of expenses based on the number of days of property rental, it states that "... the conservation, maintenance and IMI expenses paid with respect to property rented for some months, since, for purposes of taxation under Category F of the Income Tax Code, regard is had to the net income obtained, that is the rents received less the expenses and charges incurred to produce the real property income included and to maintain intact the respective source of production, that is the properties subject to rental, such expenses should be proportionally considered based on the number of months of rental".

For the reason that "Where property is rented for certain periods, deductible expenses should be considered proportionally, based on the number of days of rental, that is, 42 days in 2012, 35 in 2013 and 37 in 2014, from which the following results:

[table content follows the percentages calculated]

"By applying the percentages above determined to the values considered in accordance with Article 41 of the CIRS, we have:

[table showing calculations]

On the alleged violations of the principle of contributory capacity and legality it states "... Article 41 of the CIRS does not contain any express reference to the moment of deduction vs. the moment of obtaining the revenue, we must resort to the general principles of law as regards the interpretation of laws".

For the reason that "... in accordance with what happens with the remaining categories of income in the IRS, the deductions made are so in direct proportion to the income obtained, establishing a causal and direct relationship between the two factors". "And the way to ensure that this relationship exists is by setting the temporal element since, otherwise, it would always be very easy for taxpayers to circumvent the situation by simply signing a rental contract a few days before the end of the year in order to sustain the deduction of all expenses incurred over the twelve months".

Summarizing: "... it makes no sense that a property that generated income for only a few days should be associated with an annual expense".

It concludes in the sense that "... the present request for arbitral pronouncement should be judged unfounded, with the tax acts of assessment being challenged remaining in the legal order and the Respondent being accordingly absolved of the claim".

II - ISSUES FOR THE TRIBUNAL TO RESOLVE

In accordance with Articles 123 and 124 of the CPPT, the TAS shall examine the defects raised by the Claimant in the following order:

1. First, the alleged lack or insufficiency of proper reasoning of the inspection report, the acts of IRC assessment and the decision denying the administrative complaint in part;

2. Second, the alleged error regarding factual and legal assumptions. Violation of the principle of contributory capacity and principle of legality.

3. Separately, there shall be an examination of the alleged lack of proper reasoning of the assessment of compensatory interest.

However, the parties clearly delimit the subject matter of the dispute, namely:

First segment of disagreement - The Claimant understands that the expenses referred to in f) of the Report of this decision are "maintenance expenses" and that in light of the applicable law (Article 41 of the Income Tax Code) they should be considered deductible from real property income. It expresses the following: "although the AT accepted the tax deductibility of the majority of the expenses claimed by the Claimant for the 2014 fiscal year, it did not accept the tax deductibility of the following expenses in this fiscal year: Income tax preparation services - €239.85; Real property registration preparation services - €147.60; Mutual aid/housing - €30.75; Composting/waste parks/gardens - €33.89 + €14.52; and annual property owners' association dues … - €200.00".

The Respondent, as referred to in ll) of the Report of this decision, understands that these expenses "... in 2014 do not meet the conditions to be accepted in accordance with Article 41 of the CIRS, as they are considered current expenses and not maintenance and conservation expenses, those relating to: income tax preparation services, in the amount of €239.85; real property registration preparation services, in the amount of €147.60; mutual aid/housing, in the amount of €30.75; composting/waste, parks/gardens, in the amount of €33.89+€14.52; and annual property owners' association dues …, in the amount of €200.00".

Second segment of disagreement – The Claimant understands, as evidenced by subparagraphs h), m), n) and bb) of the Report of this decision, that the criterion adopted by the AT is inconsistent with law, in the inspection report, which is ultimately the reasoning for the assessment acts and the reasoning for the decision denying the administrative complaint in part. It states the following, citing part of CAAD decision Case 294/2015-T: "as regards the reduction of expenses and charges through the application of an 'occupancy coefficient', such procedure cannot be accepted, because all expenses incurred, such as cleaning of homes and pools and their respective health treatment, water, electricity, insurance, IMI and others, will always have to be borne, regardless of the occupancy rate". "Such 'occupancy coefficient', as referred to, a 'sui generis' basis which apparently had not previously been used by the Inspection, has, in the view of this tribunal, no legal basis whatsoever".

The Respondent, notably in accordance with subparagraphs mm) to oo) of the Report of this decision, argues that "... conservation, maintenance and IMI expenses paid with respect to property rented for some months, since, for purposes of taxation under Category F of the Income Tax Code, regard is had to the net income obtained, that is the rents received less the expenses and charges incurred to produce the real property income included and to maintain intact the respective source of production, that is the properties subject to rental, such expenses should be proportionally considered based on the number of months of rental".

In this situation, the TAS shall examine the alleged "error regarding factual and legal assumptions" only as regards these two segments of divergence between the parties.

III. PROVEN AND UNPROVEN FACTS

REASONING

With regard to the facts, the Tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven facts from the unproven facts (in accordance with Article 123, No. 2, of the CPPT and Article 607, No. 3 of the CPC, applicable ex vi Article 29, No. 1, subparagraphs a) and e), of the RJAT).

Thus, the pertinent facts for the determination of the case are chosen and delineated according to their legal relevance, which is established with regard to the various plausible solutions of the legal issue(s) (in accordance with the previous Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable ex vi Article 29, No. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions adopted by the parties and the documentary evidence submitted, the following facts were considered proven, with relevance for the decision, the facts listed below, indicating the respective documents (proof by documents), as reasoning.

Proven Facts

1. The Claimant appears as the owner of a house intended for dwelling, located at …, …, …, registered in the urban real property matrix of the parish of …, municipality of Loulé, under article … and in the years 2012, 2013 and 2014 declared rents received and expenses - in accordance with the Claimant's global position, article 4.6 of the response and sheets 16/59 and 17/59 of the file "RG11 (11-RG-551-609.pdf)" which is part of the PA submitted with the response;

2. The Claimant is a non-resident entity without a permanent establishment (country: USA), on 200201-01 commenced an activity corresponding to CAE: "68 200 – Rental of real property" and is subject to the general regime for determination of taxable profit in IRC, having appointed as tax representative the company B…, LDA, NIF PT … – in accordance with Article 16 of the request for arbitral pronouncement (ppa) combined with various documents attached as annex to the ppa that confirm the entity that was notified and articles 4.4 and 4.5 of the AT's response,

3. On 18 September 2015 the Tax Inspection Services of the Finance Directorate of … issued Service Orders No. OI2015…/…/… for the credentialing of two tax inspectors for an internal inspection procedure with the Claimant, of partial scope, for the fiscal years 2012, 2013 and 2014 and aimed at determining the IRC – in accordance with Article 8 of the request for arbitral pronouncement (ppa), articles 4.1 and 4.3 of the response, the last 3 sheets of document No. 1–annex 1 submitted with the ppa and file "credentialing" which is part of the PA submitted with the response;

4. The inspection acts were initiated on 2015.09.30 and were concluded on 2016.01.15 – in accordance with article 4.2 of the response and 5th sheet of the file "PRI (1-Inspection Report Draft.pdf)" which is part of the PA submitted with the response;

5. On 25 January 2016, by official letter No. … of 21.01.2016, the Claimant was notified of the Draft of Corrections to the Inspection Report, in the context of prior hearing, a right which it did not exercise – in accordance with articles 9 and 10 of the ppa, document No. 1–annex 1 submitted with the ppa and file "ONR (2-Official Notice and Notification of Draft RIT.pdf)" which is part of the PA submitted with the response;

6. On 24 February 2016, by official letter No. … of 22.02.2016, the Claimant was notified of the corrections resulting from internal analysis – Article 62 of the RCPIT – referring in the final part "shortly, the AT services will proceed to notify the respective assessment, which will contain the means of defense, as well as the payment period"... and also the following:

[reference to specific notification documents] in accordance with article 11 of the ppa; file "ONRIT (4-Official Notice of RIT.pdf)" which is part of the PA submitted with the response and sheet 8/17 of the file "RIT (3-Tax Inspection Report.pdf)" which is part of the PA submitted with the response;

1. On 7 March 2016 the Claimant was notified of the IRC assessment statements, and was subsequently notified of the statements of compensatory interest assessment and the corresponding statements of account adjustment, relating to fiscal years 2012, 2013 and 2014, totalling €23,346.76 of IRC and €1,421.88 of compensatory interest (total of €24,768.64) – in accordance with article 12 of the ppa and Annexes No. 3, 4 and 5 of Document No. 1 submitted with the ppa;

2. On 13 April 2016 the Claimant proceeded to pay the tax and the respective compensatory interest, in the amounts referred to in the previous point - in accordance with article 13 of the ppa and annex No. 6 of Document No. 1 submitted with the ppa;

3. On 15 July 2016 the Claimant filed an Administrative Complaint against the assessments referred to in 7, a procedure which took the number …2016…, and on 14 November 2016 was notified of the order for partial approval and on 7 December 2016 was notified of the final decision of partial denial – in accordance with article 3 of the ppa, document No. 2 submitted with the ppa and sheets 11/59, 12/59, 23/59, 24/59 and 25/59 of the file "RG11 (11-RG-551-609.pdf)" which is part of the PA submitted with the response.

4. On 31 January 2017 the Claimant, following the aforementioned final decision of partial approval of the administrative complaint, received reimbursement cheques of €354.36, €318.25 and €124.03 for overpaid tax relating to fiscal years 2012, 2013 and 2014, respectively - in accordance with article 4 of the ppa and documents Nos. 3, 4 and 5 submitted with the ppa;

5. On 04 March 2017 the Claimant delivered to CAAD the present request for arbitral pronouncement (ppa) – record of entry in the CAAD's Case Management System of the request for arbitral pronouncement.

Unproven Facts

There is no other alleged factuality that has not been considered proven and that is relevant to the composition of the procedural dispute.

IV. EXAMINATION OF THE ISSUES FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE

Lack or insufficiency of proper reasoning of the inspection report, the acts of IRC assessment and the decision denying the administrative complaint in part.

The Tax Inspection Report contains the following as to reasoning, both factual and legal:

"III. Description of the facts and grounds for mere arithmetic corrections to the taxable matter

The Taxpayer is the owner of a house intended for dwelling, located at …, …, …, registered in the urban real property matrix of the parish of …, municipality of Loulé, under article ….

In the years under review the taxpayer declared rents received and expenses, related to the aforementioned property, in accordance with the following table:

[table of declared income and expenses]

The taxpayer was notified, through our official letter No. … of 2015-09-30, to provide the following elements: - Copies of the documentary evidence of real property income and the respective deductions, which gave rise to the values entered in field 302 of the income statement model 22 for the fiscal years 2012, 2013 and 2014.

In annexes 1 and 2, the rents received and expenses incurred are detailed, having been prepared on the basis of documents provided by the taxpayer.

Under Corporate Income Tax (IRC) and in accordance with subparagraph c) of No. 1 of Article 20 of the CIRC, the taxpayers subject to IRC are "Entities, with or without legal personality, which do not have their headquarters or effective management in Portuguese territory",

With the tax being levied on "the income of the various categories, considered for purposes of the IRS" ... - d) No. 1 Article 3 of the CIRC, with such income being determined in accordance with No. 1 of Article 56.

And Article 4 of the said code proceeds to determine the territoriality of the tax being considered as obtained in Portuguese territory, income attributable to a permanent establishment, if any. On the other hand, where it is a non-resident without a permanent establishment, he is subject to tax only as to the income obtained therein and which is enumerated in No. 3 of the same article, which in subparagraph a) refers to "income relating to real property situated in Portuguese territory".

The amounts received as rent by the Taxpayer are considered real property income (category F of the IRS, Article 8).

The expenses capable of being deductible from real property income are provided for in Article 41 of the CIRS "From the gross income referred to in Article 8 there are deducted the maintenance and conservation expenses which fall to the taxpayer, which are borne by him and are documented proof, as well as the municipal property tax which is levied on the value of the properties ... whose income has been included" – wording in force in 2012.

For the years 2013 and 2014, the legislation was changed to: "From the gross income referred to in Article 8, there are deducted the maintenance and conservation expenses which fall to the taxpayer, which are borne by him and are documented proof, as well as the municipal property tax and the stamp tax which is levied on the value of the properties whose income is subject to taxation in the fiscal year".

In annex 2: column "Expenses included in Article 41 of the CIRS", the expenses capable of being deductible from real property income are identified.

The remaining expenses mentioned in the invoices are not deductible, either when the description does not permit the classification of the asset/service rendered, or when these are current expenses and not maintenance and conservation expenses.

Where property is rented for certain periods, deductible expenses should be considered proportionally, based on the number of days of rental, that is, 42 days in 2012, 35 in 2013 and 37 in 2014, in accordance with Annex 1, from which the following results:

[table of proportionality calculations]

By applying the percentages above determined to the values considered in accordance with Article 41 of the CIRS, we have:

[table with calculated amounts]

Therefore, the net income of category F, in the amounts shown in the table below, corresponds to the taxable matter for purposes of IRC:

[table of taxable income amounts]

The IRC to be paid is determined in the amounts of €9,978.62 in 2012, €14,480.21 in 2013 and €15,058.28 in 2014, by application of the rate of 15% in 2012 and 25% in 2013 and 2014, provided for in No. 4 of Article 87 of the CIRC.

Deducting the amounts already determined in the DR. Model 22/IRC of the years in question, we have unpaid tax in the amounts of €5,220.10, €8,476.58 and €9,650.11 in the years 2012, 2013 and 2014, respectively."

One may disagree with the reasoning itself, but with this factuality, we do not see how one can claim that No. 3 of Article 268 of the CRP and Article 77 of the LGT regarding the duty of proper reasoning of the inspection report, the assessment acts and the decision denying the administrative complaint in part have been breached.

The Claimant furthermore alleges that this reasoning does not express the distinctive criterion for considering certain expenses as non-deductible because they are current. But proper reasoning may be succinct, setting forth the reasons of fact and law that motivate it. What matters is that it be able to fully clarify its recipient so that he can react against the decisions adopted.

The reasoning in question permitted the Claimant to act through an extensive administrative complaint (where it obtained partial approval) and through an identical request for arbitral pronouncement, with no evidence that its rights of defense have been jeopardized.

Much less, for the same reasons, can it be considered "obscure and insufficient" (Article 53 of the ppa). The truth is that the Claimant understood the reasons invoked in the reasoning and even questioned them.

On the contrary, as is evident from the finding that reasoning for a decision that is not very consistent can benefit whoever judicially challenges it, since only that specific reasoning can be examined in Court, bearing in mind that anything constituting a change to the reasoning of the appealed act cannot be accepted.

It is that post-hoc reasoning is irrelevant; the acts whose legality is questioned must be examined as they were performed, and the court cannot, upon finding that an illegal basis is invoked to support the administrative decision, examine whether its action could be based on other grounds (see judgments of the SAC of 10-11-98, of the Plenary, issued in appeal No. 32702, published in Appendix to the Official Gazette of 12-4-2001, page 1207, of 19/06/2002, case No. 47787, published in Appendix to the Official Gazette of 10-2-2004, page 4289, of 09/10/2002, case No. 600/02, of 12/03/2003, case No. 1661/02).

Therefore, in this regard and as to this alleged formal defect, the request for arbitral pronouncement is unfounded.

Error regarding factual and legal assumptions. Violation of the principle of contributory capacity and of the principle of legality.

The maintenance expenses

First, it is necessary to ascertain whether the expenses relating to "income tax preparation services - €239.85; Real property registration preparation services - €147.60; Mutual aid/housing - €30.75; Composting/waste parks/gardens - €33.89 + €14.52; and annual property owners' association dues in the amount of €200.00", as maintenance expenses, should or should not be considered deductible in accordance with Article 41 of the Income Tax Code.

The expenses capable of being deducted from real property income are provided for in Article 41 of the CIRS: "From the gross income referred to in Article 8, there are deducted the maintenance and conservation expenses which fall to the taxpayer, which are borne by him and are documented proof, as well as the municipal property tax which is levied on the value of the properties…whose income has been included" – wording in force in 2012.

For the years 2013 and 2014, the legislation was changed to: "From the gross income referred to in Article 8, there are deducted the maintenance and conservation expenses which fall to the taxpayer, which are borne by him and are documented proof, as well as the municipal property tax and the stamp tax which is levied on the value of the properties whose income is subject to taxation in the fiscal year".

This TAS adheres to the definition (cited by the Claimant) of "maintenance expenses" which MANUEL FAUSTINO expresses in the Review of Public Finances and Tax Law, Year I, No. 3, namely "Moreover, it was expenses with energy, with cleaning, heating or air conditioning, management of horizontal property, insurance premiums or local taxes. That is, it was expenses connected, not already with the property as such, as a mere physical reality or, in the legal sense, as a "thing", but with the maintenance and guarantee, at another level, also essential, of its habitability/use for dwelling or any other purpose for which the lease was lawful, and, consequently, indissociable from the pursuit, through the rental, of the economic purpose of obtaining income, in this case income taxable under the IRS".

... "it does not seem legitimate to interpret the concept of maintenance expenses restrictively, (...) accommodating therein, in our view, all those charges which, being duly documented, have a direct and immediate connection with the property as an economic reality capable of producing income and, indeed, have contributed to obtaining that same income, or from which it cannot, without grave breach of the principle of justice of taxation by violation of the principle of contributory capacity, be separated".

This TAS also adheres to the definition of maintenance expenses contained in the CAAD arbitral decision Case 435/2014-T, cited by the Claimant: "... maintenance expenses are those that concern the day-to-day operation of the building, such as, by way of example, those for energy, water, elevator maintenance, cleaning, caretakers, and all routine administration expenses (...)"

The AT does not question one of the conditions of the law: that they are documented and as such proven. What the AT considers is that these are "current expenses" and for this reason they do not fall within the concept of maintenance expenses.

• Income tax preparation services - €239.85 – It is understood that the implicit reasoning underlying the Claimant's argument for maintaining that this expense should be considered a "maintenance expense" is the following. Since it only earns income from category F, then all expenses, such as this one, have a "direct and immediate" connection with the property "as an economic reality capable of producing income", all the more so since it is a foreign entity with the correlative difficulties in complying with Portuguese tax obligations. However, the Claimant has a national tax representative (see point 2 of the proven facts). Certainly this representation will be costly and this one will be an expense that could be considered as potentially eligible.

It is not apparent that this expense has the characteristics of direct and immediate connection with the property "as an economic reality capable of producing income", and therefore it does not fall within the provision of the norm contained in Article 41 of the Income Tax Code.

• Real property registration preparation services - €147.60 – This expense is clearly configured as having a "direct and immediate connection" with the property "as an economic reality capable of producing income". Moreover, the necessity of a registration in the Real Property Registries and at the Finance office of all immovable assets will be a paramount national objective, defining the owners and the holders of the income.

• Mutual aid/housing - €30.75 - This expense is configured as having a "direct and immediate connection" with the property "as an economic reality capable of producing income". It is an expense relating to security or services shared with other owners, essential to a dwelling, aimed at the protection and security of assets and persons.

• Composting/waste parks/gardens - €33.89 + €14.52 – These expenses appeal to the ecological aspect of waste (the first) and to the landscape and leisure environment (the second). These are clearly expenses that have "direct and immediate connection" with the property "as an economic reality capable of producing income" in the ecological and quality aspects of the landscape and leisure environment.

• Annual property owners' association dues …, in the amount of €200.00 – The association dues paid by members to non-profit entities are intended to finance, immediately, the entity in its operating costs, but aim to safeguard for the members, mediately, a set of support services that would otherwise entail higher costs or lower profits. This is the typical gain, implicit in any association. That is, without these types of entities, their members would have higher costs, in this case, of managing their assets, which would lead to higher expenses eligible for deduction in accordance with Article 41 of the Income Tax Code or lower income. From this perspective, the membership dues in question, potentially contributing to greater cost savings or greater efficiency in revenue, as regards the management of the property, are configured as expenses that have "direct and immediate connection" with the property "as an economic reality capable of producing income".

In conclusion, the request for arbitral pronouncement is founded as regards the consideration of the expenses referred to in b. through e. as being maintenance expenses eligible according to the provision of the norm contained in Article 41 of the Income Tax Code. But it is not founded as regards the expense of income tax preparation services.

Proportionality of expenses based on the number of days of property rental

Also in this regard, this Tribunal adheres to the sense of the CAAD arbitral decisions Case 201/2015-T and Case 294/2015-T, cited by the Claimant in the request for pronouncement, namely:

CAAD Arbitral Decision No. 201/2015-T, of 7 December 2015

"... the (gross) income earned in each year constitutes the positive elements that contribute to determining annual taxable income, and it is also necessary to consider the negative elements of the same period, which are deductions and allowances. It can therefore be concluded that the general rule of the IRS states that the tax is annual in nature and it is for each calendar year that the elements that permit determination of the tax incidence must be considered, namely gross income, deductions and allowances".

...

"... It does not seem that this Article 41 [of the Income Tax Code], or any other, could lead to a regime of exception to the aforementioned general rule of the annuality of the IRS. In fact, this provision does nothing more than affirm the general rule: from gross income there are deducted maintenance and conservation expenses (...). It is clear that nothing is said as to the period to be considered, as this was already stated in Article 1; it is the annual period".

...

"There are thus no doubts that there is no need to make any other temporal correspondence between the gross income and the expenses to be deducted. There is only a need to ensure that the deductions relate to the calendar year in which the real property income was paid or made available."

CAAD Arbitral Decision No. 294/2015-T, of 21 January 2016

"As regards the reduction of expenses and charges through the application of an 'occupancy coefficient', such procedure cannot be accepted, because all expenses incurred, such as cleaning of homes and pools and their respective health treatment, water, electricity, insurance, IMI and others, will always have to be borne, regardless of the occupancy rate".

...

"Such 'occupancy coefficient', as referred to, a 'sui generis' basis which apparently had not previously been used by the Inspection, has, in the view of this tribunal, no legal basis whatsoever".

Now, in the case at hand, there is no apparent legal basis that can support what is stated in the tax inspection report, namely: "where property is rented for certain periods, deductible expenses should be considered proportionally, based on the number of days of rental, that is, 42 days in 2012, 35 in 2013 and 37 in 2014".

From the reading of Article 41 of the Income Tax Code it will appear that income is on an annual basis and eligible expenses are also on an annual basis. Moreover, many of the expenses are always incurred, whether the property produces income or not. The law will not permit a restrictive reading in order to discern therein a criterion that determines the eligibility of expenses for deduction from real property income, in proportion to the period during which the leased property is rented, producing profits.

Therefore, the request for arbitral pronouncement can only be founded in the part corresponding to the IRC assessments that resulted from the application of a proportionality regime, all conservation and maintenance expenses that are documented should be eligible, on an annual basis, occurring in this case a legal non-conformity characterized by error regarding factual or legal assumptions.

Since one of the non-conformities alleged regarding the reasoning of the inspection report, the reasoning of the assessment acts and the decision denying the administrative complaint in part is founded, it would become pointless to examine the remaining defects alleged: violation of the principle of contributory capacity and principle of legality.

Illegality of the assessment of compensatory interest

The Claimant, in general terms, argues for the illegality of the assessment of compensatory interest since the tax inspection report makes no reference to fault attributable to the taxpayer, required in accordance with No. 1 of Article 35 of the LGT.

However, the inspection report reproduced above, in the part that justifies the necessity of corrections to the tax, describes the "factual situation" which the AT considers violates the law. And in section VII of the same, tax infractions are listed which, in the AT's view, were verified.

On the other hand, the interest assessment notes (see annexes 3, 4 and 5 of Document No. 1 submitted with the request for pronouncement) indicate:

• The amount of interest, separate from the IRC;

• The start and end date of the interest calculation;

• The interest rate applicable; and

• The indication of the legal provision that supports the assessment.

Now, faced with this factuality, in light of what is referred to in the judgment of the SAC of 04-02-2004, case 1733/03, at www.dgsi.pt, these elements permit complete understanding of the evaluative and cognitive path followed by the AT in the assessment of compensatory interest, with the requirement of No. 1 of Article 35 of the LGT being met.

Therefore, the request for arbitral pronouncement is unfounded in this regard, which will only have relevance for the eventual collection of these interest as to the IRC resulting from the disregard of the expense relating to income tax preparation services.

Order to pay indemnificatory interest and reimbursement of amounts paid

It has been proven that on 13 April 2016 the Claimant proceeded to pay the tax and the respective compensatory interest, in the amounts of €23,346.76 of IRC and €1,421.88 of compensatory interest (for a total of €24,768.64)

It has also been proven that on 31 January 2017 the Claimant, following the aforementioned final decision of partial approval of the administrative complaint, received reimbursement cheques of €354.36, €318.25 and €124.03 for overpaid tax relating to fiscal years 2012, 2013 and 2014, respectively.

There remains a total amount of €23,972.00, being the sum of €5,432.07 relating to the fiscal year 2012, €8,738.90 relating to the fiscal year 2013 and the sum of €9,801.03 relating to the fiscal year 2014, IRC and compensatory interest.

By annulling, as is to be annulled, partially the assessments impugned here and the order denying the administrative complaint in part, as they are in non-conformity with the law, it follows that the Claimant is entitled to partial reimbursement of the total amount paid. This is, it is noted, except as to the IRC and compensatory interest resulting from the unfounded nature of the request for pronouncement, as regards the expense of income tax preparation services, in the amount of €239.85, which does not appear to be considered as an expense for the maintenance of the property.

It further requests an order for the AT to pay indemnificatory interest.

In accordance with the provisions of subparagraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim which cannot be subject to appeal or challenge binds the Tax Administration from the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the founding of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the voluntary execution of the judgments of tax court decisions, "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for this purpose", which is in line with the provision of Article 100 of the LGT (applicable by force of the provision of subparagraph a) of No. 1 of Article 29 of the RJAT) which establishes that "the tax administration is obligated, in the event of total or partial founding of a complaint, judicial challenge or appeal in favor of the taxpayer, to immediate and full restoration of the legality of the act or situation that is the subject of the dispute, including the payment of indemnificatory interest, if applicable, from the end of the deadline for execution of the decision".

Although Article 2, No. 1, subparagraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals functioning in the CAAD, making no reference to condemnatory decisions, it should be understood that the competences thereof include the powers which, in judicial challenge proceedings, are attributed to tax courts, and this is the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, although essentially a process of annulment of tax acts, permits the ordering of the Tax Administration to pay indemnificatory interest, as can be inferred from Article 43, No. 1, of the LGT, which establishes that "indemnificatory interest is due when it is determined, in an administrative complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than legally due" and from Article 61, No. 4 of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, which corresponds to No. 2 in the original wording), which states that "if the decision recognizing the right to indemnificatory interest is judicial, the payment deadline is calculated from the beginning of the deadline for its voluntary execution".

Thus, No. 5 of Article 24 of the RJAT, by stating that "payment of interest is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be understood as permitting the recognition of the right to indemnificatory interest in the arbitral process.

In the case at hand, it is manifest that, following the partial annulment of the assessments, there is cause for reimbursement of the paid tax, by force of the aforementioned Articles 24, No. 1, subparagraph b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed".

The substantive regime of the right to indemnificatory interest is regulated in Article 43 of the LGT, which establishes, as relevant here, the following:

Article 43

Payment of taxes unduly paid

1 – Indemnificatory interest is due when it is determined, in an administrative complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than legally due.

2 – It is also considered that there is an error attributable to the services in cases where, although the assessment is performed on the basis of the declaration of the taxpayer, the latter has followed in filling it the generic guidance of the tax administration, duly published.

3 - Indemnificatory interest is also due in the following circumstances:

a) When the legal deadline for voluntary restitution of taxes is not complied with;

b) In the event of annulment of the tax act by initiative of the tax administration, from the 30th day following the decision, without the credit note having been processed;

c) When the revision of the tax act by initiative of the taxpayer is performed more than one year after the request therefor, except if the delay is not attributable to the tax administration.

4 - The rate of indemnificatory interest is equal to the rate of compensatory interest.

5 - In the period between the date of the end of the deadline for voluntary execution of final judicial decision and the date of issuance of the credit note, relating to the tax that should have been refunded by final judicial decision, penalty interest is due at a rate equivalent to double the rate of penalty interest defined in the general law for debts to the State and other public entities. (Added by Law No. 64-B/2011, of 30 December).

The illegality of the assessments is attributable to the Tax Administration, which issued them on the basis of an inspection report which departs from a factual and legal assumption in discord with the law (Article 41 of the CIRS).

In the present case, the regime of No. 1 of Article 43 of the LGT is to be applied.

Consequently, the Claimant is entitled to indemnificatory interest, in accordance with Articles 43, No. 1, of the LGT and 61 of the CPPT, from 13 April 2016, as to the amount that will be specifically determined, taking into account the unfounded nature in part of the request for pronouncement, as to the deductibility of the expense of income tax preparation services, in the amount of €239.85.

Indemnificatory interest is due on the aforementioned amount, at the legal default rate, in accordance with Articles 43, Nos. 1, and 35, No. 10 of the LGT, Article 24, No. 1, of the RJAT, Article 61, Nos. 3 and 4, of the CPPT, Article 559 of the Civil Code and Regulation No. 291/2003, of 8 April (or others that alter the legal default rate), from the date above indicated and until the issuance of the respective credit note.

V - DISPOSITIF

In the terms and with the grounds set forth above, it is decided:

1. To judge unfounded the request for arbitral pronouncement in the part in which it is petitioned that the expenses relating to "income tax preparation services" in the amount of €239.85 be considered "maintenance expenses" in accordance with Article 41 of the Income Tax Code;

2. To judge unfounded the request for arbitral pronouncement as to the alleged formal defect, due to lack of proper reasoning of the assessment of compensatory interest;

3. To judge founded the request for arbitral pronouncement in the part in which it is petitioned that the expenses relating to "real property registration preparation services - €147.60; mutual aid/housing - €30.75"; composting/waste parks/gardens - €33.89 + €14.52" and "annual property owners' association dues …- €200.00" constitute "maintenance expenses" in accordance with Article 41 of the Income Tax Code;

4. To judge founded the request for arbitral pronouncement in the part in which it challenges the criterion adopted by the AT of proportionality of conservation and maintenance expenses eligible under the norm contained in Article 41 of the CIRS. Consequently,

5. To judge founded the request for annulment of the additional assessments of IRC and compensatory interest referred to in b) of the Report of this decision, to the extent of the founded and unfounded aspects referred to in the preceding numbers. Assessments which to the extent of the founded aspects are hereby annulled, due to non-conformity with Article 41 of the CIRS;

6. To judge founded the request for annulment of the decision denying the administrative complaint No. …2016… in part, notified on 7 December 2016 to the Claimant, to the extent of the founded and unfounded aspects referred to the preceding numbers, due to non-conformity with Article 41 of the CIRS;

7. To judge founded the request for reimbursement of the amount to be determined, taking into account the unfounded aspects referred to in 1. and 2.;

8. To judge founded the request for an order against the AT to pay indemnificatory interest calculated on the amount to be reimbursed, taking into account the unfounded aspects referred to in 1. and 2..

Value of the case: in accordance with the provisions of Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and subparagraph a) of No. 1 of Article 97-A of the CPPT), the case is assigned a value of €23,972.00.

Costs: in accordance with the provisions of Article 22, No. 4, of the RJAT, the amount of costs is set at €1,224.00 according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, being €61.20 to the charge of the Claimant and €1,162.80 to the charge of the Respondent, in view of the partial dismissals.

Notify.

Lisbon, 06 October 2017

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer in accordance with the provisions of Article 131, No. 5, of the CPC, applicable by reference to Article 29 of the RJAT.

The writing of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.