Process: 161/2015-T

Date: November 20, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 161/2015-T concerns IRS capital gains taxation under Article 10(5) of the Portuguese IRS Code, which permits deferral of capital gains tax when proceeds from selling a permanent residence are reinvested in another qualifying property. The taxpayer sold property in October 2010, declared the capital gain and expressed intention to reinvest in the 2010 IRS return, resulting in a refund of €485.48. In January 2011, the taxpayer acquired new property and declared the completed reinvestment in the 2011 IRS return, which was accepted without objection. However, in July 2014, the Tax Authority issued a re-liquidation for the 2010 tax year, disregarding the reinvestment entirely and demanding €5,663.65 plus interest. The taxpayer challenged this assessment on multiple grounds: (1) absence of prior hearing before the re-liquidation, arguing that Article 60(2) LGT's exception doesn't apply when the TA modifies legal classification of declared facts; (2) lack of substantiation in both the assessment and its notification, violating Articles 77 LGT, 66 CIRS, and 268(3) of the Constitution; and (3) arbitrary disregard of validly declared reinvestment without requesting supporting documentation as required by Article 57(3)(b) CIRS. The taxpayer filed an administrative complaint, which was partially granted in February 2015, resulting in a revised assessment of €1,259.11. The TA justified dispensing with prior hearing by claiming the assessment was based on declared elements without alteration, but the taxpayer argues this reasoning fails because the reinvestment was declared in the subsequent year's return. This arbitration proceeding challenges both procedural violations and the substantive disregard of the reinvestment claim, seeking declaration of nullity of the contested assessments.

Full Decision

ARBITRAL DECISION

Claimant – A…

Respondent: Tax and Customs Authority

Subject Matter: Personal Income Tax (IRS); capital gains; re-liquidation; lack of prior hearing; partial deferment of administrative complaint; expiry of right of action

I – Report

  1. On 10 March 2015, A…, with Tax Identification Number (NIF) …, presented to the Administrative Arbitration Centre (CAAD) a petition designated as a challenge, invoking the provision of article 99(c) of the Code of Tax Procedure (CPPT), requesting the declaration of nullity of the Personal Income Tax (IRS) assessment for 2014… relating to the year 2010, in the amount of € 1,744.59 (one thousand seven hundred and forty-four euros and fifty-nine cents). With the petition were submitted, in addition to a power of attorney and proof of payment of the fee, four documents.

  2. In the petition presented, the Claimant did not appoint an arbitrator, and by decision of the President of the Deontological Council, pursuant to article 6(1) of the Legal Framework for Tax Arbitration (RJAT), the undersigned was appointed as sole arbitrator, accepting the office within the legally established deadline.

  3. The arbitral tribunal was constituted on 21 May 2015.

  4. The Tax and Customs Authority (TA or Respondent) sent the Reply and the administrative file on 22 and 26 June 2015, respectively.

  5. The Claimant responded in writing to the exception raised by the Respondent, and, with the agreement of both parties, the hearing provided for in article 18 of the RJAT was dispensed with, and 20 November was set for communication of the final decision.

  6. Claimant and Respondent submitted submissions on 4 and 8 September 2015, respectively.

7. Statement of Claim

The Claimant argues, in summary (responsibility ours):

  • On 24 May 2011, the Claimant submitted the Personal Income Tax return for the year 2010, having declared in Annex G the capital gain obtained from the sale of a property located at … as well as the intention to reinvest the same, as provided for in article 10(5) of the Income Tax Code (CIRS).

  • The said Declaration resulted in assessment No. 2011…, with the value of € 485.48 to be refunded.

  • In January 2011, the Claimant acquired a new property which he included as reinvestment in Annex G in the Personal Income Tax return for the year 2011, delivered with marital status as married, which was validated by the tax services.

  • On 31 July 2014, the Claimant was notified of a new assessment for the year 2010, in the amount of € 5,663.65 to be paid, plus compensatory interest and the previous refund of € 485.48; however, up to that date, he had never been notified of any discrepancy or any question concerning the 2010 return capable of altering the first Personal Income Tax assessment for that same year, nor had the 2011 return, in which he had declared the reinvestment, given rise to any error or discrepancy.

  • The TA, disregarding the reinvestment declared in Annex G of the 2011 Personal Income Tax return, taxed the total capital gain declared in the 2010 return, committing a gross error, and notified the assessment without any substantiation, whereby the assessment and notification lack substantiation.

  • The Administration did not request from the Claimant any documents proving the reinvestment, as provided for in article 57(3)(b) of the CIRS, and did not substantiate the assessment, violating articles 77 of the General Tax Law (LGT) and 66 of the CIRS, and article 268(3) of the Constitution (CRP).

  • The justifications given by the TA, following the Claimant's request for a certificate of substantiation, did not explain the situation or the lack of substantiation, and the Claimant presented an administrative complaint on 19 December 2014 requesting the declaration of nullity of the assessment.

  • On 9 February 2015, the Claimant was notified of the order by which the TA partially denied the complaint presented, considering justified the dispensation of prior hearing of the assessment notified on 31 July 2014, relating to the year 2010, and, analyzing the factual matter of the reinvestment of the capital gain, resulted in assessment No. 2015…, in the amount of €1,259.11.

  • This decision on the administrative complaint ignores the disregard of legal formalities in the disputed assessment, and the provision of article 60(2) of the LGT does not apply regarding the dispensation of prior hearing of the taxpayer, because in cases where the assessment is drawn up based on the factual elements of the taxpayer's return, but with different legal classification, on which the interested party has not had the opportunity to pronounce, by constitutional imperative, the hearing of the taxpayer before the assessment is carried out cannot be dispensed with.

  • However, the Claimant, in his 2011 Personal Income Tax return, declared the reinvestment in accordance with article 10(5) of the CIRS, whereby the disputed assessment could never have been carried out based on the declared elements of the 2010 Return.

  • The illegal dispensation of the right to prior hearing of the taxpayer before the assessment constitutes a disregard of an essential formality capable of invalidating the final act of assessment (article 103(3) of the CRP), but the order denying the administrative complaint presented by the Claimant does not pronounce on the lack of substantiation of the new Personal Income Tax assessment for 2010, nor on the omission of such substantiation in the notification received by the Claimant on 31.07.2014, citing for this purpose the Judgment of the Supreme Administrative Court (STA) rendered on 21.11.2012, case No. 0736/12.

  • Thus both the notification of the assessment and the assessment itself notified on 31 July 2014 are affected by nullity, due to the defect of absence of substantiation, and the present petition should be considered entirely well-founded, with the declaration of illegality of assessment No. 2014… relating to the year 2010, with all the legal consequences flowing therefrom.

8. Reply

The Respondent replies, in summary (responsibility ours):

  • The Personal Income Tax Form 3 for 2010, submitted by the Claimant on 24-05-2011, in which he indicated in Annex G that on 20-10-2010 he had carried out the onerous alienation of a property (property register entry …, … ...), expressing the intention to reinvest the capital gain generated, as provided for in article 10(5) of the CIRS, resulted in assessment No. 2011…, with the value of € 485.48 to be refunded.

  • In January 2011, the Claimant acquired a new urban property (property register entry …, Fraction A, parish of …, Lisbon), having included in Form 3 of Personal Income Tax for the year 2011, submitted on 30-05-2012, Annex G, indicating the reinvestment of the entire capital gain realized in 2010, this declaration having resulted in assessment No. 2012….

  • In the meantime, regarding the year 2010, an assessment was issued (identified with No. 2014…), disregarding the entire reinvestment carried out, with tax to be paid, by 27 August 2014, in the amount of € 5,663.65. Prior hearing was dispensed with on the grounds that this new assessment was carried out without any alterations to the data declared by the Claimant.

  • The Claimant requested, pursuant to article 37 of the CPPT, issuance of a certificate of the new assessment containing its substantiation, and, after obtaining information from the services, presented an administrative complaint, filed with No. …2014…, against assessment No. 2014…..

  • In the exercise of the right to prior hearing on the draft decision for partial denial of said complaint, the services of the TA argued for total denial, but the draft was, by order of 28-01-2015, converted into a final decision, by which the TA services, taking into account a loan with mortgage dated 06 January 2011, in the amount of € 30,000.00, corresponding to the date of acquisition of the property acquired on the same date by Public Deed of Sale with Loan and Mortgage, considered, pursuant to article 10(7) of the Income Tax Code (CIRS), that there had been only partial reinvestment, of € 76,000.00 (€ 106,000.00 – € 30,000.00), granting the benefit in that proportion.

  • The partial deferment resulted in the sole and exclusive existing assessment, identified with No. 2015….

  • In the present Statement of Claim, the Claimant identifies as the tax act subject to the request for arbitral pronouncement the Personal Income Tax assessment No. 2014…, relating to the year 2010, and not the partial deferment of the administrative complaint regarding the Personal Income Tax assessment for 2010, whereby the legally established deadline for challenging tax assessments in arbitral proceedings has been exceeded.

  • Taking into account the provisions of article 10 of the RJAT, articles 102(1) and (2) of the CPPT, article 140(4)(a) of the CIRS, and article 39(1) of the CPPT, and the fact that the payment deadline for the tax in question occurred on 27 August 2014, the right of action expired on 26 November 2014, whereby the petition for constitution of the arbitral tribunal presented on 10 March 2015 is, in accordance with doctrine followed in other cases decided at CAAD, untimely, leading to the existence of an exception that bars knowledge of the merits of the case and absolution of the Respondent from the instance.

  • What is in force is assessment No. 2015…, which considers only partial reinvestment, that is € 76,000.00 (€ 106,000.00 – € 30,000.00), and which granted the benefit provided for in article 10 of the CIRS only in that proportion.

  • The Claimant's participation through prior hearing in the administrative procedure that led to the partial deferment of the complaint degrades any essential formalities previously (to the assessment in which the entire reinvestment was disregarded) into a non-essential formality in that the interested party participated in the procedure that resulted in the assessment and values that are now being contested.

  • The partial deferment was the sole and exclusive possible decision on that complaint, because it was with that decision that the substantive truth was restored, that is, the consideration of the reinvestment carried out only in the proportion of the actual reinvestment deduced from the loan contracted.

  • The petition for arbitral pronouncement should be ruled untimely or, if not so understood, should be considered without merit, maintaining the tax acts and absolving the Respondent.

9. Issues to be Decided

The fundamental issue subject to the Petition is whether the Personal Income Tax assessment for 2010 is affected by illegality due to disregard of essential formalities in the assessment and notification, namely due to the absence of legal substantiation and lack of prior hearing.

As a preliminary issue, it is necessary to decide the exception raised by the Respondent regarding the expiry of the right of action due to untimeliness of submission of the petition.

10. Sanitation

The arbitral tribunal is materially competent, pursuant to the provisions of article 2(1)(a) of the Legal Framework for Tax Arbitration.

The parties have legal personality and capacity and have standing pursuant to articles 4 and 10(2) of the Legal Framework for Tax Arbitration (RJAT) and article 1 of Order No. 112-A/2011, of 22 March.

The proceeding is not affected by any nullity and the conditions for the rendering of the arbitral decision are met.

II SUBSTANTIATION

11. Established Facts

11.1. The Claimant submitted on 24 May 2011 a Form 3 Personal Income Tax return for the year 2010 (identified with No. …-…-…) including Annex G (article 1 of the Petition, Doc. No. 1 attached to the Petition and Administrative File, PAI-1, pp. 15 et seq., attached to the record, which are deemed fully reproduced herein).

11.2. In Annex G of the return referred to in the preceding number, the onerous alienation was declared, in 2010 and for the value of € 106,000.00, of an urban property for own residence, property register entry …, Fraction F, parish of …, municipality of …, Lisbon, acquired in 1993 for € 44,393.01, respective expenses and charges in the amount of € 6,050.00, indicating in field 5 of the same Annex, the intention to reinvest the value of 106,000.00 without recourse to credit (cf. doc. No. 1 attached to the Petition and PA I-1, pp. 17).

11.3. Based on the return referred to in the preceding numbers, the Personal Income Tax assessment No. 2011… was carried out, with the value to be refunded of € 485.48 (cf. doc. No. 2 attached to the Petition and PA I-1, pp. 20).

11.4. The Claimant acquired, on 6 January 2011, a new urban property registered in the property register under entry …, Fraction A, parish of …, Municipality and District of Lisbon (article 5 of the Petition, 9 of the Reply).

11.5. The property referred to in the preceding number was recorded in the Form 3 Personal Income Tax return for the year 2011, submitted on 30 May 2012, in Annex G, field 5 A, as property subject to reinvestment, and indicating, in field 509, the value of € 106,000.00 as the value reinvested in the first following year (without recourse to credit) (cf. doc. No. 3 attached to the Petition and PAI-2, pp. 23).

11.6. The return for 2011 resulted in assessment No. 2012…. (article 10 of the Reply).

11.7. On 31 July 2014, the Claimant was notified of an assessment relating to 2010, identified with No. 2014…. issued on 22 July 2004, with tax calculation in the amount of € 5,663.65, and the compensation note of € 6,149.13, with payment deadline of 27 August 2014 (Doc. No. 4, attached to the Petition and PAI-2, pp. 28 and 27).

11.8. Assessment No. 2014… was not preceded by prior hearing (article 15 of the Reply).

11.9. Due to non-payment, tax enforcement proceedings No. …2014… were instituted on 15 September 2014, subsequently suspended (PA I-2, pp. 52).

11.10. By electronic means, the Claimant requested clarification from the DSIRS services on 5 August 2014, and, invoking article 37 of the CPPT, requested, on 26 November 2014, from the Finance Service of Lisbon …, issuance of a certificate showing the substantiation of the new assessment; being answered on 2 December 2014 that it was a re-liquidation of the Personal Income Tax for 2010, carried out automatically, insisted on requesting a certificate with grounds for the assessment and indication of the provision that provides for automatic re-liquidation of a return validated and accepted by the services, taking into account that in the previous year a reinvestment return was submitted (Petition, Nos. 25 to 29, and PAII-1, pp. 8 to 10).

11.11. Following the exchange of emails between the Income Tax Directorate of Services (Liquidation Division) and the Finance Service Lisbon …, the Claimant was informed on 9 December 2014: "In response to the substantiation requested by the taxpayer, regarding the re-liquidation carried out for the year 2010, it is reported that pursuant to article 60 of the LGT, in its item 2, letter a), the hearing of the taxpayer is dispensed when the assessment is carried out based on the taxpayer's return, which is the case. There was no alteration of the declared data (household and values), there was only the re-liquidation based on the expressed intention of reinvestment, of the value of alienation of the property for another property, after the deadlines provided for in article 10(5) of the CIRS have elapsed. Specifically, this assessment was carried out based on the data declared by the taxpayer himself". And it added "However, if the taxpayer filed an administrative complaint, the following should be observed: That the change in marital status in the year 2011 and the reinvestment declared in subsequent years (2011) be confirmed; if the declared data are confirmed by documents, the collection of corrective statement for the year 2010 should be proceeded with, with completion of Sections 5 and 5a, to implement the reinvestment". (cf. Doc. 5 attached to the Petition and PAII-1, pp. 11 to 14).

11.12. On 19 December 2014, the Claimant presented an administrative complaint against assessment No. 2014…., with the proceeding being filed with No. …2014… (Petition, point 40, Doc. No. 6 attached to the Petition PAI-2 pp. 34 to 46).

11.13. On 29 December 2014, by official letter No. …, the TA requested from the Claimant documentation necessary to support the complaint procedure – regarding the acquisition of the property in 1993 and regarding the amount with charges, elements which he sent by email on 31 December 2014 and 7 January, respectively (PA II-1 and 2, pp. 28 to 39).

11.14. Dated 6 January 2011, when acquiring the property referred to in 11.4., a loan with mortgage was effected in the amount of € 30,000.00, with a Public Deed of Sale with Loan and Mortgage being executed, with the Claimant as obligor (article 12 of the Reply and PAII-1, pp. 25).

11.15. On 8 January 2015, the draft decision for partial deferment, with approval order of the Chief of the Finance Service Lisbon …, was sent to the Claimant by letter No. …, of the same date, for purposes of exercising the right to prior hearing, proposing amendment of assessment No. 2014…, by considering "that there is partial reinvestment of the realization value, in the amount of € 76,000.00, pursuant to the provisions of article 10(5)(a), (6) and (7) of the CIRS" and accordingly "a single corrective document for the fiscal year 2010" to be drawn up (PA II-2, pp. 46 to 52).

11.16. The Claimant exercised the right to prior hearing on 27 January 2015, insisting on the declaration of nullity or annulment of the assessment due to absence of substantiation and non-dispensability of the right to hearing (PA II-2, pp. 55 to 59).

11.17. The draft decision was converted into final through the order of the Chief of the Finance Service Lisbon …, of 28 January 2015, and notified to the Claimant through letter No. … of the same date (Doc. No. 7 attached to the Petition and PA II-2, pp. 61 and 62).

11.18. The partial deferment resulted in the issuance of Corrective Document No. … and official statement regarding 2010, dated 29 January 2015 (PAII-3, pp. 66 to 73), as well as assessment No. 2015…., issued on 4 February 2015, by considering partial reinvestment, that is € 76,000.00 (€ 106,000.00 – € 30,000.00), and granting the benefit provided for in article 10 of the CIRS only in that proportion, resulting in the calculation of the amount of tax of € 1,259.11 (cf. doc. No. 8 - reconciliation statement - attached to the Petition, and PAI-2, pp. 44 and 45).

11.19. The petition for constitution of the arbitral tribunal was presented on 10 March 2015.

12. Unestablished Facts

There are no unestablished facts to be considered as relevant for the decision of the present proceeding.

13. Substantiation of Established and Unestablished Facts

The facts were established and unestablished based on the evaluation made by the tribunal of the procedural documents delivered by the Parties and of the documents attached to the record, in particular the administrative file, as referenced in relation to each point of the factual matter fixed.

14. Application of Law

The Claimant identifies the subject matter of the Petition as the Personal Income Tax assessment notified on 31 July 2014, attributing to it a defect of form due to absence of legal substantiation, both as to the assessment and the notification, and requests the declaration of nullity of assessment No. 2014….

14.1. The Exception – Untimeliness/Expiry of Right of Action

14.1.1. Arguments of the Parties on the Matter

The Respondent raises the existence of an exception resulting from expiry of the right of action, on the grounds that the Claimant does not identify as the tax act subject to the request for arbitral pronouncement the partial deferment of the administrative complaint regarding the Personal Income Tax assessment for 2010, but the Personal Income Tax assessment No. 2014… relating to the year 2010.

Thus, in accordance with the law (article 10 of the RJAT, articles 102(1) and (2) of the CPPT, article 140(4)(a) of the CIRS, and article 39(1) of the CPPT), the deadline for payment of the tax in question would have occurred on 27 August 2014, and the right of action would have expired on 26 November 2014, whereby the petition for constitution of the arbitral tribunal presented on 10 March 2015 is untimely, and the respondent should be absolved from the instance. It refers to various CAAD decisions that would confirm this interpretation.

The Claimant responded to the exception by stating that the subject matter of the Petition presented on 10 March 2015 is not limited to the nullity of the assessment act with No. 2014…, relating to 2010, but to all acts carried out subsequently, including the partial deferment of the administrative complaint, notified on 9 February 2015.

This is because, it argues, it completely disagrees with the decision on the administrative complaint that rejected its allegation of nullity of the assessment act and considered assessment No. 2014… legal, understanding that the Claimant would have the right only to partial reinvestment. The decision for partial deferment would have ignored that "the subject matter of the administrative complaint presented consists of the illegality of the decision complained of due to lack of substantiation, regardless of the analysis of partial or total reinvestment of the capital gain".

And, it states, with the present action it intends that legality be restored, with consideration of said assessment as null and revocation of the decision on the complaint, which was implicit in the petition "declaration of nullity of Personal Income Tax assessment 2014…, with all the legal consequences flowing therefrom".

It considers that the petition presented against the decision notified on 9.02.2015 is timely in light of article 102(2) of the CPPT, and would always be so in light of item 3 of the same article, given that nullity is invoked.

14.1.2. Analysis of the Issue

Examining the Claimant's Petition, it is found that in the final part thereof, the declaration of nullity of the Personal Income Tax assessment 2014… relating to 2010 is requested, substantiating, in summary, that "it is verified that both the notification of the Personal Income Tax assessment and the assessment act itself notified on 31 July 2014 are affected by nullity, and legality of form of the assessment itself is at issue", "defect of form due to absence of legal substantiation".

However, it is found that in the systematization of the Petition, he sought to identify: the administrative act targeted (point I); the subsequent administrative procedure to clarify the act (point II); the filing of administrative complaint and decision obtained (point III); and the disputed assessment act (point IV).

It is found that the Claimant, having regard to the result of the administrative complaint for partial denial – rejection of the grounds invoked regarding illegality due to absence of substantiation and issuance of document No. 2015… with new assessment based on re-analysis of the factual situation – continues to raise the question of nullity of the assessment act that resulted in document No. 2014…, contending that the complaint should have recognized the defect of absence of substantiation and the effect of nullity of tax act due to disregard of essential formalities.

Thus, the thesis defended by the Respondent that the Claimant does not attack the decision on the administrative complaint is not accepted [1], it being rather the case that it places the emphasis on the illegality of the tax assessment act [2], not confirmed by the decision on the complaint, attributing to it a defect that may be challenged at any time because it generates, in the thesis propounded, nullity.

Thus, and even though the qualification of the defect as nullity proves not to be adequate, it is considered, having regard to the date of notification of the final decision of the administrative complaint, that the present Petition for constitution of Arbitral Tribunal, presented on 10 March 2015, is not untimely in light of article 10(1)(a) of the RJAT.

14.2. Lack of Substantiation of the Assessment Act

The Claimant does not accept that, having included in the Personal Income Tax return for the year 2010 reference to the alienation of property for own residence with future reinvestment, and, in the Personal Income Tax return for the year 2011, reference to the acquisition with proceeds of the prior alienation, the TA carried out a re-liquidation relating to the year 2010 (assessment No. 2014. …) without ever requesting that the Claimant prove what was declared in the said Personal Income Tax returns for 2010 and 2011, as provided for in article 57(3)(b) of the CIRS, and without mentioning, in the notification of that Personal Income Tax assessment, No. …., any substantiation.

The Claimant believes the right to substantiation of administrative acts, provided for in article 268(3) of the CRP, has been violated, and, considering that that assessment (No. 2014….) completely lacks substantiation, presented an administrative complaint (19.12.2014) requesting that the tax assessment act be declared null.

Claiming that the TA disregarded the content contained in the complaint petition, ignoring the allegation regarding lack of substantiation of the 2010 Personal Income Tax assessment, including in its notification, and wrongly invoking the dispensation of prior hearing provided for in article 60(2) of the LGT, the Claimant does not accept the partial deferment of the complaint and seeks review of assessment act No. 2014…..

That is, the Claimant acts having regard to the decision rendered in the complaint proceeding only insofar as it denied its claim but not as to the content in the part in which "it decided to analyze the factual matter of reinvestment" (point 47 of the Petition) and apply the law to the situation.

14.3. Controversy Regarding Automatic Assessments or "Re-liquidations"

Throughout the administrative procedure and also in the present record, the argument repeatedly invoked by the Claimant to defend the nullity of the Personal Income Tax assessment No. 2014…. is, therefore, the absence of substantiation.

From the established factual matter, it results that:

  • the Claimant declared in the Form 3 Personal Income Tax return for 2010, Annex G, the onerous alienation on 20 October of that year, of the urban property for own residence, with intention of reinvesting the capital gain generated, as provided for in article 10(5) of the CIRS;

  • the Claimant indicated, in the Personal Income Tax return for 2011 submitted on 30-05-2012, in Annex G, field 5 A, as property subject to reinvestment an urban property acquired in January 2011, and in field 509, the value of € 106,000.00 as the value reinvested in the first following year (without recourse to credit);

  • on 31 July 2014, the Claimant was notified of assessment No. 2014. …, disregarding the entire reinvestment carried out.

The services of the Respondent informed from the outset (email of 2 December) that it was a re-liquidation carried out automatically and in relation to whether or not there was reinvestment.

And, subsequently, they maintained justification for the dispensation of lack of prior hearing at the time of the disputed assessment, on the grounds that it was dispensable pursuant to article 60(2)(a) of the LGT because it was an assessment carried out based on the taxpayer's return.

Against such interpretation, the Claimant refers to the Judgment rendered by the STA on 21 November 2012, in case 0736/12, regarding a case of assessment/re-liquidation: "If the tenor of the assessment contains no explanation, even if summary, that permits clarifying a normal addressee about the reason for the alteration to the overall income that the Tax Administration made between the 'initial assessment' and the so-called 're-liquidation' – not even that such difference in value results from alteration to category G income –, the additional assessment act is affected by a defect of form of lack of substantiation, determining its voidability. No consequences regarding the validity or invalidity of the notified act can be drawn from non-use of the faculty provided for in article 37(1) of the CPPT, as article 37 concerns only the notification of acts, intended to establish the consequences of deficiencies in notifications and not the regime of defects of notified acts, hence within article 37 the Administration can only supply deficiencies in the notification, but not those of the notified act". [3]

However, on the matter, it is possible to cite other decisions such as the Judgments rendered by the STA on 15 November 2006 (case No. 0759/06), on 30 June 2010 (case 0364/10) and on 14 March 2012 (case 0155/12).

In those cases, the issue to be decided consisted of knowing whether, in a situation in which the taxpayer had declared in his income return for a given year the sale of a property and the intention to reinvest the respective price, the additional assessment, carried out based on the lack of declaration, in the two years following the first declaration, needs or does not need to be preceded by hearing of the taxpayer pursuant to article 60(1)(a) and (2) of the General Tax Law.

Among them, the following passage from the Judgment rendered in case No. 155/12 is cited: "The appealed decision considered that the right to hearing could be set aside if the tax assessment were carried out based on the taxpayer's return. However, it concluded that in the case in issue the assessment was not carried out solely based on what the taxpayers declared in the year 2000, but rather, and mainly, based on what they failed to declare in the fiscal years 2001 and 2002. It will be said from the outset that this argument by the Public Treasury merits acceptance. As the jurisprudence of this Supreme Administrative Court has repeatedly stressed, which we likewise endorse, having the taxpayer declared in his income return for a given year the sale of a property and the intention to reinvest its price, the additional assessment, carried out based on the lack of declaration, in the two following years, of that reinvestment, does not need to be preceded by hearing of the taxpayer pursuant to items 1(a) and 2 of article 60 of the General Tax Law – cf. in this sense Judgments of the Supreme Administrative Court of 30.06.2010, case 364/10 and 15.11.2006, case 759/06, in www.dgsi.pt. Now, as is stressed in the Judgment of this Supreme Administrative Court of 15.11.2006, rendered in case 759/06, if the taxpayer is aware of the preconditions for non-taxation of gains from the onerous transfer of property for own residence – since he expressed, in model G, the intention to reinvest – he cannot ignore the consequences of failure to reinvest within the period of 24 months from the date of realization – cf. article 10(5)(a) of the CIRS –, failure which was the basis of the assessment. In the case in issue, the additional assessment results from the income return of the challengers, now respondents, for the year 2000, in which they marked in section 5 of that return the intention to reinvest the realization value of property for own residence and also their failure to declare, in the returns for the two years following the year of realization, the reinvestment of the full amount of capital gains realized, and previously declared. Accordingly, the challengers, now respondents – who failed to declare that they had carried out the declared reinvestment – saw the assessment be carried out in accordance with the position that results, in the factual and legal aspects, from their respective return. Hence it is concluded that it was not necessary, being dispensed, the hearing of the challengers, now respondents, in accordance with article 60(2) of the General Tax Law, whereby the appeal should be granted".

It should further be added that the Judgment cited by the Claimant (case 0736/12) highlighted the difference between the situation it judged and that of the judgment rendered in case No. 0756/06, because, in that latter case, at the date the disputed assessment was carried out and at a time prior to payment of the tax calculated therein, a "certificate" was issued by the Finance Service attesting that the assessment (...) was based on the failure to reinvest the realization value (...)" whereas, in the case of the present record, no substantiation for the alteration to the overall income contained in the additional Personal Income Tax assessment for the year 2003 appears in the assessment act [4].

That is, it does not clearly result that STA jurisprudence always refuses the justification of dispensation of prior hearing in cases of combination of data declared by the taxpayer; rather the conclusion regarding the legality of the situation depends on analysis of the specific case.

14.4. The Established Factuality and the Framework of the Present Case

As already mentioned, it results from the record that the Claimant presented an administrative complaint regarding an assessment carried out automatically, referred to by the services as "re-liquidation", without notification for prior hearing, correcting a self-assessment relating to fiscal year 2010 that indicated alienation of property with intention to reinvest, and on the grounds that reference to reinvestment in subsequent years appeared to have been omitted.

The administrative complaint triggered an administrative procedure that made it possible to clarify the overall situation, with identification of the act of alienation in 2000 of property acquired in 1993, of the new purchase of property in the following year, 2011 (in which the Claimant changed marital status), and with indication that reinvestment of the capital gain obtained had been made.

It was the facts then identified that, subject to the interpretation and application of law carried out, led to a new assessment that considered that only part of the result of the sale obtained from the first sale was reinvested in the new acquisition.

The established facts (11.11) show that, in response to the initial request for a certificate showing the substantiation of the assessment decision, the services replied that, as to the re-liquidation carried out for the year 2010, it was a case in which, pursuant to article 60 of the LGT, in its item 2(a), hearing of the taxpayer is dispensed because it is an assessment carried out based on the taxpayer's return, with no alteration of the declared data (household and values), and only re-liquidation based on the expressed intention of reinvestment, of the alienation value of property for another property, after the deadlines provided for in article 10(5) of the CIRS had elapsed.

But it was suggested that, if the taxpayer filed an administrative complaint, he should confirm the change in marital status in the year 2011 and the reinvestment declared in 2011, and if the declared data were confirmed by documents, issuance of a corrective statement for the year 2010 should be proceeded with, with completion of Sections 5 and 5a, to implement the reinvestment". (cf. Doc. 5 attached to the petition and pp. 29 et seq. of PA I).

As already mentioned, the Claimant in fact presented an administrative complaint against assessment 2014…, and in that administrative procedure data relating to the alienation of a property and acquisition of another, with loan and mortgage, were confirmed and added (11.12. to 11.14.).

In reviewing the administrative complaint, the TA presented a draft decision for partial deferment of the complaint and amendment of the disputed assessment, considering that there had been only partial reinvestment in the amount of € 76,000.00, with tax calculation in the amount of € 1,259.11 (11.15).

The taxpayer did not contest the factual matter or the legal review, as to the partial reinvestment, continuing to contend for nullity of the disputed act.

With conversion into finality of the act for partial denial of the complaint, with issuance of a new assessment document, the Claimant presented the present petition on the grounds of disregard of essential formalities, due to lack of substantiation of the first assessment, and requesting the declaration of nullity by the present arbitral tribunal (11.19).

That is, from the summary made above, it results that the Claimant had included in the Personal Income Tax return for 2011 mention of reinvestment of capital gains [5], whereby it is legitimate to defend that the comparison of the data provided in the two returns – for 2010 and 2011 – may be considered insufficient to automatically trigger assessment No. 2014. …, it being appropriate that notification of the taxpayer be carried out to attach documents necessary for evaluation of the tax situation or to pronounce on some draft decision.

But the filing of the administrative complaint made it possible to clarify the situation, gathering factual elements and correction of the prior position of the Administration.

What of the law?

14.5. The Personal Income Tax Assessment and the Act Subject of the Petition

The decision of the chief of the finance service that decided the complaint regarding assessment 2014. … was based on the following substantiation:

  • The complainant alleged that there was reinvestment of the realization value, defect in notification of substantiation, and that computer errors cannot prevent proper application of the law;

  • As to the request for annulment of the assessment due to disregard of legal formalities affecting its validity, in particular the exercise of the right to prior hearing pursuant to article 60 of the LGT, it is found that the conditions for dispensation thereof were met, since the disputed assessment follows from the declaration to prove the expression of reinvestment submitted by the complainant.

  • As to the tax assessment subject to the complaint, it is found that the complainant declared in the return submitted in 2011 the sale for € 106,000.00 of a fraction for own residence previously acquired for € 44,393.01, but it was detected, through Reporting Form 11, the realization of a loan with mortgage of € 30,000.00, on the same date as the acquisition of the new property, whereby in accordance with article 10 of the CIRS as then in force, only the realization value deducted from the amount of the loan contracted for acquisition of the property, that is, € 76,000.00, could be admitted as reinvestment for purposes of exclusion of taxation on capital gains.

  • All other conditions are met: allocation of the property to residence and verification of charges in order to issue a corrective assessment document.

After prior hearing – where the taxpayer repeated arguments regarding nullity of the assessment due to disregard of legal formalities – the final decision for partial deferment of the complaint was rendered on new brief information where it was concluded, namely that: "the legal framework is the same, i.e. the exclusion of taxation of gains from onerous transfer of properties pursuant to article 10(5)(a) of the CIRS", but instead of the total reinvestment invoked, only partial reinvestment is recognized, in the proportion of the reinvestment carried out, pursuant to and for purposes of article 10(7) of the CIRS".

And, accordingly, corrective documents were issued, including assessment document No. 2015. ….

It can be said that the decision on the administrative complaint is not correct when it continues to justify that assessment 2014. … was carried out without prior hearing because based on the taxpayer's returns – we saw in the preceding point that this did not happen since the Personal Income Tax return for 2011 where it was stated that reinvestment had been carried out was not taken into account. But would it be justified to continue to seek the declaration of nullity of the assessment then carried out?

From the outset, disregard of prior hearing would not result in nullity but in voidability of the assessment [6].

As to the lack of the right to hearing, even if it is considered that its disregard cannot be considered remedied by the mere fact that the taxpayer uses administrative means of challenge (administrative complaint or hierarchical appeal), it may, albeit unlawful, not require annulment of the final act through application of the principle of act utility, in a realization of the general principle of law expressed by the formula "utile per inutile non vitiatur" [7].

It may, in particular, "be considered validated the primary act that is affected by a defect of violation of the right to hearing if the interested party comes to use administrative means of challenge (administrative complaint or hierarchical appeal) and therein ended up having the opportunity to pronounce on matters on which hearing was wrongly omitted in the first degree procedure. In situations of this type, whether the primary act was maintained or has been revoked and replaced by the second degree act, the final administrative decision ends up being the second degree act, whereby it should be in relation to this act that it should be determined whether the taxpayer had or did not have the opportunity to participate in its formation" [8] (emphasis ours).

In the present case, it is found that the Claimant filed an administrative complaint regarding an additional assessment (designated as "re-liquidation", which had altered the initial assessment, based on the Personal Income Tax return), and, in that procedure, he was requested to clarify various aspects of the situation, with the Tax Administration comparing the data it already had with those sent by the taxpayer in the meantime.

The factuality determined was subject to application of the legal norms considered applicable, leading to a draft decision for partial deferment that was subject to prior hearing of the complainant and subsequently converted into a final decision leading to correction of the disputed assessment.

It being a decision taken then with full knowledge of facts previously disregarded, there will have been validation of the prior act that was affected by lack of substantiation and lack of prior hearing [9].

But assessment No. 2014. … was subject to correction – the facts and the legal interpretation made of them led to determinations of different values, concretized in the issuance of assessment document No. 2015. ….

However, the interpretation of the legal norm applied – article 10, items 5, 6, and 7, of the CIRS – in the correction carried out is not the subject of the present Request for Pronouncement.

Here one can complete what was said above (point 14.1.2.): the Claimant attacked, although not entirely explicitly, the decision on the administrative complaint, but did so only as to the defect of form, disregard of the legal formality of prior hearing and lack of substantiation, omitting the correction of assessment that occurred, ceasing to have interest in continuing to discuss its legality [10].

And the Tax Administration will have carried out a corrective assessment act: based on facts, previously non-existent in the file or not detected, and only determined as a result of submission by the Claimant of a request for certificate of substantiation and administrative complaint, it reviewed the original additional assessment and, based on correction favorable to the taxpayer, determined a different amount of tax [11].

Correction whose legal substantiation is not attacked by the Claimant.

14.6. Conclusions

In applying the law to the facts and based on what has been set out above, it is concluded that:

  • The present Request for arbitral review is timely because it is still an appeal from denial of an administrative complaint;

  • The legality of assessment No. 2014. … was requested for review, a tax act whose defects imputed by the Claimant, in the administrative complaint, regarding lack of substantiation and lack of prior hearing, were overcome by the administrative complaint procedure that took place in the meantime, being subject to corrections as to the factuality that led, with application of the same legislation initially applied, to different calculation of the amount of tax and issuance of a new assessment document, No. 2015. …, whose substantive legality is not the subject of the present Request for arbitral review;

  • The defects relating to the formal legality of the assessment raised by the Claimant having been overcome, the arbitral tribunal finds the Petition without merit.

15. Decision

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

  • To rule without merit the arbitral petition for declaration of illegality of the Personal Income Tax assessment for the Claimant and relating to the year 2010, in the value of € 1,744.59 (one thousand seven hundred and forty-four euros and fifty-nine cents), from which the Respondent is absolved.

  • To condemn the Claimant in costs.

16. Value of the Proceeding

In accordance with article 306(2) of the Code of Civil Procedure (CPC), article 97-A(1)(a) of the CPPT, and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 1,744.59 (one thousand seven hundred and forty-four euros and fifty-nine cents).

17. Costs

For purposes of article 12(2) of the RJAT and article 22(4) of the RJAT and article 4(4) of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 306.00 (three hundred and six euros), pursuant to Table I attached to said Regulation, to be borne entirely by the Respondent.

Let notification be made.

Lisbon, 20 November 2015.

The Arbitrator

(Maria Manuela Roseiro)

[1] The present situation is not identical to that of case No. 38/2015-T, referred to by the Respondent, where it is stated: "(...) at no point in the petition or request presented does the Claimant make any review of the denial and its grounds, having not formulated any petition on such tax act. This tribunal had knowledge of the existence of an administrative complaint only and solely because the Claimant attached a copy of the denial decision without, however, having drawn any legal or legal effect therefrom". In the present case, the Claimant refers to the complaint and its decision, contesting it at various points in the Petition.

[2] It seems to us, moreover, that the settled and reiterated jurisprudential understanding that the judicial challenge that follows a decision of administrative complaint filed against an assessment act has as its immediate subject the decision act of the complaint and as its mediate subject the assessment act itself, as in fact is drawn from article 97(1)(c) of the CPPT" (inter alia, Judgment of the STA of 20 May 2015, in case No. 01021/14), essentially seeks to defend that "the denial of the complaint annulled for procedural defect, it falls to the court to know of the remaining defects imputed to the assessment act, since this is competent to know, in such challenge, either of the denial of the complaint or of the defects imputed to the assessment" (judgment cited which cites other STA judgments, of 16.06.2004, in case No. 01877/03, of 28.10.2009, in case No. 0595/09, of 18.05.2011, in case No. 0156/11, of 16.11.2011, in case No. 0723/11, of 18.06.2014, in case No. 01942/13). Moreover, taking into account that "the competence of arbitral tribunals is limited to the declaration of illegality of assessment acts comprising only acts of denial of second degree acts (complaints or hierarchical appeals) that actually knew the legality of first degree acts" (Jorge Lopes de Sousa, Guide to Tax Arbitration, Almedina, 2013, p. 120 to 123), the subject matter of the petitions, in such cases, is fundamentally the legality of the assessment, which will confirm that the most relevant is that the petition for pronouncement presented following denial of administrative complaint addresses the legality of the assessment and that this was reviewed by the second degree act. A requirement which is believed to be met in the present case, in which the illegality of tax act is invoked due to disregard of legal formalities and it is invoked that the same was poorly resolved by the denial of the complaint. We also consider relevant the considerations made in the arbitral judgment rendered in case 282/2013-T, regarding the application of the principles "pro actione" and "in dubio pro favoritate instanciae".

[3] In this case, the established factual matter resulted in the fact that in the year 2003 the taxpayers submitted an income return for Personal Income Tax, where they calculated a capital gain, declared in annex G, expressing the intention to reinvest the realization value of the property sale, in the two following years, as recommended in article 10(5) of the Income Tax Code, and in the years 2004 and 2005, they did not carry out the reinvestment declared in 2003. The TA, analyzing the returns of those years, concluded that there had been no reinvestment in 2004 and 2005 and that the respondents knew that they could not benefit from the tax exclusion they enjoyed in 2003, it fell to them, by force of article 60(2) of the Income Tax Code, to submit a replacement statement for 2003. Finding the lack of such statement, the TA carried out the re-liquidation of 2003, the cause of the assessment only being confirmed pending the court proceedings.

[4] It should also be noted that this judgment confirmed the judgment below which had ruled partially well-founded the challenge brought by the now respondent against the official Personal Income Tax assessment for 2003, annulling the assessment and ordering restitution of the amount paid, but not condemning the tax administration to payment of any interest, because the assessment act was annulled exclusively due to lack of substantiation, no error attributable to the TA having occurred. The judgment below further emphasized that if the Challengers had not, in fact, reinvested the realization value of the property, the official I.R.S. assessment proves legally due in light of the substantive norms, the TA being able to proceed to assessment of tax resulting from taxation of the capital gain calculated in 2003, provided that it eliminates the formal defect of lack of substantiation.

[5] This statement will not have been detected by the services (confusion that, according to what was touched upon in the record although not explained, will have resulted from the change in marital status of the Claimant).

[6] "The failure to hear the taxpayers, in cases in which it is mandatory, constitutes a defect of form of the tax procedure capable of affecting the decision taken therein, which may come to be annulled (articles 15 and 136(2) of the Administrative Procedure Code and article 99(d) and 70(1) of the CPPT). Not being in any of the situations provided for in article 133 of the Administrative Procedure Code, in which the situations generating nullity are indicated, the wrongful disregard of the right to prior hearing generates mere voidability of the act that puts an end to the administrative or tax procedure (article 135 of the Administrative Procedure Code)". Cf. Jorge Lopes de Sousa, CCPT annotated, Áreas Editora, 6th edition, I vol., p. 437 and 438.

[7] Jorge Lopes de Sousa, ibidem, p. 439, and jurisprudence cited in notes 766 and 767.

[8] Jorge Lopes de Sousa, ibidem, p. 440.

[9] In the case of optional administrative challenge, validation will not take place if the interested party does not use such faculty, but if he does, validation will already be possible (Jorge Lopes de Sousa, ibidem, citing Judgments rendered on 7-11-2001, case 38983).

[10] It should be noted that there seems to be a certain contradiction in the Claimant's claim in that it disregards the correction of the tax act, attacking the assessment which had calculated tax due in the amount of € 6,149.13, but indicates as the value of the present proceeding € 1,744.59, the value resulting from the correction carried out. However, it does not attack at any moment the interpretation of the law carried out by the Administration in determining the amount of tax now required.

[11] Reviewing a case of corrective assessment and explaining the differences compared to other concepts such as annulment, additional assessment, reform of tax act, see Judgment of the Higher Administrative Court, of 27 November 2012, in case No. 05908/12.

Frequently Asked Questions

Automatically Created

Can the Tax Authority disregard a reinvestment declared in a subsequent year's IRS return for capital gains purposes?
The Tax Authority can review and verify reinvestment claims declared in subsequent IRS returns, as Article 10(5) of the IRS Code requires actual compliance with reinvestment conditions (timing, qualifying property, amount). However, the TA cannot arbitrarily disregard a declared reinvestment without proper substantiation. When the reinvestment is validly declared in the following year's return as required, the TA must investigate and provide reasons before rejecting the claim. Article 57(3)(b) CIRS allows the TA to request supporting documentation. If the TA intends to disregard the reinvestment based on legal requalification or different factual appreciation of declared elements, prior hearing is generally required. The TA's verification power must be exercised with proper procedural guarantees and substantiation obligations.
Is the lack of prior hearing (audiência prévia) before an IRS reliquidation grounds for annulment?
Lack of prior hearing before an IRS re-liquidation can constitute grounds for annulment, depending on circumstances. Article 60(2) of the General Tax Law (LGT) permits dispensing with prior hearing when the assessment is based exclusively on elements declared by the taxpayer without modification. However, this exception doesn't apply when the Tax Authority modifies the legal classification or factual appreciation of declared elements, such as disregarding a reinvestment claim declared in a subsequent return. In such cases, prior hearing is mandatory under Article 60(1) LGT and Article 268(3) of the Portuguese Constitution. Omission of this essential procedural formality can invalidate the assessment under Article 163(3) CPPT, as it constitutes disregard of a legal formality capable of influencing the decision. The assessment's legality depends on whether the TA genuinely relied solely on unmodified declared data or instead requalified or rejected declared facts.
What happens when a taxpayer's gracious complaint (reclamação graciosa) is only partially granted?
When a taxpayer's administrative complaint (reclamação graciosa) is partially granted, the Tax Authority issues a new assessment reflecting the partial acceptance of the taxpayer's claims while maintaining the remaining disputed amount. This creates several consequences: (1) the taxpayer receives a revised liquidation with reduced tax liability; (2) the original contested assessment is replaced by the new one for the remaining amount; (3) the taxpayer must decide whether to accept the partial correction or continue challenging the remaining assessment through judicial or arbitral proceedings; (4) new deadlines begin running from notification of the decision on the complaint; and (5) the partial deferral represents administrative recognition of some merit in the taxpayer's arguments, which may strengthen the case for challenging the remainder. The taxpayer can proceed to arbitration or court to contest the portion that was not granted, within applicable statutory deadlines.
Does partial deferral of a tax complaint affect the deadline for filing an arbitration claim (caducidade do direito de acção)?
Partial deferral of a tax complaint does affect deadlines for filing an arbitration claim. When an administrative complaint is partially granted, the decision on the complaint establishes a new starting point for the deadline to challenge the remaining contested amount. Under Article 10(1)(a) of the Legal Framework for Tax Arbitration (RJAT), the arbitration request must be filed within 90 days from notification of the final decision on the administrative complaint. The partial deferral creates a new contestable administrative act—the revised assessment—which resets the deadline. This prevents the right of action (direito de acção) from expiring based on the original assessment date. The taxpayer must act within 90 days of receiving notification of the partial deferral decision to avoid caducidade (expiry) of the right to arbitration. Failure to file within this timeframe results in loss of the right to challenge the remaining assessment amount through arbitration.
How are capital gains from property sales taxed under Article 10(5) of the IRS Code when reinvestment is contested?
Under Article 10(5) of the IRS Code, capital gains from selling a permanent residence can be tax-deferred if proceeds are reinvested in acquiring another permanent residence within specified timeframes (generally 36 months before or after sale, extended to 48 months for construction). When reinvestment is contested, the Tax Authority must verify several requirements: (1) the acquired property qualifies as the taxpayer's permanent residence; (2) reinvestment occurred within legal deadlines; (3) the reinvestment amount corresponds to sale proceeds (proportional deferral applies if reinvestment is partial); (4) proper documentation was provided under Article 57(3)(b) CIRS. The TA can request supporting evidence including acquisition deeds, loan documents, and proof of residence. If reinvestment requirements aren't satisfied, the entire capital gain becomes taxable in the year of sale at the applicable rate (50% of the gain included in taxable income). Before disregarding a declared reinvestment, the TA must substantiate its decision and, when altering the taxpayer's legal classification of facts, provide prior hearing. Arbitrary rejection without proper investigation and substantiation violates Articles 77 LGT and 268(3) of the Constitution.