Process: 176/2017-T

Date: September 14, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 176/2017-T addresses whether capital gains tax applies to the sale of a hereditary share (quinhão hereditário) from an undivided estate. The taxpayer challenged an IRS assessment of €1,854.25, arguing that selling a hereditary share before estate partition does not constitute transfer of a real property right under Article 10 of the IRS Code. The claimant contended that as a mere heir in an undivided estate, he held no individual ownership rights transferable as capital gains. The Tax Authority countered that all heirs acted as sellers in the public deed, each receiving proportional sale proceeds and bearing proportional costs, demonstrating sufficient real rights to trigger Article 10(1)(a) IRS taxation. The AT argued that treating partitioned and unpartitioned estates differently would violate equality principles. Key issues include the legal characterization of hereditary shares versus real property rights, application of substance-over-form doctrine in tax matters, and whether Article 10 IRS Code encompasses gains from transferring succession rights. This case provides critical guidance on IRS treatment of inheritance transactions, the distinction between hereditary community and co-ownership for tax purposes, and procedural requirements for challenging capital gains assessments through CAAD arbitration. The ruling impacts estate planning, succession taxation strategy, and the timing of property transfers within hereditary contexts.

Full Decision

ARBITRAL DECISION

REPORT

A - PARTIES

[Name] with Tax Identification Number [NIF] ..., resident at Avenue ..., no. ..., ..., ..., ...-... Lisbon, hereinafter referred to as Claimant or taxpayer.

Tax and Customs Authority, hereinafter referred to as Respondent or AT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and thereby the Arbitral Tribunal was duly constituted on 26-05-2017, to examine and decide the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 26-05-2017, as recorded in the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, and therefore, in accordance with the provisions of Article 6, paragraph 1 and Article 11, paragraph 1, letter b) of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed Arbitrator Paulo Ferreira Alves, whose appointment was accepted in accordance with legal provisions.

On 11-05-2017, the parties were duly notified of this appointment, in accordance with Article 11, paragraph 1, letters a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code, and did not express any intention to refuse the Arbitrator's appointment.

In compliance with the provisions of Article 11, paragraph 1, letter c) of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the sole arbitral tribunal was duly constituted on 26-05-2017.

Both parties agree to waive the holding of the meeting provided for in Article 18 of the RJAT.

The Arbitral Tribunal is duly constituted and has material jurisdiction, in accordance with Articles 2, paragraph 1, letter a) and 30, paragraph 1 of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are legally represented (Articles 4 and 10, paragraph 2 of the same decree and Article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not affected by defects that would invalidate them.

B - REQUEST

  1. The Claimant hereby petitions for a declaration of illegality of the tax assessment acts for Personal Income Tax for the year 2014, formalized by assessment note no. 2016... of 6 January 2016, in the amount of €1,854.25 (one thousand eight hundred fifty-four euros and twenty-five cents).

C - BASIS FOR THE CLAIM

  1. To substantiate its request for arbitral pronouncement, the Claimant alleged, with a view to declaring the tax assessment act for Personal Income Tax illegal, as already described in point 1 of this Award, in summary, the following:

2.1. From assessment no. 2016..., of 06-01-2016, regarding IRS for the year 2014, which resulted in an amount payable to the State of EUR 2,270.52.

2.2. Part of this amount resulted from being treated as capital gains, referring to the value of the sale of a hereditary share of urban property located on ..., Numbers ... to ..., registered in the Land Registry of the Parish of ..., Porto, number ..., registered in the property register under article ... of the union of parishes of ... and others.

2.3. The amount of EUR 1,854.25 was treated as capital gains.

2.4. The Claimant argues that he was merely the holder of a "right to acquisition by way of succession of part of the property", that is, a right to a hereditary share.

2.5. And yet, it is certain that in the deed the act is recorded as "sale of urban property".

2.6. From the deed, the land registry, the cadastral data of the property register, and other elements in the possession of AT, it is clear that there was never a partition of the property.

2.7. The Claimant alleges that in procedural matters, substance should be given prevalence over form, a corollary of the principle of material truth.

2.8. Since there was never a partition, the Claimant never became an owner/holder of a real right over the property.

2.9. The Claimant and the other heirs, from a legal standpoint, intervened in the capacity of heirs of an undivided estate, in a situation of hereditary community and not of co-ownership, without determination of individual shares or rights over the estate.

2.10. Now, it is an established legal principle that no one can transfer rights that one does not have, and therefore it would never be legally possible to transfer real rights or even contractual rights over the property, as there would be no taxable gain in the form of capital gains, under Article 10 of the Personal Income Tax Code.

2.11. The Claimant concludes by arguing that the sale of a hereditary share is not classified as a taxable fact for the purpose of capital gains.

D - RESPONSE OF THE RESPONDENT

  1. The Respondent, duly notified for this purpose, filed a timely response in which, in brief summary, alleged the following:

3.1. The said assessment was based on the sale of an urban property registered in the property register of the Union of parishes of ..., ..., ..., ..., ... and ..., municipality and district of Porto, under article ..., in which the present Claimant acted as seller, as did all the heirs of the estate of B....

3.2. Following this, a Form 11 declaration was submitted, and subsequently the Claimant submitted Form 3 of IRS, having declared in Annex G the paid alienation of rights over real property.

3.3. As stated in the Form 11 declaration submitted and the tenor of the public deed of purchase and sale, all heirs executed the deed of sale as sellers of the property.

3.4. Although the Claimant argues that the property belonged to the estate and not to the heirs, because the estate was still undivided, the fact is that the proven facts contradict this thesis, in that the heirs of the estate of B... all gave their consent to the sale of the property, appearing in the deed as alienators and holders of a sufficient real right that permitted them to sell the property.

3.5. It should be noted that each of the alienators received their share of the sale price in accordance with their "ideal share", as is set forth in the public deed attached to the file.

3.6. In fact, the proceeds of the sale were not received by the estate as an indivisible whole, but were distributed among each of the heirs in accordance with the proportion of their share.

3.7. Furthermore, the expenses of the deed were not charged to the undivided estate, but to each of the heirs in proportion to their hereditary share.

3.8. Note that all heirs presented themselves as holders of a right which, together, permits the alienation of the property, and that at the time of execution of the deed they receive their share in the proceeds of the sale, each assuming their share of the deed expenses and having also, it should be noted, voluntarily fulfilled the tax obligations corresponding to the act they performed.

3.9. Now, in fact the Claimant obtained with this alienation of a real right over real property, a patrimonial increase, an increase which, under Article 10, paragraph 1, letter a) of the Personal Income Tax Code constitutes a capital gain.

3.10. And it cannot be said that because the estate was not partitioned, it is not possible to impute to the heirs the income resulting from the alienation, for even in a situation of co-ownership, the law provides that the hereditary share corresponding to each income holder be indicated, which, it is said, was set out in Form 11 on page 31 of the file and was also performed by the Claimant when he submitted his Form 3 IRS declaration for 2014.

3.11. The Respondent concludes by arguing that the thesis would violate the principle of equality, for in cases where heirs carry out a partition, they are taxed on the gains obtained from the sale of real property, whereas in the present case, the estate consisting solely of a part of the property sold, there is no need to carry out any partition, nor to tax the gains because they are not attributed to the heirs, but to the estate.

E - FACTUAL GROUNDS

  1. Prior to addressing the issue submitted for pronouncement, it is necessary to present the factual matters relevant to its understanding and decision, based on documentary evidence and the facts alleged.

  2. Thus, in accordance with the principle of free assessment of evidence, taking into account the evidence provided by documents and because the parties did not raise any challenge regarding the authenticity or probative value of the documents attached, this Tribunal considers the attached documents to be true, suitable, and authentic in accordance with Article 75, paragraph 1 of the General Tax Law.

  3. On relevant factual matters, this Tribunal establishes as proven the following facts:

  4. The Claimant is an heir of the estate of B..., to whom was attributed a share or hereditary share of the urban property registered in the property register of the Union of parishes of ..., ..., ..., ..., ... and ..., municipality and district of Porto, under article ....

  5. The property was registered in the respective Land Registry in the name of B... and C... (NIF...).

  6. The Claimant, on 25-09-2014, by means of a public deed of purchase and sale, proceeded to transfer his hereditary share of the urban property registered in the property register of the Union of parishes of..., ..., ..., ..., ... and ..., Municipality and District of Porto, under article ....

  7. The Claimant, jointly with the other heirs of said property, proceeded to sell the property in its entirety, with each of the alienators receiving their share of the sale price in accordance with their share, as set forth in the public deed.

  8. As stated in the public deed, the property was sold for the amount of €160,000.00.

  9. The Claimant received €13,309.00 from the sale of the property.

  10. The expenses of the deed were charged to each of the heirs in proportion to their hereditary share.

  11. The Claimant filed a gracious objection against the assessment and payment of capital gains, which was dismissed by Order of 13-12-2016.

F - FACTS NOT PROVEN

  1. Of the facts with relevance to the decision of the case, set out in the challenge, all subject to concrete analysis, those not included in the factual description above have not been proven.

G - QUESTIONS TO BE DECIDED

  1. Given the positions adopted by the parties in the arguments presented, the following central questions to be decided are established, which must therefore be examined and decided:

a. Those alleged by the Claimant:

(i) Declaration of illegality of the tax assessment acts for Personal Income Tax for 2013, formalized by assessment note no. 2016... of six January 2016, in the amount of €1,854.25 (one thousand eight hundred fifty-four euros and twenty-five cents).

(ii) Condemnation to payment of default interest.

H - LEGAL MATTERS

  1. Taking into account the positions adopted by the parties in the pleadings presented, the central issue to be decided by this Arbitral Tribunal is to examine the legality of the Personal Income Tax assessment acts for 2014, formalized by assessment note no. 2016... of six January 2016, in the amount of €1,854.25 (one thousand eight hundred fifty-four euros and twenty-five cents).

  2. The Claimant proceeded to the alienation of a hereditary share of the urban property located on the street of ..., at numbers ... to ..., land registry of the Parish of ..., Porto, number..., registered in the property register under article ... of the union of parishes of ....

  3. The Claimant argues that: "he was merely the holder of a 'right to acquisition by way of succession of part of the property', that is, a right to a hereditary share", and since he never became an owner/holder of a real right over the property, the alienation is excluded from the capital gains tax regime.

  4. The Respondent counter-argued in the sense that: "all heirs present themselves as holders of a right which, together, permits the alienation of the property, and that at the time of execution of the deed they receive their share in the proceeds of the sale, each assuming their share of the deed expenses and having also, it should be noted, voluntarily fulfilled the tax obligations corresponding to the act they performed".

  5. Given the positions adopted by the parties and the established facts, the fundamental issue to be decided is to determine whether the alienations of the hereditary share are covered by Article 10, paragraph 1, letter a) of the Personal Income Tax Code.

  6. Let us examine the framework provided for in Article 10, paragraph 1, letter a) of the Personal Income Tax Code, which is transcribed:

1 - Capital gains are the gains obtained which, not being considered business and professional income, capital income or property income, result from: a) Paid alienation of real rights over real property and allocation of any assets from private assets to business and professional activity carried out in individual name by its owner;

  1. Capital gains (patrimonial increases) are understood as gains resulting from the positive difference between the acquisition value and the realization or alienation value.

  2. Regarding the alienation value and the value received by the Claimant, there is no doubt whatsoever, as it results from the value described in the public deed of purchase and sale of the property, respectively: €160,000.00, with the Claimant receiving €13,309.51 from the sale of the property.

  3. The heirs/sellers attributed to the Claimant a share of 8.3% over said property, a share which, because there was no partition, required the express consent of the Claimant and all other heirs, consent that was given by means of the public deed of purchase and sale, as can be seen:

  4. The legal system of Successions or LAW OF SUCCESSIONS, provided for in Book V of the Civil Code, states in Article 2024, that "Succession is the calling of one or more persons to the ownership of the patrimonial legal relations of a deceased person and the consequent devolution of the assets that belonged to him."

  5. The succession process is the set of means and procedures whose objective is the incorporation into the assets of the successors of the assets that made up the "estate".

  6. The succession process begins at the moment of death of its author and at the place of his last domicile (Article 2031 and Article 115, both of the Civil Code), followed by the calling of heirs and legatees and their respective acceptance of the inheritance.

  7. Regarding the acceptance of inheritance, its regime provided for in Article 2050, paragraph 1 of the Civil Code, establishes: "1. The ownership and possession of the assets of the inheritance are acquired by acceptance, independently of their material apprehension."

  8. The ownership and holding of the rights and obligations of the "estate" were transferred to the person of the successors, acceptants and in proportion to that acceptance, at the exact moment when those rights and obligations cease to have as their holder the author (by virtue of his death), being automatically replaced by the successors (cf. Law of Successions, Professor José João Gonçalves Proença).

  9. In effect, the disposition of the assets of the inheritance is not dependent on a partition, provided that such disposition is effected jointly by all the heirs, as provided in Article 2091, paragraph 1 of the Civil Code: "the rights relating to the inheritance can only be exercised jointly by all the heirs".

  10. And Article 2124 establishes: "The alienation of inheritance or of a hereditary share is subject to the provisions regulating the legal act that gives rise to it, except as provided in the following articles."

  11. In the present case, it results from the public deed executed, the alienation of the Inheritance over the property, in accordance with the provisions of Articles 2091, 2124 and following of the Civil Code.

  12. In fact, an undivided inheritance or a hereditary share may be alienated, applying to such alienation the provisions regulating the legal act used for the purpose.

  13. From the legal framework of Article 2124 in conjunction with Article 2091, paragraph 1, both of the Civil Code, it follows that the alienation of the hereditary share without there being a partition or specification of assets is possible, provided that it is carried out jointly by all the heirs.

  14. From the application of the provisions of Article 2124, from which no interpretation results beyond the letter of the law, it is concluded that the alienation of the hereditary share is subject to the provisions regulating the legal act that gives rise to it, which in the present case was a purchase and sale contract.

  15. The Claimant's hereditary share translates into the right of ownership over a share of the property here under consideration.

  16. Being a share of a property and the respective right of ownership over it, the rules of the respective legal act necessary to alienate it apply to its alienation, respectively a purchase and sale contract.

  17. As stated in the public deed, the proceeds of the sale were not received by the estate as an indivisible whole, but were distributed among the heirs in accordance with the proportion of their share.

  18. The Claimant is an heir of a share of the property, and in that capacity holds a real right over the respective property.

  19. That share held by the Claimant was agreed upon with the remaining heirs, as results from the public deed of purchase and sale, and therefore in accordance with Article 2091, paragraph 1, it is concluded that it was executed with the consent and presence of all heirs.

  20. In light of the foregoing, it is concluded that the Claimant as an heir acquired the ownership and possession of the assets of the inheritance at the moment of its acceptance (Article 2050 of the Civil Code).

  21. The present legal act falls within the typical case of capital gains resulting from the paid alienation of real rights over real property, by means of a purchase and sale contract, executed by public deed.

  22. Given that the Claimant accepted the inheritance and his share in the property sold, he is liable for the rights and duties arising from that ownership right.

  23. In effect, to the Claimant is imputed the income in proportion to his respective share, in accordance with the provisions of Article 19 of the Personal Income Tax Code.

  24. Indeed, even if the Claimant's share had not been determined, it would presumably be determined in equal parts, in accordance with the provisions of Article 19.

  25. In the present case, there is a public deed, in which is described the value attributed to or received by the Claimant, a value agreed upon between the parties and the respective heirs, that is, there is a material value attributed to the right of ownership over the property held by the Claimant.

  26. And the public deed is an authentic document, suitable and with public faith, which determines that its tenor is authentic, demonstrating that the Claimant sold jointly with the remaining heirs his share of the inheritance over that property.

  27. In these terms, it is decided for the legality of the tax assessment act for Personal Income Tax: no. 2016... of six January 2016, consequently with no right to payment of default interest.

L - DECISION

Therefore, in light of all the above, this Arbitral Tribunal decides:

  1. Finds the request for a declaration of illegality of the tax assessment act for Personal Income Tax formalized by assessment note no. 2016... of six January 2016, in the amount of €1,854.25 (one thousand eight hundred fifty-four euros and twenty-five cents) to be without merit.

  2. Finds the request for condemnation to payment of default interest to be without merit.

The value of the proceedings is set at €1,854.25 corresponding to the value of the assessment, taking into account the economic value of the proceedings as measured by the value of the disputed tax assessment, and in accordance with this the costs are set at the respective amount of €306.00 (three hundred and six euros), to be borne by the Claimant in accordance with Article 12, paragraph 2 of the Tax Arbitration Regime, Article 4 of the Regulation of Costs of Tax Arbitration Proceedings and Table I attached thereto - no. 10 of Article 35, and paragraphs 1, 4 and 5 of Article 43 of the General Tax Law, Articles 5, paragraph, letter a) of the Tax Procedure Regulation, 97-A, paragraph 1, letter a) of the Tax Procedure and Process Code and 559 of the Civil Procedure Code).

Notify.

Lisbon, 14 September 2017

The Arbitrator

Dr. Paulo Ferreira Alves

Frequently Asked Questions

Automatically Created

How are capital gains from the sale of a hereditary share (quinhão hereditário) taxed under Portuguese IRS?
Under Portuguese IRS law, capital gains from selling a hereditary share (quinhão hereditário) are generally taxable under Article 10 of the IRS Code when heirs alienate their inheritance rights. However, the taxability depends on whether the heir possessed transferable real property rights. In CAAD case 176/2017-T, the central dispute was whether an heir selling their share of an undivided estate (without formal partition) transfers a real right subject to capital gains tax. The Tax Authority's position is that when all heirs jointly sell property and each receives proportional proceeds, this constitutes alienation of real rights taxable as mais-valias, regardless of whether formal partition occurred. The acquisition value for calculating gains is typically the property's value at inheritance (Article 44 IRS Code), updated by coefficients. Taxpayers must report such gains in Annex G of the IRS Model 3 declaration.
Can a taxpayer challenge an IRS tax assessment on inherited property capital gains through CAAD arbitration?
Yes, taxpayers can challenge IRS capital gains assessments on inherited property through CAAD (Centro de Arbitragem Administrativa) arbitration. Case 176/2017-T demonstrates this process: the taxpayer filed an arbitration request after receiving assessment notice 2016... for €1,854.25 in capital gains tax from selling a hereditary share. The CAAD tribunal was constituted under Decree-Law 10/2011 and has material jurisdiction over IRS disputes per Article 2(1)(a). The process requires submitting a formal request, paying arbitration fees, and presenting legal arguments. In this case, the tribunal was constituted on 26-05-2017 with a sole arbitrator appointed by the Deontological Council. Both parties can waive oral hearings. CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, typically offering faster resolution for inheritance-related capital gains disputes.
What is the legal basis for taxing mais-valias on the transfer of hereditary shares in Portugal?
The legal basis for taxing mais-valias on hereditary share transfers in Portugal derives from Article 10(1)(a) of the IRS Code (Código do IRS), which defines capital gains as patrimonial increases from the onerous alienation of real rights over immovable property. The Tax Authority in case 176/2017-T argued that heirs possess sufficient real rights to alienate inherited property, even without formal partition. When heirs collectively sell estate property and each receives proportional proceeds based on their 'ideal share' (quota ideal), this constitutes a taxable event. The legal framework also invokes Article 44 IRS Code for acquisition value determination and equality principles requiring consistent treatment of partitioned versus unpartitioned estates. The taxpayer's counter-argument emphasized that hereditary shares represent succession rights, not real property rights, invoking substance-over-form doctrine. The dispute centers on whether hereditary community status differs legally from co-ownership for capital gains purposes.