Process: 183/2015-T

Date: October 30, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 183/2015-T addresses the deductibility of documented expenses for rental income from an urban property located within a recognized four-star tourist resort in Portugal. The taxpayer declared €10,887.90 in expenses against €3,303.08 in rental income for the 2013 tax year, but the Portuguese Tax Authority (AT) reduced accepted expenses to only €1,531.96, resulting in a significantly lower tax refund. The core dispute centers on whether swimming pool maintenance costs (€5,834.21) and common development expenses (€2,748.00) qualify as deductible under Article 41 of the Portuguese IRS Code. The Tax Authority rejected the swimming pool expenses because the pool did not appear in the Municipal Property Tax (IMI) records or property valuation report, despite the pool being documented in the property's constituent title, purchase deed, and property registration certificate. Common development expenses were rejected because the management company issuing the invoices was not registered for condominium management activities. The taxpayer argues that all documented expenses are necessary and mandatory for generating rental income from a property within a legally recognized tourist development, and therefore should be deductible under Article 41 of the IRS Code. The arbitration tribunal must determine whether the formal absence of the swimming pool from municipal tax records should override its documented existence in official property titles, whether periodic payments to the tourist development management qualify as deductible expenses, and whether the taxpayer is entitled to compensatory interest if the claim succeeds. This case highlights the tension between strict interpretation of tax records and the practical realities of operating rental properties within integrated tourist complexes, establishing important precedents for expense deductibility in Portugal's tourism rental market.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case no. 183/2015-T

Subject: Personal Income Tax

I – REPORT

  1. A…, Taxpayer[1]…, resident at Rua …, no. …, ..., … ... filed a request for arbitral pronouncement, under the terms of subparagraph a) of no. 1 of Article 2, of no. 1 of Article 3, and of subparagraph a) of no. 1 of Article 10, all of the Legal Regime for Tax Arbitration[2], the Tax Authority[3] being requested with a view to annulling the tax acts relating to the assessment of personal income tax for the year 2013, whereby a refund of only € 3,077.74 was calculated, following corrections made to the tax return filed electronically on 10/08/2014.

  2. The request was made without exercing the option to designate an arbitrator, and was accepted by His Excellency the President of the Administrative Arbitration Center[4] and automatically notified to the Tax Authority on 18/03/2015.

  3. Under the terms and for the purposes provided in no. 2 of Article 6 of the Legal Regime for Tax Arbitration, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within legally applicable periods, on 08/05/2015, Arlindo José Francisco was designated as arbitrator of the tribunal, who communicated acceptance of the assignment within the legally established period.

  4. The tribunal was constituted on 25/05/2015 in accordance with the provisions contained in subparagraph c) of no. 1 of Article 11 of the Legal Regime for Tax Arbitration, in the wording introduced by Article 228 of Law no. 66-B/2012 of 31 December, and on the same date compliance was given to the provisions of Article 17 of the Legal Regime for Tax Arbitration.

  5. In summary, the claimant argued that in the tax return in question, he indicated in Annex F, Table 4, expenses in the amount of € 10,887.90, relating to the urban property …, lot … of the parish of …, municipality of ..., included in the tourist resort …, all duly documented.

  6. Notified by the Tax Authority of its intention to make corrections to these expenses, reducing them to an amount of € 1,314.21, he exercised his right to a hearing, in which he expressed his disagreement with the Tax Authority's viewpoint, agreeing only with the removal of expenses relating to the monthly cooperative quota as well as the expense for obtaining a permanent certificate in the amount € 773.73, with the value € 10,114.17 remaining in effect, to be taken into account in the respective assessment.

  7. On 26/11/2015 he was notified by the Tax Authority that his argument was only partially accepted, fixing the final value of expenses at € 1,531.96.

  8. In the claimant's view, the expenses should be accepted as they are documented and were necessary and mandatory for obtaining the income, since the lot is included in a tourist development, duly recognized by the competent authority, and are encompassed within Article 41 of the Personal Income Tax Code[5] and should be considered for purposes of determining the respective Personal Income Tax[6].

  9. In its response, the Tax Authority stated in summary that expenses for the swimming pool in the amount of € 5,834.21 were not accepted because the swimming pool does not appear in the Municipal Property Tax form model 1 or in the property valuation report.

  10. Similarly, the common expenses of the development in the amount of € 2,748.00 were not accepted, because the entity that issued the invoices, company B… – …, does not engage in the activity of Condominium Management.

II – PRELIMINARY MATTERS

The tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of the Legal Regime for Tax Arbitration.

The parties have standing and capacity, are shown to be legitimate, and are regularly represented.

In its response, the Tax Authority contended that the examination of witnesses and the holding of the meeting provided for in Article 18 of the Legal Regime for Tax Arbitration were unnecessary, a position with which the claimant did not agree, as stated in the request of 22/07/2015, in which he also requested the addition of one further witness to the list, which was granted.

The tribunal scheduled the meeting referred to in Article 18 and the examination of witnesses for 09/09/2015, as per ruling of 23/07/2015.

On 08/09/2015, the claimant requested postponement of the examination due to the impossibility of presenting the witnesses; the tribunal maintained the meeting required by Article 18 of the Legal Regime for Tax Arbitration, at which, inter alia, the question of the examination of witnesses would be considered.

At the said meeting, the claimant dispensed with the examination of witnesses, and a period of 15 days was fixed for submissions by the claimant and by the respondent, to be presented in successive order in that sequence, with the date for the pronouncement of the decision set for 30/10/2015.

III – REASONING

1 – Issues to be Resolved:

a) Whether the expenses relating to periodic payments are or are not encompassed within Article 41 of the Personal Income Tax Code.

b) Whether the expenses for the maintenance of the swimming pool are or are not encompassed within Article 41 of the Personal Income Tax Code.

c) Whether, in the event the claim is upheld, beyond the tax there will or will not be entitlement to indemnity interest in favor of the claimant.

2 – Factual Matters

The factual matters considered relevant and proven on the basis of elements contained in the case file are as follows:

a) The claimant submitted, electronically, on 10/08/2014, the Personal Income Tax form model 3 for the year 2013.

b) The same contained, inter alia, Annex F which, in field 401 of Table 4, contains property income in the amount of € 3,303.08, relating to the urban property … lot … of the parish of …, municipality of ..., with tax withholding at source in the amount of € 825.77 and expenses in the amount of € 10,887.90.

c) On 11/09/2014, the Tax Authority notifies the claimant, through the Tax Office of Cascais …, informing him of its intention to exclude the amount of € 9,573.69 of expenses for the swimming pool, monthly cooperative quota, permanent certificate, with the justification that in the Property Ledger of the property in question there is no swimming pool, and that he could exercise the right to a prior hearing.

d) Having exercised the right to a hearing, he accepts that the value of the declared expenses (€ 10,887.90) be reduced to € 10,114.17, with the monthly cooperative quota and the expense for obtaining a permanent certificate being excluded.

e) On 26/11/2014, the claimant is notified that the final value of the expenses is fixed at € 1,531.96, with the expenses of periodic payments excluded as not being encompassed within Article 41 of the Personal Income Tax Code and the swimming pool expenses excluded because the same is omitted from the contents of Article 4422.

f) The property in question was acquired by the claimant by deed of 04/03/2011, cf. doc 6, is comprised within the tourist development "C…", four-star, recognized by Dispatch no. …/2009 of …/…/2009 of the Secretary of State for Tourism.

g) The existence of the swimming pool is evidenced in the constituent title of the resort, in the deed of purchase and sale of 4 March 2011, and in the property registration certificate relating to the accommodation unit in question. It does not appear only in the matricial description of lot … of property … of the parish of … of the municipality of ....

h) By the Municipal Chamber of ... was issued the authorization permit for touristic use no. …/2009.

i) The declared expenses are duly documented and were only not considered by the Tax Authority because the latter did not consider them encompassed within Article 41 of the Personal Income Tax Code.

j) The entity managing the development is B… – …, to whom responsibility for the administration of the development falls.

3 - Legal Matters

3.1 – Regarding Periodic Payments

a) The claimant considers that these expenses are common to all owners and arise from common facilities and equipment, namely, irrigation, security, surveillance, porter and reception, roads, lighting, etc., and that by force of the provisions contained in Article 56 of Decree-Law 39/2008 of 7 March it is his duty to bear the payment to the managing entity, concluding that, once documented, they should be considered for purposes of Article 41 of the Personal Income Tax Code.

b) For its part, the respondent states that these expenses cannot be accepted because the entity that issued them, B… – …, does not engage in the activity of Condominium Management and are not itemized, with it being unknown for what purpose they were paid, and therefore cannot be accepted for purposes of Article 41 of the Personal Income Tax Code.

c) The legal framework for these tourist developments is embodied in Decree-Law 39/2008 of 7 March, with amendments introduced by Decree-Law 228/2009 of 14 September and Decree-Law 15/2014 of 23 January.

d) In its Article 53, it is established that "The relations between the owners of tourist developments in plural ownership shall be subject to the provisions of this decree-law and, subsidiarily, to the regime of horizontal ownership." And in Article 58 it establishes to whom the Administration falls:

"1 - The administration of tourist developments in plural ownership falls to the managing entity, except where it is divested of its functions, under the terms of Article 62.

2 - The administration of tourist complexes (resorts) falls to a single managing entity, designated in the constituent title of the tourist complex (resort).

3 - The managing entity of the development exercises the functions that fall to the administrator of the condominium, under the regime of horizontal ownership, and is responsible for the overall administration of the development, being incumbent upon it, in particular, to ensure the operation and maintenance of the facilities and equipment for common use and of the services for common use provided for in the constituent title, as well as the maintenance and conservation of the green spaces for collective use, the road infrastructure and the other facilities and equipment for collective use forming part of the development, where they have a private nature."

f) Article 56 of the same statute prescribes:

"1 - The owner of a plot or autonomous lot of a tourist development in plural ownership must pay to the managing entity of the development the periodic payment fixed in accordance with the criterion determined in the constituent title.

2 - The periodic payment is intended to meet the expenses for maintenance, conservation and operation of the development, including those of the accommodation units, the common facilities and equipment and the services for common use of the development, as well as to remunerate the provision of services for permanent reception, security and cleaning of the accommodation units and the common areas of the development.

3 - In addition to what is provided in the preceding number, the periodic payment is intended to remunerate the services of the official auditor and the managing entity of the development, being able to cover other expenses provided they are foreseen in the constituent title.

4 - Services for common use of the development are those required for the respective category.

5 - The percentage of the periodic payment intended to remunerate the managing entity of the development cannot exceed 20% of the total value.

6 - In tourist complexes (resorts), each of the tourist developments, establishments or facilities and equipment for tourism operation that make up the development contribute to the common expenses of the tourist complex (resort) in proportion to the respective relative value fixed in the constituent title of the development, under the terms provided in no. 2 of Article 55.

7 - Credits relating to periodic payments, as well as to the respective default interest, enjoy the privilege of real estate credit on the respective lot, graduated after those mentioned in Articles 746 and 748 of the Civil Code and after the others provided for in special legislation.

8 - A percentage of not less than 4% of the periodic payment must be allocated to the constitution of a reserve fund intended exclusively for the carrying out of repair and conservation works on the common facilities and equipment and other expenses expressly provided for in the constituent title.

9 - Regardless of the criterion for fixing the periodic payment established in the constituent title, it may be altered by proposal of the official auditor contained in the respective opinion, whenever it proves excessive or insufficient in relation to the expenses it is intended to cover and provided that the alteration is approved in an assembly convened for that purpose."

g) With the ownership of the lot … by the claimant proven, its integration in the respective development and the documented expenses, as well as their mandatory nature, by force of the constituent title of plural ownership of the resort, we shall analyze their tax treatment for purposes of Personal Income Tax.

h) No. 1 and 2 of Article 41 of the Personal Income Tax Code prescribe:

"1 - From the gross income referred to in Article 8, are deducted, in relation to each property or part of property, all expenses actually incurred and paid by the taxpayer to obtain or guarantee such income, with the exception of expenses of a financial nature, those relating to depreciation and those relating to furniture, electrical appliances and articles of comfort or decoration.

2 - In the case of an autonomous lot of property under a horizontal ownership regime, other charges are deductible, in relation to each lot or part of lot, which under the terms of the law the condominium owner is obliged to bear and which are actually paid by the taxpayer."

i) Proved as it is that the managing entity of the development exists, the subsidiary application of the horizontal ownership regime and the issuance of invoices by the managing entity, with nothing in Article 41 of the Personal Income Tax Code indicating any requirement that the entity issuing the invoices evidencing the expenses must be taxed for the activity of Condominium Management, and proved as it is that the payment and mandatory nature thereof exist, it is necessary to conclude their encompassing within the deductions provided for in Article 41 of the Personal Income Tax Code already referred to, and therefore the claim is well-founded.

3.2 – Swimming Pool Expenses

a) The respondent agrees that the swimming pool is omitted from the matricial description, despite appearing in all other documentation, justifying that the Municipal Property Tax form model 1 does not permit its inclusion in properties used for services, as is the case, but, in truth, it exists and appears in all remaining documentation, therefore it understands, with respect to the principle of the prevalence of substance over form, provided for in Article 11 of the General Tax Law[7], that its existence should be considered for purposes of Article 41 of the Personal Income Tax Code.

b) On the other hand, the respondent understands that the swimming pool expenses cannot be accepted given its omission from the Municipal Property Tax form model 1[8] and from the property valuation report, a situation preventing it from knowing with certainty in whose name the swimming pool is registered, and therefore not permitting the imputation of such expenses to the claimant, also alleging that there is no violation of the principle of substance over form, given that, in its view, such principle applies only in situations of interconnection between nos. 2 and 3 of Article 11 of the General Tax Law.

c) From the proven factual matters, it is verified that the swimming pool is found only in the matricial description, taking into account the provisions of Article 12 of the Municipal Property Tax Code[9], its no. 1 states: "The registration matrices are records which contain, in particular, the characterization of properties, location, their taxable property value, the identity of owners and, where applicable, of usufructuaries and surface holders." From this it can be understood that the matrix may be more or less exhaustive in its registration, in particular as to the characterization of properties and not all characteristics will always appear in the matricial registration, moreover, the Municipal Property Tax form model 1, in the case of urban properties intended for Commerce, Industry and Services, does not have a specific field for the swimming pool.

d) On the other hand, the Municipal Property Tax form model 1 to be submitted by the taxpayer must be accompanied by architectural plans of the constructions corresponding to the final drawings approved by the competent Municipal Chamber or certified copies of the same, as provided for in no. 2 of Article 37 of the Municipal Property Tax Code.

e) Now, having the respective Municipal Chamber issued, on 20 May 2009, the respective authorization permit for tourism use, it is concluded that the constructions carried out were in accordance with the respective construction design.

f) Also in accordance with Article 15, no. 2 of the Municipal Property Tax Code, the valuation of urban properties is direct; therefore, in addition to the final drawings, where the existence of the swimming pool could be detected, also in direct valuation this could have been ascertained by the Tax Authority, given that it is at its initiative, on the basis of the declaration submitted by the taxpayers, as per no. 1 of Article 37 of the Municipal Property Tax Code.

g) In Article 43 of the Municipal Property Tax Code, which establishes the coefficient of quality and comfort, the existence of Table I is verified to be applied to urban properties intended for housing, showing among the enhancing elements the individual swimming pool, and the existence of Table II to be applied to urban properties intended for commerce, industry and services where the swimming pool does not appear as an enhancing element.

h) Now, given that, in the present case, it is an urban property intended for services, the inclusion or non-inclusion of the swimming pool in the matricial description is irrelevant for the taxable property value to be assigned, and we cannot conclude that on the part of the taxpayer there is any non-compliance, just as Article 41 of the Personal Income Tax Code does not impose the requirement demanded by the Tax Authority for the expenses in question to be deductible, and here too the claim is well-founded.

3.3 - Indemnity Interest

a) The illegality of the assessment being declared as having occurred through non-acceptance of properly documented expenses, the Tax Authority is obliged to reconstitute the situation that would have existed if the annulled acts had not been performed, in accordance with the provisions contained in Article 100 of the General Tax Law.

b) In this sense Diogo Leite Campos/Benjamin Silva Rodrigues/Jorge Lopes de Sousa pronounce themselves in a note to the aforementioned Article 100 of the General Tax Law 2nd edition.

c) In this way, verifying the illegality of the Personal Income Tax assessment act attributable to the Tax Authority, given that it performed it without adequate legal support, and in view of the proven restitution of Personal Income Tax, lower than what was due, the claimant has the right to the payment of indemnity interest in the precise terms of no. 1 of Article 43 of the General Tax Law and Article 61 of the Tax Procedure and Process Code[10], to be calculated on the amount received less than that which was due.

IV – DECISION

Given the foregoing, the tribunal decides as follows:

a) To declare that the expenses relating to periodic payments are encompassed within Article 41 of the Personal Income Tax Code and as such deductible from the gross income referred to in Article 8 of the Personal Income Tax Code.

b) To declare that the expenses for the maintenance of the swimming pool are encompassed within Article 41 of the Personal Income Tax Code and therefore also deductible from the gross income referred to in Article 8 of the Personal Income Tax Code.

c) To declare that the assessment in question shall be corrected in conformity with the present decision, and on the difference between the amount reimbursed and the amount to be reimbursed to the taxpayer, indemnity interest shall be calculated at the legal rate, from the date on which the reimbursement occurred until the date on which its correction occurs.

d) To fix the value of the case at € 8,582.21 in accordance with the provisions contained in Article 299, no. 1 of the Civil Procedure Code[11], Article 97A of the Tax Procedure and Process Code, and Article 3, no. 2 of the Costs Regulation in Tax Arbitration Proceedings[12].

e) To fix the costs, under the provisions of no. 4 of Article 22 of the Legal Regime for Tax Arbitration, in the amount of € 918.00 in accordance with the provisions of Table I referred to in Article 4 of the Costs Regulation in Tax Arbitration Proceedings, to be borne by the respondent.

Notify,

Lisbon, 30 October 2015

Text prepared by computer, under the terms of Article 131, no. 5 of the Civil Procedure Code, applicable by cross-reference of Article 29, no. 1, subparagraph e) of the Legal Regime for Tax Arbitration, with blank lines and reviewed by the tribunal.

The Arbitrator,

Arlindo José Francisco

[1] Acronym for Taxpayer

[2] Acronym for Legal Regime for Tax Arbitration

[3] Acronym for Tax Authority and Customs Authority

[4] Acronym for Centre for Administrative Arbitration

[5] Acronym for Personal Income Tax Code

[6] Acronym for Personal Income Tax

[7] Acronym for General Tax Law

[8] Acronym for Municipal Property Tax

[9] Acronym for Municipal Property Tax Code

[10] Acronym for Tax Procedure and Process Code

[11] Acronym for Civil Procedure Code

[12] Acronym for Costs Regulation in Tax Arbitration Proceedings

Frequently Asked Questions

Automatically Created

What expenses are deductible under Article 41 of the Portuguese IRS Code for properties in tourist villages?
Under Article 41 of the Portuguese IRS Code, property owners can deduct expenses that are documented and necessary for obtaining rental income from properties in tourist villages. In case 183/2015-T, the taxpayer claimed deductions for swimming pool maintenance costs, common development expenses, and periodic payments related to a unit in a recognized four-star tourist resort. The key principle is that expenses must be both properly documented through invoices and essential for generating the rental income. However, the Tax Authority may challenge deductions if supporting documentation is inconsistent, such as when facilities like swimming pools appear in property deeds but not in municipal tax records, or when service providers' registered business activities don't match the services invoiced.
Can property owners deduct swimming pool and maintenance costs for units in recognized tourist developments?
Yes, property owners in recognized tourist developments can claim deductions for swimming pool and maintenance costs, but disputes may arise over documentation requirements. In this CAAD case, the taxpayer's swimming pool maintenance expenses (€5,834.21) were initially rejected because the pool did not appear in the Municipal Property Tax (IMI) form or property valuation report, despite being documented in the property's constituent title, purchase deed, and registration certificate. The property was part of a legally recognized four-star tourist resort authorized by official government dispatch. The arbitration had to determine whether the pool's existence in official property documents should prevail over its absence from municipal tax records, establishing important precedent for deductibility of shared facility costs in integrated tourist complexes.
How does CAAD arbitration handle disputes over documented expense corrections by the Portuguese Tax Authority?
CAAD (Centro de Arbitragem Administrativa) tax arbitration handles IRS expense disputes through a structured process. In case 183/2015-T, after the Tax Authority reduced accepted expenses from €10,887.90 to €1,531.96, the taxpayer filed an arbitration request under the Legal Regime for Tax Arbitration. The process included: (1) automatic notification to the Tax Authority, (2) appointment of an independent arbitrator by the CAAD President, (3) tribunal constitution within specific timeframes, (4) exchange of written submissions between parties, (5) optional witness examination and Article 18 hearing, and (6) final arbitral decision. The taxpayer had previously exercised the right to prior hearing with the Tax Authority but disagreed with the final corrections, leading to arbitration as an alternative to judicial courts for faster resolution of tax disputes.
What documentation is required to support rental income expense deductions for urban properties under IRS?
Documentation required to support rental income expense deductions for urban properties under Portuguese IRS includes proper invoices and proof that expenses are necessary for income generation. In this case, the taxpayer provided documented expenses totaling €10,887.90, including invoices for swimming pool maintenance, common development charges, cooperative quotas, and administrative fees. However, documentation issues arose when: (1) the swimming pool appeared in property title documents but not in Municipal Property Tax records, creating inconsistency; (2) the management company issuing invoices for common expenses was not registered for condominium management activities, raising questions about invoice validity. The case demonstrates that beyond having invoices, taxpayers must ensure consistency across all official records and that service providers' registered activities match the services they bill for to avoid Tax Authority challenges under Article 41 of the IRS Code.
What is the procedure for challenging IRS income tax reassessments through CAAD tax arbitration in Portugal?
The procedure for challenging IRS income tax reassessments through CAAD arbitration involves several steps illustrated in case 183/2015-T. First, when the Tax Authority notifies its intention to make corrections, the taxpayer exercises the right to prior hearing (audiência prévia) to contest the adjustments. If disagreement persists after the Tax Authority's final decision, the taxpayer can file a request for arbitral pronouncement with CAAD under Article 2 and Article 10 of the Legal Regime for Tax Arbitration. The taxpayer may choose to designate an arbitrator or allow automatic appointment. Once accepted, the request is notified to the Tax Authority, an arbitrator is appointed, and the tribunal is constituted within legally established timeframes. The process includes written submissions, potential witness examination, and a mandatory Article 18 hearing before the arbitrator issues a binding decision, typically within a few months, offering a faster alternative to traditional administrative courts.