Process: 201/2015-T

Date: December 7, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitral decision 201/2015-T addresses the critical issue of expense deductions from Category F rental income under Portuguese IRS law, specifically concerning the periodization requirement for property-related costs. The taxpayers challenged additional IRS assessments for tax years 2009, 2011, and 2012, where the Tax Authority disallowed deductions for IMI (property tax) and maintenance/conservation expenses totaling €38,594.51. The core dispute centered on whether such expenses must strictly correspond to the actual rental period of the properties. The claimants owned two urban properties rented from May 1, 2009 (Cartaxo property) and October 1, 2009 (Carnide property), declaring gross rental income of €6,200 for 2009. The Tax Authority's corrections reduced their declared losses to carry forward from €32,394.51 to €10,975.25, resulting in additional tax liabilities for subsequent years. The claimants argued that IRS deduction rules for Category F income do not mandate the strict temporal matching between expenses and rental periods as applied by the Tax Authority. Conversely, the Tax Authority maintained that only expenses corresponding exactly to periods when properties were actually rented could be deducted. The case proceeded through the Administrative Arbitration Centre (CAAD) following the legal regime of Decree-Law 10/2011, with the arbitral tribunal constituted in May 2015. The claimants sought annulment of the additional assessments and reimbursement of taxes paid plus compensatory interest. This decision has significant implications for Portuguese landlords regarding the timing and deductibility of property-related expenses against rental income for IRS purposes.

Full Decision

ARBITRAL DECISION

The arbitral tribunal functioning with a single arbitrator constituted at CAAD – Administrative Arbitration Centre in accordance with the legal regime established by Decree-Law No. 10/2011 of 20 January[1], for which the arbitrator from the Centre's list Nuno Maldonado Sousa was designated by the respective Deontological Council, hereby elaborates its arbitral decision.

1. Report

1.1. Constitution of the arbitral tribunal

A…, taxpayer no. … and B…, taxpayer no. …, resident at Travessa …, …, … Porto, filed a request for constitution of the arbitral tribunal, in accordance with the combined provisions of Articles 2nd and 10th of the RJAT and Articles 1st and 2nd of Ordinance No. 112-A/2011, of 22 March, in which the Tax and Customs Authority is Defendant[2].

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 20-03-2015 and notified to the Tax and Customs Authority on the same date.

In accordance with the provisions of Article 6, No. 1 and Article 11, No. 1, paragraph b) of the RJAT, the Deontological Council designated as arbitrator of the single arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable time period and notified the parties of such designation on 13-05-2015. In compliance with the rule contained in Article 11, No. 1, paragraph c) of the RJAT, the arbitral tribunal was constituted on 28-05-2015.

1.2. The request of the Claimants

In their Initial Request (RI)[3] the Claimants petitioned:

(i) The declaration of illegality and annulment of the acts of additional assessment in PIT of the years 2009, 2011 and 2012;

(ii) The reimbursement of the amounts paid as tax, plus compensatory interest.

The Claimants alleged that the additional tax results from a correction to their rental income from urban rental, based on the disallowance of expenses for taxes and maintenance and conservation of the properties, which they had deducted. They based their request on the interpretation they make of the rules governing deductions to income which, in their thesis, do not require the periodization applied by the TA.

1.3. The position of the TA

The Tax and Customs Authority responded arguing the legality of the assessments and defended the lack of merit of the requests and their basis, holding that the expenses to be deducted must correspond exactly to the period in which the respective property was rented. It concludes arguing for its absolution from the requests.

1.4. Instruction of the proceedings and arguments

On 12-10-2015 the meeting provided for in Article 18 of the RJAT was held.

For instruction of the proceedings the Claimants submitted documents, the TA submitted the administrative file, a witness presented by the Claimants was heard and statements of a party were given by A…

The Claimant and the TA argued on the facts and on the applicable law, in the said meeting of the arbitral tribunal with the parties.

1.5. Dismissal of procedural defects

The arbitral tribunal was regularly constituted and has jurisdiction ratione materiae in accordance with the rules of Article 2, No. 1, paragraph a) of the RJAT.

The Parties possess legal personality and capacity (that of the TA in accordance with the discipline contained in Article 4, No. 1 of the RJAT and 10th, No. 2, of the same diploma and Article 1, paragraph a) of Ordinance No. 112-A/2011, of 22 March), are legitimate and are regularly represented.

There are no nullities that vitiate the proceedings.

Thus, there is no obstacle to the consideration of the merits of the case and therefore a decision must be rendered.

2. Decision

2.1. Findings of fact

2.1.1. Facts considered proven

The following facts are established in this case:

A. With respect to the year 2009 the Claimants declared, for purposes of PIT[4], rental income in the amount of 6,200.00 € obtained through the rental of the following two properties of the Claimants, with the identification and value of the respective rents indicated: [8th and 9th RI; doc. 9, p. 3. 5th R-TA[5]; PA3[6] pp. 9-12]

a. Urban property in the parish …, article …, fraction A, with rents (gross income) of 3,000.00 €;

b. Urban property in the parish …, article …, fraction/section 1, with rents (gross income) of 3,200.00 €.

B. Also with respect to the year 2009 and for the same purposes of PIT, the Claimants declared that they had incurred expenses with IMI[7] and with the maintenance and conservation of the properties in the total amount of 38,594.51 €, corresponding to the following values: [8th and 9th RI; doc. 9, p. 3]

a. In the urban property in the parish …, article …, fraction A, the amount of expenses of 1,723.12 €;

b. In the urban property in the parish …, article …, fraction/section 1, the amount of expenses of 36,871.39 €;

C. From the declaration of income of the Claimants relating to 2009 resulted in the amount of "losses to be carried forward" of € 32,394.51. [6th R-TA; PA2: p. 19]

D. The rental of the urban property in the parish of Carnide, corresponding to the article of the matrix …, fraction A, began on 1 October 2009. [9th RI; PA3 pp. 9-12]

E. The rental of the urban property in the parish of Cartaxo, corresponding to the article of the matrix article …, fraction/section 1, was entered into for an effective period of five years and began on 1 May 2009. [9th RI; PA2: p. 20].

F. The Division of Assessment of Income Taxes and Expenses (DLIRD) of the Financial Department of Porto, in August 2014, notified the Claimants to proceed with the delivery of the documents proving the values indicated in the income declaration. [7th R-TA; PA2: p. 19]

G. On 26 and 29 August 2014, the Claimants submitted the requested documentation relating to the expenses. [8th R-TA; PA2: p. 19-20]

H. Following the documentation delivered on 16-09-2014 the Claimants were notified of the proposed corrections and on 09-10-2014 they exercised their right to be heard, bringing new elements to the analysis of the proceedings. [9th and 10th R-TA]

I. On 3-11-2014 the claimants were notified that, by decision of the TA, "some of the elements in the income declaration of PIT for the year 2009 were altered", with the grounds referred to in the attached document. [1st and 2nd RI and 11th R-TA; PA2: p. 16]

J. From the corrections made by the TA through the official statement of income relating to the year 2009, resulted in a value of "losses to be carried forward" of € 10,975.25 [11th and 12th R-TA; doc. 1 of the RI].

K. The claimants were notified of the following demonstrations of PIT assessment, all with "assessment date" on 05-12-2014 and with "compensation date" on 10-12-2014: [3rd RI: docs. 1 to 3]

a. Assessment No. 2014 … relating to income of the year 2009, with the amount to be refunded of 1,787.01 €;

b. Assessment No. 2014 … relating to income of the year 2011, with the amount to be paid of 1,361.06 €;

c. Assessment No. 2014 …, relating to income of the year 2012, with the amount to be paid of 895.48 €.

L. On 19 January 2015 the Claimants proceeded with the payment of the balances determined in the two documents of "warning/notice of collection", in the amount of 1,260.40 € and 4,736.49 € [5th. RI; docs. 7 and 8].

M. On 04-11-2014 the Claimants delivered to the TA the following documents relating to the property located in Carnide, article of the matrix … [PA1: pp. 20-40]:

a. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 29-07-2009, relating to "reserve fund January 2009 and January 2009", in the total amount of € 53.13; [PA1: p. 29]

b. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 10-02-2009, relating to "reserve fund February 2009 and February 2009", in the total amount of € 53.13; [PA1: p. 30]

c. Receipt No. … from "Condominium of the building R. ..., No. 14, Lisbon" dated 10-03-2009, relating to "reserve fund March 2009 and March 2009", in the total amount of € 53.13; [PA1: p. 31]

d. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-04-2009, relating to "July 2007, reserve fund August to December 2007, March to December 2008, January to April 2009 and April 2009", in the total amount of € 53.13; [PA1: p. 32]

e. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 12-05-2009, relating to "April 2009, reserve fund May 2009 and May 2009", in the total amount of € 53.92; [PA1: p. 33]

f. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-06-2009, relating to "May 2009, reserve fund June and June 2009", in the total amount of € 53.92; [PA1: p. 34]

g. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-07-2009, relating to "June 2009, reserve fund July 2009 and July 2009", in the total amount of € 53.92; [PA1: p. 35]

h. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 11-08-2009, relating to "July 2009, reserve fund August 2009 and August 2009", in the total amount of € 53.92 [PA1: p. 36]

i. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-09-2009, relating to "August 2009, reserve fund September 2009 and September 2009", in the total amount of € 53.92; [PA1: p. 37]

j. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-10-2009, relating to "September 2009, reserve fund October 2009 and October 2009", in the total amount of € 53.92; [PA1: p. 38]

k. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 10-11-2009, relating to "October 2009 and November 2009", in the total amount of € 53.92; [PA1: p. 39]

l. Receipt No. … from "Condominium of the building R. ..., No. ..., Lisbon" dated 09-12-2009, relating to "reserve fund November 2009, November 2009, reserve fund December 2009 and December 2009", in the total amount of € 53.92; [PA1: p. 40]

N. The analysis of the documents delivered by the Claimants to support the deductions to income presented in the declaration of PIT for 2009, led the TA to decide that the following expenses, totalling 607.42 €, relating to the property with the article of the matrix ...-.. of the parish of Carnide, should not be accepted, for the reason indicated:

a. Expense documented by the receipt No. … with collection date on 06-01-2009 from the Lisbon Municipal Council, of the "conservation of sewers of the year 05", in the total amount of € 131.07, corresponding to the tax the amount of 91.98 € and the remainder to late payment interest, expenses and legal fee, "because it refers to a collection of 2009-01-06" which is considered to be outside the period in which the property was rented; [12th RI: doc. 10; PA: p. 20]

b. Expense documented by the receipt No. … with collection date on 08-03-2010 from the Lisbon Municipal Council, of the "conservation of sewers" of the year 08, in the amount of € 46.36 "because it refers to a collection of 2010-03-08"; [12th RI: doc. 11; PA: p. 20]

c. Condominium expenses documented by the respective receipts, with the nos. 604, 603, 602, 601, 585, 580, 577 and 573, totalling € 428.99, because they refer, respectively, to collections of September, August, July, June, May, April, March and February 2009, in any case outside the period in which the property was rented. [12th RI: doc. 11; PA2: pp. 20-21]

O. The analysis of the documents delivered by the Claimants to support the deductions to income presented in the declaration of PIT for 2009, with respect to the property with the article of the matrix ...-… of the parish of Cartaxo, led the TA to decide that the following expenses for works in the total amount of 20,000.00 €, documented by invoices nos. 260, 261, 262, 263 and 264, respectively of 31-01-2009, 28-02-2009, 31-03-2009, 01-04-2009 and 30-04-2009, should not be accepted, because the expenses were incurred outside the period in which the property was rented. [20th RI; PA2: pp. 21-24, especially 1.4.2.4]

P. The rental of the property corresponding to the article of the matrix No. 2787 comprised the 1st floor and yard. [25th RI; PA3: p. 9]

2.1.2. Facts considered not proven

The Claimants sustained in 15th and 16th of their RI that the TA did not consider in the accepted expenses the IMI paid in that year of 2009 in the amount of € 757.92 and references this decision in section 1.4.1.1 of the basis of the decision with notification dated 29-10-2014 (PA2: pp. 16 and 20). In the cited section only expenses of "conservation of sewers" and "condominium" appear. The Claimants also reference their document No. 20 but this was issued earlier, on 29-08-2014 and therefore does not help to prove the said allegation.

In turn the TA sustained in 45th, 46th and 50th of its Response, that the expenses for works in the property in Cartaxo, in the total amount of € 20,000.00, would have been disregarded because they did not have the character of conservation expenses in one case, because they are not expenses inherent to the property, in another case and because the Claimants did not present the budget that supports the invoices of "payments on account". The TA failed to prove these statements, which do not have unequivocal support in the administrative file. It is undeniable that the five invoices in question (P of the established facts) were disregarded because it was understood that these documents constituted "expenses incurred, outside the period in which the property was rented" (PA2: pp. 22-23, § 1.4.2.4). It is clear that in the basis it is added, in parentheses, that the refusal of acceptance also took into account the "stated in 1.4.2.2"; but in this section no grounds are listed, rather the statements of the contractor are summarized, which may even be a means of proof but not the ground itself. In any case the intended budget, which actually materializes the work, was sent by the Claimants to the TA on 04-09-2014 and is part of the administrative file (PA7: pp. 1-6). Given the inconsistency of the elements and the mentioned absence of unequivocal proof, these statements were not considered as proven.

2.1.3. Basis of the proven findings of fact

The conviction of the Tribunal was based on the documentary evidence in the record and on the position taken with respect to each fact by the Parties in the pleadings, duly identified[8].

Statements of a party were taken from the Claimant and testimony was given by the witness C…. These testimonies were not shown to be essential to the determination of the pertinent facts, which by their nature are demonstrated documentarily.

2.2. Legal matters

In the case the following issues are raised, which will be resolved hereinafter, to the extent necessary, according to a criterion of logical precedence:

  • The core question consists in determining whether the expenses declared by the Claimants for purposes of deduction to the income of category F of PIT for 2009, disregarded as such by the TA and which served as the basis for the assessment of PIT for 2009, should actually be deducted or whether the said disregard made by the TA is lawful.

  • If the previous question has an answer favorable to the Claimants, admitting the deduction of the expenses (or part of the expenses), it is necessary to determine:

    • the legality of the assessments of 2011 and 2012;
    • the right of the Claimants to the reimbursement of the amounts paid;
    • the right to compensatory interest.
2.2.1. Core question: The deduction of expenses to PIT income of category F for 2009

The factual core that will be subject to the legal solution is limited to the assessment of the following expenses declared by the Claimants for purposes of deduction to the income of category F of PIT for 2009 and disregarded as such by the TA:

  • With respect to the urban property in the parish of Carnide, whose rental began on 1 October 2009, being the expenses that were disregarded in the amount of € 607.42 the following:

    • Expense of "conservation of sewers of the year 05", documented by the receipt with collection date on 06-01-2009 from the Lisbon Municipal Council, in the total amount of € 131.07, corresponding to the tax the amount of € 91.98 and the remainder to late payment interest, expenses and legal fee;

    • Expense of "conservation of sewers" of the year 08, documented by the receipt with collection date on 08-03-2010 from the Lisbon Municipal Council, in the amount of € 47.36;

    • Condominium expenses totalling € 428.99, documented by receipts referring to September, August, July, June, May, April, March and February 2009.

  • With respect to the urban property in the parish of Cartaxo whose rental began on 1 May 2009, the expenses for works in the total amount of 20,000.00 € having been disregarded, documented by invoices nos. 260, 261, 262, 263 and 264, respectively of 31-01-2009, 28-02-2009, 31-03-2009, 01-04-2009 and 30-04-2009.

It is now important to determine whether the disregard of the expenses by the TA is justified and claimed in this case by the Claimants. The answer to this question requires that it be established with precision what the ground is for the TA's refusal to accept the deductions. Let us see.

The disregard of the expenses relating to the property of the parish of Carnide is based in any case on the argument that the expenses were incurred outside the period in which the property was rented (N of the established fact). The same ground is ultimately invoked to refuse the deduction of the expenses in question of the urban property in the parish of Cartaxo (O of the established fact).

It is thus necessary to determine what the time period is in which the expenses materially deductible from the gross income of category F can actually be considered. In other words, it is necessary to see how the period in which expenses should be considered for purposes of determining income should be delimited.

It is undisputed to state that PIT is levied on the annual value of income from certain categories, after the corresponding deductions and allowances are made (Article 1-1 of the PIT Code). It does not appear that the basic rule for determining the tax provides great questions; PIT is thus levied on the annual value of income and this is calculated with respect to each fiscal year, which for purposes of this tax coincides with the calendar year (1-1, 22-1 and 143 of the PIT Code).

Now, as the elementary operation of the calculation of the tax consists in determining the taxable income, through deductions and allowances from the gross income, there is no reason why these negative components should not have the same reference period as the gross income, which is the positive component. At bottom, the income (gross) earned in each year constitute the positive elements that contribute to determining the annual taxable income, and there is also need to consider the negative elements of the same period, which are deductions and allowances. It is thus necessary to conclude that the general rule of PIT states that the tax has an annual nature and it is with respect to each calendar year that the elements should be considered that allow determining the incidence, namely gross income, deductions and allowances.

Concomitantly, also the rule that presides over the declarative obligations, discipline in the sense that a single declaration must be presented for the entire annual period (57-1 PIT Code).

However, these general rules of the annual nature of PIT have specialties, as is seen, among other examples, in the limitation to the period of four years of the attribution of income from categories A and H (74-1 PIT Code), in the attribution to the year of the final judgment of the decision on action concerning disputed income, even if they relate to various previous years (62 PIT Code) or in the possibility of deduction of losses from previous years (55-2 and 3 PIT Code). It is thus important to verify whether the discipline of the income of category F contains some specialty that imposes the application of some special command.

The provisions of the PIT Code in force in 2009, which most directly regulated the matter had the following content:

Article 8. Income of category F

1 - Rental income is considered to be the rents of rural, urban and mixed properties paid or placed at the disposal of their respective owners.

2 - The following are considered rents:

a) The amounts relating to the granting of the use of the property or part of it and to the services related to that granting;

b) The amounts relating to the rental of machinery and furniture installed in the leased property;

c) The difference, earned by the sub-lessor, between the rent received from the sub-lessee and that paid to the landlord;

d) The amounts relating to the granting of the use, total or partial, of real property, for any special purposes, including advertising;

e) The amounts relating to the granting of the use of common parts of properties under the horizontal property regime;

f) The amounts relating to the establishment, for consideration, of temporary real property rights, even if for life, over rural, urban or mixed properties.

3 - For purposes of PIT, a rural property is considered to be a delimited part of the land and the constructions on it that do not have economic autonomy, an urban property is any building incorporated into the land and the land that serves it as a courtyard and a mixed property is one that comprises a rural part and an urban part.

Article 41. Deductions

1 - From the gross income referred to in Article 8 are deducted the expenses for maintenance and conservation that are incumbent on the taxpayer, borne by him and found to be documentarily proven, as well as the municipal contribution that falls on the value of the properties or part of properties whose income has been included.

2 - In the case of an autonomous fraction of a property under the horizontal property regime, the expenses of conservation, enjoyment and others that, under the terms of civil law, the condominium owner is obliged to bear, borne by him, and found to be documentarily proven, are also deducted.

3 - In sub-letting, the difference between the rent received by the sub-lessor and the rent paid by him does not benefit from any deduction.

It does not appear that this Article 41, or any other, can lead to a regime of exception with respect to the cited general rule of the annual nature of PIT. Indeed, this provision does nothing more than state the general rule: from gross income are deducted the expenses for maintenance and conservation, as well as the municipal contribution. Of course nothing is said about the period to be considered, as this was already stated in Article 1; it is the annual period.

Thus there is no doubt that there should be no other temporal correspondence between the gross income and the expenses to be deducted. There is only the need to ensure that the deductions relate to the calendar year in which the rental income was paid or placed at the disposal of the taxpayers.

Another question must still be raised, for rigorous determination of the time window in which the expenses should be placed and that is whether the relevant moment, which allows linking the expenses to a certain date, is their actual occurrence or whether it is instead the moment when the deductions are borne. As experience has demonstrated, it sometimes happens that a certain work is performed and invoiced in a certain calendar year and that a certain tax or fee is levied in that same year but are only paid, or satisfied in another way, in a subsequent calendar year. It is believed that in the law there is only one criterion and it is important to determine it as, in the present case, the question will be raised, as we shall see.

At the level of gross income, whose paradigm in category F is rents, the answer appears to be facilitated by the clarity of the rule; Article 8-1 of the PIT Code expressly states that the tax is levied on rents paid or placed at the disposal, making clear that neither the rents collected in advance in a previous year (e.g. the rent for January of a year which tradition dictates be paid at the beginning of the previous December, is income of the year in which it is actually paid) nor those rents which the tenant has not managed to pay nor place at the disposal of the landlord (e.g. through a deposit), because he did not satisfy them, constitute income of a certain year. Moreover, the rents which the tenant does not satisfy and which are to be collected judicially, will undoubtedly constitute, without margin for doubt, income of the year in which the judicial decision that allows determining what is ultimately the value of the income becomes final (62 PIT Code) and are not income of the year in which they should have been paid according to the lease agreement.

The same line of reasoning is also followed for deductions, as is clearly evident from the concrete provisions of the law. The rule of Article 41-1 of the PIT Code makes clear that from income are deducted the expenses that are borne and found to be documentarily proven; in other words, the expenses borne in the annual period in question are deducted, even if the obligation was established in previous years. It thus appears clear that the relevant moment for determining gross income and the expenses to be deducted follows a treasury view and does not take into account the moment of establishment nor is the principle of exercise specialization followed.

Having determined the interpretation of the rules in question – which appear in nos. 1 and 2 of Article 41 PIT Code – it is important to apply them to the established facts, while always respecting the actual invocation of both by the Claimants, in compliance with the principle of disposition.

With respect to the urban property in the parish of Carnide, it is not seen that there is legal ground to refuse the deduction of the expense of "conservation of sewers of the year 05", documented by the receipt with collection date on 06-01-2009 although reduced to the value of the tax in the amount of € 91.98 since the remainder corresponding to late payment interest, expenses and legal fee do not fall within the concept of "conservation expenses". Still with respect to the same property the refusal by the TA to consider the deduction of the expense of "conservation of sewers" of the year 08 in the amount of € 47.36, documented by the receipt with collection date on 08-03-2010, cannot be censured, as this date is the determining moment and occurred already in the subsequent year 2010.

As for the condominium expenses of the urban property in the parish of Carnide, which are ultimately the expenses that under civil law the condominium owner must obligatorily bear and that total € 428.99, these are documented by receipts issued during the year 2009 (established fact N), so following the interpretation stated of Article 41-1 of the PIT Code, in this case combined with No. 2 of the same article, it is not considered in accordance with the law the disregard made by the TA.

The assessment of the legality of the disregard of the alleged expenses with the works of the property in Cartaxo presents an additional difficulty. The works in the total amount of 20,000.00 € are documented by invoices nos. 260, 261, 262, 263 and 264, respectively of 31-01-2009, 28-02-2009, 31-03-2009, 01-04-2009 and 30-04-2009 and their deduction was denied because it was understood that "the expenses were incurred outside the period in which the property was rented". To determine whether they fall within the allowable time window – the calendar year 2009 – it is necessary to determine when they were paid and the findings of fact do not provide such information, nor could it reveal it as the moment of payment was not alleged. What should be understood?

In their income declaration the Claimants declared that they had made the expenses in question. The TA does not deny that the expenses were made and even confirmed that the tax on the added value of the invoices under analysis was effectively declared by the contractor (PA6: pp. 2-6). The fact is that in accordance with the rule of Article 75-1 of the LGT[9] the Claimants enjoy the presumption in their favor of the veracity of their declarations, so it must be understood that the expenses were realized in the period in which the Claimants state and which is the year 2009, as it was with reference to that period that they entered them in the income declaration presented.

For the reasons stated it is thus necessary to conclude that the following expenses were disregarded by the TA as deductible to the income of category F in infringement of the law, namely Articles 1-1, 22-1 and 41-1 and 2 of the PIT Code, and the additional assessment should be annulled in the respective part:

  • Expense of "conservation of sewers of the year 05", documented by the receipt with collection date on 06-01-2009 although reduced to the value of the tax in the amount of € 91.98 (established fact N-a);

  • Condominium expenses totalling € 428.99, documented by receipts referring to September, August, July, June, May, April, March and February 2009 (established fact N-c);

  • Expenses for works in the total amount of 20,000.00 €, documented by invoices nos. 260, 261, 262, 263 and 264, respectively of 31-01-2009, 28-02-2009, 31-03-2009, 01-04-2009 and 30-04-2009 [established fact O].

2.2.2. The legality of the assessments of 2011 and 2012

Very little or even nothing was argued regarding these assessments of PIT for 2011 and 2012. In their RI the Claimants mention them to identify the acts being challenged without referring to their year (heading of the RI); they also refer to them and only to cite their respective value (3rd RI).

Note that although the Claimants refer to having been notified of "Alteration to the Whole of Net Income" (1st and 6th of the RI), the document they attach to the record (doc. 6 of the RI and PA2: p. 16), although it has that title, does not actually have that content as through it the Claimants were only notified "that some of the elements in the income declaration of PIT for the year 2009 were altered".

No facts, applicable rules and identified vices of the assessments of 2011 and 2012 are thus presented to this tribunal that it could review.

In accordance with Article 108-1 of the Code of Tax Procedure and Process (by virtue of 29-1-a RJAT) it falls to the claimant not only to identify the act being challenged but above all to set out the facts and the grounds of law that support the request, being these as a whole designated as cause of action (in broad terms). The lack of cause of action constitutes an impediment for the tribunal to know of the merits of the case, in the part vitiated by the request, being therefore a dilatory exception that leads to the absolution of the defendant from the instance (576-2 CPC[10] ex-vi 29-1-e RJAT).

The TA is thus absolved from the instance with respect to the requests for annulment of the assessments of PIT for the years 2011 and 2012.

2.2.3. Reimbursement of the amount paid and interest

The Claimant also petitions the TA for the reimbursement of the amounts paid plus compensatory interest.

In accordance with the rule of Article 100 of the LGT "the tax administration is obliged, in case of total or partial success of claims or administrative appeals, or of judicial proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in the terms and conditions provided for by law." It appears clear that the taxpayer has the right to have the amounts that have been paid restituted, relating to assessments affected by illegality, so that their patrimony is restored in the amount that it had at the moment prior to that payment.

It is important, however, to assess whether this Arbitral Tribunal enjoys jurisdiction to recognize this right for him or to condemn the TA in this sense. For this it is important to keep in mind that (i) with the RJAT it was intended to strengthen effective protection of the rights and legally protected interests of taxpayers (preamble of Decree-Law No. 10/2011 of 20 January); (ii) the binding character of arbitral decisions for the TA has the extent of the exact terms of those same decisions (24-1 RJAT); (iii) the obligation of restoration by the TA is subordinate to the proper scope of the success of the request (which may be total or partial) (100 LGT).

The first interpretive element cited prevents conceiving any system that would obstruct or hinder the arbitral decision from achieving its objective, which is the determination of the right in the concrete case. The protection of the rights of taxpayers is not satisfied with less, i.e., from the decision must result all the consequences necessary to obtain legality. It cannot be conceived that once the illegality of the tax act is declared the taxpayer still has to resort to another instance to see his right to the restoration of the situation declared.

On the other hand, the second element - the binding nature of arbitral decisions - leads to consider that since arbitral decisions are binding in their exact terms (24-1 RJAT), this means that these decisions must contain all the elements necessary for the TA to, with all exactness, restore legality and for this it is indispensable that the decision contain the precise limits and terms in which it rules.

The third element – the scope of restoration - illustrates in fact this need for exactness or precision of the decision. In stating that the obligation of restoration by the TA is subordinate to the proper scope of the success, the law (100 LGT) creates a nexus of dependence between the decision and the obligation of restoration. Restoration is made to the extent that the claim is judged successful. There is no restoration without success and the measure of success defines the measure of restoration. The need for this precision is very clear in cases of partial success. When partial success occurs how should the TA behave? The answer can only be one – in the exact terms and limits in which the decision was rendered, whether judicial or arbitral.

From the foregoing it results that the decision on restoration should be taken by the arbitral tribunal when it is requested to consider the question.

Let us now see the case at hand.

As is known the obligation of restoration by the TA is subordinate to the proper scope of the success (100 LGT) and being the request of the Claimants partially unsuccessful, let us see whether payments were made relating to the assessment of PIT for 2009, which is the only period in which their request succeeds, albeit in part.

It follows from document No. 1 attached by the Claimants with their RI, that the official assessment of PIT for 2009 resulted in an amount to be refunded, so it must be concluded that the payments they made were not intended to fulfill the assessment for 2009, which will be partially annulled.

Nothing having been paid on the basis of the illegal act, nothing is there to restore, so the TA is to be absolved in this part.

As there is no tax to restore, the consideration of the request for payment of interest is precluded.

3. Decision

Considering the elements of fact and law collected and set out, the arbitral tribunal decides:

a) To rule partially successful on the request for arbitral pronouncement and consequently declare the illegality of the assessment of PIT for 2009 in the part that results from the disregard as deductible to the income of category F of the expense of "conservation of sewers of the year 05" in the amount of € 91.98, of the condominium expenses totalling € 428.99 and of the expenses for works in the total amount of 20,000.00 €, and the challenged assessment should be annulled in the respective part.

b) To absolve the TA from the instance with respect to the requests for annulment of the assessments of PIT for the years 2011 and 2012 and to the requests for restitution of the tax paid relating to the assessments of these periods that were challenged and corresponding interest.

c) To absolve the TA from the request for restitution of the tax paid and respective interest relating to 2009.

The Claimants and the TA are condemned to payment of the costs, which are calculated in the proper place.

4. Value of the case

In harmony with the provision of Article 306-2 of the CPC, ex-vi 29-1-e) of the RJAT and 97-A, No. 1-a) of the CPPT ex-vi 3-2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at 5,996.89 €, corresponding to the utility quantified by the Claimants.

5. Costs

The costs are borne by the party that caused them, it being understood that the costs are caused by the losing party (527-1 and 2 CPC). In this case and considering the said rule, responsibility for costs is divided in proportion to the loss, with 90% incumbent on the TA and 10% on the Claimants.

In accordance with Article 22-4 of the RJAT, the amount of costs is fixed at 612.00 €, which are borne by the TA and the Claimants in the proportions of, respectively, 90% and 10%, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings.

Lisbon, 7 December 2015

The arbitrator,

(Nuno Maldonado Sousa)

[1] In this decision designated by the abbreviated form of common use "RJAT" (Legal Regime of Arbitration in Tax Matters).

[2] In this decision also designated by the abbreviated form "TA" as is in widespread use.

[3] In this document the acronym "RI" is used to designate the initial request presented by the Claimants.

[4] In this document the acronym "PIT" is used to designate the Personal Income Tax and "PIT Code" to identify the respective code.

[5] In this document the acronym "R-TA" is used to designate the response request presented by the TA.

[6] In this document the acronym "PA" is used to designate the administrative file joined by the TA to these proceedings. The designation PA followed by a number refers to the name of the computer files in the record, into which it is divided.

[7] In this document the acronym "IMI" is used to designate the Municipal Property Tax.

[8] The identification of the source of the allegation of the facts and the means of proof considered is referenced in brackets.

[9] In this document the acronym "LGT" is used to designate the General Tax Law.

[10] In this document the acronym "CPC" is used to designate the Code of Civil Procedure.

Frequently Asked Questions

Automatically Created

What expenses can be deducted from Category F rental income under Portuguese IRS tax law?
Under Portuguese IRS law, landlords earning Category F rental income can deduct specific expenses related to their rented properties. These deductible expenses include IMI (Imposto Municipal sobre Imóveis - municipal property tax) and costs for maintenance and conservation of the properties. However, the critical limitation established by the Tax Authority is the periodization requirement: expenses are only deductible if they correspond to periods when the property was actually rented to tenants. For example, if a property begins rental on October 1st, only expenses from October onwards for that year would be deductible. This interpretation by the Tax Authority has been contested by taxpayers who argue that the law does not explicitly require such strict temporal matching between expenses incurred and active rental periods.
How does the Portuguese Tax Authority apply periodization rules to property maintenance and conservation expenses?
The Portuguese Tax Authority applies strict periodization rules to property maintenance and conservation expenses for Category F rental income. According to the TA's position in this case, deductible expenses must correspond exactly to the period during which the respective property was actually rented. This means that if a rental contract begins mid-year, only the proportional expenses for the active rental period can be deducted, not the full annual costs. In the case analyzed, the TA corrected taxpayers' declarations by disallowing expenses that fell outside the actual rental periods - one property rented from May 1st and another from October 1st. This approach resulted in significant reductions to declared losses, converting €32,394.51 in losses to carry forward down to €10,975.25, demonstrating the substantial financial impact of the TA's periodization methodology on taxpayers' tax positions.
Can landlords deduct property taxes and maintenance costs outside the active rental period under IRS Category F?
The central dispute in this CAAD arbitral case addresses precisely whether landlords can deduct property taxes (IMI) and maintenance costs outside the active rental period under IRS Category F. The Tax Authority's position is clear: expenses are only deductible during periods when the property is actually rented. Costs incurred before the rental begins or after it ends would not be deductible against rental income. However, taxpayers have challenged this interpretation, arguing that the legal framework for Category F deductions does not explicitly mandate such strict periodization. The claimants in this case maintained that their interpretation of the deduction rules allows for expense deductions even if they don't perfectly align with the rental period. This represents a fundamental disagreement about statutory interpretation with significant practical implications for landlords managing multiple properties with varying rental commencement dates throughout the tax year.
What is the CAAD arbitral procedure for challenging additional IRS tax assessments on rental income?
The CAAD (Centro de Arbitragem Administrativa - Administrative Arbitration Centre) procedure for challenging additional IRS assessments on rental income follows the legal regime established by Decree-Law 10/2011 of January 20th. Taxpayers must file a request for constitution of an arbitral tribunal under Articles 2 and 10 of the RJAT (Legal Regime for Administrative Arbitration) and Articles 1 and 2 of Ordinance 112-A/2011. The process begins with acceptance by the CAAD President, followed by notification to the Tax Authority. The Deontological Council designates an arbitrator (single arbitrator for these cases), who must accept and notify parties of the designation. The tribunal is formally constituted within specific timeframes. Parties submit their positions - claimants file an initial request detailing grounds for annulment, and the Tax Authority responds defending the assessments' legality. An instruction phase allows document submission, witness testimony, and party statements. A formal meeting under Article 18 of RJAT is held where parties present arguments. The arbitrator then issues a binding decision on the legality of the tax assessments.
Are taxpayers entitled to compensatory interest when unlawful IRS additional assessments on rental income are annulled?
Yes, under Portuguese tax law, taxpayers are entitled to compensatory interest when unlawful IRS additional assessments are annulled. When an arbitral tribunal or court declares additional tax assessments illegal and orders their annulment, the reimbursement of amounts improperly paid includes not only the principal tax amount but also compensatory interest (juros indemnizatórios). This compensatory interest compensates taxpayers for the financial loss resulting from having paid taxes that were not legally due. In this case, the claimants specifically requested both the annulment of the additional assessments for years 2009, 2011, and 2012, and the reimbursement of amounts paid plus compensatory interest. The legal basis for compensatory interest arises from the principle that the State must compensate citizens for financial harm caused by unlawful administrative acts, including improper tax assessments. The interest is calculated from the date of payment until the date of reimbursement, using rates established by law.