Process: 211/2017-T

Date: November 30, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 211/2017-T) addresses the critical distinction between Category B and Category F income under Portuguese IRS law, specifically regarding tourist exploitation contracts. Two non-resident German taxpayers challenged additional IRS assessments totaling €33,570.26 for tax years 2012-2014, after the Tax Authority reclassified their declared Category B income (business/commercial income) as Category F income (property income). The taxpayers argued they were engaged in active tourism exploitation business activity, which under the preponderance principle should be taxed as Category B income. They also challenged the Tax Authority's substantiation of the assessment acts, claiming the Final Tax Inspection Report lacked the clarity and coherence required under Articles 39 and 42 of the administrative procedure code. The Tax Authority contended that the taxpayers' role was purely passive, arguing they acquired property and immediately ceded exploitation rights to a company for five years without practicing any active exploitation acts. The AT classified this as mere private patrimony management rather than active business exploitation, as the taxpayers had no intervention in licensing or operational activities. The case examines the boundary between active business income and passive property income, with the 'exercise' requirement in Category B definitions requiring purposeful acts aimed at profit generation through active involvement. The taxpayers additionally argued that if classified as Category F, additional expenses should be deductible, including maintenance costs, utilities, staff salaries, insurance, and property administration fees. This decision is significant for non-resident property owners and those structuring tourist exploitation arrangements in Portugal.

Full Decision

ARBITRAL DECISION

I - REPORT

  1. A…, taxpayer no. … and B…, taxpayer no. …, both resident in …, …, … - Württemberg, (hereinafter referred to as Taxpayers or Applicants) filed on 2017-03-27 a request for constitution of a singular arbitral tribunal, pursuant to the provisions of paragraph a) of no. 1 of article 2 and article 10, nos. 1 and 2, both of Decree Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority (hereinafter referred to as AT or Respondent) is requested, with a view to the declaration of nullity of additional income tax (IRS) assessment acts, acts assessing compensatory interest and reconciliation statements, in the amount of 33,570.26 €, more specifically identified as follows:

  • additional IRS assessment act no. 2016… and respective compensatory interest assessment act no. 2016… and reconciliation statement no. 2016…, with reference to the year 2012, in the amount of 5,691.19 €,

  • additional IRS assessment act no. 2016… and respective compensatory interest assessment act no. 2016… and reconciliation statement no. 2016…, with reference to the year 2013, in the amount of 16,226.25 €,

  • additional IRS assessment act no. 2016… and reconciliation statement no. 2016…, with reference to the financial year 2014, in the amount of 11,652.82 €

  1. The request for constitution of the Singular Arbitral Tribunal was accepted by the Honourable President of CAAD and notified to the Respondent on 2017-03-31.

  2. Pursuant to the provisions of paragraph a) of no. 2 of article 6 of RJAT, by decision of the Honourable President of the Deontological Council of CAAD, duly notified to the parties within the prescribed deadlines, the signatory hereto was designated as arbitrator and communicated to that Council the acceptance of the office within the period stipulated in article 4 of the Code of Ethics of the Administrative Arbitration Centre.

  3. On 2017-05-18 the parties were notified of this designation and did not express any intention to refuse it, pursuant to the combined provisions of article 11, no. 1 paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

  4. The Singular Arbitral Tribunal was constituted on 2017-06-06, in accordance with the prescription of paragraph c) of article 11 of RJAT, in the wording as amended by article 228 of Law no. 66-B/2012, of 31 December.

  5. On 2017-07-04 the Applicants attached to the proceedings two documents which they had protested to attach to their request for arbitral ruling.

  6. To substantiate their request, the Applicants, after identifying the underlying factual elements, invoked in summary, and with relevance to what matters here, the following: (which is mentioned mostly by transcription)

7.1. (…) the substantiation of the Final Report of Tax Inspection, which embodies the reasoning of the tax acts which are the subject of this arbitral request, is not congruent, nor even clear (…). (cf. article 39 of ppa)

7.2. (…) upon the Tax Administration weighs the legal duty not only to indicate all facts, in a clear and coherent manner, but also to indicate and sustain its conclusions with the corresponding legal provisions. (cf. article 42 of ppa)

7.3. Regarding the present case, it is important that the taxpayer recipient of a decision be minimally aware of the decision-making path of the Tax Administration's decision, so that the violation of these requirements in the decision implies its respective illegality, grounds for subsequent annulment, (cf. article 47 of ppa)

7.4. (…) the Tax Administration understood tout court that the action of the Applicants, especially of the male Applicant, is passive and, for that reason, the income that he declared as being Category B income should instead be taxed as Category F income (…), (cf. article 50 of ppa)

7.5. (…) the Tax Inspection Services, by not sustaining in the Conclusions of the Final Report of Tax Inspection, in a clear and unequivocal manner, the facts on which they were based to conclude that the income earned by the Applicants was Category F income of IRS, did not comply with the legal duty, constitutionally established, of express, clear and comprehensive substantiation of the decisions which weigh upon them, and therefore the contested tax acts should be annulled, (cf. article 54 of ppa)

7.6. By understanding that the tourism exploration activity conducted by them and the income generated in that context were earned in the context of a business activity (resulting from the exploitation of real property), the Applicants treated the same within Category B of IRS, by virtue of the principle of the preponderance of this Category in relation to income that falls within other categories of income, but which are obtained in connection with a business activity (in this case, a commercial activity), (cf. article 68 of ppa)

7.7. (…) the Tax Inspection Services understood that the income declared by the Applicants with reference to the financial years 2012, 2013 and 2014, were not Category B income, but rather Category F income, because "(…) the owners had no intervention whatsoever in obtaining the licensing. In this way, the income that the taxpayer earns derives from a purely passive manner, as a result of the pursuit of a commercial activity by the company C…", (cf. article 69 of ppp)

7.8. Even if it were admitted (…) that the income obtained by the Applicants is effectively Category F income under the IRS Code, the reality is that the taxable base of the Applicant would never be in the amount ascertained by the Tax Inspection Services and, seat of tax inspection (cf. article 118 of ppa)

7.9. (…) contrary to the position adopted by the Tax Inspection Services in the Inspection Report notified to the Applicants and underlying the tax acts contested here should be understood as deductible expenses from Category F IRS income the maintenance and conservation expenses relating to cleaning staff, gardener's salary, electricity, water and gas, expenses for house rental with equipment, repairs and paintings, insurance premiums and costs of property administration (cf. articles 119 and 122 of ppa)

  1. On 2017-07-07 the Respondent proceeded to attach the administrative proceedings, and submitted its reply on 2017-07-10.

  2. Wherein it fundamentally reiterates the position already expressed in the conclusions of the Tax Inspection Report, arguing against the verification of the alleged lack of substantiation of the IRS corrections, and against the non-existence of violation of the assumptions on which the additional assessment was based, concluding, consequently, for the lack of merit of the request for arbitral ruling formulated by the Applicants.

9.1. It also alleges, in very brief summary, in defense of its position, and for what is relevant the following (which is mentioned mostly by transcription)

9.2. (…) the use of the word "exercise" in the wording given to the norm, as opposed to the words used in article 8 of CIRS, to define what Category F income is, has underlying the practice of acts with a certain purpose which, in this case, would be the obtaining of profit (cf. article 51 of the reply),

9.3. (…) the Applicant acquired a property for a period of five years, never having practiced any act that indicated a will to exercise some type of exploitation thereof, as it was not even within his availability the possibility of not ceding that exploitation, as seen above in the description of the factuality relevant to the present proceedings (cf. article 62 of the reply),

9.4. (…) the mere act of purchasing real property and its consequent and immediate cession of exploitation to a third party must be subsumed to simple acts of management of private patrimony, not constituting, in themselves, signs of exercise of activity of exploitation of real property by the one who ceded the exploitation (…) (cf. article 63 of the reply),

9.5. from reading the deed of cession of exploitation, it clearly follows that the Applicant never assumes the functions of responsible for the exploitation of the accommodation, these functions being assumed by the Manager in its different aspects (cf. article 74 of the reply),

9.6. as for the pretension, on the part of the Applicant, that the totality of expenses with staff salaries, cleaning, electricity, gas and water be accepted, since these were not accepted in the analysis carried out in the inspection procedure, it should be noted that, (cf. article 81 of the reply),

9.7. pursuant to art. 41 no. 1 of CIRS, in the wording in force at the date of the facts "(…) one must assess whether those expenses referred to in abstract by the Applicant, and not demonstrated in the arbitral forum, bear the character of conservation and/or maintenance expenses incumbent on the taxpayer, (cf. article 83 of the reply)

9.8. "(…) the expenses mentioned by the Applicant do not constitute conservation expenses nor, moreover, maintenance expenses (cf. article 85 of the reply),

9.9. "(…) as for the expenses with salaries and cleaning, it is clear from sections 5 and 6 of the deed of cession that these charges are the responsibility of the Manager, which means that they are not the responsibility of the Applicant, here as landlord, (cf. article 86 of the reply).

  1. By arbitral order issued on 2017-07-10 was substantiated the waiver of holding the meeting referred to in article 18 of RJAT, inviting the parties to present, in writing, their submissions and setting a deadline for the issuance and notification to the parties of the arbitral decision.

  2. Through a petition of 2017-08-31 the Applicants came to contest the waiver of witness evidence production and requested that the Tribunal set aside the arbitral order of 2017-07-10.

  3. On that same date the AT was notified of the Applicants' pretension.

  4. By order of 2017-09-13, in addition to the foregoing, the arbitral order of 2017-07-10 was set aside, and the "reply" of the Applicants presented on 2019-09-05 was ordered to be removed.

  5. On 2017-09-21, as a result of notification to that effect, the Applicants came to indicate the facts, with reference to the request for arbitral ruling on which they intended the questioning of the witnesses.

  6. By means of arbitral order of 2017-09-25, the requested amendment of the witness list was admitted and a date was set for their questioning.

  7. By way of arbitral order of 2017-10-16, the date of witness questioning was rescheduled to 2017-10-25.

  8. On 2017-10-25, the meeting referred to in article 18 of RJAT was held, and the questioning of the witnesses offered by the Applicants was carried out.

  9. In the aforementioned meeting the Applicants presented twelve documents, whose attachment, not meeting opposition by the Respondent, were admitted by the Tribunal and inserted in the case management system (cf. minutes, part 1 and part 2).

  10. Having been granted a period for the submission of written submissions, these were presented by the parties on 2017-11-07 as for the Applicants and on 2017-11-16 by the AT, with both parties pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

  11. The Applicants in their submissions, reaffirming the positions already evidenced in their earlier filings, made various considerations about the documents they attached in the arbitral meeting of 2017-10-25, proceeded to broaden the request, requesting the condemnation of the AT in the payment of indemnity interest.

  12. The AT in the submissions produced, which essentially do not diverge from the positions previously expressed, also pronounced itself on the documents attached by the Applicants and on the witness evidence produced.

  13. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a) 5 and 6 of RJAT.

  14. The parties have legal personality and capacity, are legitimate and are duly and legally represented (article 3, 6 and 15 of the Code of Tax Procedure and Process, ex vi article 29, no. 1 paragraph a) of RJAT.

  15. No exceptions were raised and the proceedings do not suffer from nullities.

  16. On 2017-11-24 the taxpayers requested the attachment to the proceedings of a copy of the decision rendered in the context of CAAD, relating to case no. 271/2017-T.

  17. Having the AT been notified to pronounce itself on such attachment, it proceeded, in turn, to attach the decision rendered in the context of CAAD, relating to case no. 235/2017-T.

  18. Dated 2017-11-30 an order was issued, duly notified to the parties, to the effect that the copies of the aforementioned arbitral decisions attached by the same remained in the proceedings.

II - SUBSTANTIATION

A. FACTUAL MATTER

A.1. Facts Found as Proven

a- on 8 February 2008, was deposited with the then General Directorate of Tourism, by the company "D…, S.A.", the constitutive document of the "Apartments…",

b- on 7 July 2008 was granted by the Municipality Council of … the use license for such undertaking,

c- the Applicants had no intervention whatsoever in obtaining the aforementioned licensing,

d- taxpayer A…, is registered for the exercise of the activity "Tourist apartments without restaurant" CAE 55123, since 2011-12-21, being framed in the normal quarterly VAT periodicity scheme and in the organized accounting scheme, by option in IRS,

e- the aforementioned taxpayer is not resident in national territory having as his legal representative the company called E…, Lda,

f- in late December 2011 the Applicants acquired from the company D…. S.A., a property registered in the urban property register of the Parish Union of … and …, under article … fraction "B" located at "…",

g- dated 21 December 2011, a deed of cession of tourism exploitation of the aforementioned identified property was executed between the Applicants, D… and C…, S.A.,

h- according to such deed the Applicants recognized and accepted that "during the entire duration of the contract, shall not exploit, lease or in any other manner make available the Unit to a third party in exchange for payment, rent, remuneration or any other means of payment (including of a non-pecuniary or gratuitous nature), further recognizing and accepting not to disclose nor allow any other natural or legal person to disclose the Unit as being, among other things available for occupation",

i- it is the responsibility of C… (managing entity) "to provide the services described in this Section 2.2 during the entire duration of this Contract:

A- Administer the Exploitation Program (…) described in Section 3;

B- Provide the Property Administration Services described in Section 4;

C- Provide the Property Maintenance Services described in Section 5; and

D- Provide the Cleaning and Tidying Services of the Unit described in Section 6".

j- in exchange for the management services C…" "shall have the right to receive and retain 25% (twenty-five percent) of the Gross Tourism Exploitation Revenue, or any other percentage that may be agreed periodically (…)"

k- under Service Orders nos. OI 2016…/…/…, dated 2016-08-18, issued by the Finance Directorate of …, an inspection action was conducted, with commencement on 2016-08-24, being concluded on 2016-09-26

l- the internal inspection procedure of limited scope in IRS, had as its object the years 2012, 2013 and 2014

m- in that inspection action was prepared the Report of Tax Inspection whose copy is contained in document no. 14, attached with the request for arbitral ruling whose contents are given as reproduced, in which is mentioned in addition to the foregoing, and with relevance that:

The taxpayer (TP) A…, NIF…, is registered for the exercise of the activity "Tourist apartments without restaurant" CAE 55 123 since 2011-12-21, being in the normal quarterly VAT periodicity scheme and in the organized accounting scheme, by option in IRS,

This is a taxpayer not resident in national territory and in accordance with the computer system to which the Tax and Customs Authority (AT) has access was appointed as tax representative the company E… Lda., NIPC ….

The TP is the owner of a property registered in the urban property register of the Parish Union of … and … under article … fraction B, located in "…", which he acquired from D… SA, NIPC ….

Between the TP and the selling company was signed a deed of cession of tourism exploitation of the unit …", under which the company D… SA obtained the right to establish a commercial company for the management of "…", a situation which subsequently materialized with the establishment of the company C… SA NIPC … (hereafter only referred to as C…).

In this way, the new owners ensured the tourism exploitation of the properties in question through the services of the company C…, granting it exclusive authorization to exploit tourism, on its own account, the apartments of which they are owners.

Thus, the taxpayer in question mandated the company C… to in its own name and on its account receive the remuneration relating to the exploitation of its properties, with the same having the right to retain 25% of the gross revenue from the respective exploitation.

The income earned by the taxpayer in question derives from making available to third parties the property.

Properties which are managed and maintained by the company C…, which also manages short-term leasing, collecting the amounts due and providing all other associated services, such as for example cleaning, etc.

Finally this company makes available to the owner the amounts contractually agreed.

It should be noted that the owners had no intervention whatsoever in obtaining the licensing.

In this way the income that the taxpayer earns derives in a purely passive manner, as a result of the pursuit of a commercial activity by the company C….

The IRS taxpayer does not present, nor alleges, to have any organization of a business nature for obtaining the same.

Therefore the income in question corresponds to property income falling within Category F of IRS (article 8 of CIRS)"

n- The Applicants notified of the Draft Report of Tax Inspection, by means of Office no. … dated 7/10/2016, came to exercise their right of prior hearing on 2016-10-19,

o- Following the inspection action the Tax and Customs Authority issued IRS assessments relating to the periods 2012, 2013 and 2014, (cf. document nos. 1 to 8 attached with the request for arbitral ruling, whose contents are given as reproduced)

p- On 2017-03-27 the Applicants submitted their request for arbitral ruling with CAAD, which gave rise to the present proceedings.

A.2. Facts Found as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Factual Matter Found as Proven and Not Proven

Regarding the factual matter the Tribunal does not need to pronounce itself on all that was alleged by the parties, it being incumbent upon it, rather, the duty to select the facts that matter for the decision, to discriminate the proven matter from the unproven [cf. art. 123, no. 2 of CPPT and no. 3 of article 607 of Civil Procedure, applicable ex vi article 29, no. 1 paragraphs a) and d) of RJAT)].

In this way, the facts pertinent to the judgment of the cause are chosen and outlined according to their legal relevance, which is established in view of the various solutions of the (s) question(s) of law [cf. article 596 of CPC, applicable ex vi article 29, paragraph e) of RJAT).

Thus, given consideration to the positions assumed by the parties, in light of article 110, no. 7 of CPPT, the documentary evidence attached to the proceedings, the witness evidence produced and the attached PA, it is considered proven, with relevance to the decision the facts listed above.

The testimony given by witness F… to the matter contained in the request for arbitral ruling under the numbers 9, 10, 11, 12, 14, 15, 16, 17, 18, 19, 20, 24, 25, 26, 27, 29, 51, 59, 63, 66, 68, 112, 113, 114, 116 and 199, as well as the testimony of witness G…, given to the matter contained under the numbers 9, 10, 11, 14, 15, 16, 17, 18, 19, 20, 24, 25, 26, 27, 28, 29, 51, 59, 63, 66, 68 and 112 of the request for arbitral ruling did not prove essential to the fixing of the pertinent facts, which by their nature are demonstrated documentarily.

B. OF THE LAW

  • Preliminary Question

As mentioned above, in the context of the presentation of their written submissions the Applicants proceeded to broaden the request for arbitral ruling, requesting the condemnation of the AT in the payment of indemnity interest.

Such request appears to be legitimate, having regard to the provisions of no. 2 to article 265 of the Code of Civil Procedure ex vi paragraph e) of article 29 of RJAT and, as such procedurally admitted for flowing from the initial request.

  • Questions to be Determined

The questions placed before this Tribunal, and in the manner in which they were presented by the Applicants, are, fundamentally, the following: (i) whether the Report of Tax Inspection suffers from a defect of lack, incongruence or insufficiency of substantiation, and (ii) to ascertain whether the income earned by the taxpayers should be considered as falling within Category B (as these advocate), or whether they should be framed in Category F of income of natural persons, a version sustained by the Tax and Customs Authority.

Let us see then:

A. On the Lack, Incongruence or Insufficiency of Substantiation in General of the Inspection Action Report

In brief summary, the Applicants invoke that "the substantiation of the Final Report of Tax Inspection (…) is not congruent, nor even clear", summoning for such purposes article 268, no. 3 of the Constitution of the Portuguese Republic and article 77 of the General Tax Law to conclude therefrom that upon the administration weighs the legal duty not only to indicate all facts, in a clear and coherent manner, but also to indicate and sustain its conclusions with the corresponding legal provisions.

It is unquestionably acquired and consensual that administrative acts must be the subject of substantiation, a duty that moreover has constitutional reception, in no. 3 of article 286 of CRP, under which "administrative acts are subject to notification to the interested parties, in the form provided by law, and lack express and accessible substantiation when they affect rights or legally protected interests", densified in ordinary law in articles 152 and 153 of the Code of Administrative Procedure for the generality of administrative acts, and in article 77 of the General Tax Law for administrative tax acts.

Paraphrasing Diogo Freitas do Amaral [1] "the substantiation of an administrative act consists of the explicit enunciation of the reasons that led its author to practice that act or to give it certain content".

As far as the substantiation of tax acts is concerned, no. 2 of article 77 of the LGT provides that "the substantiation of tax acts may be carried out in summary form, but must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable base and the tax".

Substantiation which, moreover, takes on certain particularities depending on the presence of situations of "abnormal" relevance to the taxpayers.

On the other hand, and as a corollary of the obligation to substantiate administrative acts will be placed the exercise of the right to be heard which, in the last instance will have the virtue that the administered may confront the arguments produced against him.

It is today settled in both national doctrine and jurisprudence, including arbitral, that the legally required substantiation must meet the following characteristics:

  • officiousness: must always proceed from the initiative of the administration, with substantiations on request not being admissible,

  • contemporaneity: must be contemporary with the practice of the act, with no deferred or on request substantiations being possible,

  • clarity: must be comprehensible by an average recipient, avoiding polysemic concepts or deeply technical ones,

  • fullness: must contain all essential elements which were determinative of the decision taken, this characteristic unfolding in the duty of justification (legal norms and factuality – domain of legality) and in the duty of motivation (domain of discretionality or opportuneness, when a valuation is needed)

The Supreme Administrative Court has consistently held that the substantiation of an administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the particular case, but that the substantiation is sufficient when it allows an average recipient to perceive the cognitive and evaluative itinerary followed by the author of the act to render the decision, that is, when that person can know the reasons why the author of the act decided as he decided and not differently so as to be able to trigger the administrative or contentious mechanisms of challenge.

Purely by way of example it can be read in the Judgment of the STA of 10/09/2014 rendered by Counselor Dulce Neto, in the context of case 01226/13 the following: "I- The Tax Administration has the duty to substantiate the acts of ex officio assessment of taxes in accordance with the principle embodied in art. 268 of CRP and accepted in arts. 125 of CPA, and 77 of LGT

II. The act shall be sufficiently substantiated when the administered, placed in the position of an average recipient – the bónus pater familiae of which art. 487, no. 2 of the Civil Code speaks – may come to know the factual and legal reasons that are at its genesis, so as to opt, in an informed manner, for accepting or not the act."

As far as the internal inspection or inspection procedure triggered by the AT is concerned, it follows from article 63 no. 1 of RCPIT that tax acts or in tax matters their conclusions may be substantiated "through adherence or agreement therewith, but in all cases the entity competent for their practice must substantiate the divergence vis-à-vis the conclusions of the report".

Now, having regard to the fact that the Applicants had knowledge of the draft of the Tax Inspection Report, that relative to the same they exercised under the provision of article 60 of LGT and article 60 of the Complementary Regime of Tax Inspection Procedure (RCPIT), their right to a hearing, that they were notified of the (final) Tax Inspection Report and that the grounds for the corrections expressed therein support the tax assessments in question, it does not appear to us sustainable that the Applicants – as far as the underlying assessments are concerned – come to argue for ignorance of the cognitive itinerary that led to them.

In fact, considering the concrete context in which the assessment acts here under review were produced, the grounds contained in the Final Report of Tax Inspection that preceded them shall be perceptible to an average recipient placed in the position of the actual recipient.

In this way, and barring a better opinion in contrary sense, there is nothing to censure in the perspective of the scope and duty of substantiation of the tax assessment acts subject to this arbitral process.

B. On Taxation under Category B of the IRS Code and the Concept of Activity

As follows from the filings of the parties, specifically from the request for arbitral ruling and respective reply, the positions dissent as to the framing of the income earned by the Applicants under IRS.

Divergences already evidenced in the context of the Draft Report of Tax Inspection and the exercise of the right to a hearing that followed, which are summarized in the fact that the Applicants understand that the income earned by them in the factual situation underlying should be considered as business and/or professional income and as such framed in Category B of CIRS, whereas, in the perspective it has been sustaining, the AT understands that the income of the Applicants under the conditions that result from nos. 1 and 2 of article 8 of CIRS are income of a property nature and as such qualified in Category F of CIRS, this being the essential issue to be decided which the present proceedings invoke.

According to the provisions of paragraph a) of no. 1 of article 3 of CIRS, "business and professional income is considered: "that deriving from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;", with article 4 densifying what should be considered as commercial and industrial activities, agricultural forestry and livestock, whereas article 8 of the same normative compendium refers that "property income is considered the rents of rural, urban and mixed properties paid or made available to their respective holders", adding no. 2 that "are deemed as rents: a) the amounts relating to the cession of the use of the property or part thereof and the services related to that cession".

Now,

Without prejudice to the laborious exegesis conducted by both parties as to the meaning of the concepts of "exercise", "activity", "income" and others that the wording of articles 3 and 8 of CIRS invoke, patent in this proceeding is this tribunal's conviction, given the factual circumstances underlying and of which account was given, that the income earned by the Applicants constitutes property income.

Indeed "the rent as a typical benefit due by the cession of a property assumes in article 8 of CIRS, a scope more comprehensive than that which the typical consideration of the simple lease contract carries.

Thus, property income comprises, in addition to rents in the strict sense, all benefits which are due for the use or cession of the use of a property regardless of the purpose, including furnishings and equipment installed therein, the amounts resulting from sublease and cession of exploitation contracts (…)"[2]

There being no error whatsoever in the assumptions of law when framing the income of the Applicants, as they were, in Category F of CIRS.

Equally concurring toward the Tribunal's conviction in that sense, the circumstance pointed out, moreover, by the AT, that the acquisition of the underlying property and its immediate cession of exploitation to a third party entity, shall be submitted to acts of management of private patrimony, not constituting, in themselves, signs of exercise of activity of exploitation of property by the one who ceded the exploitation.

This Tribunal subscribes to what is stated in the judgment of 20/01/2005, of the Central Administrative Court North, in the context of case no. 00325/04, reported by Judge Valente Torrão, in the segments in which it is stated:

"(…) the cession of exploitation or concession of exploitation of the commercial establishment, also known as lease of commercial establishment is a legal transaction by which the holder of the establishment provides to another, temporarily and through remuneration, the enjoyment and fruition of the establishment, considered as a legal and economic unit, that is, an organization economic – legal of all the elements that comprise it, affected to the realization of a certain mercantile or industrial activity".

….

"(…) in ceding the exploitation of the establishments obtained property income framed as Category F income (…) effectively, the impugner did not come to exercise commercial or industrial activity in the installations in question, so the situation is comparable to that of a mere individual who earned income subject to IRS.

The fact of having acquired and equipped certain installations intended for commerce does not itself constitute a commercial or industrial activity, rather being equated to a financial investment which subsequently resulted in the receipt of a certain amount for the lease of the installations"

It is recalled that in the case underlying, it results that the Applicants executed a deed of cession of tourism exploitation in favor of the company "D…, S.A.", under which it would be this one, initially the entity to which the exploitation would fall and at a later time the company "C…, S.A."

Concluding in this segment:

The income earned by the Applicants, in the years 2012, 2013 and 2014 (as far as it matters here) are derived from the cession of the exploitation of tourism of the property owned by them in favor of the company "C…" have the nature of rents in light of the provisions of paragraph a) of no. 2 of article 8 of CIRS and, as such, framed in Category F of income.

It being indifferent to such conclusion the fact that Applicant A… is registered from the tax perspective for the exercise of the activity "Tourist apartments without restaurant", as is equally indifferent the VAT scheme in which he is framed.

This being said;

C. On the Non-Binding Nature of the Tribunals to Administrative Guidance Issued by the Tax Administration

Not unaware of this Tribunal of the function, scope, level of binding force and recipients of administrative guidance, particularly the circulars on tax matters that the proceedings apprise us of, it shall always be said that, prior to the guidance for the AT that results therefrom, particularly as regards Circular 5/2013 of 2013-07-02, there shall be need to qualify the income earned by the Applicants in the strict factual framework in which they are perceived, having regard to the nature and specificities of the operations carried out by these.

The same applies to the binding rulings (nos. 477 and 1369) that "D… SA" may have sought on the matter here under discussion.

Everything to be said, and without need for any other considerations, that this Arbitral Tribunal subscribes to the position that flows from the Judgment of the South Central Administrative Court, of 09-11-2010 (reported by Judge José Correia in the context of case no. 04292/10):

"(…)

VII)– The Courts, as independent organs of sovereignty are not subordinated to the decisions taken in tax matters by the administration, even if binding for the latter, insofar as those courts are competent to interpret and apply the tax law without any dependence on the criteria adopted by the administration and hence if a judicial decision is rendered in a sense different from that followed in the binding ruling, the administration must respect it and have it executed.

VIII)- That, if it is certain that the courts are only subject to the law, so no administrative guidance from which flows a certain interpretation thereof binds them, the administrative circulars (as well as prior rulings) do not bind the taxpayers, but only the respective services and, in light of the law, the procedures defined, "maxime" the "circulated law" of the AF cannot derogate from the principle of tax legality so that, in this light, it will be possible to affirm the non-conformity of the content of the contested act with the legal norms referred and, thus, that the actually existing assumptions imposed the administrative decision of the opposite sign, it being certain that the Judge, even if he had knowledge of the prior binding ruling, was not bound by that administrative decision"

D. On the Consideration of Other Expenses under the Provisions of Article 41 of the IRS Code

As a subsidiary matter, albeit without express mention in the request they formulate, "(…) the tax acts above identified should be annulled" the Applicants, cautiously, invoke in brief summary for the purpose of this segment, that the Tax Administration should have taken into consideration the totality of the expenses borne by the Applicants with the maintenance of the source of income in question, summoning for such purposes the provisions of no. 1 of article 41 of CIRS.

Article 41 [3]

Deductions

  1. From the gross income referred to in article 8, the following are deducted: maintenance and conservation expenses incumbent on the taxpayer, borne by him and documentarily proven, as well as the municipal property tax and stamp duty which falls on the value of the properties or part of the properties the income of which is subject to taxation in the fiscal year.

The legal provision transcribed in the version applicable for the fiscal years 2013 and 2014, which does not diverge significantly from the wording in force for the year 2012, not typifying the expenses, expenditures and charges considered essential to the obtaining of the income, makes their deductibility dependent on the following legal assumptions:

  • are configured as maintenance expenses,

  • are incumbent on the taxpayer

  • are effectively borne and documentarily proven

According to the Final Report of Tax Inspection in the additional assessments here in question, maintenance expenses with Municipal Property Tax (IMI) and as for the others referred to by the Applicants and partially disregarded by the AT ("maintenance and conservation expenses relating to cleaning staff, gardener's salary, electricity, water and gas, expenses for house rental with equipment, repairs and paintings, insurance premiums and costs of property administration", in accordance with the deed of cession of tourism exploitation executed it falls to the managing entity "C…" to make the payments relating to such expenses, regardless of whether they are subsumable to maintenance and conservation expenses.

Moreover, having the Applicants effectively made mention of the same, they did not demonstrate the indispensability of such costs to the obtaining of the income, nor even do they quantify or documentarily prove them, or justify that the payment thereof was incumbent on them, given the cession of exploitation referred to.

Thus the request of the Applicants as to the consideration of such expenses for the purposes of deduction from Category F income of the years in question, under the terms provided for in no. 1 of article 41 of CIRS, lacks merit.

III - INDEMNITY INTEREST

The Applicants formulate in the context of broadening of the request the payment of indemnity interest.

The reimbursement of the amounts relating to them depends on the merit of the request for declaration of illegality of the assessment acts.

Consequently, lacking merit that request, lacking merit necessarily also are those for reimbursement and indemnity interest.

IV - DECISION

In accordance with the foregoing, this Singular Arbitral Tribunal decides as follows:

a. to find the requests formulated by the Applicants to lack merit,

b. to condemn the Applicants in the payment of the costs of the proceedings.

V - VALUE OF THE PROCEEDINGS

In conformity with the provisions of articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 41/2013, of 26 June, 97 A. no. 1, paragraph a) of the Code of Tax Procedure and Process, the value of the proceedings is fixed at 33,570.26 €.

VI - COSTS

Pursuant to the provisions of articles 12, no. 2, 22, no. 4 of RJAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is fixed at 1,836.00 €.

NOTIFY

Text drafted on computer, pursuant to the provisions of article 131 of the Code of Civil Procedure, applicable by reference from article 2, no. 1, paragraph d) of the Legal Framework of Tax Arbitration, with blank lines, and reviewed by the arbitrator.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except as regards the transcriptions made.

Thirtieth of November of two thousand and seventeen.

The Arbitrator

(José Coutinho Pires)

[1] Course of Administrative Law, Volume II, Almedina, pp 352 et seq.

[2] Manuel Faustino in Lessons of Taxation, AAVV, Vol. I, Almedina 2014, 3rd edition, p. 224.

[3] In the wording given by Law no. 66-B/2012 of 31 December, in force as of 01/01/2013

Frequently Asked Questions

Automatically Created

How are income from tourist exploitation contracts classified for IRS purposes in Portugal?
Income from tourist exploitation contracts in Portugal can be classified as either Category B (business/commercial income) or Category F (property income) depending on the taxpayer's level of active involvement. Category B applies when taxpayers actively exercise tourism exploitation activities with purposeful acts aimed at profit generation. Category F applies when income derives from passive cession of exploitation rights where the taxpayer has no active operational involvement. The distinction hinges on whether the taxpayer merely manages private patrimony by ceding rights to third parties or actively conducts tourism business operations. The Tax Authority examines factors such as licensing involvement, operational management, and the nature of contractual arrangements to determine proper classification.
What is the CAAD arbitral procedure for challenging additional IRS tax assessments?
The CAAD (Centro de Arbitragem Administrativa) arbitral procedure for challenging IRS assessments follows the RJAT (Regime Jurídico da Arbitragem Tributária) established by Decree-Law 10/2011. Taxpayers file a request for constitution of a singular arbitral tribunal within the legal deadline, identifying the contested assessment acts. The CAAD President accepts the request and notifies the Tax Authority. An arbitrator is designated by the President of the Deontological Council, with parties having the right to refuse. The tribunal is formally constituted once designation is accepted. The Tax Authority submits its reply and administrative file. The procedure provides an alternative dispute resolution mechanism for tax matters, with decisions having the same force as court judgments.
Can non-resident taxpayers dispute IRS additional tax assessments and compensatory interest in Portugal?
Yes, non-resident taxpayers can dispute IRS additional tax assessments and compensatory interest in Portugal through the CAAD arbitral procedure. As demonstrated in Process 211/2017-T, two German residents successfully initiated arbitral proceedings to challenge additional IRS assessments totaling €33,570.26 covering tax years 2012-2014, including compensatory interest assessment acts. Non-residents have the same procedural rights as Portuguese residents to contest tax assessments, including challenging the classification of income, substantiation of assessment acts, calculation of taxable base, and deductible expenses. The RJAT framework provides equal access to tax arbitration regardless of taxpayer residence status.
What are the legal grounds for declaring nullity of additional IRS tax assessments under Portuguese tax law?
Portuguese tax law provides several grounds for declaring nullity of additional IRS assessments: (1) lack of substantiation - assessment acts must contain clear, coherent factual findings and legal reasoning as required by Articles 39 and 42 of the administrative procedure code; (2) incorrect income qualification - misclassification of income categories such as Category B versus Category F; (3) incorrect calculation of taxable base - errors in determining taxable amounts or improperly rejecting deductible expenses; (4) violation of procedural guarantees including the right to be heard; (5) lack of competence of the issuing authority; and (6) violation of substantive tax law provisions. The substantiation requirement is constitutionally mandated, requiring tax authorities to expressly, clearly, and comprehensively explain factual and legal bases for their decisions.
How does the Tax Authority (AT) classify income from tourism property exploitation agreements for IRS?
The Tax Authority classifies income from tourism property exploitation agreements based on the taxpayer's active versus passive role. When taxpayers merely acquire property and immediately cede exploitation rights to third parties without active operational involvement, the AT classifies this as Category F income (property income), treating it as private patrimony management. The AT examines whether taxpayers practiced acts indicating active exploitation, such as obtaining licensing, managing operations, or making business decisions. If the cession contract transfers all exploitation rights and the taxpayer has no discretion or involvement in the tourism activity, the AT considers income passive and classifies it as Category F. The AT's approach focuses on substance over form, analyzing actual taxpayer activity rather than contractual labeling.