Process: 22/2019-T

Date: September 9, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 22/2019-T addressed an IRS assessment of €38,900.81 for the 2016 tax period, where taxpayers challenged the disallowance of expenses related to capital gains from property sales. The claimants, a married couple, purchased a property in Lisbon for €100,000 in 2014, undertook extensive rehabilitation works totaling €178,132.79, and sold it in September 2016 for €315,000. They declared total deductible expenses of €200,146.22, including construction costs, acquisition taxes (IMT and stamp duty), notary fees, and real estate commissions. The Portuguese Tax Authority rejected certain expenses, leading to the disputed assessment. The key legal issues included whether the IRS assessment suffered from lack of reasoning (falta de fundamentação) under Article 51 of the IRS Code, and whether all declared expenses and charges were properly substantiated and deductible against the capital gain. The claimants argued they only learned the true reasoning behind the assessment during administrative proceedings, and provided witness testimony and documentation to prove all expenses. The Tax Authority contended the assessment was legally valid and challenged both the admissibility of late-submitted documents and the adequacy of proof for claimed expenses. This case illustrates critical requirements for documenting deductible expenses in property transactions and the importance of proper administrative reasoning in tax assessments, while demonstrating taxpayers' ability to challenge IRS decisions through CAAD arbitration.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Process no. 22/2019-T

Date of Decision: 2019-09-09

IRS

Value of Claim: € 38,900.81

Subject Matter: IRS – Lack of Reasoning – Article 51 – Capital Gains – Deductible Expenses and Charges

ARBITRAL DECISION

The arbitrator Nuno Cunha Rodrigues, appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the present Arbitral Tribunal, constituted on 25 March 2019, decides as follows:

I. REPORT:

  1. A..., taxpayer no. ... and B..., taxpayer no. ..., residents at Street ..., ..., ..., ..., in Cascais (hereinafter referred to as the Claimants), having been notified of the IRS assessment no. 2017... and compensatory interest no. 2017..., referring to the tax period 2016, in the total amount of € 38,900.81, presented, on 11 January 2019, an application for constitution of a single arbitral tribunal, pursuant to Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFTAM), in conjunction with article 99(a) CCPT, in which the Tax and Customs Authority is the Respondent (hereinafter referred to as the Respondent AT).

  2. The Claimants request the declaration of illegality of the IRS assessment act no. 2017 ... and compensatory interest no. 2017..., referring to the tax period 2016, in the total amount of € 38,900.81 (thirty-eight thousand nine hundred euros and eighty-one cents).

  3. The application for constitution of the arbitral tribunal was accepted by the Illustrious President of CAAD on 14 January 2019 and notified to the Tax and Customs Authority on that same date.

  4. Pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of the LFTAM, the Deontological Council appointed as arbitrator of the single arbitral tribunal the present signatory, who communicated acceptance of the assignment within the applicable time period.

  5. On 4 March 2019, the Parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11(1)(a) and (b) of the LFTAM and articles 6 and 7 of the Deontological Code.

  6. In accordance with the provisions of article 11(1)(c) of the LFTAM, the single arbitral tribunal was constituted on 16-04-2019.

  7. By arbitral order of 22 May 2019, the meeting provided for in article 18 of the LFTAM was scheduled for 4 June 2019, at which the witness indicated by the Claimants was examined.

  8. The date of 24 September 2019 was set for the rendering of the final decision.

  9. The Arbitral Tribunal was regularly constituted and is competent.

  10. The parties have legal personality and capacity and are entitled (articles 4 and 10(2) of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

  11. The process is not affected by any nullities and there is no obstacle to the examination of the merits of the case.

II. FROM THE CLAIMANTS' REQUEST:

The Claimants request the declaration of illegality of the IRS assessment act no. 2017... and compensatory interest no. 2017..., relating to the tax period 2016, in the total amount of € 38,900.81 (thirty-eight thousand nine hundred euros and eighty-one cents) on the grounds that only during the administrative procedure and after reading the AT's Response did they become aware of the real reasoning underlying the contested act and that, furthermore, in the present arbitral proceedings, all the charges declared by the Claimants have been proven, with no grounds whatsoever for their disregard in calculating the capital gain subject to IRS.

III. FROM THE RESPONDENT AT'S RESPONSE:

In response, the Respondent AT considered that the assessment act sub judice does not suffer from any defect of law that calls into question its legality and validity.

By way of submissions, the Respondent AT further invoked the inadmissibility of late joinder of documents by the Claimants as well as the lack of adequate proof of the charges and expenses incurred by the Claimants.

IV. MATTER OF FACT:

A. Proven Facts

The following facts are considered proven:

  1. On 13.11.2014, the Claimants acquired the property located at Street ..., no. ..., ..., in Lisbon ("Property RP"), for the value of € 100,000.

  2. Following acquisition of Property RP, the Claimants undertook rehabilitation works on it.

  3. The rehabilitation works were initially undertaken by C..., Lda, (cf. invoices FT/68 and FT/75).

  4. The Claimants paid both invoices, in the amounts of € 23,055.00 and € 12,296.00, through 3 bank transfers: a first in the amount of € 3,055.00, the second in the amount of € 20,000.00 and the last in the amount of € 12,296.00.

  5. The rehabilitation works on Property RP were later undertaken by D..., Lda. ("D...").

  6. D... issued the following invoices:

(i) Invoice FT M/366, in the amount of € 13,250.00, issued on 29.04.2016;

(ii) Invoice FT M/429, in the amount of € 21,219.06, issued on 07.10.2016;

(iii) Invoice FT M/460, in the amount of € 8,437.35, issued on 03.11.2016;

(iv) Invoice FT M/461, in the amount of € 24,492.15, issued on 04.11.2016;

(v) Invoice FT M/463, in the amount of € 16,365.92, issued on 10.11.2016;

(vi) Invoice FT M/487, in the amount of € 14,912.81, issued on 29.12.2016;

(vii) Invoice FT M/489, in the amount of € 17,317.22, issued on 31.12.2016;

(viii) Invoice FT M/499, in the amount of € 17,496.33, issued on 18.01.2017;

(ix) Invoice FT M/500, in the amount of € 14,901.82, issued on 18.01.2017;

(x) Invoice FT M/501, in the amount of € 16,506.39, issued on 18.01.2017;

(xi) Invoice FT M/502, in the amount of € 5,735.09, issued on 18.01.2017.

  1. D... issued, on 18.01.2017, a credit note relating to the closure of account for the rehabilitation works on Property RP in the amount of € 15,412.05.

  2. The Claimants paid all invoices from D....

  3. On 12.05.2016, a promise of sale and purchase contract was executed, whereby the sale of Property RP was promised for 01.09.2016, for the value of € 315,000.00, in which it was stipulated that the Claimants were carrying out rehabilitation works and that these would be expected to be completed by the end of July.

  4. On 01.09.2016, the Claimants sold Property RP by deed of sale and purchase for the value of € 315,000.00.

  5. On 01.09.2016, the mediation commission for the sale of Property RP was paid, in the amount of € 19,372.50.

  6. On the date of the deed, the works were not yet completed due to delays in their execution.

  7. On 25.10.2016, a provisional reception certificate of Property RP was signed.

  8. The works on Property RP were completed in early 2017.

  9. Invoices were issued by D... after the provisional reception certificate of the property was signed.

  10. Due to delays in the execution of the works, the new owners only took possession of Property RP in early 2017.

  11. The Claimants had charges relating to Property RP in a total of € 200,146.22 as follows:

(i) € 178,132.79: costs of the construction works;

(ii) € 1,075.93: payment of IMT on acquisition;

(iii) € 800.00: payment of stamp duty on acquisition;

(iv) € 700: payment of deed at Casa Pronta;

(v) € 19,372.50: payment of commission to real estate agent;

(vi) € 65.00: cost of certificates for deed.

  1. Each of the Claimants declared, in field 4002 of Schedule G of the tax return for 2016 the amount of € 106,292.81, referring to 50% of the charges incurred with Property RP (cf. document no. 8 attached to the application).

  2. In 2016, the Claimants sold another property located at Street ... in Lisbon ("Property RA"), for the value of € 110,000.00.

  3. As a result of this sale, each of the Claimants declared, in Schedule G of the tax return for 2016 the capital gain realized.

  4. With respect to the capital gain realized from the sale of Property RA, the Claimants declared expenses, in field 4001 of Schedule G, totaling € 10,998.75.

  5. With Property RA, the Claimants had the following charges:

(i) € 135.00: emoluments (this expense was, meanwhile, accepted by AT, in the order of 22.02.2019 of the Deputy Director-General of the Tax Management area – Income Taxes, as expressly referred to by the Respondent AT in articles 20, 21 and 22 of the Response);

(ii) € 135.00: emoluments (idem);

(iii) € 1,395.16: notary fees (idem);

(iv) € 354.59: notary fees (idem);

(v) € 8,610.00: real estate commission.

  1. Following the filing of the tax return for 2016, the Claimants received a notification which stated:

"The tax return relating to the year 2016, with the identification (…) has been selected for analysis due to the detection of the following situation(s):

Non-declaration of property sales or need to provide proof of the values of expenses, value of sale, date of acquisition of properties sold or allocation to professional activity".

  1. The Claimants exercised, with the Cascais Tax Service-..., their right to prior hearing, having at that moment presented documents.

  2. The Claimants received a notification by official letter no. ... sent by registered mail (RH...PT), which was received by the Claimants, which contained the following text:

"From the analysis carried out on the documents/elements presented with respect to the IRS declaration, Form 3, for the year 2016, with the identification... /..., the existence of the following error(s) was noted:

"The expenses and charges declared in section 4 of Schedule G relating to the sale of properties have not been proven, pursuant to article 51 of IRS Code, and will therefore be removed. You should also provide proof of the reinvestment values declared in section 5, pursuant to article 10(5) of IRS Code. (AMS)

Accordingly, you are hereby notified of the intention to make the following correction(s) to the values entered in the aforementioned Form 3 declaration:

  1. The Claimants were notified of the IRS assessment no. 2017 ... and compensatory interest no. 2017..., relating to the tax period 2016, in the total amount of € 38,900.81.

  2. The Claimants filed, on 07.06.2018, an administrative review of the aforementioned assessment act.

  3. On 12.10.2018, the Claimants were notified of the final decision on the administrative review presented.

B. Unproven Facts

With relevance to the arbitral decision, it was not proven:

i) That the amount of € 12,439.40, contained in receipt M/319 and invoice M/429 (dated 25 August 2016), issued by company D..., in the total amount of € 21,219.06, resulted from works carried out on unit F located at Street ..., no. ..., –...;

C. Reasoning of the Matter of Fact

The Tribunal is not obliged to rule on all matters alleged, but rather has the duty to select only those that are relevant to the decision, taking into account the cause (or causes) of action that support the claim filed by the claimant (cf. articles 596(1) and 607(2) to (4) of the Code of Civil Procedure) and to record whether it considers them proven or not proven (cf. also article 123(2) of the Tax Code of Procedure and Process, under article 29 of LFTAM).

According to the principle of free assessment of evidence, the Tribunal bases its decision, regarding the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the case and in accordance with its experience of life and knowledge of persons (cf. article 607(5) of the Code of Civil Procedure).

Only when the probative force of certain means is pre-established by law (e.g. full probative force of authentic documents - cf. article 371 of the Civil Code) does the principle of free assessment of evidence not prevail in the appreciation of the evidence produced.

The matter of fact given as proven has its origin in the documents submitted by the Claimants, the administrative procedure, of which a copy was submitted by AT and in the testimony given before the Tribunal, in person, by witness E..., which, analyzed critically, constitute the basis of the Tribunal's conviction as to the reality of the facts described above.

In particular, the credible testimony presented by the witness is noted, which, among other aspects, explained that the works carried out on unit RP were completed much later than the scheduled time, leading to the late issuance of invoices by company D....

Regarding the unproven facts - that the amount of € 12,439.40, contained in receipt M/319 and invoice M/429 (dated 25 August 2016), issued by company D..., in the total amount of € 21,219.06, resulted from works carried out on unit F located at Street ..., no. ..., –... - it was found that the total amount thereof is broken down into three separate items, with different values, attributed to different units (...º Left; ...º Right and ... Right), without any address being indicated for the units in question.

Given that what is being discussed in the present proceedings is the charges for works carried out on the unit located at Street ..., no. ... and that in all invoices/receipts the location of the works is referred to as Street ... or Street ..., ..., it was not proven that, in receipt M/319 and invoice M/429 all values refer to that same work, since not only does the aforementioned address not appear – Street... – but the total amount is broken down by three distinct units – with their exact location not being known – the Tribunal having decided to give as proven that the value referring to the .... refers to one of the properties sub judice, i.e. that located at Street of ..., no. ..., ....

V. ON THE LAW:

A. Questions to be Decided:

In the present proceedings, two questions arise which must be examined.

First, the lack of reasoning underlying the contested act, and

Second, the proof of the charges declared by the Claimants, for the purposes of calculating the capital gain subject to IRS.

Let us analyze, in this order, each of the questions at hand.

B. On the Lack of Reasoning Underlying the Contested Act:

The Claimants contend that they were notified, in very vague terms, regarding the tax return for the year 2016, since that notification stated that the "tax return relating to the year 2016, with the identification (…) was selected for analysis due to the detection of the following situation(s): Non-declaration of property sales or need to provide proof of the values of expenses, value of sale, date of acquisition of properties sold or allocation to professional activity" (cf. article 50 of the application).

They further assert that the "formulation used by AT was merely generic, not referring to (i) which property or properties were at issue, (ii) which expenses were being specifically questioned, (iii) why they were being questioned, (iv) why the sale value was being questioned, (v) why the date of acquisition was being questioned, and (vi) why professional activity allocation was mentioned" "stating nothing because it is merely a form letter, with no reference to the specific case."

To the contrary, the Respondent AT contends, in summary, that "it is evident from the decision of the divergence procedure that the non-acceptance of the expenses is due to the fact that they have not been proven, specifying them immediately thereafter, therefore it is indisputable that the reasoning employed by AT meets all the legal requirements identified above relating to the duty to state reasons" (cf. article 35 of the response)."

An examination and decision is required.

For this purpose, we make use of abundant jurisprudence – namely resulting from processes nos. 336/2016-T; 588/2017-T; 239/2017-T; 184/2017-T; 659/2017-T and 10/2018-T of CAAD – and existing doctrine.

It is well known that the reasoning of tax acts in general constitutes a constitutional requirement (cf. article 268 of the Portuguese Constitution) and legal requirement (cf. article 77 of the General Tax Law) and it is accepted without dispute in national doctrine and jurisprudence that the required reasoning must have the following characteristics:

  1. Officiosidad: it must always originate from the initiative of the administration, with reasoning on request not being admissible;

  2. Contemporaneity: it must be contemporary with the performance of the act, with delayed reasoning not being permissible;

  3. Clarity: it must be comprehensible to an average recipient, avoiding polysemic or highly technical concepts;

  4. Completeness: it must contain all essential elements that were determinative of the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal norms and factuality – sphere of legality) and motivation (sphere of discretion or opportunity, when a valuation is required).

Now, if reasoning is, in the terms referred to, necessary and mandatory, this cannot nor should be understood in an abstract and/or absolute manner.

In other words, the reasoning required for a specific tax act must be that which is functionally necessary for it not to be presented to the taxpayer as a mere demonstration of arbitrariness.

This will – it is considered – be the touchstone for compliance with the duty to state reasons: when, before an average recipient placed in the position of the actual recipient, the tax act presents itself, from a reasonableness perspective, as a product of pure administrative arbitrariness, due to the fact that the factual and/or legal grounds on which it rests are not discernible, the act will be deficient in reasoning.

In the case sub judice, it is verified that the assessment act in question occurred following the understanding of the Respondent AT that the charges for the works carried out on the two properties in question had not been demonstrated.

For this purpose, AT notified the Claimants, by official letter no. ... sent by registered mail (RH...PT), which was received by the Claimants, which contained the following text:

"From the analysis carried out on the documents/elements presented with respect to the IRS declaration, Form 3, for the year 2016, with identification ..., the existence of the following error(s) was noted:

"The expenses and charges declared in section 4 of Schedule G relating to the sale of properties have not been proven, pursuant to article 51 of IRS Code, and will therefore be removed. You should also provide proof of the reinvestment values declared in section 5, pursuant to article 10(5) of IRS Code. (AMS)

Accordingly, you are hereby notified of the intention to make the following correction(s) to the values entered in the aforementioned Form 3 declaration:

The Claimants invoke, in article 40 of the application, that they were notified in the following terms: "from the analysis carried out on the documents/submissions presented during the prior hearing, regarding the notification of the divergence(s) identified in the Form 2 tax return for the year 2016 with identification ..., the elements declared were not proven" (cf. document no. 14 which is attached)" to conclude, in article 41 of the same application, that "With this reasoning – and only this reasoning – AT corrected in full (that is, reduced to zero) the values of the charges declared in fields 4001, 4002 and 4003 of Schedule G of the tax return for 2016."

Now it was proven that the Claimants received AT's notification which contained the official letter no. ..., and that it was sent by registered mail (RH...PT) duly received, as evidenced by the CTT proof attached by the Respondent AT (cf. page 8 of the administrative procedure submitted by the Respondent AT).

However, the Claimants do not refer to this notification in the application nor in the submissions, and it is known that it expressly contains the following reasoning (in addition to that which they indicate in article 40 of the application and in article 57 of the submissions):

The expenses and charges declared in section 4 of Schedule G relating to the sale of properties have not been proven, pursuant to article 51 of IRS Code, and will therefore be removed. You should also provide proof of the reinvestment values declared in section 5, pursuant to article 10(5) of IRS Code. (AMS)

It is true that, with respect to the reasoning invoked by the Respondent AT, it may be argued that it could be more detailed or precise.

But it is equally certain that the reasoning referred to in the previous paragraph arises as a consequence of the assessment, made by AT, of the elements brought by the Claimants during the prior hearing.

On this point, it will be helpful to recall the distinction between absolute lack of motivation and deficient, mediocre or incorrect motivation, already noted by the STA, in the judgment of 14 May 2015, in process no. 833/13.

In that judgment, that high court understood the following: "(…) although it is certain that a distinction must be made between absolute lack of motivation and deficient, mediocre or incorrect motivation, it is equally certain and established jurisprudence that this nullity only covers the absolute lack of motivation of the decision itself and not the lack of justification of its respective grounds; that is, the nullity is only operative when there is total omission of the factual or legal grounds on which the decision is based – cf., among many others, the STA judgments of 4/3/2015, proc. 01939/13, of 7/1/2009, proc. no. 800/08 and of 10/5/73, BMJ 228, 259; and the STJ judgment of 8/4/75, BMJ 246, 131».

Consequently, if the AT's reasoning in the present case may be, in the abstract, qualified as deficient, mediocre or incorrect, it cannot, however, fail to be considered that it was clear, since comprehensible to an average recipient, and complete, since the reasons on which it rested were perceptible and were communicated to the Claimants.

The jurisprudence of the STA contained in the judgment of 18-06-2011, rendered in process 068/11, may properly be invoked here, considering that "(…) despite the lack of express indication of the applicable legal provision, the required legal reasoning of the tax act will be sufficient with the reference to the relevant legal principles, to the applicable legal framework or to a determined normative framework, provided that, in any event, it can be concluded that those were known or knowable by a normal recipient placed in the concrete position of the actual recipient".

In fact, as established in the same judgment, "the legal and constitutional requirement of reasoning for the tax act, arising from articles 268 of the Portuguese Constitution, 77 of the General Tax Law and 125 of the Code of Administrative Procedure, aims, primarily, to enable interested parties to know the reasons that led the Administration to act, thereby enabling them to make a conscious choice between accepting the legality of the act and contesting it contentiously".

Note that the Claimants understood the reasons underlying the assessment, as reflected, among other aspects, in the exercise of the right to prior hearing; in the provision of explanations in person and in the administrative review submitted.

In fact, the Claimants understood perfectly the cognitive path that led them to decide as they did, so that, even if there were deficiencies in the reasoning discourse of the tax act, these would be reduced to mere non-essential irregularities.

In this way, it can be concluded that the grounds that motivated the selection of the Claimants' tax return for the year 2016 – in accordance with which "The expenses and charges declared in section 4 of Schedule G relating to the sale of properties have not been proven, pursuant to article 51 of IRS Code, and will therefore be removed. You should also provide proof of the reinvestment values declared in section 5, pursuant to article 10(5) of IRS Code - were clear and perceptible to an average recipient placed in the position of the actual recipient.

In this light, it is concluded that the notification to the Claimants contained all mandatory elements by law, including the respective reasoning, and therefore the alleged lack of reasoning must be found to be without merit.

C. On the Proof of the Charges Declared by the Claimants, for the Purposes of Calculating the Capital Gain Subject to IRS:

The Claimants contend that the amount of charges declared for Property RP corresponded to the total of € 212,585.62, which corresponds to the sum of the following items:

(i) € 190,572.19 – costs of construction works;

(ii) € 1,075.93 – payment of IMT on acquisition;

(iii) € 800.00 – payment of Stamp Duty on acquisition;

(iv) € 700.00 – payment of deed at Casa Pronta;

(v) € 19,372.50 – payment of commission to real estate agent;

(vi) € 65.00 – cost of certificates for deed.

Later, in the administrative review proceedings, the Respondent AT accepted the expenses for payment of IMT on acquisition (€ 1,075.93), payment of Stamp Duty on acquisition (€ 800.00) and payment of deed at Casa Pronta (€ 700.00), totaling € 2,575.93.

Thus, what is being discussed in these proceedings is whether, for the purposes of the provision of article 51 of the IRS Code, the Claimants presented supporting documents for the following expenses:

i) € 190,572.19 – costs of construction works;

ii) € 19,372.50 – payment of commission to real estate agent;

iii) € 65.00 – cost of certificates for deed.

Let us examine.

It was proven that the Claimants had charges with works carried out on Property RP, supported by the following invoices:

a. Invoices FT/68 and FT/75, issued by company C..., Lda, in the amounts of € 23,055.00 and € 12,296.00;

b. The following invoices issued by company D..., Lda. ("D...").

i. Invoice FT M/366, in the amount of € 13,250.00, issued on 29.04.2016;

ii. Invoice FT M/460, in the amount of € 8,437.35, issued on 03.11.2016;

iii. Invoice FT M/461, in the amount of € 24,492.15, issued on 04.11.2016;

iv. Invoice FT M/463, in the amount of € 16,365.92, issued on 10.11.2016;

v. Invoice FT M/487, in the amount of € 14,912.81, issued on 29.12.2016;

vi. Invoice FT M/489, in the amount of € 17,317.22, issued on 31.12.2016;

vii. Invoice FT M/499, in the amount of € 17,496.33, issued on 18.01.2017;

viii. Invoice FT M/500, in the amount of € 14,901.82, issued on 18.01.2017;

ix. Invoice FT M/501, in the amount of € 16,506.39, issued on 18.01.2017;

x. Invoice FT M/502, in the amount of € 5,735.09, issued on 18.01.2017.

On the other hand, it was proven that, on 01.09.2016, the mediation commission for the sale of Property RP was paid in the amount of € 19,372.50. This commission paid to the real estate agent must be accepted as a charge, moreover, in accordance with the understanding that AT has had, which, following an order from the Deputy Director General of Taxes, made in process 12/2008, on 14.07.2008, has accepted the deduction of this charge for the purposes of the provision of article 51 of the IRS Code.

The costs with the deed certificate, in the amount of € 65.00, were further proven, in accordance with the document attached on 15 January 2019.

With respect to the invoices described in items ii) to x) above, it was proven that the issuance of these occurred later due to delays in the completion of the works, attributable to the company responsible, which were completed in early 2017.

Now, in accordance with article 51(1)(a) of the IRS Code, in determining capital gains subject to tax, the acquisition value is increased by "charges for the enhancement of assets, proven to have been carried out in the last 12 years, and necessary and actually incurred expenses, inherent to the acquisition and sale (…)".

Given that it was proven that there was a delay in the completion of works on Property RP and that these were completed in early 2017, it is entirely understandable that the issuance of invoices occurred at the time of completion of these – after the execution of the deed of sale and purchase but relating to charges assumed before this by the Claimants - as was recognized by the witness and is evident from the documentation submitted by the Claimants, and consequently, these invoices must be considered as charges for the purposes of article 51 of the IRS Code.

It was not proven that the amount of € 12,439.40, contained in invoice M/319 and M/429 (dated 25 August 2016), issued by company D..., in the total amount of € 21,219.06, resulted from works carried out on unit F located at Street ..., no. ..., – ... .

In fact, it is considered that, given invoice FT M/429, in the amount of € 21,219.06, issued on 07.10.2016; only the charge of € 8,779.66 was proven as being related to charges incurred on Property RP.

Given the above, it is understood that the total amount of charges with Property RP duly proven corresponded to the total of € 200,146.22, which corresponds to the sum of the following items:

i) € 178,132.79 – costs of construction works;

ii) € 1,075.93 – payment of IMT on acquisition (already accepted by the Respondent AT);

iii) € 800.00 – payment of Stamp Duty on acquisition (already accepted by the Respondent AT);

iv) € 700.00 – payment of deed at Casa Pronta (already accepted by the Respondent AT);

v) € 19,372.50 – payment of commission to real estate agent;

vi) € 65.00 – cost of certificates for deed.

On the other hand, all of the following expenses related to Property RA are considered proven:

(i) € 135.00: emoluments (already accepted by the Respondent AT);

(ii) € 135.00: emoluments (already accepted by the Respondent AT);

(iii) € 1,395.16: notary fees (already accepted by the Respondent AT);

(iv) € 354.59: notary fees (already accepted by the Respondent AT);

(v) € 8,610.00: real estate commission

Note that the first four expenses had already been accepted by the Respondent AT.

The charge for the commission paid to the real estate agent, referred to in item v) must be accepted as a charge, moreover, in accordance with the understanding that AT has had following an order from the Deputy Director General of Taxes, made in process 12/2008, on 14.07.2008.

In summary, and given the disputed value, invoked by the Claimants, of (Property RP - € 190,572.19 + € 19,372.50 + € 65.00) + (Property RA € 8,610.00) corresponding to the total of € 218,619.69, it is considered that the sum of € 206,180.29 should be accepted as deductible (Property RP € 178,132.79 + € 19,372.50 + € 65.00) + (Property RA € 8,610.00), in addition to the expenses already accepted by the Respondent AT relating to each of the two properties, and explained above.

D. On Indemnification for Unduly Provided Guarantee:

The Claimants further formulate a claim for indemnification for unduly provided guarantee, for the cost incurred with the provision of guarantee through the constitution of a voluntary mortgage.

In accordance with the provision of article 53(1) of the General Tax Law, the debtor who, in order to suspend execution, offers a bank guarantee or equivalent shall be indemnified fully or partially for the losses resulting from its provision, if it has maintained it for a period exceeding three years in proportion to the outcome in administrative appeal, impugnation or opposition to execution that have as their object the guaranteed debt.

Article 53(2) of the same adds that the period referred to in paragraph 1 shall not apply if it is concluded that there was error attributable to the services.

Article 171(1) of the Tax Code of Procedure and Process, in turn, provides that indemnification in case of bank guarantee or equivalent unduly provided for in the referred provision shall be requested in the process in which the legality of the enforceable debt is contested, and must be requested, in accordance with paragraph 2 of the same provision, if the ground is supervening, within 30 days following its occurrence.

In application of the provision of article 53(1) of the General Tax Law, in case of partial success of the arbitral claim, the indemnification shall be due in proportion to the success.

On the other hand, since the losses resulting from provision of guarantee are not immediately quantifiable, due to lack of allegation and proof of the charges incurred, they can only be reimbursed in a separate liquidation incident (in this sense, the CAAD judgment of 12 February 2018, process no. 369/2017-T).

Giving partial success to the claim for annulment of the contested tax act, to which the guaranteed debt relates, and it being verified that the same was provided as a result of error attributable to the services, the claim for indemnification for the provision of the respective guarantee should thus proceed, fixing the quantum thereof at the percentage of the success in the annulment.

VI. DECISION:

In these terms, and with the grounds set forth, it is decided:

i. To judge partially successful the request for arbitral pronouncement, in the part relating to the deduction of expenses in the total amount of € 206,180.29 (Property RP € 178,132.79 + € 19,372.50 + € 65.00) + (Property RA € 8,610.00), in addition to the expenses already accepted by the Respondent AT, determining the annulment of the IRS assessment relating to the year 2016, which must be reformulated accordingly.

ii. Not to consider, for the purposes of the provision of article 51 of the IRS Code in force in 2016, the amount of € 12,439.40 relating to expenses with Property RP, as it was not proven.

iii. To condemn the Respondent AT to reimburse the Claimants the value of the tax unduly paid, plus the payment of compensatory interest to be calculated on the IRS unduly paid, pursuant to article 43 of the General Tax Law, in the proportion of the cancelled IRS and from the date on which that tax was unduly paid, until the date on which the taxpayer is reimbursed that tax, at the legally applicable rate.

iv. To condemn the Respondent AT to indemnify the Claimants for the guarantee provided, fixing the quantum of the indemnification at the percentage of the success in the annulment.

v. To condemn the Claimants and Respondent AT in the costs of the process, in the proportion fixed below.

VII. VALUE OF THE PROCESS:

In accordance with the provision of article 306(2) of the Code of Civil Procedure and article 97-A(1)(a) of the Tax Code of Procedure and Process and article 3(2) of the Regulation of Costs in Arbitration Tax Processes, the process is assigned the value of € 38,900.81 (thirty-eight thousand nine hundred euros and eighty-one cents).

VIII. COSTS:

Under article 22(4) of the LFTAM, and in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Processes, the amount of costs is fixed at € 1,836 (one thousand eight hundred and thirty-six euros), in proportion to the respective shares in the success, being 5.73% (€ 105.20) at the charge of the Claimants and 94.27% (€ 1,730.80) at the charge of the Respondent Tax and Customs Authority.

Register and notify.

Lisbon, 9 September 2019

The Arbitrator

(Nuno Cunha Rodrigues)

Frequently Asked Questions

Automatically Created

What deductible expenses and charges can be claimed against capital gains under Article 51 of the Portuguese IRS Code?
Under Article 51 of the Portuguese IRS Code, deductible expenses and charges against capital gains from property sales include: acquisition costs (purchase price, IMT property transfer tax, stamp duty, notary and registration fees), improvement and rehabilitation expenses that increase property value, real estate agent commissions, and legal fees directly related to the transaction. These expenses must be properly documented with invoices and proof of payment. In CAAD Process 22/2019-T, the taxpayers claimed €200,146.22 in total expenses including €178,132.79 for construction works, €1,075.93 for IMT, €800 for stamp duty, €700 for notary fees, €19,372.50 for real estate commission, and €65 for certificates.
What constitutes a lack of reasoning (falta de fundamentação) in an IRS tax assessment by the Portuguese Tax Authority?
Lack of reasoning (falta de fundamentação) in an IRS assessment occurs when the Portuguese Tax Authority fails to adequately explain the legal and factual basis for its decision, violating the taxpayer's right to understand why expenses were rejected or adjustments were made. According to Article 77 of the Tax Procedure Code (CPPT), tax assessments must clearly state the facts, applicable law, and reasoning behind the decision. In Process 22/2019-T, the claimants argued they only discovered the true reasoning after filing their challenge, suggesting the initial assessment lacked sufficient explanation. Proper reasoning is essential for taxpayers to effectively exercise their right to defense and is grounds for annulment of tax assessments in Portuguese tax arbitration.
How are capital gains (mais-valias) calculated for IRS purposes in Portugal?
Capital gains (mais-valias) for IRS purposes in Portugal are calculated as the difference between the sale price (valor de realização) and the acquisition value (valor de aquisição), adjusted for deductible expenses and charges. The calculation includes: sale price minus acquisition costs (purchase price plus associated taxes and fees) minus improvement expenses minus selling costs (commissions, legal fees). For properties held over 24 months, taxpayers may apply indexation coefficients to the acquisition value to account for inflation. In Process 22/2019-T, the taxpayers sold a rehabilitated property for €315,000 after acquiring it for €100,000 and investing over €200,000 in expenses, with the Tax Authority disputing certain expense deductions, resulting in the €38,900.81 assessment difference.
Can taxpayers challenge IRS liquidation decisions through CAAD tax arbitration in Portugal?
Yes, taxpayers can challenge IRS liquidation decisions through CAAD (Centro de Arbitragem Administrativa) tax arbitration in Portugal. Under Decree-Law 10/2011 establishing the Legal Framework for Tax Arbitration (RJAT), taxpayers may request arbitration as an alternative to judicial court proceedings for tax disputes. In Process 22/2019-T, the claimants filed their arbitration request on January 11, 2019, pursuant to Articles 2 and 10 of RJAT and Article 99 of the Tax Procedure Code. The arbitral tribunal was constituted with a single arbitrator appointed by CAAD's Deontological Council, with proceedings including document submission, witness testimony, and a hearing held on June 4, 2019. CAAD arbitration offers a faster, specialized alternative to traditional tax litigation.
What was the outcome of CAAD Process 22/2019-T regarding the €38,900.81 IRS assessment for the 2016 tax period?
While the complete outcome is not provided in the excerpt, CAAD Process 22/2019-T involved taxpayers contesting a €38,900.81 IRS assessment for the 2016 tax period related to capital gains on property sales. The claimants sought declaration of illegality of the assessment, arguing lack of proper reasoning by the Tax Authority and proving all declared expenses through documentation and witness testimony. The arbitral tribunal, constituted on April 16, 2019, with arbitrator Nuno Cunha Rodrigues, held hearings and scheduled the final decision for September 24, 2019. The case established that the tribunal had proper jurisdiction and the parties had legal standing. The proven facts confirmed the taxpayers incurred €200,146.22 in expenses related to acquiring, rehabilitating, and selling the Lisbon property, though some invoices were issued after the provisional reception certificate.