Summary
Full Decision
ARBITRAL DECISION
I. REPORT
1. A..., a legal person with tax identification number ("NIF")..., with registered office at ..., n.º..., ...-... ... (hereinafter referred to as the Claimant), filed, on 1 April 2017, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, i.e., the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for constitution of an arbitral tribunal, in order to have declared the illegality of the tax acts imposing additional assessments of Corporate Income Tax ("IRC") for the tax years 2012, 2013 and 2014 set out below, as well as the declaration of illegality of the act partially granting the Administrative Appeal presented by the now Claimant with a view to the declaration of illegality and annulment of the aforementioned tax assessments:
(i) Demonstration of IRC assessment No. 2016..., dated 17 February 2016, demonstration of assessment of compensatory interest No. 2016..., as well as the respective statement of account settlement No. 2016..., these two dated 19 February 2016 (tax year 2012);
(ii) Demonstration of IRC assessment No. 2016..., dated 17 February 2016, demonstration of assessment of compensatory interest No. 2016..., as well as the respective statement of account settlement No. 2016..., both dated 22 February 2016 (tax year 2013);
(iii) Demonstration of IRC assessment No. 2016..., dated 17 February 2016, demonstration of assessment of compensatory interest No. 2016..., as well as the respective statement of account settlement No. 2016..., both dated 23 January 2016 (tax year 2014).
The Tax and Customs Authority ("Respondent" or "TA") being the Defendant.
A) Constitution of the Arbitral Tribunal
2. Pursuant to the provisions of paragraph (a) of paragraph 2 of Article 6 and paragraph (b) of paragraph 1 of Article 11 of the RJAT, the Deontological Council of this Administrative Arbitration Centre ("CAAD") appointed the undersigned as sole arbitrator, who communicated acceptance of the appointment within the applicable period, and notified the parties of this appointment on 6 June 2017.
3. Thus, in accordance with the provisions of paragraph (c) of paragraph 1 of Article 11 of the RJAT, and through communication from the President of the Deontological Council of CAAD, the Single Arbitral Tribunal was constituted on 22 June 2017.
B) Procedural History
4. In the request for arbitral decision, the Claimant petitioned for the declaration of illegality of the IRC assessments mentioned above, relating to the tax years 2012, 2013 and 2014, as well as the illegality of the act partially granting the Administrative Appeal presented in order to declare the illegality and annulment of the aforementioned tax assessments.
5. By order of 18 October 2017, the Single Arbitral Tribunal, pursuant to the provisions of paragraph (c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in Article 18 of the RJAT, as a result of the simplicity of the issues in question, as well as considering that it had at its disposal all the necessary elements to make a clear and impartial decision.
6. It also decided, in accordance with paragraph 2 of Article 18 of the RJAT, that oral proceedings were not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set 30 November 2017 as the deadline for the arbitral decision.
7. The Tribunal was regularly constituted and is competent to hear the issues indicated (Article 2, paragraph 1, paragraph (a) of the RJAT), the parties have legal standing and capacity and have full legitimacy (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March). No defects of nullity occur and nothing prevents judgment on the merits.
8. The present proceedings are thus in a position for a final decision to be rendered therein.
II. Issue to be Decided
9. The central issue to be considered and decided with regard to the merits of the case, as it emerges from the procedural documents of the parties, is to define, in a first stage, the scope of the concept presented in Article 41 of the Personal Income Tax Code ("IRS") relating to maintenance and conservation expenses and, as well, to assess the legality of the proportional consideration of the deductibility of expenses incurred according to the income from real property, based on the number of days of rental of the property.
III. Decision on Matters of Fact and its Justification
10. Having examined the documentary evidence produced, the tribunal finds proven, with relevance to the decision of the case, the following facts:
i. The Claimant is a non-resident legal entity, and without permanent establishment in Portugal, taxed for the activity corresponding to NACE code 68331 "Real Estate Intermediation Activities".
ii. The method of determining the taxable income of the Claimant is governed by the provisions of Article 56 of the IRC Code, whereby it is determined in accordance with the rules established for the corresponding categories under IRS taxation.
iii. In the years 2012, 2013 and 2014, the property was rented for 28, 35 and 63 days, respectively, with no indication that the property was used for the benefit of the Claimant itself, another person/entity not contracted or for any other purposes, during the period in question.
iv. In compliance with Service Orders No. OI2015.../.../.../..., dated 11 December 2015, an internal tax inspection was carried out by the TA on the Claimant, of partial scope and covering the tax years 2012, 2013 and 2014, relating to the procedures adopted in determining the IRC.
v. On 14 January 2016, the Claimant was notified of the Draft Tax Inspection Corrections, carried out pursuant to the aforementioned Service Orders. The Claimant was notified through Letter No. ... of 12 February 2016 of the Final Inspection Report.
vi. As a result of the aforementioned inspection, corrections were made in IRC in the amount of € 4,063.64 for the tax year 2012, € 3,914.73 for the tax year 2013, and € 4,042.70 for the tax year 2014. Following the Tax Inspection and the conclusions set out in the Draft and Final Report, the Claimant was notified of the additional IRC assessment acts and their compensatory interest, with a total amount of € 12,829.45 being paid.
vii. The Claimant filed an Administrative Appeal relating to the tax years 2012, 2013 and 2014, aimed at correcting the additional IRC assessment acts that had occurred, having requested reimbursement of the tax paid in the amount of € 12,021.07 and the sum of € 808.38 in compensatory interest, plus indemnity interest.
viii. On 3 January 2017, the Claimant was notified of the final decision partially granting the said Administrative Appeal, which materialized in the reimbursement of € 170.85 and € 258.67 relating to tax paid in excess for the tax years 2012 and 2014.
ix. The partial granting resulted from the provision of additional information by the Claimant in the Administrative Appeal, namely the property administration contract, underlying the invoices issued by B... Ltd (hereinafter, B...) and statements, in addition to the invoices previously presented, with the description that allows, in the understanding of the Respondent, to classify the property/service provision as current expenses or conservation and maintenance expenses.
11. The Tribunal's conviction regarding the facts found proven resulted from the documents attached to the case file and contained in the pleading and uncontested submissions of the parties, as specified in the points of the matters of fact enumerated above.
IV. On the Law
A) Arguments of the Parties
12. The Claimant, in its pleading, alleges, first, the lack of reasoning in the Tax Inspection Report, considering that the Inspection Report refrains from indicating which expenses concretely are not deductible when the description does not allow the property/service provision to be classified.
13. In fact, the Claimant considers that the TA provided obscure and insufficient justification for the correction made, particularly regarding the application of a criterion of proportionality in the deductibility of expenses incurred for obtaining real property income.
14. The Claimant further alleges that the assessment acts suffer from error regarding the assumptions of fact and law, as regards the deductibility of expenses under Article 41 of the IRS Code and the proportionality of expenses based on the number of days of rental.
15. The Claimant considers that the concept of maintenance and conservation expenses, provided for in Article 41 of the IRS Code should not be interpreted in the sense of assuming itself as a factor of rigidity capable of putting at risk the rationality that should characterize the income of Category F of IRS.
16. In this context, in the opinion of the Claimant, all types of conservation expenses provided for in the various branches of Law, such as ordinary and extraordinary conservation expenses, are deductible for tax purposes.
17. Additionally, as regards the application by the TA of a proportion to the amount of expenses whose deductibility is accepted based on the number of days of rental of the property, the Claimant understands that the same is illegal, not least due to the lack of legal support.
18. In conclusion, the Claimant then petitioned that the assessments previously mentioned be annulled, as they are manifestly illegal, with all other consequential effects.
19. For its part, the Respondent considers that the invoices presented, and disregarded as deductible expenses, relate to current expenses, thus excluded from the deduction contemplated in Article 41 of the IRS Code, and it is equally the Respondent's understanding that conservation, maintenance and real estate tax ("IMI") paid relating to the rented property should be proportionally considered based on the rental period.
20. In particular, the Respondent considers that the Final Inspection Report itemizes the expenses incurred in each of the years, stating what they relate to and identifying whether or not they are deductible, reinforcing that such is the case as later the Claimant added new documentation intended, precisely, to supplement the invoices that had omitted descriptions.
21. Furthermore, in the Respondent's understanding, the Claimant as the owner of an accommodation unit, beneficiary, therefore, of real property income, and not commercial income, can only deduct from that real property income the expenses expressly contemplated in Article 41 of the IRS Code, in the proportion that the property is dedicated to generating that income.
22. In this sense, the Respondent also considers it relevant to reaffirm, in its view, the scope of the concept of current expenses, which relate to current consumption that has no direct connection or is not inherent to the property or services that do not directly affect the property but the current use that is made of it.
23. The Respondent thus understands that the assessments it promoted result from a correct interpretation and application of the law to the facts, asking, therefore, that the claim raised by the Claimant be judged unfounded and the Respondent absolved of the claim.
24. The Tribunal's conviction as to the decision on matters of fact was based on the documents in the case file, as well as on the pleadings presented and the positions of the parties expressed therein, it being noteworthy that the parties agree on matters of fact, with disagreement limited to matters of law.
B) Tribunal's Assessment
25. By way of introduction, it should be noted that, in the understanding of the present tribunal, and having regard to the legal framework previously presented, the essential normative proposition to be considered for the decision of the case is that which results from Article 41 of the IRS Code, at the time of the facts, in which the legal framework underlying the possibility of deducting expenses from real property income obtained is provided.
Article 41 - Deductions (version 2013 and 2014)
1 - From the gross income referred to in Article 8, there shall be deducted the maintenance and conservation expenses that are incumbent on the taxpayer, borne by him and evidenced by documents, as well as the municipal real estate tax and stamp tax that relates to the value of the properties or part of properties whose income is subject to taxation in the fiscal year.
2 - In the case of an autonomous fraction of property under a condominium property regime, there shall also be deducted the conservation, use and other charges which, under civil law, the condominium owner must mandatorily bear, borne by him, and evidenced by documents.
3 - In subletting, the difference between the rent received by the sub-lessor and the rent paid by this person does not benefit from any deduction.
26. Paragraph 1 of the above article in the year 2012 presented the following wording: "From the gross income referred to in Article 8, there shall be deducted the maintenance and conservation expenses that are incumbent on the taxpayer, borne by him and evidenced by documents, as well as the municipal real estate tax that relates to the value of the properties or part of properties whose income has been aggregated", such difference in wording presenting no impact on the issues under consideration.
27. It should also be noted that, in the eyes of the arbitral tribunal, the issue under analysis concerns, exclusively, matters of law, namely to understand, for the purposes of application of the aforementioned provision, what the relevant concept of "maintenance and conservation expenses" is and, as well, to assess the legality of the application of a proportion (calculated based on the number of days the property was rented) in calculating the amount of deductible expenses incurred.
28. For ease of exposition, in this decision it is opted to individualize the analysis with regard to each of the topics identified, notwithstanding the connection existing between both.
A. Deductibility of Conservation and Maintenance Expenses
29. First, it is emphasized the existence of consolidated arbitral jurisprudence on this matter, to which in this decision full adherence is given, not least contributing to a uniform interpretation and application of the Law (Article 8, paragraph 3 of the Civil Code).
30. Among other decisions, it is worth highlighting the arbitral decisions made in the framework of cases No. 435/2014-T, No. 201/2015-T, 294/2015-T, No. 434/2016-T, discussed below.
31. Arising from the assessment of the Administrative Appeal presented by the Claimant, the TA did not accept the deductibility of the expenses detailed below by considering them as "current expenses", despite recognizing their adequate documentary support, with the exception of expenses relating to home maintenance services, which were not evidenced by a contract with the service provider (B...).
32. In particular, and as regards the expenses incurred for the services provided by B... under the aforementioned contract, note that from the descriptions (which present a level of detail common, adequate and necessary for understanding the objective/purpose sought with the property and services now in question) are, in particular, the following: "cleaning services", "social security relating to cleaning services", the detail of the products used in cleaning services (see, for example, invoice 2520 of 26 December 2012), "pressure cleaning after flooding".
33. This is particularly relevant with regard to invoices with a more generic description ("home maintenance services"), detailing the scope of the services provided, in accordance with the aforementioned contract, as follows:
a. "The Administrator, administers, at the request of, and in the interest of, the owner, the property identified above, being responsible for maintaining the property in good condition by organizing cleaning and maintenance services for all areas, gardens and swimming pool, in exchange for a monthly sum to be agreed between the parties taking into account the characteristics of the property in question.
b. The Administrator undertakes to organize the minor maintenance work to be carried out on the property, such as electrical work and minor repairs, organizing and having the owner approve budgets for carrying out larger-scale work."
34. In this context, the Respondent questions the absence of a contract concluded in the name of the Claimant with the aforementioned service provider company. The tribunal understands with regard to this fact that such is irrelevant for the purposes of this decision, given that it is never questioned throughout this proceeding by the Respondent the actual provision of the service in question, and it is therefore understood that the same did indeed occur in the manner described above, not least by the reference in the contract to the property held by the Claimant.
35. Indeed, from this it follows that the existence or absence of the aforementioned contract proves irrelevant for the purposes of evaluating the expenses borne by the Claimant, these expenses being duly evidenced, not least, through the respective invoice.
36. Now, the Respondent additionally argues, without calling into question the truthfulness of the invoices and the underlying expenses, that the disregard of those expenses results from the fact that it is not understood that they would correspond to maintenance and conservation expenses, but rather to current expenses.
37. In this regard, note that the set of expenses incurred is supported by a statement, whenever applicable, signed by a legal representative of the aforementioned service provider company, attesting to the truthfulness and scope of the services provided.
38. Note, however, and as developed in the arbitral decision made in case No. 434/2016-T, that there is no reason of a legal (or economic) order to affirm that the so-called "current" expenses are not "maintenance and conservation expenses", also because such expenses – as is easily understood from the description and list given by the Respondent itself, aim to preserve the condition (and regular operation) of the property, ensuring that it meets its purposes, allowing tenants to enjoy all the services that were and are made available to them under the contract, and for which they pay the rents.
39. Indeed, the list of expenses above is sufficiently enlightening as to the connection of the expenses (underlying the invoices in question) to the activity carried out by the Claimant. In other words, the expenses incurred by the Claimant, and identified above, were necessary for obtaining real property income, being maintenance expenses that are evidenced by documents and that, as such, are subject to deduction in light of the provisions of Article 41 of the IRS Code (both in the wording before and after Law No. 66-B/2012 of 31/12), and therefore the petitioned arbitral decision is judged well-founded in this regard.
B. Proportional Consideration of Expenses Incurred
40. In light of the factual framework discussed, it falls to the present tribunal to decide at this stage whether the expenses of Article 41 of the IRS Code can only be deductible from the gross income of Category F in proportion to the period during which the rented property was actually rented during the respective fiscal year.
41. Indeed, the topic in question has been the subject of arbitral decisions which, to date, have proven unanimous in their assessment of this matter, see, for example, the arbitral decisions made in the framework of cases No. 201/2015-T, No. 294/2015-T and No. 434/2016-T.
42. In particular, see the understanding recommended in case No. 294/2015-T: "As regards the reduction of expenses and charges through the application of an 'occupancy coefficient', such a procedure cannot be accepted, since all expenses incurred, such as cleaning of homes and the swimming pool and their sanitation treatment, water, electricity, insurance, IMI and others, will always have to be borne, regardless of the occupancy rate. Such 'occupancy coefficient', as referred to, a 'sui generis' foundation which (...), has, in this tribunal's view, no legal basis whatsoever."
43. In fact, and agreeing with the tenor of the conclusion stated therein, see, equally, the decision made in case No. 103/2017-T, in which it is sustained that the position assumed by the TA regarding the proportionality of deductibility of expenses or application of occupancy coefficient does not result from the IRS Code or the tax regime of real property income itself, and is therefore illegal.
44. In more generic terms, note, as stated in decision No. 201/2015-T:
"Now, since the elementary operation of tax calculation consists of determining taxable income, through deductions and abatements from gross income, there is no reason why these negative components should not actually have the same reference period as gross income, which is the positive component. In essence, the (gross) income earned in each year constitutes the positive elements that contribute to determining annual taxable income, and one must also consider the negative elements of the same period, which are deductions and abatements. It must thus be concluded that the general rule of IRS states that the tax is of an annual nature and it is in relation to each calendar year that the elements allowing for the determination of the incidence must be considered, namely gross income, deductions and abatements.
It does not appear that this Article 41, or any other, can lead to an exceptional regime with regard to the aforementioned general rule of annuality of IRS. Indeed, this provision does nothing more than state the general rule: from gross income there are deducted the maintenance and conservation expenses, as well as the municipal contribution. Of course, nothing is said about the period to be considered, for this was already established in Article 1; it is the annual period.
There are thus no doubts that there is no need to make any other temporal correspondence between gross income and the expenses to be deducted. There is only a need to ensure that the deductions relate to the calendar year in which the real property income was paid or made available."
45. In light of the foregoing, it is considered that the letter of the law does not provide for an exception to the deductibility of expenses based on proportionality, so that the expenses presented by the Claimant in the years 2012, 2013 and 2014, under Article 41 of the IRS Code, are legally accepted in their entirety, with the proportionality argument for deductibility of expenses based on the rental period being thus unfounded.
V. Decision
46. Therefore, this Arbitral Tribunal decides:
A) To uphold the petition for arbitral decision and, as a consequence, declare illegal and annul the IRC assessments and their compensatory interest mentioned above, by reference to the tax years 2012, 2013 and 2014, which resulted in tax paid in the amount of € 12,399.93, which amount should now be reimbursed to the Claimant;
B) To condemn the Respondent, pursuant to Article 43, paragraph 1 of the General Tax Law ("LGT") and Article 61, paragraphs 2 and 5 of the Tax Procedure and Process Code ("CPPT"), to payment of indemnity interest, at the rate resulting from paragraph 4 of Article 43 of the LGT, with there being, in the case sub judice, undoubtedly error attributable to the services in the practice of the tax acts in question, calculated on the amount paid, from the day the aforementioned assessments were paid until the complete reimbursement of the amount referred to; and
C) To condemn the Respondent to pay the costs of the proceedings.
VI. Value of the Case
47. The value of the case is fixed at € 12,399.93 pursuant to Article 97-A, paragraph 1, paragraph (a), of the CPPT, applicable by virtue of paragraphs (a) and (b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings ("RCPAT"), corresponding to the economic benefit quantified by the Claimant.
VII. Costs
48. In accordance with the provisions of Article 22, paragraph 4, of the RJAT, the value of the arbitration fee is fixed at € 918, pursuant to Table I of the aforementioned Regulation, to be borne by the Respondent, given the complete success of the petition.
Let notification be made.
Lisbon, CAAD, 27 November 2017
The Arbitrator
(Sérgio Santos Pereira)
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