Process: 237/2017-T

Date: January 22, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 237/2017-T) addresses the controversial tax classification of income from tourist property exploitation contracts under Portuguese IRS law. The case involved a Spanish resident taxpayer who challenged additional IRS assessments for 2012-2014, where the Tax Authority reclassified her declared Category B income (business income) to Category F income (rental income). The taxpayer had entered into a tourist exploitation management contract with a company to operate her apartment, declaring the resulting income as business income under Article 3(1)(a) of the IRS Code. The Tax Authority, relying on Circular 5/2013, determined that the taxpayer's conduct was passive, warranting reclassification to Category F. The taxpayer raised three main arguments: (1) the Tax Authority failed to provide adequate substantiation for the assessment acts; (2) income from tourist exploitation contracts should be taxed as Category B regardless of whether operation is direct or delegated to a third-party manager, as the law does not distinguish between these scenarios; and (3) Circular 5/2013 constitutes administrative guidance that lacks binding legal force and cannot override statutory law. Additionally, the taxpayer argued that even if Category F classification were correct, the Tax Authority incorrectly calculated taxable income by disallowing deductible expenses such as maintenance, cleaning, utilities, insurance, and property administration costs permitted under Article 41 of the IRS Code. This case highlights the tension between formalistic application of administrative circulars and substantive interpretation of tax statutes, particularly regarding the active versus passive nature of tourist property management arrangements and the proper scope of deductible expenses in each income category.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. On 4.04.2017, the Claimant, A…, taxpayer number …, resident at …, …, …, Spain, requested the CAAD to constitute an arbitral tribunal, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), against the Tax and Customs Authority as Respondent, with a view to the annulment of the additional IRS assessment act no. 2016… relating to the year 2012, as well as the additional IRS assessment act no. 2016…, the compensatory interest assessment act no. 2016…, and the account settlement statement no. 2016…, all relating to the year 2013, and further, the additional IRS assessment act no. 2016…, the compensatory interest assessment act no. 2016… and the account settlement statement no. 2016…, relating to the year 2014.

  2. The request for constitution of the arbitral tribunal was accepted by the Honourable President of the CAAD and notified to the Tax and Customs Authority.

Pursuant to the terms and for the purposes provided in paragraph 1 of article 6 of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable time periods, the undersigned was appointed as arbitrator, and communicated to the Deontological Council and the Centre for Administrative Arbitration the acceptance of the assignment within the regularly applicable time period.

The Arbitral Tribunal was constituted on 22-06-2017.

  1. The grounds presented by the Claimant in support of her claim were, briefly, as follows:

  • The reasoning of the final tax inspection report, which constitutes the substantiation of the tax acts that are the subject of this arbitral request, is neither congruent nor clear, and the Tax Authority is under the legal duty not only to indicate all facts in a clear and coherent manner, but also to indicate and support its conclusions with the corresponding legal provisions.

  • Only with the indication of all reasons, of fact and of law, can the objecting party, in good conscience, assess the legality of the acts practised by the Tax Administration and thus opt for their contestation or acceptance.

  • In the case at hand, the Tax Authority understood that the Claimant's conduct is passive and for that reason the income she declared as category B income should be taxed as category F income, pursuant to Circular no. 5/2013 of 2 July 2013.

  • Since the late husband of the Claimant was the owner of the tourist operation of the apartment and had ceded the operation thereof to B… SA, NIPC … (hereinafter referred to only as "B…"), nevertheless maintaining in his sphere the risk of operation, it is not understood in what measure the Claimant exercises the tourist operation in a passive manner.

  • It appears from the reading of the Tax Inspection Report that the understanding of the Tax Inspection Services is nothing more than a conclusive judgment that has no support in the facts nor in the law, but only in a circular, which is not above the law, and it must be concluded that the Tax Authority failed to comply with the legal duty, constitutionally enshrined, of express, clear and comprehensive substantiation of the decisions that weigh upon it, and therefore, the contested tax acts should be annulled.

  • On the other hand, unless better advised, it is manifest that the income earned by the Claimant is category B income under the IRS Code and not category F income.

  • On 29 October 2010, the Claimant and her husband, since deceased, signed a contract with C…, S.A. for the cession of tourist operation of the … identified above, appointing this entity, the company B…, to the functions of manager.

  • From this contract, it results that the manager always acted on account and in the interest of the Claimant and her husband while carrying out the operations necessary to realize the tourist operation of the apartment identified above.

  • It is established jurisprudence that "provided that there exists an increase in value accruing to a patrimony by virtue of the exercise of an economic activity (even if expressed in a single act) translated into the creation of an economic utility, resulting from any relationship of the agent/taxpayer with third parties in which, satisfying the economic needs thereof, the patrimony increases (mediation between supply and demand) there will be a commercial activity" (Supreme Administrative Court Decision of 24.02.2016, case no. 580/15).

  • It is manifest that all income derived within the scope of income-generating activities of commercial activities are taxed in category B, namely those resulting from hotel and similar activities.

  • Although the Tax Authority argues, in the course of tax inspection, for a restrictive interpretation of the concept of "exercise", considering that for purposes of taxation under category B only profits resulting from direct operation of the Unit are admissible, the Claimant understands that this interpretation finds no support in the literal tenor of subparagraph a), of paragraph 1, of article 3 of the IRS Code, which is why all results obtained during the fiscal year attributable to the activity of operating a tourist enterprise should be considered, whether they are results derived from direct operation, or whether through the contracting of services from an entity to operate the unit.

  • If the legislator intended to exclude from the scope of subparagraph a), of paragraph 1, of article 3 of the IRS Code the income resulting from operation arising from the contracting of services, as the Tax Administration understands, it was necessary that it expressly determine that only results derived from direct operation were subject to taxation within category B of the IRS Code, which did not happen, and therefore, the income in question should be taxed within subparagraph a), of paragraph 1, of article 3 of the IRS Code.

  • Circular no. 5/2013 of 2 June 2013, invoked by the Respondent, like any other administrative guidance, only binds the organs of the Tax Administration and is not considered a source of tax law, and therefore has no binding external efficacy of its own, not even being subject to publication, which is why taxpayers are in no way obliged to comply with its provisions, nor are the Courts.

  • Thus, because the contested tax acts are based on a circular contra legem, they should be annulled as manifestly illegal.

  • Even if it were admitted – which is done merely as a precaution and duty of representation – that the income obtained by the Claimant is effectively category F income under the IRS Code, the reality is that the Claimant's taxable matter would never be in the amount ascertained by the Tax Inspection Services in the course of tax inspection, for contrary to the Tax Authority's position, pursuant to and for the purposes of article 41 of the IRS Code, should be understood as deductible expenses to category F income of the IRS the maintenance and conservation expenses relating to cleaning personnel, gardener's salary, electricity, water and gas, costs of renting a house with equipment, repairs and paintings, insurance premiums and costs of property administration, insofar as they are essential to obtain the income in question.

  1. The ATA – Tax and Customs Authority, called upon to make a statement, contested the Claimant's claim, defending itself by objection, in summary, with the following grounds:

  • Regarding the alleged lack of substantiation of the corrections now challenged, such understanding must be disagreed with, particularly because, from the reading of the inspection report, a reasonable person, placed in the position of recipient, can grasp its meaning and conclusion.

  • In the present case, the substantiation is sufficiently clear and unequivocal, especially since the Claimant, through this request for arbitral pronouncement, not only demonstrates, in light of the arguments set forth throughout her pleading, to have fully understood the factual and legal framework on which the Respondent's decision was based, as it attempts to rebut, point by point, all of her actions.

  • As a matter of fact, she had also fully understood the same factual and legal framework at the prior hearing stage, and therefore the defect of lack of substantiation is considered not to have occurred.

  • Between the present Claimant and the selling company, a contract for cession of tourist operation of the unit … was signed, pursuant to which the company C… SA obtained the right to constitute a commercial company for the management of the "…", a situation that came to be implemented with the incorporation of the company B… SA, NIPC….

  • Thus, the Claimant ensures the tourist operation of the property in question, through the services of the company B…, granting it exclusive authorization to exploit the apartment, of which the Claimant is the owner, for tourist purposes and on its own account.

  • Thus, the Claimant mandated the company B… to in its own name and on its own account receive the remuneration relating to the operation of her property, such company obtaining the right to retain 25% of the gross revenue of the respective operation.

  • The income earned by the Claimant therefore derives from the provision to third parties of the properties, which are managed and maintained by the company B…, which also manages short-term rentals, collecting the amounts due and providing all other associated services, such as for example cleaning.

  • Finally, this company provides to the owner the amounts contractually agreed.

  • It should be noted that the owner had no involvement in obtaining the licensing.

  • In this manner the income that the Claimant earns comes from a merely passive manner, as a result of the pursuit of a commercial activity by the company B….

  • The Claimant demonstrated no organization of an entrepreneurial character to obtain the same.

  • The law expressly states that income understood as business income is that derived from the exercise of any commercial activity.

  • And, taking into account both the meaning of the concept used in the legal norms in question, and the interpretation that the jurisprudence of the superior courts has made thereof, one can only conclude that the Claimant has no reason.

  • Effectively, searching in the Portuguese dictionary for the meaning of the word "exercise", it is verified that this corresponds to the act of exercising or practicing, to the practice and use of something, thus, for what matters here, to the performance of a professional activity.

  • In other words, the use of the word "exercise" in the wording given to the norm, by contrast with the words used in article 8 of the CIRS, to define what are category F income, has underlying the practice of acts with a certain purpose which, in this case, will be the obtaining of profit.

  • Thus, to claim, as the Claimant does in the request for arbitral pronouncement, that the fact of having declared the start of activity, affirming the intention to exercise an activity of tourist operation (when, effectively, nothing more was done beyond acquiring a property), should be valued as sufficient for the qualification of the income as attributable to category B, when afterwards one effectively does not exercise the declared activity, would be to give primacy to form over substance, contrary to the most elementary principles of tax law.

  • From the reading of the cession of operation contract, it clearly results that the Claimant never assumes the functions of person responsible for the operation of the accommodation, such functions being assumed by the Manager in its different aspects.

  • For this very reason, the Tax Inspection Services (hereinafter SIT) considered that the income in question corresponds to property income classifiable in category F of the IRS (article 8 of the Code of Personal Income Tax).

  • Because, being in question income relating to the cession of the use of the property or part thereof, the amounts received by the owners, as consideration for the cession of the use of the apartments, are considered property income, in accordance with the provision in subparagraph a) of paragraph 2 of article 8 of the IRS Code regardless of the fact that the amount received is not fixed.

  • As for the Claimant's claim that the full amount of expenses with staff salaries, cleaning, electricity be accepted, pursuant to article 41, paragraph 1 of the IRS Code, in the wording in force at the date of the facts, "From the gross income referred to in article 8 are deducted maintenance and conservation expenses that are the responsibility of the taxpayer, supported by him and proven by documentation, as well as the municipal property tax and the stamp duty that affects the value of the properties or part of properties whose income is subject to taxation in the fiscal year. (Wording given by law no. 66-B/2012, of 31 December)."

  • Therefore, it is necessary to assess whether those expenses mentioned in the abstract by the Claimant, and not demonstrated in the arbitral proceedings, have the character of conservation and/or maintenance expenses that are the responsibility of the taxpayer.

  • Thus, by means of these concepts, it appears, from the outset, that the expenses mentioned by the Claimant do not constitute conservation expenses nor, either, maintenance expenses.

  • On the other hand, and regarding expenses with salaries and cleaning, sections 5 and 6 of the cession contract show that these charges are the responsibility of the Manager, which means they are not the responsibility of the Claimant, the owner herein.

  • Thus, also on this point, the Claimant has no reason in the petitioned matter.

  1. Verifying the non-existence of any situation provided for in article 18, paragraph 1, of the RJAT, that would make necessary the arbitral meeting provided therein, its realization was dispensed with, based on the prohibition of the practice of useless acts.

The presentation of allegations was also dispensed with, pursuant to article 18, paragraph 2, of the RJAT, "a contrario".

  1. By order of 10.12.2017, taking into account that the Claimant identified in the request for arbitral pronouncement, the assessment relating to the year 2012, as "additional IRS assessment act no. 2016… relating to the year 2012, from which resulted a total collection of € 6.091,25 (See Document 1 which is attached and deemed fully reproduced)" and that from document 1 appears a total and net collection of € 9702,3, the mention of withholdings at source in the amount of € 15.501,35 and a copy of a non-negotiable check, in the amount of € 6091,25, issued by the Tax and Customs Authority in favor of A… and D…, the Tribunal notified the Claimant to within ten days clarify the aspects mentioned, namely, if necessary, rectifying the value of the tax act in question.

  2. Following said order, the Claimant came to allege that:

a) The Claimant declared, for purposes of IRS, relating to the year 2012, the following:

Category B

Income for determination of the rate 2.852,32 €

Collection (25%) 713,08 €

Withholdings at source 17.541,01 €

Refund in favor of the

Claimant 16.827,93 €

b) Following the corrections made by the tax inspection that occurred in 2016, the Tax Authority proceeded with the following corrections:

Category F

Income for determination of the rate 58.801,80 €

Collection (25%) 9.702,30 €

Withholdings at source 17.541,01 €

Refund in favor of the

Claimant 7.838,71 €

c) Said refund of € 7.838,71 was made, partially, by check (in the amount of € 6.091,25) and, partially, made by bank transfer to the Claimant's account (€ 1.747,46).

d) Considering the above, it is verified that the Claimant intends, with this action, to be refunded, for the year 2012, in the amount of € 8.989,22 (corresponding to the difference between the refund calculated under Category B - of € 16.827,93 - and the refund calculated under Category F - of € 7.838,71)

e) In that measure, considering the above, it is verified that the Claimant intends to contest the illegality of the IRS assessment no. 2016… relating to the year 2012, regarding the failure to refund the amount of € 8.989,22.

f) It is thus noted that the value of the tax act contested herein is € 8.989,22.

Thus, the value of the action is set at € 29815,84 which corresponds to the value initially indicated (€2691787) added to the difference (€ 2.897,97) between the value now indicated (€ 8.989,22) and the initially identified (€ 6.091,25)

  1. The tribunal is materially competent and is regularly constituted pursuant to the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate it.

  1. The following issues must be resolved:

a) Illegality of the tax acts subject of the proceedings due to lack, incongruence or insufficiency of substantiation.

b) Illegality of the tax acts subject of the proceedings, due to a defect of violation of law.

II – THE RELEVANT FACTS

  1. The following facts are considered proven:

  2. On 18.08.2016, by Service Order number 2016…/…/…, determined by order of the Finance Director of Faro, an internal inspection action was opened with a view to controlling property rental, with the Claimant and the since deceased husband D… being inspected and had limited scope in IRS, as provided in subparagraph b) of paragraph 1 of article 14 of the Supplementary Framework of Tax and Customs Inspection Procedures (RCPITA), with extension to the years 2012, 2013 and 2014.

  3. As a result of the inspection procedure, the Respondent determined corrections to the taxable IRS income, of a purely arithmetic nature, in the amounts of 55.949,48€, 32.729,98 and € 11.754,12€, in the years 2012, 2013 and 2014, respectively, which gave rise to the following tax acts:

a) Relating to the year 2012:

Additional IRS assessment act no. 2016…, from which resulted a total and net collection of € 9702,30, consisting of the amount of 15,501,35 € of withholdings at source made by taxpayers.

b) Relating to the year 2013:

Additional IRS assessment act no. 2016…, from which resulted a collection, total and net, of 16.579,25; compensatory interest assessment act no. 2016…, and account settlement statement no. 2016…, which taking into account the additional assessments and compensatory interest, withholdings at source made and the refund made to taxpayers as a consequence of the original assessment, results in an amount to pay of € 15.907,46.

c) Relating to the year 2014:

Additional IRS assessment no. 2016…, from which resulted a collection, total and net of € 16.343,31; compensatory interest assessment act no. 2016… and the account settlement statement no. 2016…, which taking into account the additional assessments and compensatory interest, withholdings at source made and the refund made to taxpayers as a consequence of the original assessment, results in an amount to pay of € 4.919,76.

  1. From the tax inspection report that preceded and serves as the basis for the tax assessment acts subject of these proceedings, it appears, in particular, the following:

(…)

  1. The Claimant is registered for the exercise of the activity "Tourist apartments without restaurant" CAE 55123 since 2010-11-05, being classified in the normal scheme of quarterly periodicity in VAT and in the scheme of organized accounting, by choice, in IRS.

  2. The present Claimant is a non-resident taxpayer on national territory and according to the Tax Authority's computer system, has as her representative the company "E… Lda." NIF…, with headquarters at …, …, …–…, being taxpayer B is D… NIF….

  3. Unproven facts.

With interest for the decision of the case, the contractual clauses of the tourist operation contract were not proven, because the contract in question was not joined to the proceedings. In fact, on this matter, the Claimant initially attached an alleged contract, not signed in which the late husband of the Claimant D… appeared as grantor, with the mention of being married to her. Notified to attach to the proceedings the properly signed contract, she attached an alleged contract, signed by her and by the other grantors, in which, differently from the alleged contract initially attached, she herself appears as grantor with the mention of being married to D…. In these circumstances, it cannot be considered that the Claimant attached the contract object of the notification since the signatories of the document do not entirely coincide with that of the alleged contract initially attached to the proceedings, which is why it cannot be considered.

However, considering the substantiating discourse of the tax inspection report which, in essence, regarding the content of the contract, does not depart from the draft contract attached, the proof of the contract's clauses by the Claimant does not prove to be absolutely essential to the decision of the case.

  1. The Tribunal's conviction regarding the decision of the facts was based on the documents contained in the proceedings, as well as the pleadings presented, and it should be noted that there is complete agreement between the parties regarding the facts considered proven, with disagreement limited to the matter of law.

III – APPLICABLE LAW

  1. Having the objecting party imputed various defects to the contested tax acts, it is necessary to determine the order of knowledge thereof, the order of article 124 of the CPPT being observed, applicable by virtue of article 29, paragraph 1, subparagraph a) of the RJAT (See Jorge Lopes de Sousa, Commentary to the Legal Framework for Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2017, Almedina, page 205).

The merits of any of the defects invoked by the claimant will lead to the annulment of the tax act. However, the defect of violation of law is the one that will lead to the "more stable or effective protection of the interests offended" insofar as its eventual merits will prevent the renewal of the act, which does not occur with the annulment resulting from the defect of lack of substantiation.

In conformity, the Tribunal will first assess the defect of violation of law, formulated as the main claim by the Claimant.

  1. The legal issue to be resolved first concerns the question of whether the commercial activity of hospitality in question, exercised with reference to the apartment of which the Claimant was owner with her late husband, is exercised by the company B… SA, as sustained by the Tax Authority, or, differently, by the owners of the fraction, as sustained by the Claimant.

The Respondent sustains that the income obtained by the owners was in a merely passive manner and that the direct exercise of the activity was effected by the company B…, with those not bearing the business risk, nor disposing of entrepreneurial organization.

The Claimant, by contrast, understands that the activity was exercised by her through the contracting of the company B…, whose services she paid for, with the owners bearing the business risk.

On the other hand, she understands that subparagraph a), of paragraph 1, of article 3 of the IRS Code provides for the exercise of commercial activity but does not require that such exercise be direct, and can therefore such exercise be done through the contracting of another entity for that purpose.

She further alleges that Circular no. 5/2013 of 2 June 2013, by requiring that the activity be exercised directly, excluding the exercise in an indirect manner through the contracting of another entity for that purpose, proceeds to a restrictive interpretation of the mentioned norm, having an innovative character, and, like any other administrative guidance, only binds the organs of the Tax Administration and is not considered a source of tax law, and therefore have no own binding external efficacy, not even being subject to publication, which is why taxpayers are in no way obliged to comply with the provisions thereof, nor are the Courts.

Thus, because the contested tax acts are based on a circular contra legem, they should be annulled as manifestly illegal.

Let us examine this.

Article 3 of the CIRS provides as follows:

"1 - Business and professional income is considered to be:

a) That derived from the exercise of any commercial, industrial, agricultural, forestry or livestock activity; […];"

In turn, pursuant to article 4 of the CIRS:

"1 – Commercial and industrial activities are considered to be in particular the following:

(…)

h) Hotel and similar activities, restaurants and beverages, as well as the sale or exploitation of the right to periodic housing;"

On the other hand, the following was the wording of article 8 of the same Code, at the date of the facts, in the part relevant for the case at hand:

"1 - Property income is considered to be the rents of rural, urban and mixed properties paid or made available to their respective holders.

2 - Are considered rents:

a) The amounts relating to the cession of the use of the property or part thereof and services related to such cession;

b) The amounts relating to the rental of machinery and furniture installed in the rented property; […]"

Article 8, paragraph 1, of the CIRS, in the wording at the date of the facts, classified in category F, on a mandatory basis, the remuneration (rent) accruing to the lessor of rural, urban and mixed properties.

José Guilherme Xavier de Basto tells us that "The law, in paragraph 2 of article 8, defines rent, better said, redefines rent, for purposes of IRS. The redefinition is necessary, especially since today, the General Tax Law, in its article 11, paragraph 2, contains the principle according to which, whenever in tax laws are employed terms proper to other branches of law (…) such terms shall be worth with the meaning they have in that branch of law, unless the law provides otherwise. The principle thus leads to the fiscal legislator having to be cautious when using words that may have a technical meaning in another branch of law, in the present case in civil law, and frequently proceeds to redefinitions for tax purposes.

We are obviously not going to discuss here the concept of rent in civil law, in the law of leasing. The concept of fiscal rent, the only one that interests us here, is broader than the civil law concept.

The six subparagraphs of paragraph 2 of article 8 delimit the fiscal concept of rent."[1]

In the abstract, the situation in question could only be classified in subparagraphs a) and b) of paragraph 2 of article 8 of the CIRS, which appears to be the position of the Respondent.

Under these subparagraphs, Xavier de Basto further tells us[2]:

"Subparagraph a) contains the basic concept: rent is the amount relating to the cession of the use of property or part thereof and services related to such cession. Note that the law refers to the cession of the use of property, without caring to distinguish between the different causes of cession. In most cases, the cause will be the lease contract, but the norm clearly covers other legal situations.

(…)

Subparagraph b) equates rent to "the amounts relating to the rental of machinery and furniture installed in the rented property". This is an elementary caution of the legislator, intended to avoid temptations of fraud, separating from the rent, taxable in category F, the price of the lease of machinery and furniture. (…)"

In the case at hand, it is clear that we are not in the presence of a lease contract (nor is this even alleged by the Respondent).

Let us then see whether the income in question results from the cession of the use of the property, the services related to such cession and/or the amounts relating to the rental of machinery and furniture installed in the rented property.

The answer can only be negative.

In fact, it is inherent in subparagraphs a) and b) of paragraph 2 of article 8 that the cession of the use of the property or the rental of machinery is made to a third party who pays to the cedent or to the lessor, in return for that use.

Now, B…, according to the Tax Inspection Report, in substance, pays nothing to the owners, but rather receives from them remuneration for the services it provides.

The amounts that B… makes available to the owners are not amounts of which it is the owner, but rather that are in its custody as mandatary thereof.

The degree of success of the business is reflected fundamentally in the legal sphere of the owners and not of the manager, although the latter is also interested in the results of the business insofar as its remuneration for the services it provides amounts to 25% of the gross revenue of the operation.

On the other hand, the costs with the activity developed also run, essentially, on account of the owners, have specific components, notably very different from the normal charges of a fraction intended for mere cession of use, and are in value significantly superior.

The revenues are, also, in line with what happens with the expenses, in significantly superior value to what is common in remuneration for the simple cession of use.

In fact, according to the RIT:

[redacted data]

And also consisting of:

[redacted data]

And also that:

[redacted data]

On the other hand, neither can it be considered that there occurs "cession of the use of the property or rental of machinery" to the client users of the property since the sums paid by the clients relate to the accommodation service that is provided to them, with the owners of the fraction bound to a broad and costly set of expenses in order to provide such services, which they bear in their legal sphere, nothing preventing, moreover, any commercial activity from being exercised, even entirely, through the contracting of external services to the entity, which moreover derives from the principle of freedom of management, constitutionally enshrined.[3][4]

Furthermore, it should be added that, contrary to what is sustained by the Respondent, from the contractual clause of the contract for tourist operation emerges that the owners maintain in their sphere the business risk, as demonstrated by the contractual clauses invoked by the Respondent in the tax inspection report, mentioned above.

As Pedro Pais de Vasconcelos writes, "The contract for tourist operation, as a non-legal social type, as recognized by jurisprudence and doctrine, typically has accommodations as its object. (…)

The contracts for tourist operation depart clearly from leasing and approach service provision, and have a partnership aspect, characteristic of participation in association, which can be more or less accentuated depending on the cases"[5]

It is therefore manifest that the situation in question does not fall within subparagraphs a) and b), of paragraph 2, of article 8 of the CIRS, and cannot consequently fail to be classified under articles 4, paragraph 1, subparagraph h) and 3, paragraph 1, subparagraph a) of the CIRS, because, as can be read in the Supreme Administrative Court decision of 24.02.2016, case no. 580/15, cited by the Claimant:

"Provided that there exists an increase in value accruing to a patrimony by virtue of the exercise of an economic activity (even if expressed in a single act) translated into the creation of an economic utility, resulting from any relationship of the agent/taxpayer with third parties in which, satisfying the economic needs thereof, the patrimony increases (mediation between supply and demand) there will be a commercial activity"

Thus, it is concluded that the increases in patrimony in question constitute category B income for IRS purposes.

And such conclusion is not prevented, as is clear and uncontroversial, by Circular no. 5/2013 of 2 June 2013, for as can be read in the Supreme Administrative Court decision of 21-06-2017, delivered in case 0364/14, in line with settled jurisprudence and doctrine:

"Indeed the administrative guidance conveyed in the form of a circular of the Tax Administration do not constitute provisions of legislative value (…).

As clarified by CASALTA NABAIS (Tax Law, 6th ed., Almedina, p. 197), "the so-called administrative guidance, traditionally presented in the most diverse forms such as instructions, circulars, office-circulars, office-circulated letters, normative orders, regulations, opinions, etc.", which are very frequent in tax law constitute "internal regulations which, because they are directed only at the tax administration, only this need obey them, being therefore binding only for the organs situated hierarchically below the organ of the author thereof.

Therefore they are not binding either for individuals or for the courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating work methods or modes of action, whether they are interpretative regulations, which proceed to the interpretation of legal provisions (or regulatory).

It is true that they densify, clarify or develop legal provisions, previously defining the content of the acts to be practiced by the tax administration upon their application. But this does not convert them into standards of validity of the acts they support. In fact, the assessment of the legality of the acts of the tax administration should be carried out through direct comparison with the corresponding legal norm and not with the internal regulation, which has been interposed between the norm and the act".[6]

Thus, the assessments subject of these proceedings cannot fail to be annulled due to a defect of violation of law, thereby rendering prejudicial the knowledge of the other defects invoked by the Claimant.

IV – DECISION

Thus, the arbitral tribunal decides to uphold the request for arbitral pronouncement and, consequently, annuls the tax acts subject of these proceedings.

Value of the action: € 29815,84 (twenty-nine thousand eight hundred and fifteen euros and eighty-four cents) pursuant to the provision in article 306, paragraph 2, of the CPC and 97-A, paragraph 1, subparagraph a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Arbitration Proceedings.

Costs against the Respondent, in the amount of € 1530,00 (one thousand five hundred and thirty euros) pursuant to paragraph 4 of article 22 of the RJAT.

Notify.

Lisbon, CAAD, 22 January 2018

The Arbitrator

Marcolino Pisão Pedreiro

[1] IRS REAL INCIDENCE AND DETERMINATION OF NET INCOME, Coimbra Editora, 2007, pages 343-344.

[2] Op. cit. p. 344.

[3] See articles 61, paragraph 1, 80, subparagraph c) and 86 of the Constitution of the Portuguese Republic.

[4] Explain J.J. Gomes Canotilho-Vital Moreira that "Private initiative freedom has a dual meaning. It consists, on the one hand, in the freedom to initiate an economic activity (freedom to create an enterprise, freedom of investment, freedom of establishment) and, on the other hand, in the freedom of organization, management and activity of the enterprise (freedom of enterprise, freedom of the entrepreneur, entrepreneurial freedom). In the first sense, it is a personal right (to be exercised individually or collectively); in the second sense it is an institutional right, a right of the enterprise in itself)." (CONSTITUTION OF THE PORTUGUESE REPUBLIC ANNOTATED, Coimbra Editora, 4th Ed., 2007, I vol., p. 790)

[5] ATYPICAL CONTRACTS, Almedina, 2nd Ed., 2009, pages 201-202.

[6] http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/c8eb7132b6a9c68f8025814c003198fb?OpenDocument&ExpandSection=1&Highlight=0,orienta*,interpretação,circula*#_Section1

Frequently Asked Questions

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How are income from tourist exploitation contracts classified for IRS purposes in Portugal?
Income from tourist exploitation contracts is classified based on the nature of the taxpayer's activity. If the owner actively operates the tourist accommodation or maintains operational risk despite delegating management tasks, the income qualifies as Category B (business income) under Article 3(1)(a) of the IRS Code. However, if the owner's conduct is purely passive, merely receiving rental payments without bearing operational risks, the Tax Authority may reclassify it as Category F (rental income). The classification depends on economic substance rather than contractual form, with Circular 5/2013 providing administrative guidance on distinguishing active from passive exploitation.
What is the difference between Category B and Category F income in Portuguese IRS taxation?
Category B income comprises profits from commercial, industrial, agricultural, and professional activities, including hotel and similar tourist accommodation operations. It allows comprehensive deduction of business expenses and requires active economic participation. Category F income consists of rental payments from property letting and other passive capital yields. It permits only limited deductions specified in Article 41 of the IRS Code, such as maintenance, conservation, insurance, and property administration costs. The key distinction lies in the taxpayer's role: active business management versus passive property ownership with minimal involvement in operational decisions.
Can passive tourist property management be reclassified from business income to rental income by the Portuguese Tax Authority?
Yes, the Portuguese Tax Authority can reclassify tourist property income from Category B (business income) to Category F (rental income) if it determines the owner's participation is passive. This reclassification typically occurs when the owner delegates all management functions to a third-party operator without maintaining operational risk or active involvement. However, such reclassification is challengeable through administrative appeals or CAAD arbitration if the taxpayer can demonstrate active participation, operational risk-bearing, or that the Tax Authority's interpretation contradicts statutory provisions. Mere reliance on administrative circulars like Circular 5/2013 may be insufficient if the circular's interpretation exceeds or contradicts the IRS Code.
What role does Circular 5/2013 play in determining the tax treatment of tourist accommodation income?
Circular 5/2013 of July 2, 2013, provides administrative guidance distinguishing between active tourist exploitation (Category B) and passive rental arrangements (Category F). It instructs Tax Authority officials on classification criteria but does not constitute binding tax law. As administrative guidance, it binds only tax officials, not taxpayers or courts. Taxpayers can challenge assessments based solely on circulars by arguing they are contra legem (contrary to law). Courts and arbitral tribunals independently interpret statutory provisions without being bound by circulars, making them persuasive but not determinative in disputes over income classification for tourist accommodation activities.
What are the grounds for annulling additional IRS tax assessments through CAAD arbitration proceedings?
Grounds for annulling additional IRS assessments through CAAD arbitration include: (1) insufficient or unclear substantiation of the assessment acts, violating constitutional and statutory requirements for reasoned administrative decisions; (2) incorrect legal classification of income contrary to IRS Code provisions; (3) reliance on administrative circulars that contradict or improperly extend statutory law (contra legem application); (4) mathematical errors in calculating taxable income; (5) improper denial of legitimate deductions permitted by law; and (6) procedural irregularities in the inspection or assessment process. The tribunal examines both substantive legality and formal compliance with taxpayer rights established in the Portuguese Tax Procedure Code and Constitutional provisions.