Summary
Full Decision
ARBITRAL DECISION
REPORT
A..., taxpayer number..., resident at Rue..., no.... ..., ...-... in Lisbon, hereinafter referred to as the "Applicant", has requested the establishment of an Arbitral Tribunal pursuant to Articles 2, No. 1, paragraph a) and 10, No. 1, paragraph a) and No. 2, both of the Legal Framework for Tax Arbitration ("RJAT"), approved by Decree-Law No. 10/2011, of 20 January, and Articles 96 et seq. of the Tax Procedure and Process Code ("CPPT"), with the Tax and Customs Authority ("AT") being the Respondent.
The Applicant has submitted a request for an arbitral decision against the ex officio assessment of Personal Income Tax ("IRS") made by the Respondent under No. 2017..., of 5 December 2017, for the year 2016, issued in the total amount of €35,210.06, including compensatory interest of €103.54, of which he contests the partial amount of €6,123.53, seeking that the same, to the extent applicable, be declared null due to formal and substantive defects.
He further petitions, in a subsequent request for extension of his claim, the condemnation of the Respondent to restitution of the said amount, plus a set of expenses incurred within the scope of tax enforcement proceedings No. ...2018..., including default interest, court costs and fees and expenses relating to the provision of security in the form of a voluntary mortgage (registration at the Land Registry Office, Stamp Duty and notarial deed), totaling €6,867.49, to which he believes should be added indemnity interest calculated from the date of payment until actual receipt.
The Applicant bases his claim on formal and substantive defects. He begins by invoking formal defects relating to:
Lack of competence of the author of the act, given that, in his understanding, pursuant to Articles 65, Nos. 4 and 5 of the IRS Code, the competent body to perform the act should be the Director of Finance and not the (head of the) Finance Service from which the ex officio Declaration originated (cf. Article 65, No. 5 of the IRS Code);
Complete lack of reasoning (cf. Article 66 of the IRS Code and Article 268, No. 3 of the Constitution ("CRP")); and
Omission of pronouncement on the arguments presented in the exercise of the right to be heard, in violation of that required by Article 60, Nos. 5 and 7 of the General Tax Law ("LGT").
With regard to material defects, the Applicant alleges error of law concerning the determination, by excess, of the capital gain on immovable property calculated by the AT in the sale of the autonomous unit. On the one hand, he contends the incorrect calculation of the acquisition value of the alienated immovable property by the AT, which, in his view, should be determined pursuant to Article 46, No. 2 of the IRS Code, with reference to the specific rules of the Municipal Tax on Onerous Transfers of Immovable Property ("IMT"), and not No. 1 of the same article, which takes the value on which the IMT or Sisa was assessed. On the other hand, he rejects the non-acceptance, by the AT, as charges to be added to the acquisition value of the immovable property, and therefore to be deducted from the sale value for the purpose of calculating the capital gain, of the monthly condominium fees borne by him in the 12 years preceding the sale of the property and of extraordinary amounts paid to the condominium for common building works, as this is contrary to what is provided in Article 51, paragraph a) of the IRS Code.
The Applicant called two witnesses and submitted documents.
The request for establishment of the Arbitral Tribunal was accepted by the President of CAAD and followed normal proceedings, including notification to the AT.
The Deontological Council appointed the undersigned as sole arbitrator of the Arbitral Tribunal, who communicated acceptance of the assignment within the applicable period, pursuant to Articles 6, No. 1 and 11, No. 1, paragraph a), both of the RJAT, and Article 4, No. 2 of the CAAD Deontological Code.
The parties, duly notified, manifested no intention to refuse the appointment, as provided for in the CAAD Deontological Code, and the Arbitral Tribunal was established on 27 March 2018, in accordance with Article 11, No. 1, paragraphs b) and c) of the RJAT.
The Respondent submitted a response and submitted the administrative file and documents.
It considers the formal defects unfounded, since the Applicant was informed of the AT's position and notified to exercise the right to be heard, which he did. With regard to substantive arguments, it contends that the acquisition value of the immovable property for the purpose of calculating the capital gain taxable under IRS was correctly determined pursuant to Article 46, No. 1 of the IRS Code, given the fact that such acquisition was subject to Sisa (predecessor of IMT), and should therefore correspond to the amount that served as the basis for the assessment of this tax.
As regards condominium expenses, it holds that the Applicant did not provide documentary proof thereof and that, additionally, these cannot be subsumed under Article 51, paragraph a) of the IRS Code, as they do not constitute necessary expenses inherent to the acquisition and alienation of the immovable property in question.
The Respondent requested a waiver of witness evidence production and concluded that the request for arbitral decision was unfounded, due to lack of legal support.
The Tribunal denied the request for waiver of witness evidence, considering that proof of facts such as the performance of works, their nature and scope, is not restricted to the production of documents and may be accomplished through other means of proof.
On 4 June 2018, the meeting referred to in Article 18 of the RJAT took place and the two witnesses presented by the Applicant were examined. During this meeting, the parties were notified of the opportunity for further submissions and of the deadline for the decision, which was set at 27 September 2018, with notice to the Applicant to pay, by that date, the subsequent arbitration fee, pursuant to Article 4, No. 3 of the Regulations on Costs in Tax Arbitration Proceedings, and to communicate such payment to CAAD.
The Applicant submitted further submissions, maintaining in essence the arguments contained in his request for arbitral decision and the request for partial annulment of the IRS assessment, supplemented as follows:
The grounds of the AT were communicated after the fact, when the IRS was already assessed and in enforcement proceedings and the matter had been submitted to the Arbitral Tribunal;
Proof was provided of condominium expenses and conservation and structural works on the building, which should be considered as charges relating to the improvement of the property;
Although Sisa was assessed in the acquisition of the autonomous unit in question, this was due to the action of a business manager without authorization from the Applicant, which did not duly take into account the status of which he was the beneficiary, as holder of an emigrant savings account, pursuant to Article 8 of Decree-Law No. 140-A/86, of 14 June and Decree-Law No. 540/76, of 9 July. Therefore, the Applicant was exempt from Sisa, and thus the provision of Article 46, No. 2 of the IRS Code applies to him and not No. 1. If this were not understood, the Applicant would be entitled to deduct the entire acquisition value contained in the public deed and not merely half.
The Respondent's further submissions followed, maintaining the substance of the Response and concluding that the request was entirely unfounded. The Respondent reiterates the lack of proof of payment of condominium and work expenses on the part of the Applicant, and deems it irrelevant which entity made the Sisa payment, being that the Applicant's separation of property regime implies consideration of the 50 percent share.
EXAMINATION
The Tribunal was duly established and is competent ratione materiae, given the structure of the subject matter of the proceedings (cf. Articles 2, No. 1, paragraph a) and 5 of the RJAT).
The request for arbitral decision is timely, as it was submitted within the period provided for in paragraph a), No. 1, of Article 10 of the RJAT.
The parties have legal standing and capacity, have legitimacy and are duly represented (cf. Articles 4 and 10, No. 2 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).
The proceedings do not suffer from nullities, and no preliminary issues have been raised.
REASONING
FINDINGS OF FACT
With relevance to the decision, the following facts must be considered:
On 4 July 1994, A..., the Applicant herein, and his wife B..., married under the regime of separation of property, acquired in equal parts the autonomous unit of the 3rd floor right, designated as unit "I", with entrance through..., no.... and through..., no...., intended for residential purposes, of the urban building located at... Nos... to ..., ..., Nos... and ..., ..., ... and ..., parish of... (former...), municipality of Lisbon, described in the Land Registry Office of Lisbon under No...., and entered in the tax register under article... – cf. deed of purchase and sale attached to the administrative file ("PA").
The purchase price declared in the deed executed by the Applicant and his wife for the autonomous unit identified in the preceding paragraph was 16,500,000$00 (sixteen thousand five hundred contos), a value also referred to in clause two of the promise to purchase and sell contract, dated 2 March 1994, according to which: "The first contractors [sellers] promise to sell to the second contractors [Applicant and wife] and these promise to purchase, free of any liens, charges or liabilities, the unit identified in clause 1 of this contract for the price of Esc. 16,500,000$00 (sixteen million five hundred thousand escudos);" – cf. deed of purchase and sale and promise to purchase and sell contract attached to the PA.
The said promise contract further stated that "[t]o the said price is added the amount of 4,500,000$00 (four million five hundred thousand escudos) to cover the costs of restoration, recovery and improvements to the said floor which are already underway and in the finishing stage; so the total value of the transaction is Esc. 21,000,000$00 (twenty-one million escudos);" – cf. promise to purchase and sell contract attached to the PA.
The acquisition of the autonomous unit identified in paragraph A above was preceded by the assessment and payment of Sisa on 30 June 1994 at the Finance Office of... Fiscal District of Lisbon, with the respective Sisa Declaration Statement being presented by C..., representative of the seller, in the capacity of business manager of the purchasers, who declared as the purchase and Sisa assessment value Esc. 16,500,000$00 and that the "acquisition is made pursuant to Dec.Law No. 140-A/86 of 14 JUN and other complementary legislation, in accordance with the declaration of the respective Credit Institution which is filed, the value – balance – of the EMIGRANT SAVINGS account being Esc. 5,500,000$00." This Sisa assessment was issued under No. .../43 and identifies the Applicant and his wife as taxpayers – cf. copy of Sisa Knowledge submitted by the Respondent.
Between November 1996 and March 2016, the Applicant and his wife paid the following monthly condominium fees relating to the maintenance and upkeep works of the building identified in paragraph A above:
From November 1996 to July 2013 (201 months, monthly fee of €25.00) - €5,025.00;
From August 2013 to March 2016 (32 months, monthly fee of €39.00) - €1,248.00,
– cf. statement of the building condominium administration attached to the PA and testimony of the two witnesses examined.
Being an old building, more than two hundred years old, works were carried out due to special maintenance needs different from a modern building, relating to roof repairs due to infiltration problems, as well as repairs to the wooden stairs and staircase windows and replacement of the building entrance door. In these works, condominium reserves (financial) were used in part and, given their insufficiency, extraordinary contributions from the unit owners, which in the case of the Applicant and his wife amounted to the following amounts:
(a) In 2005 – €1,700.00; and
(b) In 2013 – €2,029.00,
– cf. statement of the building condominium administration attached to the PA and testimony of the two witnesses examined.
On 11 March 2016, the Applicant and his wife sold the autonomous unit identified in paragraph A above for the price of €335,000.00, with the intervention of a real estate agent – cf. deed of purchase and sale attached to the PA.
On 31 May 2017, the Applicant submitted the IRS Model 3 declaration for the year 2016 and reported in Annex G the onerous alienation of the autonomous unit identified in paragraph A above, registered in the tax matrix under article... of the parish..., in his share of 50%, as follows:
– Realization value (2016, month 3) – €167,500,000.00
– Acquisition value (1994, month 6) – €52,373.73
– Expenses and charges – €15,174.61
– cf. copy of Model 3 declaration attached to the PA.
The AT initiated a divergence proceeding, notified to the Applicant, following which the latter provided it with documentary elements relating to the acquisition and sale of the autonomous unit identified in paragraph A above, with the AT accepting the amount of €10,301.25 relating to the real estate agency, but not considering the remaining expenses and charges declared by the Applicant in Annex G of the Model 3 IRS for 2016 as proven – cf. document 2 submitted by the Applicant and documents attached to the PA.
The Applicant was notified by letter signed by the Head of the Finance Service of Lisbon -..., dated 14 September 2017, to, if he so wished, exercise the right to be heard referred to in Article 60 of the LGT, within a period of 15 days, due to the following discrepancy being noted "[a]ll expenses and charges are not proven (as they do not fall within article 51 CIRS), with the amount of €10,301.25 relating to the real estate agency being accepted. Submit a replacement declaration; in its absence an ex officio assessment will be made with the amounts known to the AT" – cf. document 2 submitted by the Applicant and documents attached to the PA.
The Applicant submitted a replacement declaration which resulted in assessment No. 2017 ..., dated 29 September 2017, in the amount of €29,086.53, which was paid, and exercised the right to be heard, received by the Services on 12 October 2017 – cf. documents 1, 3 and 4 submitted by the Applicant and documents attached to the PA.
In the right to be heard, he argued that the acquisition value of the property is different (higher) from that mentioned in the deed, by application of Article 46, No. 2 of the IRS Code, due to there being no Sisa payment as the transfer of the property was exempt, and thus should consider the additional value paid for works, pursuant to Article 12, No. 5, paragraph l) (current paragraph h)) of the IMT Code, and also that the expenses incurred with works necessary for the appreciation and maintenance of the quality of the property should be deducted in the last twelve years, under Article 51 of the IRS Code. He also requests that the AT pronounce itself on the arguments presented by him [Applicant] – cf. document 3 submitted by the Applicant and documents attached to the PA.
The Applicant was again notified by letter signed by the Head of the Finance Service of Lisbon -..., dated 17 October 2017, to, if he so wished, exercise the right to be heard referred to in Article 60 of the LGT, within a period of 15 days, due to the following discrepancy being noted "Taxable income subject to tax withholding / total income in annex B inconsistent and in annexes H and J. The non-presentation of the deeds of acquisition/alienation and documentation of declared expenses results in the correction of the declaration considering values known to the AT. Mod11/Tax Register" – cf. document 5 submitted by the Applicant and documents attached to the PA.
On 3 November 2017, the Applicant exercised this second right to be heard, having submitted documents and reaffirmed the framework previously advocated – cf. document 6 submitted by the Applicant and documents attached to the PA.
On 17 November 2017, the Head of Finance of the Finance Service of Lisbon..., issued a ruling in agreement with the information from that Service of the same date, from which the following extract is transcribed:
"OF THE FACTS:
The right to be heard pursuant to Article 60 of the LGT appears to be timely, so we shall proceed with its analysis.
The Applicant seeks, through the exercise of this right, to be considered as acquisition value €52,373.73 (50% of the value of the Promise contract).
He likewise seeks to be considered as Expenses and charges the amount of €15,174.61.
Category B income is duly justified, being related to copyright and reflected in annexes B, H and J.
By No. 1 of Article 46 of the CIRS "... if the immovable property was acquired for value, the acquisition value is deemed to be that which served for the purposes of assessing the municipal tax on onerous transactions of immovable property (IMT or Sisa). Thus, the Applicant's claim has no merit, as it does not fall within the said article, which is substantiated by evaluation of Sisa (Knowledge No... of 30/06/1994, ... Fiscal District Lisbon), which was assessed on 16,500,000$00, corresponding in euros to €82,301.65, total value, with 50% corresponding to €41,150.83.
On the second point, the document lists monthly condominium fees and extraordinary amounts for conservation and maintenance works to the building, which have not been accompanied by the respective invoices (issued to the Condominium), which prevents assessment against what is provided in Article 51 of the CIRS. Thus, the amount €10,301.25 relating to real estate intermediation will be accepted as Expenses and Charges.
In these terms, in light of the foregoing and given the information provided, we are of the opinion that the claim deserves partial approval of conservation expenses in the amount of €10,301.25, and with the acquisition value of €41,150.83., with the remainder of the proposed corrections remaining in the legal order.
For the consideration of the superior authority." – cf. ruling, information and opinion attached to the PA.
On 22 November a document of correction was prepared by the Finance Service of Lisbon... and the Ex Officio Declaration / DC was issued which, in the Applicant's share (50%), considered the following values in Annex G for the year 2016:
– Realization value (2016, month 3) – €167,500,000.00
– Acquisition value (1994, month 6) – €41,150.83
– Expenses and charges – €10,301.25
– cf. Corrective Ex Officio Declaration attached to the PA.
Following the mentioned ex officio correction, on 5 December 2017, IRS assessment No. 2017..., for the year 2016, in the total amount of €35,210.66, was issued in the name of the Applicant, from which resulted the additional amount to be paid of €6,123.53, which is being contested herein, with the payment deadline being set at 18 January 2018 – cf. documents of IRS assessment and account settlement demonstration submitted by the Applicant.
On 18 January 2018, the Applicant submitted a request for establishment of the Arbitral Tribunal in the CAAD computer system.
Through Official Communication No...., of 1 February 2018, from the Head of Finance of the Finance Service of Lisbon ..., the Applicant was notified of the information and ruling mentioned in paragraph O above, in the following terms:
"From the analysis carried out on the documents / submissions presented in the hearing procedure regarding the notification of the divergence(s) identified in the income declaration Model 3 for the year 2016 with the identification ... the elements declared were not proven, so by my decision of 2017-11-17 the following correction(s) were determined:
The Acquisition value was altered and part of the expenses corresponding to the alienated property declared in annex G were removed.
As per information and ruling.
As a result of such alteration(s) to the declared values, you will be duly notified of the assessment of the corresponding tax, against which you may lodge a complaint / appeal in accordance with Article 140 of the IRS Code and Articles 68 / 99 et seq. of the Tax Procedure and Process Code." – cf. official communication attached to the PA.
On 8 February 2018, tax enforcement proceedings No. ...2018... were instituted against the Applicant for the amount to be enforced of €6,123.53, to which default interest of €33.41 and court costs and fees of €261.13 were added – cf. service of process attached to the PA and documents submitted by the Applicant in an ad hoc request.
To stay the enforcement proceedings, the Applicant provided security by constituting a voluntary mortgage, incurring the following charges: (i) registration at the Land Registry Office - €255.00; (ii) stamp duty - €47.95; and (iii) notarial deed - €146.47 – cf. documents submitted by the Applicant in an ad hoc request and documents attached to the PA.
MOTIVATION AND FACTS NOT PROVEN
The facts relevant to the judgment of the case were selected and delineated according to their legal relevance, in light of the plausible solutions to the legal issues, pursuant to the combined application of Articles 123, No. 2, of the CPPT, 596, No. 1 and 607, No. 3 of the Code of Civil Procedure ("CPC"), applicable ex vi Article 29, No. 1, paragraphs a) and e) of the RJAT.
With regard to the facts found to be proven, the arbitrator's conviction was based on critical analysis of the documentary evidence attached to the proceedings and on the testimony of the two witnesses, administrators of the condominium of the building where the autonomous unit generating the capital gain under discussion in these proceedings is located. Indeed, the testimony of witnesses D... and E... was objective, credible and consistent, revealing direct knowledge of the performance of various works and interventions in the building where they reside, confirming the values of the monthly and extraordinary condominium expenses borne by the Applicant and contained in a document subscribed by the condominium administration. For this purpose, as the condominium arrangement is not subject to organized accounting nor to specific requirements for record keeping and documentary support, all means of proof must be considered.
The facts alleged by the Applicant in Article 11 of his request for arbitral decision were not proven, in which he invokes the appearance of the ex officio declaration and the assessment without any reasoning or explanation, which fails in light of the multiple notifications and rights to be heard exercised by the Applicant which were demonstrated in the proceedings and by the information from the Finance Service on which a ruling in agreement from the Head of Finance was based (paragraph O). Furthermore, the alleged non-payment of Sisa in the acquisition of the property was not proven, with the documentary evidence to the contrary being attached to the proceedings, that of the payment of Sisa on the value declared in the acquisition deed.
Finally, the Applicant did not prove payment of the additional IRS assessment and the enforced debt, alleged in Article 4 of the autonomous request for extension of the claim.
With relevance to the decision, there are no other facts that should be considered unproven.
OF THE LAW
2.1. On the subsequent extension of the claim
The Applicant has sought, in an autonomous request, the condemnation of the AT to restitution of the amount of tax allegedly paid to stay the tax enforcement proceedings instituted after the filing of this action, plus compensatory and default interest, expenses incurred for the provision of security in the form of a voluntary mortgage (registrations, stamp duty and notarial deed), and court costs and fees relating to the tax enforcement proceedings.
This extension of the subject matter of the proceedings concerns facts relating to the tax debt in dispute, in particular its enforcement proceedings, and constitutes the development or consequence of the original claim for partial annulment of the assessment, as the tax collection proceeding is based on that act as the enforcement title and its possible invalidity, arising from a constitutive pronouncement by the Tribunal with ex tunc repristinatatory effect, implies the reconstruction of the current hypothetical situation which cannot but produce effects in the enforcement arena.
In fact, the immediate elimination from the legal order of the annulled act (or parts of the act) not only causes the enforcement title founding the tax enforcement to disappear, but also imposes the restoration of the situation that would have existed if that act (or part of the act) had never existed.
It should be noted that, with the exception of the request for restitution of court costs charged in the tax enforcement proceedings, the additional claims deduced fall within the cognition and pronouncement powers of Arbitral Tribunals, delimited by comparison of arbitral proceedings to judicial challenge proceedings, pursuant to the legislative authorization granted by Article 124 of Law No. 3-B/2010, of 28 April, concretized in Article 2, No. 1, paragraphs a) and b) of the RJAT, and thus include, in addition to the principal claim, the assessment and declaration of the (il)legality of compensatory and default interest, the condemnation to the payment of indemnity interest (Article 43 of the LGT) and indemnification for unjust provision of security for reimbursement of the respective incurred charges (Article 53 of the LGT).
With regard to default interest, it should be noted that Article 6 of Decree-Law No. 73/99, of 16 March, which establishes the regime for default interest on debts to the State and other public entities, provides that debtors may challenge the assessment of default interest pursuant to the terms and grounds now provided for in the CPPT, so the proper procedural form for the discussion of such interest is judicial challenge, as decided by the Judgment of the Administrative Court of the South, of 26 June 2012, case No. 04704/11.
Thus, with the exception of the request for condemnation of the AT to return the court costs paid in enforcement proceedings[1], the extension of the claim is admitted, with legal support in Articles 63 and 86 of the Code of Administrative and Tax Court Procedure ("CPTA") and Articles 264 and 588 of the Code of Civil Procedure ("CPC"), by reference to Article 29, No. 1, paragraph e) of the RJAT and Article 1 of the CPTA, which, in favor of the principle of procedural economy, broadly accommodate objective modification of the action, in particular when this arises from subsequent facts closely connected with the principal claim, as is the case herein.
2.2. Delimitation of the issues to be decided
The following are submitted for the consideration of this Tribunal: the formal defects of lack of competence, complete lack of reasoning and omission of pronouncement (on the arguments presented in the right to be heard) which, in the Applicant's thesis, vitiate the ex officio IRS assessment in the part contested herein and raise the question of its nullity and voidability.
Additionally, the Tribunal must consider the defects of violation of law attributed to the contested tax act, concerning the determination of the acquisition value of the property and the alleged applicability to the case of No. 2 of Article 46 of the IRS Code (to the detriment of No. 1), and the acceptance of condominium expenses to be added to the acquisition value, for the purposes of Article 51, paragraph a) of the same Code.
Finally, the Tribunal must pronounce itself on the supplementary claims for indemnity interest and condemnation of the AT to payment of expenses incurred in the context of enforcement proceedings with the constitution of a voluntary mortgage.
2.3. On the lack of competence of the Head of Finance
It is established that it was indeed the Head of Finance of the Finance Service of Lisbon ..., in the area of the taxpayer's domicile, who carried out the ex officio alteration of the values declared by the Applicant for the purpose of calculating the capital gain on real property reported in Annex G of Model 3, for the year 2016. However, the Applicant argues that the author of such act should have been the Director of Finance, from which he concludes that the assessment is invalid due to a defect of competence.
To this end, he invokes the provision of Article 65 of the IRS Code which, in its Nos. 4 and 5, provides:
"4 - The Tax and Customs Authority shall alter the declared elements whenever, where there is no occasion for the determination referred to in No. 2, corrections must be made arising from errors evident in the declarations themselves, omissions made therein or corrections arising from divergence in the qualification of acts, facts or documents with relevance to the assessment of the tax.
5 - The competence to perform the acts of ascertainment, determination or alteration referred to in this article is exercised by the Director of Finance in whose area is located the tax domicile of the taxpayers, and may be delegated to other officials whenever the high number of such acts justifies it."
Notwithstanding the foregoing, it is, however, necessary to take into due account two fundamental rules. The first concerns the concurrent general competence that Article 10, No. 2 of the CPPT grants to the local peripheral bodies of the tax administration (namely Finance Services) of the domicile or headquarters of the taxpayer, the location of the assets or the assessment.
The second concerns the general power of delegation and sub-delegation of powers that Article 62 of the LGT contemplates, allowing another body to perform the act (whose regulation is contained in Articles 44 and 46 of the CPA).
While the first rule, of Article 10, No. 2 of the CPPT, may raise interpretative questions concerning the delimitation of its scope of application in relation to the apparently contradictory content of Article 65, No. 5 of the IRS Code, the second rule definitively resolves the issue.
This is because, in the present case, the Director of Finance of Lisbon delegated the corresponding powers to the Heads of Finance by ruling of 20 December 2016, issued under No. 3332/2017, effective from 26 November 2015. This delegation of competence covered, among others: the "alteration of elements declared by taxpayers for the purposes of IRS, pursuant to Nos. 4 and 5 of Article 65 of the IRS Code, up to the limit of €50,000 in tax per tax year, in the case of non-inspective tax control actions whose service orders are previously opened by the Finance Directorate, namely under the methodology of 'analysis of IRS reimbursement listings' and monitoring of capital gains under IRS, as well as monitoring of tax benefits, with the consequent processing and collection for assessment of correction documents" – cf. point 7.10 of the Ruling published in the Official Gazette, 2nd series, No. 78, of 20 April 2017.
Based on this act of delegation of powers by the Director of Finance, it appears unequivocal that the Head of Finance of the Finance Service of Lisbon... has legal authorization and consequent competence to alter the elements declared by the Applicant for the purposes of IRS, within the scope of monitoring of capital gains under this tax, within the stipulated threshold of €50,000.00 (in tax). Thus, it must be concluded that the defect of lack of competence invoked by the Applicant is without merit.
2.4. Lack of reasoning
Tax acts are imposing and injurious acts, and therefore must be reasoned prior to their issuance, with the lack or serious deficiency of reasoning constituting a vitiating defect generating voidability. The general principle of reasoning of acts of authority affecting rights or legally protected interests is enshrined in Article 268, No. 3 of the Constitution ("CRP") and has been developed by Articles 66 of the IRS Code and 77 of the LGT[2], with reasoning being required to be express, indicating, even if succinctly, the factual and legal reasons for the decision, and always containing "the applicable legal provisions, the qualification and quantification of taxable facts and the operations for ascertaining the taxable base and the tax"[3].
The case law of the Supreme Administrative Court ("STA") advocates that reasoning is a relative concept that varies depending on the legal type of act, aimed at responding to the need to clarify the taxpayer, allowing him to know the factual and legal reasons that determined its performance and why the decision was made one way rather than another – see by way of example the judgments of the STA, cases Nos. 065/09, of 15 April 2009, and 01114/05, of 2 February 2006. An act is sufficiently reasoned when it provides its addressees with the ability to reconstruct the cognitive and evaluative itinerary followed by the authority that performed it, i.e., when a normal addressee, placed before the act in question, may become aware of the reasons supporting the decision therein pronounced (cf. judgments of the STA, cases Nos. 0512/17, of 14 March 2018, 42180, of 20 November 2002, and 46796, of 14 March 2001).
Returning to the present case, it is found that the motivation for the ex officio assessment is contained in an information prepared by the Finance Service of Lisbon ..., on which there was a ruling in agreement by the Head of Finance, and which, regardless of agreement with the same, contains sufficient and clear arguments on the reasons for the AT's divergences and its decision to consider as acquisition value that which was declared in the deed and which served as the basis for incidence of the Sisa assessment, and also of not accepting as necessary expenses and charges inherent to the acquisition and alienation of the property (to be added to the acquisition value for calculation of the capital gain), the monthly condominium fees and the amounts paid to the condominium for conservation and maintenance works to the building.
This information and ruling are dated prior (17 November 2017) to that of the correction document (22 November 2017) which, in turn, preceded the issuance of the ex officio assessment (5 December 2017), as results from paragraphs O, P and Q of the factual findings. It is not, therefore, an ex post facto reasoning, being prior and antecedent to the IRS tax act which is the subject of this action.
However, it appears from the proceedings that the Applicant was notified of the reasoning after notification of the assessment act, as only with Official Communication No...., dated 1 February 2018, was the said reasoning sent to him by the Head of Finance of the Finance Service of Lisbon..., already the request for arbitral decision had been filed.
There is thus a failure to communicate the grounds of the assessment to the Applicant in a timely manner, in breach of Articles 66, No. 1 of the IRS Code and 36 of the CPPT, an omission by the AT that appears censurable.
However, the failure to notify the grounds or their late notification should not be confused with the formal defect of lack of reasoning. The latter constitutes an intrinsic defect that invalidates the tax act and is susceptible to determining its annulment. The lack of notification, because it is external to the act, produces the inefficacy of the tax act, not its invalidity, and can only defer the beginning of the counting of periods for reaction, administrative or contentious, against such act.
This is the regime that results from Article 77, No. 6 of the LGT, according to which the efficacy of the decision depends on notification, and from Article 37 of the CPPT, in particular its Nos. 1 and 2, transcribed below:
"Article 37
Insufficient communication or notification
1 - If the communication of a tax decision does not contain the reasoning legally required, the indication of the means of reaction against the notified act or other requirements required by tax laws, the interested party may, within 30 days or within the period for complaint, appeal, challenge or other judicial means that may be available from this decision, if shorter, request the communication of the requirements that have been omitted or a certified copy containing them, free of any payment.
2 - If the interested party avails itself of the facility granted in the preceding number, the period for complaint, appeal, challenge or other judicial means shall be counted from the notification or delivery of the certified copy that has been requested.
3 – (...)
4 – (...)"
Thus, the Applicant had at his disposal the facility to request communication of the reasoning of the IRS assessment act notified and, while such claim was not satisfied, the periods (of expiry) for reaction against the act would not begin to run, so the legal framework protects the taxpayer's defense guarantees in relation to the tax act.
In light of the foregoing, the defect of lack of reasoning raised by the Applicant is without merit.
2.5. Omission of pronouncement on the right to be heard
The Applicant alleges that the AT violated the duty to communicate to the taxpayer the draft decision and its reasoning (Article 60, No. 5 of the LGT) and did not pronounce itself on the arguments adduced in the right to be heard exercised (Article 60, No. 7 of the LGT). However, he is not correct. On the one hand, the Applicant himself acknowledges that he was notified, on two distinct occasions, to exercise the right to be heard on the corrections proposed to the elements declared in Annex G (capital gains) of Model 3 IRS for the year 2016, due to lack of proof of elements and divergences in classification, having exercised that right, so there is no infraction of Article 60, No. 5 of the LGT.
On the other hand, in the information containing the reasoning for the tax act, the consideration by the AT of the right to be heard is manifest, with the justifications and elements relating to Category B income being accepted. The fact that, concerning the capital gain on real property, the AT did not adopt the position defended by the Applicant, does not constitute an omission of pronouncement, but rather disagreement with the arguments presented by him.
In light of the foregoing, it is concluded that the defect of omission of pronouncement invoked by the Applicant has not been established.
2.5. Acquisition value of the property – Article 46 of the IRS Code
The criteria for determining the acquisition value of immovable property for the purpose of calculating capital gains on immovable property under IRS are contained in Article 46 of this tax code, which provides as follows:
"Article 46
Acquisition value for valuable consideration of immovable property
1 - In the case of subparagraph a) of No. 1 of Article 10, if the immovable property has been acquired for valuable consideration, the acquisition value shall be deemed to be that which served for the purposes of assessment of the municipal tax on onerous transfers of immovable property (IMT).
2 - Where there is no occasion for assessment of IMT, the value that would serve as its basis is deemed to apply, determined in accordance with the specific rules of that tax.
3 – (...)
4 – (...)
5 – (...)"
It follows from the legal text that the primary and preponderant criterion is that of the value which served for the purposes of IMT assessment, or Sisa in the case of transactions carried out up to 31 December 2003 (Article 46, No. 1), as is the case in the situation under analysis. Only in the event that there is no occasion for IMT (or Sisa) assessment does the law provide for a supplementary criterion, which likewise refers to the specific rules governing the tax on onerous transfers of immovable property (Article 46, No. 2), which is understandable so as not to leave to the discretion of taxpayers and the AT the choice of valuation formula that most suits them, ensuring the principle of equality and preventing unnecessary litigation.
Contrary to what was initially alleged by the Applicant, the acquisition of the autonomous unit in question was taxed under Sisa, both in the share acquired by the Applicant and in that acquired by his wife, with the corresponding tax being assessed on the value stated in the deed of purchase and sale, of 16,500,000$00. In these terms, as there was occasion for Sisa assessment, the prerequisite of the primary objective criterion enshrined in No. 1 of the cited Article 46 of the IRS Code is satisfied, making recourse to the secondary and subsidiary criterion in No. 2 unnecessary, so the AT was correct in considering as acquisition value that which was the basis for incidence of Sisa corresponding thereto.
This understanding is not prejudiced by the fact that, as alleged by the Applicant, he may be a beneficiary of Sisa exemption by being, at that time, holder of an "Emigrant Savings" account, the full balance of which was used to pay part of the price stated in the deed of purchase and sale under the regime of the "Emigrant Savings" account, provided for in Article 8 of Decree-Law No. 140-A/86, of 14 June, and in Article 7 of Decree-Law No. 540/76, of 9 July.
Indeed, the Applicant's argument does not support the conclusion he seeks to draw from it, for, regardless of whether he could have been a hypothetical beneficiary of Sisa exemption, it is certain that this exemption was not applied, and therefore he did not benefit from it, and there was occasion for assessment of this tax, with its basis for incidence being determined (of Sisa), so there is no justification for recourse to a secondary criterion, which should only operate in the unavailability of the primary criterion, which is objectively determinable.
It should further be noted that in the Applicant's construction the fact is relevant that the Sisa Knowledge declaration and payment was made by the seller in the capacity of business manager, allegedly without his authorization, despite the Applicant himself being a party to the deed and the notary having recorded in the deed the mention of the Sisa Knowledge No. 43.
Now, not only is what was alleged by the Applicant not demonstrated, but Article 17, No. 3 of the LGT presumes ratification of the business management in case of fulfillment of accessory obligations or payment after the legal period for its fulfillment has expired, so it is, in accordance with the law, legally binding.
Furthermore, the Applicant points to as a solution arising from the application of Article 46, No. 2 of the IRS Code the referral to Article 12, No. 5 of the IMT Code, without first resolving the phenomenon of succession of laws in time that is raised in the concrete situation. As IMT was not assessed, but Sisa was, the question would arise of, if that construction were to be accepted (and it is not), the determination of the base value should be made in accordance with rules other than those of IMT.
For the reasons described, agreement is expressed with the solution advocated by the Respondent, with the acquisition value being determinable by the general rule contained in Article 46, No. 1 of the IRS Code, the prerequisites for recourse to the provision of No. 2 of the same article not being met, whose teleology resides in supplying the lack of criteria when the acquisition transaction was not subject to the tax on onerous transfers of immovable property and, in the situation at hand, there was indeed occasion for Sisa assessment in the transaction for purchase of the property.
Within this scope, the Applicant's assertion that, if the understanding of the AT were to apply, he would be entitled to deduct the entire acquisition value stated in the public deed and not merely half, is not understood nor endorsed. It should be recalled that the Applicant acquired the property in co-ownership with his wife in equal shares. This proportion was maintained in relation to Sisa assessment, whose Knowledge expressly mentions acquisition by both spouses, identifying them as taxpayers, so only the share, of 50%, of the acquisition value corresponding to the Applicant's patrimonial position may be considered.
2.6. Expenses and charges to be added to the acquisition value of the property – Article 51, paragraph a) of the IRS Code
In the Applicant's view, expenses incurred with monthly condominium fees and extraordinary contributions for conservation works to the building in which the autonomous unit generating capital gains is situated fall within Article 51, paragraph a) of the IRS Code and, as such, should be added to the acquisition value of the property for the purpose of calculating capital gains. To assess this issue, it is necessary first of all to examine the provision of the cited rule:
"Article 51
Expenses and charges
For the determination of capital gains subject to tax, the acquisition value is increased by:
a) Charges for improvement of the property, comprovably made in the last 12 years, and necessary expenses actually incurred, inherent to the acquisition and alienation, as well as indemnification comprovably paid for onerous waiver of contractual positions or other rights inherent to contracts relating to those property, in the situations provided for in subparagraph a) of No. 1 of Article 10;"
The teleology of the deductibility of these expenses in the calculation of capital gains is inscribed in the general principle that the income subject to taxation must be net income, corresponding to the actual taxable capacity acquired, so charges comprovably incurred that have an evident or necessary connection with the obtaining of income, even in the case of income of a non-recurring, irregular or fortuitous nature, such as capital gains, should be subtracted from the realization value.
Both case law and legal doctrine point out the indeterminate nature of the concepts employed by the legislator in Article 51 of the IRS Code, which therefore require specification. While this type of legislative formulation presents undeniable advantages from various points of view, not least as to its adaptability and appropriateness to the justice of the concrete case, it does present some hermeneutic difficulties.
As Xavier de Basto notes (IRS Real Incidence and Determination of Net Income, Coimbra Editor, 2007, pp. 460-464), the legal formula raises interpretation doubts, "considering the great margin of indeterminacy of what are «necessary expenses»" considering excessively restrictive the administrative doctrine expressed in a Ruling of 4 March 2004, which restricts them to "expenses which, by nature, bring additional value to the property, such as for example improvement works", increasing its intrinsic value and rejecting, for example, the payment of indemnification to the tenant, which was later confirmed by the Administrative Court of the South, of 25 January 2005, case No. 297/03, which supported the understanding that a "sum paid as indemnification related to the resolution of a lease contract cannot be regarded as constituting a charge for the purposes of the provision of the, at that time, article 48 – currently article 51, paragraph a) of the CIRS."
Similarly, Manuel Faustino in a position similar to that of Xavier de Basto considered as more correct "the view of the property, not as a thing in merely legal sense, but as a source of income, with an economic aspect that cannot be disregarded. And in that perspective, everything that may contribute to the economic appreciation of the property must necessarily be considered as «charge for appreciation»", under penalty of committing an "injustice, because the taxation of a non-existent taxable capacity was carried out"[4].
It should be noted that, in this sequence, the wording of Article 51, paragraph a) was altered with the Reform of taxation of natural persons, approved by Law No. 82-E/2014, of 31 December, in order to incorporate the deserved criticisms and currently includes indemnifications paid for onerous waiver of contractual positions and other rights inherent to contracts relating to such property, in addition to the temporal scope of incurred charges being significantly expanded, from 5 to 12 years. On the doctrine, case law and legislative evolution, see also the illustrative summary contained in Arbitral Decision No. 313/2015-T, of 25 January 2016.
However, the segments of the normative proposition relating to "charges for improvement of property" and "necessary expenses actually incurred, inherent to acquisition and alienation" remained unchanged, whose application is claimed by the concrete situation sub iudice.
In our view, the two segments aim at distinct hypotheses and fields of application.
In the case under consideration, the Applicant seeks to deduct from taxable income the monthly fees paid to the condominium in the 12 years preceding the sale and also two extraordinary contributions to the condominium, made in 2005 and 2013, to cover the costs of repair of the roof, stairs, windows and door of the building. We consider that expenses of this nature, for maintenance and conservation of the building, do not fall within the concept of expenses inherent – in the sense of specific, indissociable or inseparable – to the operations of acquisition and alienation of the autonomous unit.
As explained in the Judgment of the STA, of 18 November 2009, case No. 585/09, "only expenses inherent are necessary, so only they are relevant. Now, the adjective «inherent», etymologically - in re - contains in itself an idea of inseparability, an intrinsic relationship - not merely extrinsic - with the alienation: to be considered relevant, the expense must be so by its position relative to the alienation, it must, in short, be indissociable from it. In other words: the expense must be integral to the alienation itself. The position of the appellants is limited to the necessity of the expense, not attributing then, strictly speaking, to that expression, any useful meaning."
This case law was followed in subsequent judgments, namely in the Judgment of the Administrative Court of the South, of 14 April 2015, case No. 6824/13, according to which "[i]t is not enough, therefore, that the expenses be connected to the obtaining of income, it is necessary that they be indissociable from it." – see also the Judgments of the Administrative Court of the South, of 25 May 2017, case No. 715/11.8BEALM, and of 10 July 2015, case No. 5834/12, as well as the Arbitral Decision of CAAD, of 25 January 2016, in case No. 313/2015-T.
As examples of expenses inherent to acquisition and alienation, legal doctrine mentions the commission paid to the real estate agent who mediated the sale or expenses for registrations and public deeds – cf. Rui Duarte Morais, On IRS, 3rd edition, Almedina, 2016, pp. 135-136, and Paula Rosado Pereira, Studies on IRS, Capital Income and Capital Gains, IDEFF Notebooks, No. 2.
In light of this, it does not appear that condominium expenses and expenses for restoration and repair works to the building in which the autonomous unit that the Applicant sold is located are indissociable or inseparable from the operations of acquisition or sale of that same unit, so the regime sought by the Applicant under this normative provision is ruled out, due to lack of compliance with the respective prerequisites.
It remains to examine whether such expenses can be deducted by being framed in the segment "charges for improvement of property".
As regards the monthly fees paid to the condominium, these are intended to meet the current and foreseeable maintenance charges of the buildings, and are not qualifiable as expenses for improvement of the property. Furthermore, it was not demonstrated that any portion thereof was devoted to repairs.
In any event, even with respect to the works on the building financed in whole or in part with additional contributions relating to the unit in question in the amount of €3,729.00 (being 50%, i.e., €1,864.50 charged to the Applicant) those were limited to the maintenance needs of the building which, given its antiquity (over 200 years) has involved, over the years, indispensable repairs, namely to the roof, to allow and preserve conditions of habitability (water infiltration, for example) and prevent its deterioration, without having been of an innovative character.
The charges thus incurred had the strict purpose of preserving the value of the property and not the increased improvement thereof, understood as something that must translate into an increment of value and not the mere maintenance or preservation of value. In this context, the STA pronounces on the concept of "improvement" and states that, "looking at the letter of the law (charges for improvement of property, comprovably made in the last five years) one cannot but conclude, from the outset, that the charge must be related to the improvement of the alienated property. That is, charges that have as their purpose the mere preservation of the value of the property are not included, but only those intended to increase such value." – cf. Judgment of the STA, case No. 0587/11, of 21 March 2012.
It is thus to be concluded that the repairs carried out on the building in question do not fall within the concept of "charges for improvement of property" and, consequently, should not be added to the acquisition value of the property.
In these terms, the defect of violation of law raised by the Applicant is judged to be without merit and it is concluded that the IRS assessment act relating to 2016, in the part contested, does not suffer from invalidity[5].
The dependent claims are likewise without merit, relating to the condemnation of the AT to restitution of the tax, compensatory and default interest, also due to lack of proof of their payment, and of the charges for provision of security (Article 53 of the LGT), as well as to the payment of indemnity interest (Article 43 of the LGT).
* * *
Finally, it should be noted that the relevant issues submitted for the consideration of this Tribunal were known and assessed, with those whose decision was prejudiced by the solution given to others not having been.
DECISION
In light of the foregoing, the request for arbitral decision is judged to be entirely without merit, with the legal consequences thereof.
* * *
The value of the case is fixed at €6,123.53, in accordance with Articles 3, No. 2 of the Regulations on Costs in Tax Arbitration Proceedings ("RCPAT"), 97-A, No. 1, paragraph a) of the CPPT and 306, Nos. 1 and 2 of the Code of Civil Procedure ("CPC"), the latter ex vi Article 29, No. 1, paragraph e) of the RJAT.
Court costs in the amount of €612.00, charged to the Applicant, in accordance with Table I attached to the RCPAT, and Articles 12, No. 2 and 22, No. 4 of the RJAT, 4, No. 5 of the RCPAT and 527, Nos. 1 and 2 of the CPC, ex vi Article 29, No. 1, paragraph e) of the RJAT.
Lisbon, 25 August 2018
The Arbitrator,
Alexandra Coelho Martins
[Text prepared by computer, pursuant to Article 131, No. 5 of the CPC, applicable by reference to Article 29, No. 1, paragraph e) of the RJAT]
[1] However, this does not mean that such costs do not have to be refunded, as a consequence of winning the case and a pronouncement annulling the act by the tribunal, as the AT will have to draw all conclusions from the disappearance of the act (or part of the act) with retroactive effects.
[2] In addition to other rules generally applicable to the actions of the Public Administration, such as those provided for in Articles 152 and 153 of the Code of Administrative Procedure ("CPA"), whose meaning is identical to that advocated in tax rules.
[3] Excerpt from Article 77, No. 2 of the LGT.
[4] See Bulletin of Apeca, 121, 2nd quarter of 2005, p. 60.
[5] It should be noted that, if the cause of invalidity were to be found to exist, it would follow the regime of voidability and not nullity, in accordance with Articles 161 and 163 of the CPA.
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