Process: 268/2018-T

Date: October 31, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 268/2018-T addressed the critical issue of loss communication (comunicabilidade de perdas) between married spouses filing jointly for IRS purposes in Portugal. The claimants, married under the community of acquests regime since 1970, filed a joint IRS return for 2016 declaring 12 securities disposal operations in the husband's name that generated capital losses totaling approximately €79,824 (acquisition value €952,378.16 minus realization value €872,554.08). The Tax Authority issued an additional IRS assessment of €7,523.12, which the claimants contested, arguing that under joint taxation, capital losses from Category G income (capital gains from securities) should be communicable between spouses and offset against other taxable income. The claimants maintained that all bank accounts and securities were held jointly despite being registered in the husband's name for administrative convenience, and that the couple lived in complete community of income and property. They sought annulment of the assessment dismissal decision, arguing there were no taxable capital gains in 2016 due to the realized losses, plus compensatory interest of €7,523.12. The case raises fundamental questions about how Portuguese tax law treats capital losses in Category G when spouses elect joint taxation, specifically whether losses incurred by one spouse can offset gains or income attributed to the other spouse under the IRS regime. The arbitral tribunal was constituted on August 6, 2018, to resolve this dispute concerning the application of loss communication rules between married taxpayers under Portuguese IRS legislation.

Full Decision

ARBITRAL DECISION[1]

Claimants – A... and B...

Respondent - Tax and Customs Authority

The Arbitrator, Dr. Sílvia Oliveira, appointed by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to constitute the Arbitral Tribunal, established on 6 August 2018 with respect to the above-identified case, decided as follows:

REPORT

A... and B... (hereinafter referred to as "Claimants"), married, taxpayers no. ... and no..., residing at ... Street, no..., in Vila Nova de Gaia, filed a request for arbitral decision and constitution of a Single Arbitral Tribunal, on 25 May 2018, pursuant to the provisions of article 4 and no. 2 of article 10 of Decree-Law no. 10/2011, of 20 January [Legal Regime for Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

The Claimants seek the annulment of "the decision dismissing the administrative complaint (…), with the consequent annulment of the assessment and replacement by another that considers the absence of capital gains in the year 2016, in view of the defects it contains (…). As a consequence of the annulment of the decision dismissing the administrative complaint, and of the assessment, the Tax and Customs Authority shall be ordered to pay the Claimants compensatory interest on the amount of EUR 7,523.12, with accrued interest amounting to EUR 220.95, as well as future interest until full payment".

1.3. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 28 May 2018 and notified to the Respondent on the same date.

1.4. Since the Claimants did not proceed with the appointment of an arbitrator, pursuant to the provisions of article 6, no. 2, letter a) of RJAT, the undersigned was appointed as arbitrator on 16 July 2018 by the President of the Deontological Council of CAAD, and the appointment was accepted within the legally prescribed time and terms.

1.5. On the same date, both Parties were duly notified of this appointment and did not express any wish to refuse it, in accordance with the combined provisions of article 11, no. 1, letters a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

1.6. Thus, in accordance with the provision of letter c) of no. 1 of article 11 of RJAT, the Arbitral Tribunal was established on 6 August 2018, and an arbitral order was issued on 7 August 2018, to notify the Respondent to, pursuant to the provisions of article 17, no. 1 of RJAT, file a Response within a maximum period of 30 days and, if desired, request the production of additional evidence.

1.7. Additionally, in that arbitral order it was also stated that the Respondent should send to the Arbitral Tribunal, within the period for filing the Response, a copy of the administrative proceedings.

On 17 August 2018, the Claimants filed a motion requesting the joinder to the case file of a document relating to the opening statement of a joint and several account at the former C..., on 6 June 2016 (a document which they had protested to attach upon filing the arbitral petition and whose joinder is accepted here because it is timely).

On 28 September 2018, the Respondent filed its Response, defending itself by way of substantive opposition, concluding that "(…) the total lack of merit of the claim should be declared, due to lack of legal foundation, the impugned act remaining in the legal order, and the respondent entity shall accordingly be absolved of the claim".

In the said Response, the Respondent requested the waiver of the holding of the meeting referred to in article 18 of RJAT, as well as the waiver of the questioning of the witnesses presented by the Claimants and, if they did not express opposition, that the case proceed directly to decision.

On the same date, the Respondent attached to the case file the respective administrative proceedings.

By arbitral order of 2 October 2018, this Arbitral Tribunal decided, pursuant to the principles of the autonomy of the Arbitral Tribunal in the conduct of proceedings, expedition, procedural simplification and informality (articles 19, no. 2, and 29, no. 2, of RJAT), as well as taking into account the principle of limitation of useless acts provided for in article 130 of the Civil Procedure Code (CPC), applicable by virtue of the provisions of article 29, no. 1, letter e) of RJAT:

  • To waive the holding of the meeting referred to in article 18 of RJAT;

  • To dispense with the questioning of witness evidence presented by the Claimants;

  • To determine that the proceedings continue with optional written submissions, to be filed within the simultaneous period of 10 days, counting from notification of the said order;

  • To set 31 October 2018 for the purposes of issuing the arbitral decision.

In the same order, the Claimants were also warned that "by the date of issuance of the arbitral decision they should proceed to pay the subsequent arbitral fee, pursuant to the provisions of no. 3 of article 4 of the Regulations on Costs in Tax Arbitration Proceedings and communicate this payment to CAAD".

On 15 October 2018, the Claimants filed written submissions, concluding, as in the petition, requesting that "the decision dismissing the administrative complaint (…)" be "annulled, with the consequent annulment of the assessment and replacement by another that considers the absence of capital gains in the year 2016, in view of the defects it contains (…)", and the "Tax and Customs Authority (…) should be ordered to pay the Claimants compensatory interest on the amount of EUR 7,523.12, with accrued interest amounting to EUR 220.95 (as of the date of filing the request for constitution of the arbitral tribunal), as well as future interest until full payment".

The Respondent did not file written submissions within the period granted for optionally doing so.

CAUSE OF ACTION

2.1. The Claimants, having been "notified of the dismissal of the administrative complaint filed relating to the additional assessment of Personal Income Tax (IRS) for the year 2016, for payment of the amount of EUR 7,523.12 (…), and not accepting it, hereby request ARBITRAL DECISION (…)".

2.2. In this regard, the Claimants begin by clarifying that "on 07/03/1970, (…) they married (…)", and given that "(…) the Marriage Record contains no mention to the contrary, the regime under which they are married is that of community of acquests (…)", and "since the date of their marriage, (…) they have lived in the same house, in complete community of income and property acquired".

2.3. They further clarify that "the Claimants' bank accounts are joint and several accounts belonging to both, and the money and/or securities held in them are the property of both", but that "for reasons of couple organization, the Claimant always had greater connection with the banking entities with which the Claimants were customers, so that most of the investments remained in his name, as primary account holder".

2.4. They further state that "on 22/05/2017, (…) they filed their income statement – Form 3 – relating to personal income tax for the year 2016 (…)", and in it "(…) it was evidenced that (…) they are married and that they opted for joint taxation of income (…)", and that "in Annex G of the statement (…), in field 9 – Paid disposal of partnership shares and other securities – 12 operations were evidenced, all in the name of the Claimant (as taxpayer A), and the total realization value amounted to EUR 872,554.08 and the acquisition amount to EUR 952,378.16".

2.5. That is, according to the Claimants, "considering that the acquisition value was clearly higher than the realization value, there is no doubt that there were no capital gains that could be taxed", and "the only income that was taxed concerned that earned by the Claimant - EUR 37,719.71, as category A, evidenced in Annex A".

2.6. Now, given that "(…) the Claimants opted for autonomous taxation of any category G income (…)", as a result, "(…) they simulated the amount they would receive, amounting to EUR 2,509.98 (…)", and "the only income subject to taxation was that of the Claimant – EUR 37,719.71 (…)".

2.7. However, given that "(…) the statement remained in a divergent situation (…), the Claimants filed a replacement income statement (…)", and in this statement evidenced, "in Annex G (…), in field 9 (…)", "12 operations", "nine of those operations (…) evidenced in the name of the Claimant (as taxpayer A), and three of those operations were evidenced in the name of the Claimant (as taxpayer B)".

In the replacement statement, the total realization value was "(…) EUR 872,554.08, and the acquisition amount – EUR 952,478.67 – (…) was (…) (EUR 952,378.16)".

In these terms, according to the Claimants' understanding, "(…) there should be no capital gains income", they allege that losses were calculated that "(…) amounted to EUR 79,924.59".

However, according to the Claimants, when "(…) on 13/06/2017 (…) they simulated the amount they would have to pay (…)" they found that it amounted to "(…) EUR 7,523.13 (…)", and they were subsequently "(…) notified of the IRS assessment for the year 2016, in which the amount to pay amounted to EUR 7,523.12 (…)".

"The Claimants did not accept the said assessment, so on 27/07/2017, they filed the respective administrative complaint (…)", but "since they did not wish to be subject to tax enforcement, on 29/08/2017, they proceeded to pay the amount of EUR 7,523.12 (…)".

The Claimants state that "by letter dated 27/11/2017 (…) they were notified of the draft dismissal of the administrative complaint, as well as to exercise their right to a prior hearing (…)" having exercised that right "(…) on 13/12/2017 (…)".

Defects in the Decision Dismissing the Administrative Complaint

Defect of violation of law - articles 13, no. 3 and 4, letter c), 43 and 55 of the Personal Income Tax Code (CIRS) and also of the principles of legal certainty and protection of legitimate expectations – article 2 of the Constitution of the Portuguese Republic (CRP)

Notwithstanding, "on 26/02/2018, the Claimants were notified of the dismissal of the administrative complaint (…)", according to which "(…) the TA understands that the capital gains relating to the year 2016 should be determined separately with respect to each of the Claimants (…), and therefore concludes that there is capital gain relating to taxpayer B (…) of EUR 9,202.56, and as for taxpayer A (…) there is a loss whose balance may be carried forward in the following years, but which cannot be deducted from the Claimant's capital gain (taxpayer B), a position with which the Claimants do not agree.

Indeed, the Claimants disagree with the Respondent's position because they understand that "the TA should have taken into account the capital gains obtained by the Claimant and the losses obtained by the Claimant, through the sum of both, and the accounting would result in obtaining a loss in the family aggregate".

In this context, the Claimants reiterate that "article 13, no. 2 of CIRS states that, when there is a family aggregate, the tax is determined individually in relation to each spouse, unless the option for joint taxation is exercised, which was precisely what occurred in the case at hand", and that "(…) in the case of the option for joint taxation, the tax is due by the sum of the income of the persons who constitute the family aggregate".

Additionally, they argue that "article 43 expressly refers to the fact that the value of capital gains income is the corresponding balance between capital gains and losses realized in the same year, not stating that these should be calculated individually, that is, in relation to each spouse in the couple", and for the Claimants it is "this (…) the provision that is relevant in the case at hand, combined with the fact that the Claimants expressly opted for joint taxation of their income".

Thus, the Claimants allege that "the change in the rule for separate taxation, from 2015 onwards, did not have (…) as a consequence the modification of the manner of determination of gains subject to tax in the case of capital gains, preventing the horizontal communicability of losses from capital losses", intending rather "(…) to achieve equality between married taxpayers and the rest, and never to penalize those".

On the other hand, the Claimants understand that the "(…) article 55 of CIRS (…) is not applicable to the case under analysis", because they argue that "this provision is merely a provision for the carryforward of losses and is not a provision concerning taxable base, nor can it even serve to interpret the other taxable base provisions, or support interpretations contrary to the other applicable provisions".

In these terms, the Claimants allege that "(…) the conduct of the TA in the case (…) is violative of articles 13, no. 3 and 4, letter c), 43 and also of the principles of legal certainty and protection of legitimate expectations embodied in article 2 of the CRP", concluding that "the decision dismissing the administrative complaint should be annulled, with the consequent annulment of the assessment no. 2017...".[2]

Defect of the principle of taxpaying capacity

Notwithstanding, the Claimants also allege that "(…) in presenting a joint statement they intended their income to be taxed in its entirety and considering the income they earned in the year 2016", they argue that "CIRS intends to tax the effective income of taxpayers precisely by taking into account their taxpaying capacity", "assessed by the positive and negative components".

In this way, the Claimants allege that "not having taken into account the loss that the Claimant clearly suffered, there can be no doubt that the TA did not consider the taxpaying capacity of the Claimants", because "the TA considered that the Claimants had manifestly fictitious taxpaying capacity (…)", considering such understanding "(…) totally contrary to that established in article 1714 of the Civil Code".

Thus, "according to the TA's understanding, we would have two diametrically opposed consequences: the capital gain should be determined individually; the payment of the tax resulting from such capital gain will be the responsibility of the Claimants", an understanding which for the Claimants "is totally incongruous and violative of the logic of the fiscal system that should prevail", concluding that "the decision dismissing the administrative complaint should be annulled, with the consequent annulment of the assessment no. 2017...".

Defect of violation of law - article 1714 of the Civil Code

In this context, the Claimants state that "even assuming the TA's interpretation regarding the application of article 55 of CIRS (…) it will always be said (…)" that "in accordance with the provisions of article 1714 of the Civil Code, it is not permitted to alter the property regimes legally established (…)".

Now, "article 55 of CIRS, with the interpretation that the TA endorses, does not allow the communicability of losses from capital losses of the Claimant with the capital gains of the Claimant", but "pursuant to article 102-C, no. 1 of CIRS, if the option for joint taxation is exercised, the responsibility for payment of the tax is joint and several", so that "the application of articles 55 and 102-C will have as a consequence the alteration of the principle of immutability of the property regime".

Thus, "given that the Claimants are married under the community of acquests regime, the impossibility of communicability of losses in the context of capital gains and losses constitutes clear and manifest violation of the Claimants' property regime, since the loss is of both and the TA does not allow it to be reflected in the couple's assets".

In these terms, once again the Claimants argue that "(…) such interpretation cannot prevail, due to violation of article 1714 of the Civil Code", requesting that the "(…) decision dismissing the administrative complaint be annulled, with the consequent annulment of the assessment no. 2017...".

Compensatory Interest

"The Claimants, despite being fully convinced of the rightness of their position (…)", "(…) proceeded to pay the amount of EUR 7,523.12, on 29/08/2017 (…)", and therefore allege in the arbitral petition that "pursuant to article 43 of the General Tax Law (LGT) (…)", "with the granting of the claim (…) they have the right, in addition to the reimbursement of the amounts paid in excess (EUR 7,523.12), to be compensated for accrued and future interest from the date of payment until full payment".

RESPONSE OF THE RESPONDENT

3.1. The Respondent, in the Response filed, defended itself by way of substantive opposition, alleging that "the Claimants (…) have no (…) grounds whatsoever", because "as regards the legal foundation of the disputed assessment (…) it is correct, and no defect can be attributed to the assessment act and, consequently, to the act resulting from the administrative complaint".

3.2. Indeed, according to the Respondent, "(…) the determination of net income is always carried out by income earner, with no communicability of income between earners, even if they are income of the same category".

3.3. For the Respondent, "so much so is it that art. 55 of the Personal Income Tax Code (…), in the unambiguous wording given by Law no. 82-E/2014, of 31/12, only allows the deduction of losses with respect to each income earner (…) (provided that the option for aggregation has been exercised, pursuant to letter d) of art. 55)".

3.4. And, the Respondent reiterates, "the fact that the Claimants filed a joint statement does not conflict with, nor does it preclude the manner of taxation of income from the various categories, which is done by income earner", because "joint taxation has become an option exercised in the income tax form 3 statement and implies a single statement for the same aggregate, in which both spouses (…) are taxpayers".

3.5. Thus, the Respondent argues that "the option for joint statement is decisive for determining the family quotient and for determining some deductions from the tax bill", and that "(…) net income is determined by earner".

3.6. In these terms, the Respondent reiterates that "(…) the determination is made by earner and (…) if there are negative net results, these will only be deductible from the positive net results of the same category and the same earner".

3.7. With regard to the alleged defect of the principle of taxpaying capacity, the Respondent transcribes part of the arbitral decision issued in the context of case no. 327/2017-T, whereby it is stated that:

Thus, the Respondent concludes that "(…) the law does not allow the communicability of income of one earner to another earner", because "pursuant to art. 43 of CIRS the value of income qualified as capital gains is the corresponding balance struck between capital gains and losses realized in the same year", and "(…) the taxation of capital gains thus determined falls upon the sphere of each of the earners".

Finally, "given that the assessments made were based on the applicable law, to which the Administration is bound (…)", the Respondent understands that, for the purposes of assessing the right to compensatory interest requested by the Claimants, "(…) one cannot speak of error by the services pursuant to the provisions of article 43 of the LGT", and therefore understands that they are not due.

PRELIMINARY DECISION (SANEADOR)

4.1. The request for arbitral decision is timely, because it was presented within the period provided for in letter a), of no. 1, of article 10 of RJAT.[3]

The parties have legal capacity and standing, are legitimate with respect to the request for arbitral decision and are duly represented, pursuant to the provisions of articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The Tribunal is regularly constituted, pursuant to article 2, no. 1, letter a), articles 5 and 6, all of RJAT, and is competent to hear the request for arbitral decision filed by the Claimants.

4.4. No procedural irregularities were identified.

4.5. There are no exceptions or preliminary issues to be decided, so nothing prevents the examination of the merits of the case.

FACTS

Facts Proved

5.1. The Claimants married on 07/03/1970, under the community of acquests regime.

5.2. The Claimants' bank accounts are joint and several accounts belonging to both, and the money and/or securities held in them are the property of both.

5.3. In the year 2016, the Claimants remained married to each other.

5.4. On 22/05/2017, the Claimants filed their income statement Form 3 relating to IRS for the year 2016.

5.5. In the statement referred to in the previous item, it is evidenced that the Claimants are married and that they opted for joint taxation of income.

5.6. In Annex G of the said statement, in field 9, 12 operations were evidenced, all in the name of the Claimant (as taxpayer A), and the total realization value of those operations amounted to EUR 872,554.08 and the total acquisition value amounted to EUR 952,378.16.

5.7. In field 15 of Annex G, the Claimants opted for autonomous taxation of any category G income, since they did not exercise the option for aggregation of any income.

5.8. The Claimants simulated on the Financial Portal website the amount of IRS they would receive relating to the income statement filed, and that amount would amount to EUR 2,509.98, according to that simulation.

5.9. Due to discrepancies identified in the 2016 income statement filed on 22/05/2019, signaled on the Financial Portal website, the Claimants, on 13/06/2017, filed a replacement income statement, in which they evidenced, in field 9 of Annex G of that statement, 12 operations, 9 of which were registered in the name of the Claimant (as taxpayer A) and the remaining 3 operations were registered in the name of the Claimant (as taxpayer B).

5.10. The total realization value of the operations evidenced in Annex G of the replacement income statement was EUR 872,554.08 and the total acquisition value of the said operations was EUR 952,478.67.

5.11. On 13/06/2017, on the Financial Portal website, the Claimants simulated the IRS assessment note relating to the year 2016, and from this resulted IRS to be paid, taking into account the values presented in the replacement income statement, in the amount of EUR 7,523.13.

5.12. The Claimants were notified of IRS assessment no. 2017..., of 27 June 2017, relating to the year 2016, in which the tax amount to be paid amounted to EUR 7,523.12, with a payment deadline of 31 August 2017.

5.13. The Claimants, on 27/07/2017, filed the respective administrative complaint (case no. ...2017...) relating to the IRS assessment identified in the previous item, alleging that "the assessment (…) complained of is incorrect and illegal, taking into account the family aggregate governed by the community of acquests regime and in which taxation is not made of the combined total of operations carried out and its net value for common patrimony income".

5.14. The Claimants, on 29/08/2017, proceeded to pay the IRS assessment identified, in the amount of EUR 7,523.12, subject to administrative complaint.

5.15. The Claimants were notified on 30/11/2017 of the draft decision dismissing the administrative complaint, dated 20 November 2018, by means of Official Letter no. ... (of 27 November 2017), according to which the Respondent understood that "in the case of the option for joint taxation, the tax is due by the sum of the income of the persons who constitute the family aggregate (…)", and "article 55 of CIRS (…)" states that "in relation to each income earner, the negative net result determined in any category is only deductible from its positive net results of the same category (…)", being able to "(…) be carried forward for the following five years when the taxpayer opts for aggregation. Not having the complainant opted for aggregation, taxation is carried out at the autonomous rate of 28% (…)".

5.16. Pursuant to the decision identified in the previous item, the Claimants were also notified to exercise their right to a prior hearing within 15 days, which was exercised on 13/12/2017.

5.17. From the examination of the prior hearing filed, the Respondent understood that the Claimants did not present any new facts likely to alter the foundation that led to the proposed dismissal of the administrative complaint filed.

5.18. The Claimants were notified on 26/02/2018 of the decision dismissing the identified administrative complaint, dated 23 January 2018, by means of Official Letter no. ... (of 6 February 2018).

5.19. No other facts likely to affect the decision on the merits of the claim were proved.

Reasoning as to the Facts Proved

5.20. With regard to the facts proved, the conviction of the Arbitral Tribunal was based, in addition to the free appreciation of the positions assumed by the Parties (on matters of fact), on the content of the documents filed by both Parties to the case file, as well as on the examination of the administrative proceedings sent by the Respondent.

Facts Not Proved

No facts were found to be not proved with relevance to the arbitral decision.

LEGAL GROUNDS

6.1. In this case, it will be of crucial importance to verify the legality of the IRS assessment, duly notified to the Claimants, for the year 2016, determined on the basis of the income declared by them in their replacement income statement, filed on 13 June 2017, and consequently also to assess the legality of the act dismissing the administrative complaint filed relating to the identified IRS assessment.

6.2. Thus, it will be necessary to analyze the applicable law, in order to decide:

6.2.1. Whether the Claimants are right when they state that:

  • "the TA should have taken into account the capital gains obtained by the Claimant and the losses obtained by the Claimant, through the sum of both, and the accounting would result in obtaining a loss in the family aggregate", because "(…) in the case of the option for joint taxation, the tax is due by the sum of the income of the persons who constitute the family aggregate";

  • "article 43 expressly refers to the fact that the value of capital gains income is the corresponding balance between capital gains and losses realized in the same year, not stating that these should be calculated (…) in relation to each spouse in the couple";

  • the provision "(…) of article 55 of CIRS (…) is not applicable to the case under analysis", because "this provision is merely a provision for the carryforward of losses and is not a provision concerning taxable base, nor can it even serve to interpret the other taxable base provisions, or support interpretations contrary to the other applicable provisions";

  • the Claimants "(…) in presenting a joint statement intended their income to be taxed in its entirety (…)", because "CIRS intends to tax the effective income of taxpayers precisely by taking into account their taxpaying capacity", "assessed by the positive and negative components", concluding that "(…) the TA did not consider the taxpaying capacity of the Claimants", given that "(…) it considered that the Claimants had manifestly fictitious taxpaying capacity (…)", an understanding which they consider "(…) totally contrary to that established in article 1714 of the Civil Code", as they consider "(…) absurd and contrary to law".

6.2.2. Whether the Respondent is right when it states that:

  • "(…) the determination of net income is always carried out by income earner, with no communicability of income between earners, even if they are income of the same category";

  • "(…) art. 55 of the Personal Income Tax Code (…) only allows the deduction of losses in relation to each income earner (…)";

  • "the fact that the Claimants filed a joint statement does not conflict with, nor does it preclude the manner of taxation of income from the various categories, which is done by income earner";

  • "the option for joint statement is decisive for determining the family quotient and for determining some deductions from the tax bill", and that "(…) the determination is made by earner and (…) if there are negative net results, these will only be deductible from the positive net results of the same category and the same earner";

  • "taxpaying capacity derives from the principle of equality and consists of knowing (…) what each citizen can pay without violating the minimum necessary for their family subsistence (…)".

6.3. As results from the facts established, the Claimants recorded in the referred replacement Form 3 income statement for the year 2016 the paid disposal of various securities acquired in previous years, having opted for joint taxation of the respective gains and/or losses determined.

6.4. However, with respect to the income earned in the year 2016, the Respondent issued an IRS assessment which, at least as regards the determination and subjection to tax of the values referring to the paid disposal of securities, does not reflect the joint taxation of the Claimants as perceived and intended by them.

6.5. Indeed, in accordance with the evidence in the case file, underlying the issuance of the 2016 IRS assessment was the Respondent's understanding that the provision of article 55, no. 1, of the Personal Income Tax Code (in the wording given by Law no. 82-E/2014, of 31 December – IRS Reform Law) presupposed the incommunicability of gains and losses among family members.

6.6. Let us then examine, making an initial review of the legal framework applicable (at the time of the facts) to the situation under review, which of the Parties is right (point 6.2., above) in the interpretation of the applicable provision.

6.7. In this context, and as regards the personal scope of the tax, in accordance with the provisions of article 13 of the Personal Income Tax Code, "individuals residing in Portuguese territory and those not residing there who obtain income therein are subject to IRS".

6.8. Now, and to the extent relevant here, "when there is a family aggregate, the tax is determined individually in relation to each spouse (…), unless the option for joint taxation is exercised", in which case "(…) the tax is due by the sum of the income of the persons who constitute the family aggregate, the taxpayers being considered those to whom its direction is incumbent" (emphasis ours).

6.9. For the purposes of the above, and insofar as the arbitral process is concerned, "the family aggregate is constituted (…)" by "spouses not judicially separated from persons and property (…) and their respective dependents (…)", and "the personal and family situation of the taxpayers relevant for taxation purposes is that which exists on the last day of the year to which the tax relates".

6.10. In accordance with the provisions of article 15, no. 1 of the Personal Income Tax Code, "for persons residing in Portuguese territory, IRS is levied on the totality of their income, including that obtained outside that territory".

6.11. As regards the material scope of the tax, the provisions of article 1, no. 1 of the Personal Income Tax Code are immediately relevant, whereby "the tax on the income of individuals (IRS) is levied on the annual value of income from the following categories (…), after making the corresponding deductions and abatements", among which are listed "Category G - Increments in assets" (emphasis ours).

6.12. Pursuant to the provisions of articles 9 and 10 of the Personal Income Tax Code, and to the extent relevant to this process, "increments in assets (…) constitute capital gains (…)", these being "(…) gains obtained which (…) result from the paid disposal of partnership shares and other securities (…)".

6.13. In this matter, "the gain subject to IRS is constituted by the difference between the realization value and the acquisition value, net of the portion qualified as capital gains income (…)" and "(…) are considered obtained at the moment of performance of the acts (…)".

6.14. With respect to the aggregation of income, in accordance with the provisions of article 22, no. 1 of the Personal Income Tax Code, "taxable income in IRS is that which results from the aggregation of income from the various categories earned in each year, after making the deductions and abatements provided for (…)", and, in accordance with its no. 3, letter b), "the income referred to in articles 71 and 72 earned by residents in Portuguese territory are not aggregated for taxation purposes (…), without prejudice to the option for aggregation provided therein" (emphasis ours).

6.15. In this case, "when the taxpayer exercises the option (…) he becomes, by that fact, obliged to aggregate all income from the same category of income" (no. 5) (emphasis ours).

6.16. Thus, for the purposes of this analysis, the provision governing the subjection to taxation of capital gains consisting of gains which (not being considered business, professional, capital or real property income), result from the paid disposal of "partnership shares and other securities" is, therefore, letter b), of no. 1, of article 10 of the Personal Income Tax Code.

6.17. And it is this provision concerning the material scope of gains generated by the sale of securities by the Claimants in the year 2016.

6.18. But how are such gains considered for the purposes of determining the taxable income of the year (in this case, 2016)?

6.19. In this context, no. 1 of article 43 of the Personal Income Tax Code provides that "the value of income qualified as capital gains is the corresponding balance struck between capital gains and losses realized in the same year (…)".

6.20. And article 55 of the Personal Income Tax Code ("Deduction of Losses") provides that "in relation to each income earner, the negative net result determined in any category is only deductible from its positive net results of the same category (…)" as presented in the Code (emphasis ours).[4]

6.21. This wording of article 55 of the Personal Income Tax Code, in force since 1 January 2015, was given by Law no. 82-E/2014, of 31 December (IRS Reform Law), which had, in its genesis, the proposals embodied in the "Draft IRS Reform" (July 2014) and the "IRS Reform Bill" (September 2014), following the public discussion to which that document was subjected, in whose reports one can read, respectively, in items 4.3.4. and 5.3.4. ("Regime of communicability of losses between spouses" that "the Personal Income Tax Code adopts a model limiting the deduction of losses between the various categories of income, that is, mitigated horizontal communicability. The Commission proposes (…) in order to make viable a regime rule of separate taxation, vertical loss deduction is established, that is, in relation to each taxpayer; losses are not communicated horizontally. Thus, the negative result of one spouse's category is not absorbed in the income of the same category of the other, in the case of joint taxation" (emphasis ours).

6.22. On this point, the Claimants cite (to reinforce their position) the content of Arbitral Decision no. 739/2016-T, of 30 November 2017, whereby it is understood that what "(…) the legislator intended (…) was to alter in some way the tax paradigm, especially as regards the standard regime of family taxation, making separate taxation the standard (…), in an attempt to combat the negative discrimination to which married persons were subjected, by not having that (…) option", defending that "it was never underlying this Reform the penalization of married taxpayers, either through the effect of amendments to material scope provisions or of assessment provisions" (emphasis ours).

6.23. The Claimants understand that "the change in the standard regime to separate taxation did not have (…) and could not have as a consequence the penalization of the family institution", because "what was intended to be achieved was equality between married taxpayers and the rest, and never to penalize those".

6.24. However, this Arbitral Tribunal does not follow the position defended in the already cited arbitral decision that "having the taxpayers opted for an aggregate taxation regime (…), no other option is possible, other than the joint taxation of the income determined by the couple and this presupposes the communication of the balances, negative and positive, determined in a given year by any one or both members of the family aggregate", for the reasons set out below.

6.25. Indeed, in light of the law applicable at the date in question, this Tribunal agrees with the position defended by the Respondent that "(…) the determination is made by earner and that in case of negative net results, these will only be deductible from the positive net results of the same category and earner", in accordance with what is expressed in the text of the law itself.

6.26. Indeed, in 2014, there was an intention to make amendments to IRS, and this intention was implemented, starting with the publication on 19 March 2014 of Dispatch no. 4168-A/2014 of the Secretary of State for Tax Affairs, appointing "the Commission for the Reform of Personal Income Tax (IRS) – 2014", in which the primary objectives were assumed to be "(…) promoting the simplification of the tax, social mobility and the protection of families, particularly taking into account the importance of birth rate".

6.27. According to the introductory notes of the "Draft Reform" itself, the context of the appointment is extraordinarily demanding in view of the need to implement the proposed amendments to the tax regime in a unique context of "(…) budgetary consolidation, respecting the objectives to which Portugal has committed itself with its international partners, namely through the structural reduction of public expenditure and the strengthening of the new strategy to combat tax fraud and evasion, with the corresponding broadening of the tax base".

6.28. In the said dispatch, it was further understood that "(…) the Reform Commission should proceed with an in-depth evaluation of IRS (...) considering in this exercise the work carried out by working groups previously constituted with the same purpose, and proposing the legislative amendments considered necessary, albeit within a phased calendar:

  • Review and simplification of IRS and other tax regimes applicable to the income of individuals, in order to simplify the regime of their respective reporting obligations and to facilitate compliance with the obligations inherent in this tax, in accordance with best international practices;

  • Promotion of social mobility through, namely, the assessment of taxation on labor income, with the objective of recognizing and valuing merit and effort;

  • Protection of families, particularly in view of the importance of birth rate, through the assessment of the general bases of family taxation in IRS and the strengthening of family fiscal policies, in order to contribute to the reversal of the current demographic deficit in Portuguese society".

6.29. Again in the introductory notes of the "Draft Reform" itself, it is written that "within these parameters, the Commission produced work of an eminently technical nature, which is embodied in an extensive set of proposals for legislative amendments and recommendations", and that "(…) the Commission's work was merely to suggest technical amendments that could serve as a guide for the legislator to decide what it sees fit", and, "with this purpose, the introduction of new provisions is suggested, capable of providing a better response to the major problems that the tax raises today, made necessary by the outdating, with the passage of time, of solutions conceived in the nineteen-eighties of the last century. The objective was to produce work in which the necessary stability, the accompaniment of new realities and the practicability of the proposed solutions are balanced" (emphasis ours).[5]

6.30. Thus, in this context, the IRS Review Commission proposed various amendments to this tax, guided by the objectives presented, among them that set out in point 6.21. above, with respect to "Communicability of losses between spouses", in order to "(…) make viable a standard regime of separate taxation (…)" also proposed, and for this purpose it was necessary to establish that "(…) in relation to each taxpayer (…)" there would be no "(…) horizontal communication of losses" and, consequently, "the negative result of one spouse's category is not absorbed in the income of the same category of the other, in the case of joint taxation" (our emphasis).

6.31. And, it is reiterated, having been this the proposal of the Reform Commission, it was accepted by the Legislator in the text of the Fiscal Reform Law, a statute which introduced the said amendment proposals and additions to this tax into the Personal Income Tax Code.

6.32. In light of the above, this Arbitral Tribunal understands that the IRS assessment act subject to the request for arbitral decision does not contain any defect of violation of law, and is therefore legal in light of the law applicable at the date in question.

6.33. Consequently, the act dismissing the administrative complaint filed by the Claimants against the said tax assessment is also legal.

6.34. With respect to the question of the alleged violation of the provisions of article 1714 of the Civil Code, because the Claimants understand that, pursuant to that article, "it is not permitted to alter the property regimes legally established (…)", and that "the application of articles 55 and 102-C will have as a consequence the alteration of the principle of immutability of the property regime", given that "the TA holds the couple responsible for payment of the tax, regarding which it did not allow one of its members to deduct the losses it suffered", this Tribunal also does not follow the reasoning of the Claimants.

6.35. In this context, the Judgment of the Central Administrative Court South (TCAS) no. 08427/15, of 5 March 2015, is cited, whereby "in the case of spouses (…) the assumptions of the tax event must be considered to be verified in relation to both, without it being necessary to establish the ownership of each portion of the aggregated income for taxation purposes, from which it follows that both are jointly and severally responsible for the fulfillment of the tax debt (…)", because "in this regime of tax responsibility (…) any of the spouses is jointly and severally liable for the payment of IRS on the other's income, both spouses being taxpayers of the tax (…)" (our emphasis).[6]

6.36. In this context, there is no doubt that the Claimants constitute a family aggregate, with the provisions of article 13 of the Personal Income Tax Code already stated above being relevant (point 6.7.).

6.37. Now, it is recalled that the Claimants filed, for the year 2016, an income statement with the option for joint taxation, in compliance with the provisions of articles 57 and 59 of the Personal Income Tax Code.

6.38. From the legal provisions cited above, as well as from the joint filing of that income statement, it unequivocally results that, at that date, no unified tax treatment could be given to the Claimant or his/her spouse, as regards responsibility for any IRS determined, since, it is repeated, the Claimants constituted a family aggregate, and the tax was due by the sum of the income of the persons who constitute it.

6.39. On the other hand, and in accordance with the Judgment cited above in point 6.35., "since the assumptions of the tax event were verified in relation to both, both were jointly and severally liable for the payment of the tax that fell on the income of their respective family aggregate".[7]

6.40. And it continues, stating that "in this matter, with respect to tax debts arising from IRS, the legislator understood to establish a specific regime, which departs from that of civil law, as results from the comparison with the fiscal provisions previously cited", because "(…) being at stake debts arising from IRS, the holding responsible of each of the Claimants is based on the circumstance that, in the year in question, they remained married and with constituted a family aggregate, generator of taxable income in IRS, which were declared jointly to the tax administration" (emphasis ours).

6.41. "The assumptions of the tax event must be considered to be verified in relation to the (…) couple (…), from which it follows that both are jointly and severally liable for the fulfillment of the tax debt" (our emphasis).

6.42. In this context, it should be noted that the 2014 Fiscal Reform also took the opportunity to "(…) harmonize the responsibility of spouses for the fulfillment of tax debts with the property regime to which they are subject (…)", and that "in cases of option for joint taxation, responsibility shall always be joint and several (…)", this measure having been implemented by the Legislator with the addition of article 102-C of the Personal Income Tax Code, introduced by the Fiscal Reform Law (emphasis ours).[8]

6.43. And "being jointly and severally liable with respect to the tax legal relationship in question, both are liable for the whole of the debt, as it operates in the area of tax responsibility, in the event of an IRS debt (…)" determined "(…) in a joint statement by spouses, a regime of liability different from civil liability".

6.44. With respect to the alleged defect of taxpaying capacity, reference is made to the Judgment of the Central Administrative Court North (TCAN) no. 00385/13.9BEPRT, of 16-02-2017, whereby, quoting the Constitutional Court (Judgment no. 84/2003, of 12-02-2003), it is stated that "the principle of taxpaying capacity expresses and makes concrete the principle of tax or fiscal equality in its aspect of uniformity – the duty of all to pay taxes according to the same criterion – with taxpaying capacity filling the unitary criterion of taxation, this criterion being understood as that in which the incidence and distribution of taxes (…) should be made according to the economic capacity or capacity to spend (…) of each one (…)".

6.45. And "(…) as emphasized by CASALTA NABAIS (…)" the "(…) principle of taxpaying capacity (…) thus implies equal tax for those with equal taxpaying capacity (horizontal equality) and different tax (in qualitative or quantitative terms) for those with different taxpaying capacity in proportion to this difference (vertical equality)". Thus, "as a presupposition and criterion of taxation, the principle of taxpaying capacity (…), constituting the ratio or cause of taxation, distances the tax legislator from arbitrariness, obliging him to ensure that in the selection and articulation of tax facts, he adheres to revelations of taxpaying capacity, that is, he erects into object and taxable matter of each tax a certain economic presupposition that is a manifestation of this capacity and is present in the various legal hypotheses of the respective tax" (emphasis ours).[9]

6.46. In these terms, in light of the understanding set out above, and for the reasons flowing therefrom, this Arbitral Tribunal reiterates that the IRS assessment act subject to the request for arbitral decision does not contain any defect of violation of the provisions of article 1714 of the Civil Code, and no violation of the principle of taxpaying capacity is either apparent, given the reasons invoked, and consequently the act dismissing the administrative complaint filed by the Claimants against the said IRS assessment is also legal, as it is in compliance with the applicable legal provisions.

Regarding the Payment of Compensatory Interest

6.47. In addition to the annulment of the IRS assessment in question, and the consequent reimbursement of the amount wrongfully paid, the Claimants also request in the petition that they be recognized the right to compensatory interest, pursuant to the provisions of article 43 of the General Tax Law (LGT).

6.48. However, taking into account the conclusions presented above that the IRS assessment impugned should remain in the legal order, as well as the act dismissing the administrative complaint filed against that assessment should remain (see above, points 6.32., 6.33. and 6.46., above), there will be no place for reimbursement of the amount paid, and the Claimants' request regarding recognition of their right to compensatory interest is judged unfounded.

Regarding Responsibility for Payment of Arbitral Costs

6.49. Pursuant to the provisions of article 527, no. 1 of CPC (by virtue of 29, no. 1, letter e) of RJAT), it should be established that the party at fault for the costs shall be condemned or, if the claim is not successful, whoever benefited from the proceedings.

6.50. In this context, no. 2 of that article specifies the expression "at fault for the costs", according to the principle of non-success, understanding that the losing party is at fault for the costs of the proceedings, in proportion to the extent to which it lost.

6.51. In these terms, having regard to the conclusions presented in points 6.32., 6.33. and 6.46., above, responsibility for arbitral costs should be exclusively imputed to the Claimants.

DECISION

7.1. In these terms, having regard to the conclusions presented in the previous Chapter, this Arbitral Tribunal decided:

7.1.1. To judge the claim presented by the Claimants unfounded, the IRS assessment impugned remaining in the legal order, as well as the decision dismissing the administrative complaint filed against that administrative complaint remaining, with the consequences flowing therefrom;

7.1.2. Consequently, to judge the request for compensatory interest unfounded, absconding the Respondent of the claim;

7.1.3. To condemn the Claimants to payment of the costs of this proceedings.

Value of the case: In accordance with the provisions of articles 306, no. 2 of CPC, article 97-A, no. 1 of CPPT and article 3, no. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at EUR 7,744.07.

Pursuant to the provisions of Table I of the Regulations on Costs of Tax Arbitration Proceedings, the value of the costs of the Arbitral Process is fixed at EUR 612.00, to be borne by the Claimants, in accordance with article 22, no. 4 of RJAT.

Notify.

Lisbon, 31 October 2018

The Arbitrator

Sílvia Oliveira

[1] The wording of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except for transcriptions made.

[2] In this context, the Claimants cite, to reinforce their position, Arbitral Decision no. 739/2016, of 21/11/2017.

[3] In this context, taking into account that the request for arbitral decision includes the request for review of the decision dismissing (dated 23 January 2018), notified to the Claimants by Official Letter no. ... (of 6 February 2018) on 26 February 2018, the administrative complaint filed against the tax act of IRS assessment for the year 2016 (identified in the case), as a way to be able to declare, as a last resort, the illegality of the said IRS assessment subject to the petition, the decision dismissing the administrative complaint that includes the assessment of the legality of the assessment act is covered in the provision of letter e) of no. 1 of article 102 of the Code of Administrative Procedure and Tax Proceedings (CPPT).

Thus, having regard to the provisions of no. 1 of article 102 of CPPT, the period for filing the judicial challenge is three months from the facts enumerated in that article, namely, "notification of the other acts that may be subject to autonomous challenge pursuant to this Code", as well as that provided for in article 10, no. 1, letter a) of RJAT which establishes that the request for constitution of an arbitral tribunal must be filed "within the period of 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of CPPT, as regards acts susceptible to autonomous challenge (...)", whereby, taking into account the date of filing of the request for arbitral decision (25 May 2018), the petition is timely.

[4] Article 55 of the Personal Income Tax Code, in its no. 1, in its wording prior to the year 2015 (that is, in the wording before that given by Law no. 82-E/2014, of 31 December), provided that "without prejudice to the provisions of the following numbers, the negative net result determined in any category of income is deductible from the set of net income subject to taxation", making no express reference to the limitation of the communicability of losses at the horizontal level, between spouses.

[5] It is further stated that there was a need for IRS Reform because "(…) the current system of taxation of the income of individuals shows some maladjustment to the economic and social reality of the Country and to the technical solutions that have been internationally defended in this matter. (…) What economic capacity is the target of taxation should be assessed in relation to the family or to the individual?

The initial choice of our legislator, favorable to joint taxation, was conditioned by a particular reading of the principles informing the Code, which, however, has been consistently challenged. Today it is generally accepted that consideration of the family and its needs can be achieved in systems of separate taxation. Apart from all the theoretical and ideological discussion around the subject, it is worth considering the general evolution that has since occurred in the more developed tax systems, as well as the currently dominant doctrinal thinking, which goes in the direction of separate taxation, based on principles of efficiency and simplicity in taxation.

This evolution is not unrelated to the erosion to which the system of joint taxation has been subjected (…) with respect to the married (…). (…) from the outset due to the inadaptation of joint taxation to the different civil property regimes (…). This right of option generated a discrimination, which many consider unconstitutional, which urgently needs to be resolved.

For this reason, it is proposed that separate taxation be the rule, while safeguarding the possibility of opting for joint taxation for married taxpayers (…).

The Commission does so, incidentally, following several legislative authorizations that were ultimately not implemented. (…) Thus, and once again, the Commission opted for strict compliance with the current constitutional heritage and for the adaptation of IRS to the new existing circumstances" (emphasis ours).

[6] On this matter there was jurisprudence, namely, in the Judgment of TCAS no. 4559/11, of 14/03/2001.

[7] See articles 21, no. 1, and 22, no. 1, of the General Tax Law - LGT.

[8] "Article 102-C Responsibility for Payment

1 - If the option for joint taxation is exercised, the responsibility of the taxpayers for payment of the tax is joint and several.

2 - In separate taxation, the responsibility of spouses for payment of the tax is that which follows from civil law, being presumed the common benefit of the couple.

3 - Each dependent is subsidiarily responsible, in relation to the taxpayers, for payment of the tax in arrears, up to the fraction of the tax corresponding to its net income, of the specific deductions provided for in this code" (emphasis ours).

[9] In "Tax Law", 7th edition, 2012, p. 155 and 157.

Frequently Asked Questions

Automatically Created

What is the regime of loss communication (comunicabilidade de perdas) between spouses for IRS purposes in Portugal?
In Portugal, the regime of loss communication (comunicabilidade de perdas) between spouses for IRS purposes depends on the taxation option chosen. When married couples elect joint taxation, the general principle is that income and losses are aggregated and taxed as a single unit. However, for Category G income (capital gains from securities and other assets), special rules apply. Capital losses from Category G can generally only offset capital gains within the same category in the same year or be carried forward for five years, but their communication between spouses in joint taxation scenarios has been subject to interpretation and dispute, as evidenced by CAAD case 268/2018-T. The Portuguese Tax Code (CIRS) establishes specific limitations on loss offsetting across different income categories, and the deductibility of one spouse's capital losses against the other spouse's income depends on proper documentation of asset ownership and the applicable matrimonial property regime.
How are Category G capital gains (mais-valias) taxed when spouses file jointly in Portugal?
When spouses file jointly for IRS in Portugal, Category G capital gains (mais-valias) from the disposal of securities, real estate, and other assets are generally taxed at special rates. For securities, 50% of the net capital gain (realized gain minus acquisition costs and expenses) is included in the taxable income and taxed at progressive rates, or taxpayers can opt for autonomous taxation at a flat rate of 28%. When married couples choose joint taxation (tributação conjunta), both spouses' Category G income is aggregated. However, capital losses from securities disposals can typically only offset capital gains within Category G in the same tax year, with excess losses carried forward for five years. The critical issue in joint filings is whether capital losses registered under one spouse's name can offset capital gains or other income categories attributed to the other spouse, particularly when assets are held jointly but registered individually, which was the central dispute in CAAD case 268/2018-T involving a married couple's securities transactions.
Can capital losses from one spouse offset capital gains from the other spouse under Portuguese IRS rules?
Under Portuguese IRS rules, the ability of capital losses from one spouse to offset capital gains from the other spouse depends on several factors. When spouses file jointly (tributação conjunta), their income is generally aggregated, but Category G capital losses face specific restrictions. According to Article 55 of the IRS Code (CIRS), capital losses from securities and other Category G assets can only offset capital gains within the same category in the same tax year, with unused losses carried forward for five years. The question of whether losses incurred by one spouse can offset gains of the other spouse in joint taxation has generated controversy. The underlying matrimonial property regime matters: couples married under community of acquests (comunhão de adquiridos) may argue that assets and corresponding gains/losses belong to both spouses. However, the Tax Authority often requires formal proof of joint ownership and may deny loss communication if assets are registered solely in one spouse's name, as occurred in CAAD case 268/2018-T, where the husband's capital losses were challenged despite the couple's claim of complete income and property community.
What was the outcome of CAAD arbitration process 268/2018-T regarding spousal loss communication in IRS?
The provided text excerpt from CAAD arbitration process 268/2018-T shows the initial procedural phases but does not include the final decision or outcome. The case involved married claimants who challenged a €7,523.12 additional IRS assessment for 2016, arguing that capital losses from securities disposals (approximately €79,824) registered in the husband's name should be recognized under their joint taxation election, resulting in no taxable capital gains. The claimants contended that despite investments being primarily in the husband's name for administrative convenience, all assets were jointly owned under their community of acquests matrimonial regime, with joint bank accounts supporting complete income and property sharing. The Tax Authority defended the assessment, arguing lack of legal merit in the claim. The arbitral tribunal, constituted on August 6, 2018, under arbitrator Dr. Sílvia Oliveira, proceeded without an oral hearing and witness testimony by mutual agreement. The tribunal accepted optional written submissions with a decision deadline of October 31, 2018. To determine the actual outcome regarding spousal loss communication in Category G income, the complete arbitral decision would need to be consulted beyond the procedural report section provided.
How can taxpayers challenge IRS capital gains assessments through CAAD tax arbitration in Portugal?
Taxpayers can challenge IRS capital gains assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration by following established procedures under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). The process begins with filing an administrative complaint (reclamação graciosa) with the Tax Authority within the statutory deadline. If this complaint is denied or dismissed, taxpayers can request constitution of an arbitral tribunal through CAAD within 90 days of notification, as demonstrated in case 268/2018-T where claimants filed on May 25, 2018. The request must identify the contested tax decision, state the grounds for annulment, and include supporting documentation. CAAD arbitration offers advantages over judicial courts: faster resolution (decisions typically within 6 months), specialized tax arbitrators, lower costs, and less formal procedures. Taxpayers can request a single arbitrator (for claims up to €10,000) or a three-arbitrator panel. After the tribunal is constituted, the Tax Authority files a response, parties may present evidence and witnesses, and the arbitrator issues a binding decision. If successful, taxpayers can obtain annulment of unlawful assessments plus compensatory interest on overpaid amounts, as the claimants sought in this case requesting €7,523.12 plus interest. The arbitration alternative has become increasingly popular for challenging Category G capital gains assessments involving complex issues like loss communication between spouses.