IRS Tax Classification of Tourist Resort Income: Category B vs Category F – CAAD Case 271/2017-T

ARBITRAL DECISION

PARTIES

Claimants – A… and B…

Respondent – TAX AND CUSTOMS AUTHORITY (AT)

I – REPORT

On 18 April 2017, the Claimants filed a petition for constitution of a singular arbitral tribunal (TAS), in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), with the Tax and Customs Authority (AT) as Respondent.

THE PETITION

The Claimants contest the following additional Personal Income Tax (IRS) assessments:

For the year 2012: assessment no. 2016…, compensatory interest assessment no. 2016…, and account reconciliation statement no. 2016…, resulting in a total amount due of €4,917.21;

For the year 2013: assessment no. 2016…, compensatory interest assessment no. 2016…, and account reconciliation statement no. 2016…, resulting in a total amount due of €6,680.97;

For the year 2014: assessment no. 2016…, compensatory interest assessment no. 2016…, and corresponding account reconciliation statement no. 2016…, resulting in an amount due of €7,876.75.

They conclude by stating that these acts "... should be annulled ... with all legal consequences."

THE GROUNDS FOR CLAIM

The Claimants were subjected to a "... tax inspection procedure directed at examining income declared under IRS for the years 2012, 2013 and 2014, in compliance with Service Orders no. 012016…/…/…, having been notified through Official Communication no. …, dated 17 October 2016," of "... corrections to taxable income ... of €53,335.67 for the year 2012, €21,687.58 for the year 2013 and €26,727.14 for the year 2014," on the grounds that "the income earned derives only from making property available to third parties, and the property owners had no involvement in obtaining the licensing, whereby the income earned by the taxpayer in 2012, 2013 and 2014 was earned in a merely passive manner as a result of pursuit of a commercial activity by H…, and should therefore be classified as Category F income in the taxpayer's sphere," on which basis they were notified of the additional assessments at issue here. They disagree with the grounds for the assessments because:

They are owners of an apartment in the tourist development "…" and on the date of acquisition signed with the developer entity a contract for assignment of tourist operation reserving the right to appoint a managing entity, which they subsequently agreed to appoint.

In the years 2012, 2013 and 2014 they were registered in the tax register of taxpayers classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, under IRS (Category B).

They submitted in the years 2012, 2013 and 2014 their income declaration Form 3 of IRS, classified under the Category B income regime of IRS (organized accounting) and in that capacity paid the IRS due.

This classification was assumed to be correct by the VAT Services Directorate in a tax inspection procedure in 2010 on the occasion of assessment of a VAT refund request.

They conclude, firstly, that the inspection report underlying the assessments challenged here suffers from "lack, inconsistency or insufficiency of grounds in general," not in harmony with article 74(1) of the General Tax Law (LGT) and article 268(3) of the Constitutional Law (CRP), concluding that the tax acts challenged here should be annulled.

Secondly, they submit that, given the position adopted by AT as grounds for the assessments challenged here, "... the position and restrictive interpretation lacks legal basis ... since considering the legal concept of activity ... one must necessarily conclude that the income in question must be taxed under paragraph a) of article 3 of the IRS Code and not under the terms of article 8(2) of the same statute."

Subsequently, since AT invokes in the grounds for the assessments challenged here Circular 5/2013 of 2 July 2013, they argue that generic guidelines do not bind courts as they are subject to a test of legality, and maintain that the reading of the law expressed in this Circular is contra legem as it treats differently a similar situation (local accommodation), as results from Circular Notice no. 20180 of 19 August 2015, concluding that the reading of the law put into practice by AT violates the principle of equality enshrined in the CRP.

Moreover, in this case AT acts in a situation of venire contra factum proprium given the position assumed by the VAT Services Directorate mentioned above, whereby they conclude "the income earned by the Claimants arising from the tourist operation contract executed are subsumable to the typology of income from a commercial activity, in particular from pursuit of an activity of a hotel nature and similar, provided for in paragraph a) of article 3(1) and paragraph h) of article 4(1) of the IRS Code and consequently the additional assessments for the years 2012, 2013 and 2014 should be annulled under paragraph a) of article 99 of the Tax Procedure Code (CPPT)."

Even if this were not the case and the income were classified as Category F in IRS, the "... maintenance and conservation expenses relating to cleaning staff, gardener's salary, electricity, water and gas, costs of renting a house with equipment, repairs and painting, insurance premiums and property administration costs" would still be deductible from such income under article 41(1) of the IRS Code, in addition to "... expenses relating to insurance, remuneration of H… and security, the costs relating to cleaning staff, gardener's salary, electricity, water and gas, repairs and painting should still be taken into account," as was held in arbitral decisions CAAD 435/2014-T, 185/2015-T and 294/2015-T.

They assert that the assessments challenged suffer from the defects of lack of grounds and violation of law through error as to the factual and legal presuppositions, in that they classified the income earned as falling within Category F and not Category B.

THE SINGULAR ARBITRAL TRIBUNAL (TAS)

The petition for constitution of the TAS was accepted by the President of CAAD and automatically notified to AT on 27 April 2017.

The undersigned was appointed arbitrator by the CAAD Deontological Council, and the parties were notified of this on 12 June 2017. The parties did not express any intention to refuse the appointment under article 11(1) paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal has been properly constituted since 3 July 2017 to hear and decide the subject matter of this dispute (articles 2(1) paragraph a) and 30(1) of the RJAT).

All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 3 July 2017, which is incorporated herein by reference.

AT was notified on 3 July 2017 in accordance with article 17-1 of the RJAT. It replied on 20 September 2017, attaching two documents and the Administrative File (PA), comprising a computer file with 16 pages.

On 16 October 2017 the meeting of parties was held in accordance with article 18 of the RJAT, with the hearing of two witnesses, namely: C… who testified on all factual matters, in particular those contained in articles 9 to 28, 30, 52, 61, 62, 66, 78, 109 to 111, 113 and 116 of the petition for arbitral ruling; and D…, who testified on all factual matters, in particular those contained in articles 9 to 12, 15, 16 to 30, 52, 61, 62 and 78 of the petition for arbitral ruling.

At the beginning of the proceeding referred to in the preceding paragraph, the learned counsel for the Claimants dictated into the minutes a motion, ending with the filing of the following documents: (1) copy of proof of cessation of activity of the Claimant husband, effective 31 August 2012 (Document 1); (2) copy of proof of commencement of activity of the Claimant wife on 24 January 2012, as being classified under CAE 55123 "tourist apartments without restaurant" and classified under the normal regime of quarterly periodicity in VAT and, for IRS purposes, in Category B under the organized accounting regime, and also of cessation of her activity on 3 January 2014 (Documents 2 and 3); (3) copy of proof of resumption of activity of the Claimant husband on 3 January 2014, as being classified under CAE 55123 "tourist apartments without restaurant" and classified under the normal regime of quarterly periodicity in VAT and for IRS purposes in Category B under the organized accounting regime (Document 4); (4) copy of the property record, proving that it is assigned to "services" (Document 5); (5) copy of the draft inspection report prepared for the Claimant in 2010 and also of the final tax inspection report, in which it was found that the Claimant's classification under Category B was correct (Documents 6 and 7); (6) copy of the draft inspection report prepared for two other owners of the same tourist resort (E… and F…) - 2 of 34 (natural and legal persons) who were inspected - and also of the final tax inspection report, in which it was found that the classification of those owners under Category B was correct (Documents 8, 9, 10 and 11); (7) Copy of binding information no. 3626, dated 9 October 2012, from the VAT Services Directorate, in which it is stated that a rental contract with inclusion of services constitutes "thus an operation subject to VAT assessment at the rate defined in paragraph c) of article 18(1) of the said Code" (Document 12); and (8) copy of the tax assessments for 2012, 2013 and 2014, and respective proof thereof (Documents 13, 14 and 15), which are attached to the minutes of the party meeting.

The Respondent did not waive its period to respond. The filing was admitted by the TAS and a period of 10 days was granted for AT to respond.

On the same date a period of 10 days was established for the filing of written and successive arguments.

On 25 October 2017 the Respondent responded to the filing of documents referred to in paragraph u) of this Report, maintaining what it had already stated in its response.

The Claimants filed arguments on 7 November 2017, pursuing the same terms contained in the petition for ruling. The Respondent filed counter-arguments on 20 November 2017, maintaining what it had stated in its Response.

PROCEDURAL REQUIREMENTS

Legitimacy, capacity and representation – The parties are legitimate, possess legal personality, judicial capacity and are properly represented (articles 4 and 10(2) of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

Principle of contradiction - AT was notified in accordance with paragraph s) of this Report. All procedural documents and all documents attached to the case were made available to the respective opposing party in the CAAD Case Management System. The filing of all documents was always notified to both parties.

Dilatory exceptions - The arbitral proceeding is not subject to any nullities and the petition for arbitral ruling is timely as it was filed within the prescribed period in article 10(1) paragraph a) of the RJAT. Indeed, AT did not question the timeliness of presentation of this petition for arbitral ruling.

SUMMARY OF THE CLAIMANTS' POSITION

In August 2007, the Claimants acquired from "... company G…, S.A. (NIPC…) (G…), ... the Apartment…, registered in the urban property register of the Union of Freguesias of … and … under article …- letter H, located in the development 'Apartments …'" and "... on the same date signed with G… a contract for assignment of tourist operation of the unit ... ..., reserving to itself the right to appoint a managing entity"...

They state that "from 28 December 2007 to 31 August 2012, ... the Claimant husband exercised the activity of tourist apartment operation, being registered for this purpose with CAE 55123 'tourist apartments without restaurant' and classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, under IRS (Category B), having on 3 January 2014 resumed his activity with the same classification." The Claimant wife "between 24 January 2012 and 3 January 2014, ... was registered for the exercise of the activity with CAE 55123 'tourist apartments without restaurant' and classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, under IRS (Category B)".

In the contract for assignment of tourist operation the following is noted, in particular:

In clause 2.1 that the Claimants shall ensure "... the tourist operation of the UNIT through the services of the MANAGER and in accordance with this Contract," concluding that "... the managing entity (H…) was to operate the tourist apartments of the unit … on behalf of and in the interest of the Claimants by providing all services necessary for the performance of that operation" and that "in this manner, the operation of the said tourist apartment was carried out directly by the Claimants, though using H… to operationalize that tourist operation given its experience and established reputation in this sector of activity, receiving this compensation for the services provided."

In the same clause 2.1 it is stated that the parties agreed that "the MANAGER [H…, S.A.] accepts, hereby, the appointment (...) to, under an exclusive regime, provide the services comprehended within the scope of this Contract (...)"

In clause 2.2 it is stated that H… accepted the appointment as manager of the tourist apartment and consequently accepted "(...) to provide the services described in this Section 2.2 throughout the duration of this Contract: A - Administer the Tourist Operation Program described in Section 3; B - Provide the Property Administration Services described in Section 4; C - Provide the Property Maintenance Services described in Section 5; and D - Provide the Cleaning and Tidying Services for the Unit described in Section 6."

In clauses 3.1 to 3.13 it is stated that "as part of the said Tourist Operation Program, H… was obliged to manage, on behalf of the Claimants, the operational aspects of current management inherent to the tourist operation of the apartment identified above, specifically dealing with collection of payments due, collection of expenses, management of reservations, determination of rates."

In clause 4.1 it is stated that H… was further responsible "(...) for general administration services in favor of the Unit. The nature and object of these services shall be determined by the MANAGER and shall include, without being limited to, accounting, sales and marketing, travel agency costs and/or commissions of tour operators and respective expenses incurred, costs of central services related to the Tourist Operation Program and costs of reception services and other related expenses."

In clause 5.1 it is stated that "as part of the general administration services of the unit 'the MANAGER accepts to perform routine maintenance services that it freely considers necessary to keep the Unit suitable for Guest occupancy, namely routine maintenance such as changing light bulbs, unclogging toilets, restoring/connecting circuits, and maintenance of gardens and landscape."

In clause 6.1 it states that "... as part of the general administration services of the unit H… would have to deal with cleaning and tidying services of the unit, specifically providing house linen and unit cleaning, emptying trash, changing towels, kitchen cloths and bed linen, daily tidying of kitchen, dining and living rooms, bathroom and bedrooms (such as dish washing, countertop cleaning, sweeping floors, dusting, vacuuming, cleaning mirrors, and making beds) and also cleaning after guest departure and annual professional deep cleaning of the unit interior (which involves steam cleaning of carpets and upholstery, floor waxing, external window cleaning and other services)."

Also in clause 2.1 it is stated that "in exchange for management services the parties agreed that the 'MANAGER shall provide the services identified above in return for the remuneration described in Section 7.," which section provides that the "MANAGER shall be entitled to receive and will retain 25% (twenty-five per cent) of Gross Revenue from Tourist Operation, or such other percentage as may be agreed periodically between the MANAGER and the FIRST CONTRACTING PARTY."

According to clause 4.4 to H… fell the performance of acts of current management while to the "... Claimant husband fell the performance of all operations not related to operational management of tourist operation, specifically ... 'for all charges and expenses, pending or due, related to the Unit, including, but not limited to, any taxes and charges levied by creditors or suppliers, namely, including but not limited to payment of any operating expenses, condominium charges, management and reserve costs, all insurance premiums, auditors, telephone accounts and other expenses and all costs for basic services (electricity, oil, gas, water)"."

According to clause 3.12 it further fell "... to the Claimant husband to keep the unit fully operational, whereby it was he who acquired all equipment and furniture for the Unit, equipping it with the standard package of furniture, which represented an expense of €55,660.00 (fifty-five thousand six hundred and sixty euros), including VAT at the applicable legal rate, which was "... borne and paid by the FIRST CONTRACTING PARTY on the date of signing this Contract"".

They conclude that it is evident from the contractual clauses transcribed above that the managing company "... always acted on behalf and in the interest of the Claimants while performing the operations necessary to carry out the tourist operation of the apartment identified above."

In this context "in compliance with their disclosure obligations, with reference to the years 2012, 2013 and 2014, the Claimants filed together their income declaration Form 3 of IRS," that is, following the Category B income regime of IRS (organized accounting).

In the arguments they state that "the classification of the Claimants - under the normal regime of quarterly periodicity in VAT and, for IRS purposes, in Category B under the organized accounting regime - results not only from the instructions that the Claimants' tax representative always obtained, either from the Administration or from the company operating the development, but also from the position assumed by the VAT Services Directorate in the binding information process no. 3626, of 9 October 2012."

The Claimants themselves attached at the party meeting of article 18 of the RJAT the content of an AT inspection report from 2010 where the substantive issue discussed here was addressed (whether they should be included in the Category B income regime of IRS or in Category F) concluding, after their prior hearing, that their integration into Category B of IRS was in fact correct, since no contrary decision was adopted.

AT came in 2016 to open "...a tax inspection procedure directed at examining income declared under IRS for the years 2012, 2013 and 2014, in compliance with Service Orders no. 012016…/…/…, and the Claimants were notified through Official Communication no. …, dated 17 October 2016" of "... corrections to the Claimants' taxable income of €53,335.67 for the year 2012, €21,687.58 for the year 2013 and €26,727.14 for the year 2014," on the grounds that "the income earned derives only from making property available to third parties, and the property owners had no involvement in obtaining the licensing, whereby the income earned by the taxpayer in 2012, 2013 and 2014 was earned in a merely passive manner as a result of pursuit of a commercial activity by H…, and should therefore be classified as Category F income in the taxpayer's sphere."

Based on the facts narrated above, the Claimants argue that because "the Tax Administration found that the performance of both Claimants is passive and for that reason the income that he declared as Category B income should instead be taxed as Category F income under circular no. 5/2013 of 2 July 2013," but because the Claimant husband is the holder "of the tourist operation of the apartment ... and having assigned the operation thereof to H…, while maintaining in his sphere the risk of operation, it is not understood in what manner the Claimants exercise the tourist operation in a passive manner" it should be concluded that the Tax Inspection Services in not supporting, in the Conclusions of the Final Tax Inspection Report, clearly and unambiguously, the facts on which they based their conclusion that the income earned by the Claimants was Category F income of IRS, did not fulfill the legal duty of stating grounds.

Whereby the inspection report underlying the assessments challenged here suffers from "lack, inconsistency or insufficiency of grounds in general," not in harmony with article 74(1) of the LGT and article 268(3) of the CRP.

The Claimants further submit that, given the position adopted by AT as grounds for the assessments challenged here "... the position and restrictive interpretation lacks legal basis ... since considering the legal concept of activity ... one must necessarily conclude that the income in question must be taxed under paragraph a) of article 3 of the IRS Code and not under the terms of article 8(2) of the same statute."

They maintain integration of the income into Category B of IRS, based on "... paragraph a) of article 3(1) of the IRS Code: 'business and professional income includes a) That arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity (...)'" since under "... paragraph h) of article 4(1) of the IRS Code 'the following are deemed commercial and industrial activities in particular (...) h) - Hotel and similar activities, catering and beverages, as well as sale or operation of the right to periodic residential use (...)'"

Noting that "it is settled jurisprudence that 'whenever there is an increase in value accruing to an estate by virtue of the exercise of an economic activity (even if expressed in a single act) translated into creation of economic utility, resulting from any relationship of the agent/taxpayer with a third party in which, by meeting the economic needs of the latter, the estate of the former increases (mediation between supply and demand) there will be commercial activity' (judgment of the Supreme Administrative Court, Case no. 580/15, dated 24 February 2016, available at www.dgsi.pt")."

Finally, since AT invokes in the grounds for the assessments challenged here "... Circular 5/2013 of 2 July 2013 which states: 1 - The activity of operating a tourist development when exercised directly by the owner, a natural person, is considered a commercial activity provided that the taxpayer has requested registration of the development in the National Registry of Tourist Developments. 3 - When by contract for assignment of tourist operation, the owner of a property suitable for such operation relinquishes proceeding with the same tourist operation, transferring, for remuneration, to another such activity and being the transfer prior to registration of the tourist development in the National Registry of Tourist Developments, the income earned shall be deemed property income under article 8(2) paragraph a) of the Personal Income Tax Code (CIRS)," they argue that generic guidelines do not bind courts as they are subject to a test of legality.

They further argue that the reading of the law expressed in Circular 5/2013 of 2 July 2013 is contra legem and treats differently a situation similar at the level of local accommodation, as results from Circular Notice no. 20180 of 19 August 2015, whereby the reading of the law put into practice by AT violates the principle of equality enshrined in the CRP.

And that, in the case of the Claimants, for the reasons set out in paragraph ii) of this Report, they understand that AT acts in a situation of venire contra factum proprium, whereby they conclude "the income earned by the Claimants arising from the tourist operation contract executed are subsumable to the typology of income from a commercial activity, in particular from pursuit of an activity of a hotel nature and similar, provided for in paragraph a) of article 3(1) and paragraph h) of article 4(1) of the IRS Code and consequently the additional assessments for the years 2012, 2013 and 2014 should be annulled under paragraph a) of article 99 of the CPPT."

They maintain that even if this were not the case and the income were classified as being Category F under IRS, the "...maintenance and conservation expenses relating to cleaning staff, gardener's salary, electricity, water and gas, costs of renting a house with equipment, repairs and painting, insurance premiums and property administration costs" would still be deductible from such income under article 41(1) of the IRS Code, in addition to "... expenses relating to insurance, remuneration of H… and security, the costs relating to cleaning staff, gardener's salary, electricity, water and gas, repairs and painting should still be taken into account," as was held in arbitral decisions CAAD 435/2014-T, 185/2015-T and 294/2015-T.

SUMMARY OF THE RESPONDENT'S POSITION

The Respondent has a different reading of the facts and the legal provisions it considers applicable.

It begins by confirming that the Claimants were registered in the taxpayer register as stated in the petition for ruling, clarifying the situation further. It states: "taxpayer B… NIF … (SP B in 2012, A in 2013 and B in 2014) was registered between 2012-01-24 and 2014-01-03 for the exercise of the activity 'tourist apartments without restaurant' CAE 55123, classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, in IRS." And that "... taxpayer A… NIF … (SP A in 2012, B in 2013 and A in 2014), was registered for the exercise of the activity 'Tourist apartments without restaurant' CAE 55123 in the period between 2007-12-28 and 2012-08-31, resuming the same activity on 2014-01-03, the same being classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, in IRS."

From the analysis of the tourist operation assignment contract it draws a different conclusion: "the income earned by the Claimants thus derives from making property available to third parties, which are managed and maintained by company H…, which also manages short-term rentals, collecting the amounts due and providing all other associated services, such as for example cleaning."

Concluding that such income "... arises in a merely passive manner as a result of pursuit of a commercial activity by company H…". "The Claimants did not demonstrate having any business-type organization for obtaining it." "For this reason the Tax Inspection Services (hereinafter SIT) considered that the income in question corresponds to property income classifiable in Category F of IRS (article 8 of the Personal Income Tax Code)." "Since the income in question relates to assignment of use of the property or part thereof, the amounts received by the property owners as consideration for assignment of use of the apartments are considered property income in accordance with the provision in paragraph a) of article 8(2) of the IRS Code regardless of whether the amount received is not fixed."

As to the factual matters it considers relevant for assessment of the case, it also cites some facts determined during the Tax Inspection, in particular:

As to the revenue produced by the Claimants' apartment: "according to an e-mail sent to the SIT by H…, in the context of order no. DI2013…: 'with regard to the accommodation revenue generated by the apartments …, this is distributed daily among all apartments available for rent based on the per-thousand allocation of each apartment, with the base able to change daily depending on the total of the per-thousand allocations of units available for rent in the ….'

As to the expense allocated to the Claimants' apartment: "''… under the contract the respective costs are distributed among all units comprising the … based on the per-thousand allocation of each unit in the universe of the 154 apartments comprising the …, with the exception of the condominium value which is calculated based on the per-thousand allocation of each apartment relative to the per-thousand allocation of all units comprising the resort ….'' – as stated in the mail sent by H… in the context of order no. DI2013…"

As to the defects invoked by the Claimants, AT argues that there is no lack of grounds in the Inspection Report (and the corrections in question here), stating that "... the jurisprudence of the Supreme Administrative Court (STA) has uniformly held that the statement of grounds of an act is a relative concept that varies depending on the type of act and the circumstances of the particular case," "and it is considered that there is sufficient statement of grounds when it allows a normal recipient to understand the cognitive and evaluative path followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide in that manner and not another." It cites various STA judgments supporting this understanding.

And it concludes that "in the case at hand, the statement of grounds is sufficiently clear and unambiguous, particularly since the Claimant through this petition for arbitral ruling not only demonstrates, in light of the arguments explained throughout its submission, to have fully understood the factual and legal framework on which the Respondent's decision was based, since it attempts to refute point by point all of its action," "as it also had already fully understood the same factual and legal framework during the prior hearing." "Whereby the defect of lack of statement of grounds is deemed not to exist."

As to the invoked violation of presuppositions it begins by appealing to the subsumption of the facts determined to the norm contained in paragraph a) of article 8(2) of the IRS Code and not to that of paragraph a) of article 3(1) of the IRS Code.

Disagreeing with the Claimants' reading of the law that "the law does not distinguish the manner in which income is obtained" it states that "... such is not true, since the law expressly refers to business income being that arising from the exercise of any commercial activity." And it adds "... considering both the meaning of the concept used in the legal norms in question, and the interpretation that courts of higher rank have made of it, one cannot but conclude that the Claimants have any reason." It concludes "... the use of the word 'exercise' in the wording given to the norm, as opposed to the words used in article 8 of the CIRS to define what are Category F income, has underlying the practice of acts with a certain purpose which, in this case, would be that of obtaining profit."

It cites in support of its position the STA judgment in case 01622/15, of 11 January 2017 and judgment of the Court of Appeals of the North, in case 00325/04, of 20 January 2005.

As to the invocation of the content of Circular Notice no. 20180 of 19 August 2015, issued by the IRS Services Directorate, to the effect that the regime established there for local accommodation is contradictory with the manner of application of the law discussed here, it states that "after careful reading ... one quickly concludes that these address distinct situations, particularly because the legal norms in question in each of these have different wordings," especially since the regime for local accommodation is contained in Decree-Law no. 128/14 of 28 August, a reality that did not exist on the date of the assessments at issue here.

As to the Claimants' invocation that AT's position is also inconsistent with the position assumed in 2010 in another inspection proceeding in which a VAT refund request was analyzed, it states that "... as the Claimants themselves say, not only is this a different fiscal year from those now at issue, but also the tax being analyzed is different, and in the case at hand the specific norms of IRS applicable to the particular case should be considered," because "there is no equality in illegality," citing in support of this assertion what is stated in the STA judgment in case no. 0509/05 of 14 March 2006.

Regarding "... the Claimants' claim that the entirety of expenses for personnel salaries, cleaning, electricity, gas and water (article 116 of the ppa) be accepted, as these were not accepted in the analysis performed in the inspection procedure" it states that "under article 41(1) of the IRS Code, in the wording in force at the date of the facts, 'From the gross income referred to in article 8 shall be deducted the maintenance and conservation expenses that are the responsibility of the taxpayer, borne by the taxpayer and which are documented, as well as the municipal tax on property and stamp tax that applies to the value of properties or part of properties whose income is subject to taxation in the fiscal year (wording given by Law no. 66-B/2012 of 31 December)'." "In this manner one must assess whether those expenses referred to in the abstract by the Claimants, and not demonstrated in the arbitral hearing, have the character of conservation and/or maintenance expenses that are the responsibility of the taxpayer."

Concluding that it appears "... at the outset that the expenses mentioned by the Claimants do not constitute conservation expenses nor, likewise, maintenance expenses." And that "on the other hand as regards expenses for salaries and cleaning, it emerges from sections 5 and 6 of the assignment contract that such charges are the responsibility of the Manager which means they are not the responsibility of the Claimants."

In counter-arguments AT stated regarding the documents filed by the Claimants with the arguments that "... the binding information filed as doc. 9 on 25 October has as its object a situation in which a rental contract is analyzed and the applicable VAT rate is discussed, and no parallel can be established with the situation at hand." "On the other hand as the Claimants certainly know, the concept of provision of services for VAT purposes is defined in article 4(1) of the VAT Code, which has a markedly residual nature, in that all operations that are not transfers of goods, imports or intra-Community acquisitions of goods are deemed provisions of services." "That is, the fact that an operation is classified for VAT purposes as being a provision of services does not automatically mean that the same must necessarily fall under the concept of provision of services of the IRS Code and thus be covered by Category B. By way of example only, consider the case of assignment of intellectual property rights which, for IRS purposes, is provided for in article 5(2) paragraph m) and as such constitutes Category E income and for VAT purposes is a provision of services subject to tax."

It concludes by stating that "... this petition for arbitral ruling should be judged not well-founded, and consequently the Respondent absolved of all claims, all with due and legal consequences."

II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

In accordance with articles 123 and 124 of the CPPT, the TAS shall consider the defects pointed out in paragraph n) of the Report, that is:

Lack, inconsistency or insufficiency of statement of grounds in general;

Violation of law through error as to the factual and legal presuppositions in that they classified the income earned as falling within Category F and not Category B.

In the case discussed here, in terms of matters of law to be determined, what is at issue in terms of substantive question in the analysis of this TAS appears to be reducible to a question of harmonization in the application of the following legal provisions:

IMI – paragraph b) of article 6(1) of the IMI Code, since the property at issue is classified by AT as being for "services";

VAT – paragraph a) of article 29(1) and article 31, both of the VAT Code (commencement and change of activity) and paragraph a) of article 9(29) of the VAT Code (Exemption from VAT = rental of immovable property. Subject to VAT = provision of services).

IRS – article 112 of the IRS Code (commencement and change of activity); paragraph a) of article 3(1) of the IRS Code; paragraph h) of article 4(1) of the IRS Code; paragraph a) of article 8(2) and (1) both of the IRS Code, since what is being discussed is whether the income earned by the Claimants should be classified as Category B or Category F income of IRS.

We are not in a case in which it is discussed whether or not a tax should be paid, or whether the tax paid was paid in the correct amount. It is only discussed whether the income earned by the Claimants should be considered as Category B or Category F income of IRS.

III. PROVEN AND UNPROVEN FACTS.

GROUNDS

As to factual matters the Tribunal does not have to rule on all that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven from the unproven facts (in accordance with article 123(2) of the CPPT and article 607(3) of the Code of Civil Procedure (CPC), applicable ex vi article 29(1) paragraphs a) and e) of the RJAT).

In this manner the relevant facts for judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (in accordance with former article 511(1) of the CPC, corresponding to the current article 596, applicable ex vi article 29(1) paragraph e) of the RJAT).

Thus, taking into account the positions assumed by the parties and the documentary evidence filed, the following facts are considered proven with relevance for the decision, with the respective documents indicated (proof by documents) as grounds:

The relevance of the testimony of witnesses shall be indicated in each fact considered proven or unproven.

Proven Facts

1. The Claimants are owners of an autonomous unit of a property in the form of condominium ownership, registered in the urban property register of the Union of Freguesias of … and …, under article …º - unit "H" (1st … – Apartment …) situated at … – … – …, …, … - … …, inserted in the tourist development designated "…" which they acquired on a date not specifically ascertained from G… SA NIPC… (hereinafter referred to as G…), appearing in the respective urban property record "assignment: services" – in accordance with article 9 of the ppa; article 10 of AT's response and first paragraph of part III of the PA (comprising the inspection report) attached by AT with its response and document no. 5 attached by the Claimants in Annex to the minutes of the party meeting of article 18 of the RJAT.

2. On 8 August 2007 the Claimants signed with G… the promise of sale and purchase contract for the autonomous unit referred to above and on that same date signed between themselves a contract for assignment of tourist operation of the unit "…" for 10 years counted from the execution of the deed of sale, under which the assignee was designated manager, being able to appoint another company for "management and tourist operation" of the apartment "on behalf of" the Claimants, with H… SA, NIPC …, a commercial company (hereinafter referred to only as H…) having been appointed on a date not specifically ascertained – in accordance with article 10 of the ppa; article 11 of AT's response, second paragraph of part III of the PA (comprising the inspection report) attached by AT with its response and considering A and item 2.1 of document no. 4 attached with the ppa.

3. The contract for assignment contains notably the following:

a) That the Claimants (designated "first-contracting party") accept that "... during the entire duration of the contract they will not operate, rent or in any other manner make available the Unit to any third party in exchange for rent, tariff or any other means of payment (including of non-pecuniary character) and ... shall not disclose nor permit that any other natural or legal person discloses that the Unit is available for such."

b) That H… (managing entity) accepts to provide the services described "... throughout the entire duration of this Contract: A. Administer the Tourist Operation Program (reasonable commercial efforts for occupation by guests); B. Provide the Property Administration Services (collection of payments and expenses, reservations, rates and courtesy uses, sales, marketing, travel agencies, etc.); C. Provide the Property Maintenance Services (routine maintenance, bulbs, gardens, landscape, etc.; and D. Provide the Cleaning and Tidying Services of the Unit."

c) That H… (managing entity) "... shall be entitled to receive and will retain 25% (twenty-five per cent) of Gross Revenue from Tourist Operation or such other percentage as may be agreed periodically..." for administration of the tourist operation program.

d) That the Claimants are responsible for "direct expenses of the unit" understood as "... all charges and expenses, pending or due, related to the Unit, including but not limited to any taxes and charges levied by creditors or suppliers, namely including but not limited to payment of any operating expenses, condominium charges, management and reserve costs, all applicable insurance premiums, auditors' fees, telephone accounts and other expenses and all costs for basic services (electricity, oil, gas, water)." Expenses which H… shall pay on their behalf and for their account "... using funds in the operating account except as regards namely insurance premiums and condominium charges paid..." on behalf of the Claimants.

e) That the Claimants agreed to equip and furnish the unit with furniture, utensils and equipment according to a "standard package" to be realized by H… in exchange for payment added to the purchase price of the unit of €55,660.00.

f) That H… is obliged to provide the Claimants a monthly account report within 15 (fifteen) days of the end of the month in question and an annual audited account report (report) of his account identifying for the previous calendar year: (i) all revenues from tourist operation of all units participating in the Program; (iii) Manager compensation; (iv) net revenue from tourist operation; (v) compensation of claimants; and (vi) all other expenses and charges the responsibility of the Claimants, made available in accordance with the contract terms.

• in accordance with articles 19 to 28 of the ppa and document no. 4 attached with the ppa.

1. On 8 February 2008 the title constituting the "… was deposited with the General Directorate of Tourism, and on 7 July 2008 a license for tourist use was granted by the Municipal Chamber of … to the development – in accordance with articles 11 and 12 of the ppa and Documents nos. 5 and 6 attached with the ppa.

2. B… NIF … (taxpayer B in 2012, A in 2013 and B in 2014) was registered between 2012-01-24 and 2014-01-03 for the exercise of the activity "tourist apartments without restaurant" CAE 55123, classified under the normal regime of quarterly periodicity in VAT and under the organized accounting regime, by option, in IRS (category) – in accordance with article 14 of the ppa, article 7 of AT's response and first paragraph of item II - 3.1 of the PA attached by AT with its response.

3. A… NIF … (taxpayer A in 2012, B in 2013 and A in 2014) was registered for the exercise of the activity "tourist apartments without restaurant" CAE 55123 in the period between 2007-12-28 and 2012-08-31, resuming the same activity on 2014-01-03 and is classified under the normal regime of quarterly periodicity in VAT and for IRS purposes in Category B under the organized accounting regime – in accordance with article 13 of the ppa, article 8 of AT's response and second paragraph of item II - 3.1 of the PA attached by AT with its response.

4. The Claimants, according to AT's computer system, are non-resident taxpayers in national territory and a tax representative was appointed as company I…, Lda. NIPC…, appearing in item 23 of the registration/commencement of activity declarations submitted in paper form as the location of exercise of the activity the geographical designation of the property identified in 1. – in accordance with article 9 of the response, third paragraph of item II - 3.1 of the PA attached by AT with its response and documents nos. 2 to 4 attached by the Claimants in Annex to the minutes of the party meeting of article 18 of the RJAT.

5. In the year 2012 Annex B was submitted corresponding to A…'s activity (without income) and Annex C with B…'s income. In 2013 only Annex C was submitted with the income generated by B…. In 2014 two Annexes C were submitted, one corresponding to B… (without income as it ceased on 2014-01-03) and the other with the income generated by A…'s activity resulting in IRS assessments – in accordance with articles 31 and 32 of the ppa, articles 22 and 23 of AT's response and PA – page 7 – attached by AT with its response.

6. On 10 August 2016 Official Communication no. OI2016…/…/… was opened determined by order of the Finance Director of …, for purposes of control of rental of property, had partial scope in IRS, with extension to the years 2012, 2013 and 2014, having been prepared a report raising corrections to taxable IRS income of a purely arithmetic nature in the amounts of €53,335.66, €21,687.58 and €26,727.14 in the years 2012, 2013 and 2014 – in accordance with articles 33 and 34 of the PA, article 5 and 6 of AT's response and content of the PA attached by AT with its response.

7. It appears in the grounds of the inspection report referred to in the preceding number the following: "... the new property owners ensured the tourist operation of the properties in question through the services of company H…, granting it exclusive authorization to operate them for profit, the apartments of which they are owners.

Thus the taxpayers in question mandated company H… to receive in its own name and on their behalf the remuneration relating to operation of their property, with the latter having the right to retain 25% of gross revenue from the respective operation.

The income earned by the taxpayers in question derives from making property available to third parties.

These are properties which are managed and maintained by company H…, which also manages short-term rentals, collecting the amounts due and providing all other associated services such as for example cleaning, etc.

Finally this company makes available to the owner the amounts contractually agreed.

To note that the property owners had no involvement in obtaining the licensing.

Thus the income that the taxpayers earn arises in a merely passive manner as a result of pursuit of a commercial activity by company H…. The IRS taxpayers do not appear to have, nor claim to have, any business-type organization for obtaining it.

Therefore the income in question corresponds to property income classifiable in Category F of IRS (article 8 of the CIRS).

Circular no. 5/2013 of 02-07-2013 states: '1 – The activity of operating a tourist development when exercised directly by the owner, a natural person, is considered a commercial activity provided that the taxpayer has requested registration of the development in the National Registry of Tourist Developments…

3 – When by contract for assignment of tourist operation, the owner of a property suitable for such operation relinquishes proceeding with the same tourist operation, transferring for remuneration to another such activity and being the transfer prior to registration of the tourist development in the National Registry of Tourist Developments, the income earned shall be deemed property income under article 8(2) paragraph a) of the Personal Income Tax Code (CIRS).'

Furthermore company G… SA NIPC … requested two binding information items on this matter (nos. 477 and 1369) which were considered that given the law in force one is faced with property income and from which the relevant parts are transcribed:

'…. Specifically regarding the questions raised we have:

1st question - Qualification of income earned by owners under the tourist operation assignment contract:

1. Regarding the qualification of the income in question two hypotheses arise under IRS: either we are faced with property income as defined in the IRS Code or these are income arising from the exercise of a commercial nature activity hypothesis defended by the claimant.

2. In IRS business and professional income (Category B) are considered those arising from the exercise of any commercial industrial agricultural forestry or livestock activity that is all activities that consist of carrying out economic operations of a business character including those relating to provision of services exercised on own account even if related with any of the activities mentioned above (art. 3(1) paragraphs a) and b) of CIRS).

3. On the other hand property income subject to IRS in Category F consists notably of rents arising from assignment of use of property or part of property and services related to that assignment as well as amounts relating to rental of machinery and furniture installed in the rented property (art. 8(2) paragraphs a) and b) of CIRS).

4. In the case under analysis the owners merely limit themselves to assigning use of the apartments for operation thereof to an entity receiving as compensation a proportional quota corresponding to the number of units participating in the tourist operation program and to the number of days the unit was available for use within the program less the value corresponding to costs and expenses borne by the manager on behalf of the owners.

5. In this aspect it seems to us that the fact that owners receive non-fixed compensation depending on the number of days the unit was available for use within the program does not constitute a reason to consider that the owners are directly operating the apartments nor removes that compensation from the concept of rent.

6. Indeed having analyzed the nature and specificities of the underlying operations the owners merely assign use and enjoyment of the tourist apartments equipping them and furnishing them with the standard package of furniture delivering management and operation thereof to an operator entity G… which provides all services necessary for operation of the development namely the commercial efforts necessary to promote the apartments accounting sales marketing contacts with travel agencies and tour operators maintenance services cleaning and tidying services garden and landscape maintenance etc..

7. In this sense it seems to us that the amounts received by the owners as consideration for assignment of use of the apartments do not constitute income arising from the exercise of a business activity as previously described but should rather be considered property income.

8. Thus we cannot agree with the understanding of the claimant as income relating to assignment of use of the property or part thereof is at issue whereby in accordance with the provision in paragraph a) of article 8(2) of the IRS Code the same income is considered property income

independent of the fact that the amount received is not fixed...' – Binding Information no. 477

'…. Since the legal presuppositions for provision of the requested information with binding character are deemed met it behoves us to provide the following information:

1. Through the submission made by the claimant on 2010-01-14 in the Information Management and Binding Information System (SIGIV) - Request no. 477 regarding the legal-tax framework of income arising from the so-called 'Tourist Operation Assignment Contract of Unit …' binding information was provided in which it was concluded in summary as follows:

•. It is deemed that property income subject to IRS in Category F consists notably of rents arising from assignment of use of property or part of property and services related to that assignment as well as amounts relating to rental of machinery and furniture installed in the rented property (art. 8(2) paragraphs a) and b) of CIRS).

•. In the case under analysis the owners merely limit themselves to assigning use of the apartments for operation thereof to an entity receiving as compensation a proportional quota corresponding to the number of units participating in the tourist operation program and to the number of days the unit was available for use within the program less the value corresponding to costs and expenses borne by the manager on behalf of the owners.

•The fact that owners receive non-fixed compensation depending on the number of days the unit was available for use within the program does not constitute a reason to consider that the owners are directly operating the apartments nor removes that compensation from the concept of rent.

•Having analyzed the nature and specificities of the underlying operations the owners merely assign use and enjoyment of the tourist apartments equipping them and furnishing them with the standard package of furniture delivering management and operation thereof to an operator entity G… which provides all services necessary for operation of the development particularly commercial efforts commercial efforts necessary to promote the apartments contacts with travel agencies and tour operators maintenance services cleaning and tidying services garden and landscape maintenance etc.

•. In this sense being income relating to assignment of use of the property or part thereof at issue the amounts received by the owners as consideration for assignment of use of the apartments are considered property income in accordance with the provision in paragraph a) of article 8(2) of the IRS Code independent of the fact that the amount received is not fixed.

•. Whether the owners are natural persons resident or non-resident the income earned being deemed property income is subject to source withholding in accordance with the terms provided in paragraph a) of article 101(1) of CIRS that is at a rate of 16.5% (with the wording given by Law no. 12-A/2010 of 30 June).

1. Considering the above particularly the understanding superiorly sanctioned contained in the conclusions of the information provided within the framework of the legal-tax framework of the disputed matter (SIGIV) - Request no. 477 it is highlighted that what is at issue is source withholding on Category F income (property income) paid by G… to the respective owners income that arises from the amount paid by the user/users independently of the amount collected by G… from the owner by title of expenses for the operation services provided.

2. Thus the amounts of Category F income on which source withholding falls in accordance with the terms above mentioned constitute the gross income (net) referred to in article 8 of CIRS from which the expenses referred to in article 41 of the same Code are deducted in the conditions there provided namely those relating to maintenance and conservation insurance and municipal property tax (IMI). …' – Binding Information no. 1369.

Under Personal Income Tax (IRS) and in accordance with article 13(1) of CIRS natural persons residing in Portuguese territory and those who do not reside there and obtain income here are IRS taxpayers.

The tax is levied on "(…) the annual value of income of the following categories even when arising from unlawful acts after corresponding deductions and abatements are made." – article 1(1) of CIRS.

The expenses capable of being deductible from property income are provided for in article 41 of CIRS "From the gross income referred to in article 8 shall be deducted the maintenance and conservation expenses that are the responsibility of the taxpayer borne by the taxpayer and which are documented as well as the municipal property tax and stamp tax that applies to the value of properties whose income is subject to taxation in the fiscal year." (Wording in force in the years under examination)."

• in accordance with content of the PA attached by AT with its Response.

1. It appears in communication via e-mail from H… (manager) sent to the Inspection Services the following as regards revenues and expenses of the unit referred to in 1.: "with regard to the accommodation revenue generated by the apartments … this is distributed daily among all apartments available for rent based on the per-thousand allocation of each apartment with the base able to change daily depending on the total of the per-thousand allocations of units available for rent in the …". "… under the contract the respective costs are distributed among all units comprising the … based on the per-thousand allocation of each unit in the universe of 154 apartments comprising the … with the exception of the condominium value which is calculated based on the per-thousand allocation of each apartment relative to the per-thousand allocation of all units comprising the resort…".

• in accordance with articles 27 and 30 of AT's response item T of the Claimants' arguments and pages 8 and 9 of the PA attached by AT with its response.

1. On 25 October 2016 the Claimants exercised the right of prior hearing for which they were notified of the inspection report by official communications of 2016-10-17 arguing for correction of the classification of the income declared in 2012 2013 and 2014 as Category B of IRS which was not accepted by AT with them subsequently being notified of the assessments indicated in b) of the Report of this decision – in accordance with articles 36 to 38 of the ppa and Documents nos. 1 to 3 attached with the ppa.

2. For the fiscal years 2007 2008 and 2009 inspection procedures were opened (OS 012011…/…/…) by the Finance Directorate of …regarding a VAT refund request then filed by the Claimants where it was initially stated:

[Content showing initial VAT inspection conclusion]

this understanding having been changed after hearing the Claimants to the following:

[Content showing changed VAT inspection conclusion]

• in accordance with articles 110 and 111 of the ppa and document no. 6 attached with the ppa.

1. The outcome of the inspection procedure referred to in the preceding number combined with informal contacts with officials of the Finance Service of Loulé – … and access to binding information in 2014 from the VAT Services Directorate which states "that the grant of operation of a unit of accommodation that is part of a tourist development classified in paragraph c) of article 18(1) of the VAT Code and as such covered by the concept of provision of services in harmony with paragraph a) of article 1(1) combined with article 4(1) of the VAT Code finding that 'compensation of the assignor for assignment of the accommodation unit' is subject to VAT assessment at the rate defined in paragraph c) of article 18(1) of said Code" created in the persons advising the Claimants tax-wise the conviction that they were correctly fulfilling their tax obligations as regards classification of the income earned – articles 110 and 111 of the ppa and items 127 and 133 of the arguments combined with the testimony of witnesses C… and D….

2. Until 16 October 2017 the date of the holding of the party meeting in this case the VAT Administration Services continued to accept processing of the amounts received by the Claimants under the VAT subject-to regime – testimony of witness D….

3. On 18 April 2017 the Claimants filed the present petition for arbitral ruling (ppa) – registration of entry in the CAAD Case Management System of the petition for arbitral ruling.

Unproven Facts

There exists no other factuality alleged that has not been considered proven and which is relevant for composing the procedural dispute.

IV. ASSESSMENT OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE

Lack inconsistency or insufficiency in general of statement of grounds of the inspection report

The essential nucleus of the grounds at the level of the reading of the law carried out by AT which served as the basis for the inspection report and the assessments is reproduced in 10 of the proven facts.

One may disagree with the statement of grounds in itself but the factuality that occurred is reflected in the Inspection Report and likewise the reading AT draws from application of the law to those facts.

We do not see how one could consider that article 268(3) of the CRP and article 77 of the LGT on the duty of stating grounds of the inspection report and assessment acts have been breached.

A different matter would be any possible inconsistency that might be attributed to the reading of the law carried out there which would have to do with verification of any non-conformity with law under paragraph a) of article 99 of the CPPT.

Neither does this TAS see how one could consider there to be insufficient statement of grounds.

The statement of grounds in question allowed the Claimants to act through an extensive petition for arbitral ruling it not being evident that their rights of defense have been compromised or that the same did not allow perception of the reasoning adopted by AT that led to the additional assessments.

The petition for ruling on this invoked non-conformity with law of the inspection report and assessment acts is therefore not well-founded.

Violation of law through error as to the factual and legal presuppositions

Given the proven facts it is this TAS's understanding that it will not be necessary to resort to a deep analysis of the particular case taking into account the manner in which income is produced and distributed that is to determine whether we are faced with income to be qualified as Category B or Category F both of IRS.

Indeed it will be sufficient to consider what AT has already decided on the specific matter at issue here within the relationship taxpayer versus AT.

Both parties defend plausible interpretations of the law. And there are positions of higher courts that may support one or the other position.

At the level of the Taxpayer Registration Management System what emerges from the proven facts is that there appear to be divergencies between the VAT Administration Services and the IR Administration Services.

The TAS cannot ignore what occurred in the past (before the assessments at issue) regarding registration of activity of the Claimants accepted by AT and likewise the result of the inspection report to which they were subjected in 2010 on this matter.

As emerges from the proven facts the core of the question discussed here would have to do in a first instance with the divergence that appears to exist in application of paragraph a) of article 9(29) of the VAT Code on the one hand and paragraph a) of article 8(2) of the IRS Code on the other.

If AT considers the registration of the Claimants from at least 2012 in accordance with numbers 5 to 8 and 13 of the established facts and accepted until 2016 the processing of the income earned in Category B of IRS beyond VAT incidence since only in 2016 was the Service Order opened that led to the additional assessments at issue here there appears to be a contradiction in the position defended in this proceeding given that even today the registration of the activity of the Claimants is maintained in accordance with terms she herself accepted.

The registration of commencement of activity or alteration operating by legal duty of the taxpayer does not oblige AT to accept it in the terms requested if she considers them wrong as appears to result particularly from the content of field 10 of the official form which is reproduced below:

[Content of official form]

As may be gathered from the content of the official form model (which as is well known is presumed to contain correct reading and application of the law) the classification of the Finance Service where the declaration is presented allows AT to disregard an incorrect classification requested by the taxpayer. Only if there is consonance between what is requested and AT's evaluation will a given registration produce effects between the taxpayer and AT given the principles informing relations between taxpayers and the Tax Administration.

In the case discussed here the classification reported by the Claimants has subsisted all along and to the present date.

AT in the MANUAL OF COMMENCEMENT OF ACTIVITY OPERATIONS (updated in March 2011) refers to this matter: "This field must be obligatorily filled by the receiving service in situations where the declaration is submitted in paper form (only when there is computer error or failure in communication of the application of the Taxpayer Registration Management System) in which it shall indicate which classification – tax treatment – (fields 1 to 14 23 and 18 to 21) results from the declaration data as well as the date from which the same takes effect (field 15). This classification defined by the receiving service at the moment of its submission shall bind the Services and the taxpayer as to the obligations established for the respective tax treatment in the VAT Code IRS Code and Corporation Income Tax Code given that the taxpayer is notified of the classification at that moment. For this reason all doubts must be fully clarified there."

This same text appears in the instructions for filling field 10 of the official model of declaration of registration/commencement of activity.

Also at the level of classification of the property generating the income it appears that it was registered in the register in accordance with article 13 of the IMI Code considering it assigned to "services" and not to housing given the various hypotheses of assignment that appear in article 6 of the IMI Code.

The question of the specific classification of the Claimants in the Taxpayer Registration Management System was analyzed in 2010 regarding a VAT refund request by the VAT Services Directorate having concluded in the sense of confirming its correct registration not applying AT the VAT exemption norm (article 9(29) of the VAT Code).

There is at least one situation that may have some parallelism with what is discussed here regarding harmonization of the rules of application of one tax with the regime of VAT exemptions. This would be the case of the exemption regime for financial operations enshrined in article 9(27) of the VAT Code. Financial operations either are subject to VAT (because not exempted under article 9(27) of the VAT Code) or being exempt from VAT are subject to stamp tax as results from article 1(2) of the Stamp Tax Code combined with item 17 of the General Table of Stamp Tax.

The same reasoning could be applied in the case discussed here to help find coherence and harmonization between the regimes of application (and exemptions) of the two taxes in this case VAT versus IRS whereby in the situation discussed here it appears to us that the regime established under VAT appears should determine the regime to apply regarding qualification of income at the level of IRS (Category B or Category F).

Concluding as regards integration of the specific income earned by the Claimants as AT concluded in 2010 and as it concluded when it accepted the registration of commencement or change of activity it should be considered that such income would be taxable in IRS in accordance with the regime of paragraph a) of article 3(1) and paragraph h) of article 4(1) both of the IRS Code (Category B income).

Considering only in 2016 that the income earned by the Claimants is after all Category F income of IRS classifiable in paragraph a) of article 8(2) and (1) both of the IRS Code in order to harmonize application of the two taxes appears to be such that it should be considered income exempt from VAT under article 9(29) of the VAT Code and will consequently be necessary to promote prior alteration of registration of the taxpayers establishing in the relationship taxpayer versus AT the new framework to govern going forward.

The new classification to occur in 2016 should only be applied in the relations between the taxpayer and AT that occur after alteration of the registration in the Taxpayer Registration Management System in situations where as here occurred AT bound itself with the taxpayer "as to the obligations established for the respective tax treatment in the VAT Code IRS Code and Corporation Income Tax Code" as is acknowledged in AT's own published instructions assuring the principles of good faith and legal certainty.

The registration in the Taxpayer Registration Management System assumes in this case particular importance given the circumstance that the question of classification of the income earned having been the object in an earlier moment of an inspection procedure in the year 2010 it was considered that it was correct.

Moreover as was proven in 14 of the established facts AT through the VAT Administration Services Directorate appears to continue to maintain the same classification of the income at issue: "the grant of operation of a unit of accommodation that is part of a tourist development classified in paragraph c) of article 18(1) of the VAT Code and as such covered by the concept of provision of services in harmony with paragraph a) of article 1(1) combined with article 4(1) of the VAT Code finding that 'compensation of the assignor for assignment of the accommodation unit' is subject to VAT assessment at the rate defined in paragraph c) of article 18(1) of said Code."

Although in the arguments AT expresses that the binding information from which resulted the text above referred was taken in a situation that has no parallelism with the situation at hand the truth is that the reasoning expended there appears to be of application to the situation in discussion in this proceeding.

Now this position only appears in the analysis of this TAS to be in accordance with the consideration that these are income classifiable in article 3(1) of the IRS Code and in paragraph h) of article 4(1) of the IRS Code (and paragraph a) of article 9(29) of the VAT Code) that is income resulting from a commercial activity similar to hotel activity capable of integrating Category B of income in IRS given being earned by natural persons.

Even if this were not the case with AT basing the assessments at issue here on an alteration of position contained in Circular 5/2013 of 02.07.2013 being to be considered a generic guideline under article 68A of the LGT we do not see how it could be invoked as grounds for an additional assessment of 2013 (at least for periods before 02.07.2013) and 2012 taking account of article 68A(2) of the LGT which prohibits retroactive application of generic guidelines.

Indeed it is clear that the Claimants given the proven facts not only acted in good faith and based on a plausible interpretation of tax law but acted in conformity with express indications of AT that bind her (registration in force in the Taxpayer Registration Management System and in consonance with the result of a prior inspection).

The same shall be said regarding the compensatory interest assessment acts.

In accordance with article 35(1) of the LGT depending the compensatory interest assessment on the tardiness of the tax assessment by fact attributable to the taxpayer we do not see in the Inspection Report the demonstration of the adequate nexus of causality between the behavior of the Claimants and the failure to receive the amount now assessed by AT.

A word regarding the manner in which current management of the accommodation unit of the Claimants (and other owners of accommodation units of the development) is carried out: through a managing entity by mandate (as AT itself classified it).

Naturally in a tourist development with a large quantity of accommodation units with dozens or hundreds of owners of autonomous units the best manner to enhance increase of revenues and decrease of expenses will have to pass through acting in conjunction in the operation. An owner of a unit alone could never obtain such a high degree of occupancy with quality standards and uniformity competitive.

Independently of resulting from legal or contractual source the type of organization of the tourist development adopted (current management of the units in conjunction by a single entity mandated for this purpose) will be the one that best could enhance revenues and will allow optimization of expenses potentially contributing even to an increase in tax revenues whether they be considered as Category F or Category B income of IRS.

The manner of organization at the level of current management by itself does not appear to us to be determinative for purposes of qualification of income in one or another category (rules of tax application) given what is stated in article 11(3) of the LGT which mandates regard to economic substance and not form.

Taking into account that the manner of organization of management of the tourist operation adopted by the Claimants appears to be the one necessary (whether by imposition of law or by will of the parties) by enhancing a greater level of revenue even if the content of Circular 5/2013 of 02.07.2013 were to be applied to the assessments at issue given the proven facts (item 3 - f) of the established facts) it is not clear that one should conclude that in this case operation of the accommodation unit is not done directly by the Claimants (in a manner that may be considered as equivalent) given there is very immediate (bi-weekly) control of the holders of accommodation units over the evolution of revenues and expenses.

Moreover from the tourist operation assignment contract it does not appear clear that all activity of tourist operation of the accommodation unit is handed over to the managing entity.

Whereby for the reasons expounded the petition for arbitral ruling is well-founded given that there is deemed to be non-conformity of the assessments challenged (and the report underlying them) within the scope of paragraph a) of article 99 of the CPPT.

V - OPERATIVE PART

For the reasons and grounds set out above it is decided to judge well-founded the petition for annulment of the following additional IRS assessments which are hereby annulled:

For the year 2012 - assessment no. 2016…, compensatory interest assessment no. 2016… and account reconciliation statement no. 2016… from which resulted the amount due of €4,917.21;

For the year 2013 – assessment no. 2016…, compensatory interest assessment no. 2016… and account reconciliation statement no. 2016… from which resulted a total amount due of €6,680.97;

For the year 2014 – assessment no. 2016…, compensatory interest assessment no. 2016… and respective account reconciliation statement no. 2016… from which resulted an amount due of €7,876.75.

Process value: in accordance with the provision in article 3(2) of the Costs Regulation in Tax Arbitration Proceedings (and paragraph a) of article 97A(1) of the CPPT) the process is assigned a value of €19,474.93.

Costs: in accordance with the provision in article 22(4) of the RJAT the amount of costs is fixed at €1,224.00 according to Table I attached to the Costs Regulation in Tax Arbitration Proceedings to be borne by the Respondent.

Notify.

Lisbon, 21 November 2017

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer in accordance with the provision in article 131(5) of the Code of Civil Procedure (CPC) applicable by reference to article 29 of the RJAT.

The wording of this decision is governed by the spelling in use prior to the Orthographic Agreement of 1990.