Process: 272/2017-T

Date: March 1, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 272/2017-T addresses a fundamental question in Portuguese tax law: how to classify income from tourist exploitation contracts for IRS purposes. Two Irish resident taxpayers challenged additional IRS assessments for 2012-2014, contesting the Tax Authority's classification of their income from tourist exploitation cessation contracts as Category F (property income) rather than Category B (business/professional income). The claimants initiated arbitration through CAAD under the Legal Framework of Tax Arbitration (RJAT - Decree-Law 10/2011) seeking annulment of additional assessment acts and related compensatory interest charges.

The central legal dispute focused on whether the Tax Inspection Services properly substantiated their income classification. The claimants argued that the final inspection report lacked proper legal foundation, relying merely on administrative Circulars rather than concrete facts or substantive law. They contended the Tax Authority failed to meet its burden of proof under Article 74(1) of the General Tax Law (LGT) by not demonstrating "founded indications" justifying Category F classification.

The arbitral tribunal, constituted on July 3, 2017, with arbitrator Dr. Olívio Mota Amador, conducted comprehensive proceedings including examination of three witnesses in January 2018. The tribunal admitted substantial documentary evidence, including binding VAT information, comparative inspection reports for other tourist village owners, and property tenure records. During written arguments, the claimants expanded their request to include compensatory interest at the maximum legal rate under Articles 43(1) and 35(10) of the General Tax Law.

This decision carries significant implications for tourist property owners, establishing important precedents regarding income qualification criteria, the Tax Authority's evidentiary obligations, and non-resident taxpayers' procedural rights. The case demonstrates that CAAD arbitration provides an effective remedy for challenging IRS assessments, particularly where the Tax Authority's legal reasoning relies predominantly on administrative guidance rather than individualized factual analysis of contractual arrangements.

Full Decision

ARBITRAL DECISION

I - REPORT

  1. A…, taxpayer no.…, and B…, taxpayer no.…, residents in…, …, …, Ireland (hereinafter referred to as "Claimants") submitted, on 18-04-2017, pursuant to article 2, no. 1, paragraph a) and article 10, nos. 1 and 2 of the Legal Framework of Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter briefly designated "LFTA") and articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, a request for an arbitral pronouncement in which they request the annulment of the following tax acts: (i) additional assessment act for Personal Income Tax ("IRS"), no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2012; (ii) additional IRS assessment act no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2013; (iii) additional IRS assessment act no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2014.

  2. The Tax and Customs Authority is the Respondent (hereinafter designated as "Respondent").

  3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 27-04-2017.

  4. Pursuant to paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the LFTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council of CAAD appointed as arbitrator of the single arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable period, communicated his acceptance of the appointment.

  5. The parties were notified on 12-06-2017 of the appointment of the arbitrator, and did not express the wish to refuse the arbitrator's appointment, in accordance with the combined terms of article 11, no. 1, paragraphs a) and b) of the LFTA and articles 6 and 7 of the Deontological Code.

  6. In accordance with the provision in paragraph c) of no. 1 of article 11 of the LFTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 03-07-2017.

  7. The Respondent, duly notified through the arbitral order of 10-07-2017, submitted on 20-09-2017 its Reply and remitted the Administrative File.

  8. The Claimants, on 03-08-2017, filed documents nos. 10 (copy of the letter from the Tax Inspection Services of the Finance Department of Faro, dated 29-07-2010) and 11 (copy of the letter from the Tax Inspection Services of the Finance Department of Faro, dated 03-11-2010) which they had protested to file in the request for constitution of the Arbitral Tribunal.

  9. The Arbitral Tribunal by order of 17-08-2017 notified the Respondent of the filing of the documents referred to in the preceding number and granted it a period of 15 days to, if it wished, exercise the right of reply.

  10. The Arbitral Tribunal by order of 23-10-2017 notified the Claimants to, within a period of 10 days, indicate the facts on which they requested the examination of witnesses.

  11. The Claimants on 06-11-2017 proceeded to indicate the facts on which they intended to produce witness evidence and requested the addition to the witness list, in accordance with articles 598 and 593 of the Code of Civil Procedure, pursuant to paragraph e) of no. 1 of article 29 of the LFTA, of witness E…. They also requested the filing of the power of attorney in favor of the signatories of the petition and the translation of document no. 4, which they protested to file when submitting the request for arbitral pronouncement.

  12. The Arbitral Tribunal by order of 19-12-2017 determined: (i) to extend, pursuant to no. 2 of article 21 of the LFTA, the arbitration period by two months and set 03-03-2018 as the deadline for issuing the arbitral decision; (ii) to dispense with the holding of the meeting provided for in article 18 of the LFTA, in accordance with the principle of the Tribunal's autonomy in conducting the proceedings and in order to promote their speed, simplification and informality (articles 19 and 29, no. 2, of the LFTA), given that no exceptional matter was invoked nor questions raised that would prevent the examination of the merits of the request; (iii) to admit the filing to the record of the documents attached to the Claimants' petition of 06-11-2017; (iv) to admit the addition to the witness list requested by the Claimants on 06-11-2017; (v) to set the date for the examination of the three witnesses listed by the Claimants (12-01-2018 at 11:00 a.m.), despite the substantial objections raised by the Respondent to the examination of the witnesses, it was not intended to limit the production of evidence presented by the Claimants; (v) should the parties wish to submit written arguments, these should be produced within 10 days of the date of the production of witness evidence, granting the Respondent the option of, if it so wishes, submitting its arguments in successive fashion relative to those produced by the Claimants.

  13. The Tribunal, on 12-01-2018, proceeded to examine the witnesses C…, D… and E… in accordance with the minutes which are in the present arbitral record and which are given, for all purposes, as fully reproduced. In the said session the Claimants requested the admission of the following documents: (i) copy of the proof of the beginning of activity of the Claimant; (ii) copy of the property tenure record; (iii) copy of the draft inspection report relating to three owners of the same tourist village; (iv) copy of the draft inspection report relating to F…; (v) copy of binding information no. 3626, of 09/10/2012 from the VAT Services Department; (vi) copy of binding information dated 01/09/2014 from the VAT Services Department; (vii) copy of the Tax Authority's understanding that maintenance and conservation expenses are accepted under category F of IRS; (viii) Arbitral Decision issued in case no. 271/2017-T. The documents were admitted by the Arbitral Tribunal and the Respondent had the opportunity to exercise the right of inspection in the context of written arguments.

  14. The Claimants submitted their arguments on 23-01-2018. In the said arguments the Claimants, taking into account the provision in article 265, no. 2, of the Code of Civil Procedure pursuant to paragraph e) of article 29 of the LFTA, expanded the request for the Respondent, should the action be judged well-founded, to be ordered to pay compensatory interest at the maximum rate in force, in accordance with the provision in no. 1 of article 43 and no. 10 of article 35 of the General Tax Law (GTL), in no. 5 of article 61 of the Code of Tax Procedure and Process (CTPP) and in article 559 of the Civil Code and in Ordinance no. 291/2003, of 8 April.

  15. The arguments of the Respondent were submitted on 29-01-2018.

  16. The position of the Claimants, in accordance with the provision in the request for constitution of the Arbitral Tribunal and in the written arguments, is, in summary, as follows:

16.1. The rationale of the Final Tax Inspection Report, which constitutes the motivation for the tax acts which are the subject of the present arbitral request, is neither congruent nor clear. Indeed, the understanding of the Tax Inspection Services is nothing more than a conclusive judgment that has no support in the facts or in the law, but only in a Circular. Furthermore, they did not demonstrate in relation to the Claimants, particularly to the male Claimant, the existence of "founded indications" that demonstrate that the income in question is income of Category F and not Category B. Thus, the Tax Administration did not fulfill the burden of proof of verification of the respective indications or assumptions of taxation that rests upon it, in accordance with no. 1 of article 74 of the GTL, that is, of the legal assumptions for its action, faced with the legal presumption of truthfulness of the taxpayers' declarations (article 75 of the GTL), whereby the tax acts should be annulled.

16.2. The tourist exploration activity that the Claimants exercised and the respective income generated are obtained within the scope of a business activity (even though they result from the exploitation of real property) and consequently must be treated within the scope of Category B of IRS, by virtue of the principle of the prevalence of this Category in relation to income that falls within other categories of income, but which are obtained in connection with a business activity (in this case, a commercial activity).

16.3. For income to be attributable to activities that generate business or professional income, with the taxpayer registered with the respective CAE, it is sufficient that the income obtained is related to that activity. Which manifestly occurred in the concrete case.

16.4. Where income derived from tourist exploitation is concerned, which is the activity carried out by the male Claimant, the same cannot be taxed as Category F income, completely out of step with the said commercial activity carried out.

16.5. If the legislator intended to exclude from the scope of paragraph a) of no. 1 of article 3 of the IRS Code income resulting from exploitation arising from the contracting of services, it was incumbent upon him to expressly determine that only results arising from direct exploitation were subject to taxation within the scope of Category B of the IRS Code, which does not occur. In this norm the legislator uses the expression "activity" without delimiting (restrictively) its scope, whereby it is evident that he intended to include all income obtained, in any form, from direct exploitation or through the contracting of services to achieve the income in question. If at no time the law makes any limitation, it is not the responsibility of the Tax Administration to make that limitation.

16.6. The position and restrictive interpretation carried out by the Tax Administration lacks legal foundation, since taking into account the legal concept of activity, it must be concluded that the income in question must be taxed pursuant to paragraph a) of no. 1 of article 3 of the IRS Code and not in accordance with no. 2 of article 8 of the same act.

16.7. The Tax Inspection Services understood it necessary to requalify the income of the Claimants based on the understanding contained in Circular no. 5/2013, of 2013-07-02. Notwithstanding the Tax Administration being bound by compliance with administrative guidance, in accordance with no. 1 of article 68-A of the GTL, the reality is that such guidance must always be subject to a judgment of legality, whereby they will only be valid to the extent of their intrinsic legality.

16.8. The Tax Administration intending to tax the income obtained by the Claimants, in accordance with paragraph a) of no. 2 of article 8 of the IRS Code (Category F), through its own interpretation and contra legem, which appears, therefore, illegitimate and illegal.

16.9. The income obtained by the Claimants arising from the tourist exploitation contract are subsumed to the typology of income from a commercial activity, in particular the pursuit of an activity of hotel and similar nature, provided for in paragraph a) of no. 1 of article 3 and paragraph h) of no. 1 of article 4 of the IRS Code and, in consequence, the additional IRS assessments relating to the years 2012, 2013 and 2014 should be annulled, in accordance with paragraph a) of article 99 of the CTPP.

16.10. Even if it were admitted that the income obtained by the Claimants was Category F income of the IRS Code, the taxable matter of the Claimant would never be in the amount ascertained by the Tax Inspection Services. In fact, should be understood as expenses deductible from Category F income of IRS the expenses of maintenance and conservation relating to cleaning woman, gardener's salary, electricity, water and gas, costs of house rental with equipment, repairs and paintings, insurance premiums and costs of administration of the property. Such expenses were disregarded by the Tax Inspection Services, but must be deducted from the taxable matter to the extent that they are essential expenses for obtaining the income in question.

16.11. Thus, should be considered the expenses with personnel salaries, cleaning, electricity, gas and water, borne by the Claimants in the year 2012, 2013 and 2014, in accordance with and for the purposes of article 41 of the IRS Code.

  1. The position of the Respondent, expressed in the reply and in the written arguments, may be summarized as follows:

17.1. With regard to the rationale of the Inspection Report, the jurisprudence of the Supreme Administrative Court has uniformly held that the rationale of the act is a relative concept that varies according to the type of act and the circumstances of the concrete case. There is deemed to be sufficient rationale 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 may know the reasons that led the author of the act to decide in that way and not another. In the case at hand, the rationale is sufficiently clear and unequivocal, especially since the Claimants, through the present request for arbitral pronouncement, demonstrate having fully understood the factual and legal framework on which the Respondent's decision was based. Indeed, from the reading of the inspection report it appears that an average man, placed in the position of recipient, is able to grasp its meaning and conclusion. Whereby the defect of lack of rationale is not verified.

17.2. Should a situation of lack or insufficiency of rationale have been verified – a hypothesis that is only admitted in theory and without conceding – it was incumbent upon the Claimants to use the mechanism provided for in article 37 of the CTPP and request the respective notification or issuance of the certificate in conformity. Now, as the Claimants did not avail themselves of that faculty conferred by law, it follows that the acts in question contained, as they indeed do, all the elements necessary for their full understanding and that the alleged defect which they might have suffered was cured.

17.3. The law expressly states that business income is understood as that derived from the exercise of any commercial activity. Taking into account the meaning of the concept used in the legal norms and the interpretation that the jurisprudence of the superior courts has made thereof, it is concluded that the Claimants have no grounds. The use of the word "exercise" in the wording given in article 3 of the IRS Code, as opposed to the words used in article 8 of the IRS Code to define what is Category F income, underlies the practice of acts with a certain purpose which, in this case, will be the obtaining of profit.

17.4. Thus, it is not in accordance with the law to claim, as the Claimants do, that the fact that one has declared the beginning of activity, affirming the intention to exercise a tourist exploitation activity (when, in fact, nothing more was done beyond acquiring real property), should be valued as sufficient for the qualification of income as attributable to Category B, when one actually does not exercise the declared activity.

17.5. In this way the income that the Claimants obtain comes in a merely passive manner, as a result of the pursuit of a commercial activity by the managing company. Being that the Claimants do not appear, nor allege, to have any organization of an entrepreneurial character for obtaining the said income.

17.6. In that sense, the Tax Inspection Service considered that the income in question corresponds to property income that can be classified in Category F of IRS (article 8 of the IRS Code). Where income relating to the cession of the use of the property or part thereof is concerned, the amounts received by the owners, as consideration for the cession of the use of the apartments, are considered property income, in accordance with the provision in paragraph a) of no. 2 of article 8 of the IRS Code, regardless of the fact that the amount received is not fixed.

17.7. The mere act of purchase of a property and its consequent and immediate cession of exploitation to a third party must be subsumed to simple acts of management of private patrimony, not constituting, in themselves, signs of the exercise of an activity of exploitation of a property by the one who ceded the exploitation.

17.8. It is evident that the Claimants do not, nor can they carry out any action of free use and utilization of the property of which they are merely owners.

17.9. Regarding the claim by the Claimants that all expenses with personnel salaries, cleaning, electricity, gas and water be accepted, which were not accepted in the analysis carried out in the inspection procedure, it is important to note that one must assess whether those expenses, referred to in the abstract by the Claimants and not demonstrated in the arbitral proceedings, have the character of conservation and/or maintenance expenses that are incumbent upon the taxpayer.

17.10. As the IRS Code does not define the concept of "conservation expenses," the civil law notion contained in the Urban Leasing System-ULS (approved by Decree-Law no. 321-B/90, of 15 October) regarding the definition of conservation works and the determination of which are incumbent upon the landlord contained in article 11 of the ULS (see, Judgment of the Court of Appeal of the South issued in case 05310/12, on 15.12.2016) should apply here. Taking into account this legal framework, the expenses mentioned by the Claimants do not constitute conservation or maintenance expenses.

17.11. With regard to expenses with salaries and cleaning, it follows from sections 5 and 6 of the cession contract that these charges are the responsibility of the Managing Company, which means they are not the responsibility of the Claimants. Whereby, also in this point, the Claimants lack grounds in their petition.

II - PRELIMINARY MATTERS

  1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (articles 4 and 10, no. 2, of the LFTA and article 1 of Ordinance no. 112-A/2011, of 22 March).

The tribunal is competent and is regularly constituted.

The proceedings do not suffer from any nullities.

No exceptions were raised.

The expansion of the request formulated by the Claimants in the arguments is admitted, on the basis of the provision in article 265, no. 2, of the Code of Civil Procedure pursuant to paragraph e) of article 29 of the LFTA.

There are no other circumstances that prevent the examination of the merits of the case.

In these terms, the Arbitral Tribunal is regularly constituted to appraise and decide the subject matter of the proceedings.

III - MERITS

III.1. Factual Matter

  1. Proven Facts

19.1. With relevance for the appraisal and decision of the questions raised the following facts are given as established and proven:

  • The Claimants are non-resident taxpayers. Their tax representatives were, first, the company "G…, Lda.", NIPC… and, then, the company "H…, Lda.", NIPC… (as per Document no. 1 attached to the minutes of the Arbitral Tribunal meeting of 12-01-2018, and Certificate of Notification at fls. 130 of the Administrative File);

  • The Claimant, A…, has been registered since 24-01-2012 with CAE 55123, exercise of the activity "tourist apartments without restaurant," being classified in the normal regime of quarterly periodicity, for VAT purposes, and in the organized accounting regime, by option, for IRS purposes (as per Document no. 1 attached to the minutes of the Arbitral Tribunal meeting of 12-01-2018, and which is given as fully reproduced for all legal purposes);

  • The Claimant, A…, together with F…, taxpayer no.…, and with I…, taxpayer no.…, entered into a promise of sale and purchase contract with company J…, S.A., NIPC…, with registered office at Avenue… no.…, Lisbon, relating to autonomous fraction no.…, located at…, located on the… floor of Building… (see, Recital A of Document no. 4 attached to the request for arbitral pronouncement);

  • The property referred to in the previous paragraph is inscribed in the urban property register, under article…, fraction N, floor/unit…, located at…– …, …, of the Joint Parishes of… and…, Municipality of…, District of Faro (as per Document no. 2 attached to the minutes of the Arbitral Tribunal meeting of 12-01-2018, and which is given as fully reproduced for all legal purposes);

  • The Claimant, A…, together with F… and with I…, entered into on 03-07-2007, with J…, S.A., NIPC…, with registered office at Avenue… no.…, Lisbon, a contract for the cession of the tourist exploitation of unit… (as per Document no. 4 (fls. 1 to 33) attached to the request for arbitral pronouncement, whose content was translated in the document attached to the record by the Claimants on 06/11/2017, and which is given as fully reproduced for all legal purposes);

  • From the contract for the cession of tourist exploitation, identified in the previous paragraph, the following clauses are important to highlight:

F.1) The promising seller (J…, S.A.) will constitute a company whose activity will include the management of… and Unit… . Such company will assume the position held by J…, S.A., as Managing Company (see, Recital H, fls. 2 of the contract).

F.2) The duration of the tourist exploitation cession contract is 10 years renewable (see, clause 2.4, fls. 4 of the contract);

F.3) K…, under the brand L…, was appointed by the managing entity for the management and operation of the tourist exploitation of Unit… on behalf of the Claimants. The Managing Company will provide, on an exclusive basis, the services provided for in the said contract, also ensuring the management of the property Unit… (see, clause 2.1, fls. 3 of the contract);

F.4) The Claimants ensure the tourist exploitation of Unit… through the services of the Managing Company (see, clause 2.1, fls. 3 of the contract);

F.5) The Managing Company intends to exploit Unit… for tourism on behalf of the Claimants to the general public on a temporary basis and as part of its activity (see, clause 2.1, fls. 3 of the contract);

F.6) The Managing Company throughout the term of the Contract provides the following services:

"A. Administer the Tourist Exploitation 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 Housekeeping Services of the Unit described in Section 6." (see, clause 2.2, fls. 3 of the contract);

F.7) Regarding the tourist exploitation of the unit, clause 3.1 provides: "In exchange for the remuneration described in Section 7 below, the MANAGING COMPANY accepts to make reasonable commercial efforts, in accordance with the provisions of this Contract, to exploit the Unit for tourism to Guests, on behalf of the OWNER" (see, fls. 4 of the contract);

F.8) As regards the collection of payments due from the tourist exploitation, clause 3.2 provides as follows: "THE OWNER authorizes the MANAGING COMPANY to make reasonable commercial efforts to collect all payments relating to the tourist exploitation of the Unit, when these become due." (see, fls. 4 of the contract);

F.9) With respect to reservations, clause 3.4 states: "Without prejudice to the rights of the OWNER described in Section 3.10 below, the OWNER authorizes the MANAGING COMPANY to accept reservations for the occupation of the Unit by Guests for any period of time and at any time up to the end of this contract, but not after that." (see, fls. 4 of the contract);

F.10) Regarding tariffs, clause 3.5 provides: "THE OWNER hereby grants to the MANAGING COMPANY exclusive authorization to exploit the Unit for tourism, and on its own account, according to the tariffs that it may freely establish and set, in accordance with its sole discretion, based on various factors, (…) THE MANAGING COMPANY shall also have the right to freely alter the tariffs in effect at any time (…)" (see, fls. 5 of the contract);

F.11) As to the reservation system, clause 3.9 provides: "The reservations of the Unit for guests shall be handled through the reservation system managed and maintained by the MANAGING COMPANY and in accordance with the policies and procedures that govern the reservation system." (see, fls. 5 of the contract);

F.12) In accordance with clause 13.3, the Claimants "(…) acknowledge and accept that the MANAGING COMPANY has control of the keys of the Unit during the term of the Contract" (see, fls. 19 of the contract);

F.13) Under clause 3.11: "THE MANAGING COMPANY shall be responsible for the payment of the Operating Expenses of the Tourist Exploitation Program in its own name and on behalf of the OWNER, during the term of this Contract. The following are included in the Operating Expenses of the Tourist Exploitation Program, for the purposes of this Contract, the following (but not limited to) expenses with: (i) Property Administration Services (Section 4); (ii) Property Maintenance Services (Section 5); (iii) Cleaning and Housekeeping Services (Section 6); (iv) Equipment Expenses (included in Section 4.3); and (v) Insurance Premiums." (see, fls. 9 of the contract);

F.14) The Managing Company will provide the services receiving as consideration the remuneration described in Section 7 of the Contract (see, clause 2.3, fls. 3 of the contract);

F.15) Under clause 7, for the administration of the Tourist Exploitation Program with respect to the Unit the Managing Company will be entitled to receive and will retain 25% of the Gross Tourist Exploitation Revenue (see, fls. 15 of the contract);

F.16) The Claimants, under clause 3.8, are bound to: "(…) during the entire term of this Contract, will not exploit, lease, rent or by any other means make the Unit available to any third party in exchange for the payment of any rents, commissions or any other means of payment (including if free), further acknowledging and accepting the OWNER not to disclose nor allow any other natural or legal person to disclose the Unit as being available for occupation." (see, fls. 5 of the contract);

F.17) In accordance with clause 9, each owner shall have the right to receive, as remuneration, a proportional share corresponding to the amount calculated based on: "(I) Number of units participating in the Tourist Exploitation Program; and (ii) Number of days the Unit was available for use within the scope of the Tourist Exploitation Program, (that is the period that are not occupied by the OWNER minus the value corresponding to the costs and expenses incurred by the MANAGING COMPANY, in its own name and on behalf of the OWNER (which is called "Net Tourist Exploitation Revenue")." (see, fls. 16 of the contract);

F.18) Under clause 9.2, the Managing Company "(…) will deliver to each owner within a maximum of 15 (fifteen) days from the end of each month, a statement on the Net Tourist Exploitation Revenue relating to the previous month." (see, fls. 16 of the contract);

F.19) Under clause 11 the Managing Company provides the Claimants with a Monthly Report and an Annual Report. It being incumbent upon the Managing Company to freely appoint the auditor to audit the annual accounts report (see, fls. 17 and 18 of the contract);

F.20) In accordance with clause 3.12, the Claimants agree to "(…) furnish and equip the Unit with the standard package of furniture, arrangements and equipment selected by the MANAGING COMPANY" (see, fls. 9 of the contract).

  • The constituent deed of "Apartments…" was deposited with the General Directorate of Tourism on 08-02-2008 (as per Document no. 5 attached to the request for arbitral pronouncement);

  • The Municipal Council of…, on 07-07-2008, granted to J…, S.A. the license for tourist use relating to the undertaking called "…" (as per Document no. 6 attached to the request for arbitral pronouncement);

  • The Claimants were subject to a tax inspection procedure, through the Tax Inspection Services of the Finance Department of Faro, relating to IRS for the years 2012 (Service Order no. OI 2016…, of 17-08-2016), 2013 (Service Order no. OI2016…, of 17-08-2016) and 2014 (Service Order no. OI2016…, of 17-08-2016) (as per Administrative File fls. 2 to 4);

  • The draft Tax Inspection Report was notified to the Claimants through letter no.… of the Tax Inspection Services of the Finance Department of Faro, of 18-10-2016 (as per Document no. 7 attached to the request for arbitral pronouncement);

  • The Claimants submitted on 03-11-2016 the request for prior hearing (as per Document no. 8 attached to the request for arbitral pronouncement);

  • The Claimants were notified of the Tax Inspection Report and Notes of Fixing/Alteration - IRS (as per Certificate of Notification of the Tax Inspection Division 1 of the Finance Department of Faro contained in Document no. 9 attached to the request for arbitral pronouncement);

  • The Tax Inspection Report, identified in the previous paragraph, proposed corrections to the taxable matter of the Claimants of €63,482.97 for the year 2012, of €21,378.74 for the year 2013 and of €35,941.50 for the year 2014, arising from the classification of the rents received, relating to the cession of the use of the property owned by the Claimants, in category F, in accordance with paragraph a) of no. 2 of article 8 of the IRS Code (as per Administrative File fls. 107 to 128);

  • As a consequence of the Inspection Report referred to in the previous paragraph, the Claimants were notified of the following tax acts: (i) additional IRS assessment act no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2012, from which resulted an amount to pay of €3,987.09; (ii) additional IRS assessment act no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2013, from which resulted an amount to pay of €6,551.19; (iii) additional IRS assessment act no. 2016…, compensatory interest assessment act no. 2016… and Account Settlement Statement no. 2016…, relating to the year 2014, from which resulted an amount to pay of €7,373.86 (as per Documents nos. 1, 2 and 3 attached to the request for arbitral pronouncement);

19.2. There are no other facts with relevance for the appraisal of the merits of the case that have not been proven.

19.3. Rationale of Factual Matter

Regarding the factual matter given as proven, the conviction of the Arbitral Tribunal was based on the free appraisal of the documentary evidence filed in the record, whose authenticity was not questioned, as well as on the analysis of the administrative file remitted by the Respondent and on the testimony of witnesses C…, D… and E… who appeared to have impartiality in their testimony and demonstrated knowledge of the facts they reported.

III.2. Legal Matter

  1. The questions to be decided placed before this Arbitral Tribunal are four.

First, to know whether there is a violation of the duty to provide rationale for the additional assessments made by the Tax and Customs Authority, as a result of the defect of lack of rationale of the Tax Inspection Report.

Second, to know whether the income obtained by the Claimants, arising from the tourist exploitation cession contract they entered into, is classifiable as Category B income of IRS, pursuant to paragraph a) of no. 1 of article 3 of the IRS Code, or whether, instead, they should be qualified as Category F income of IRS, in accordance with the provision in paragraph a) of no. 2 of article 8 of the same act.

Third, in case of non-success of the main request, it is necessary to analyze whether the contested assessment acts suffer from partial illegality as a result of the Tax and Customs Authority not having taken into account, for purposes of deduction under Category F, all expenses borne by the Claimants with the property generating the income in question.

Finally, in case of success of the request, to know whether the Claimants have the right to payment, by the Respondent, of compensatory interest.

  1. The arbitrator of the present proceedings issued a decision in a single arbitral tribunal in case no. 240/2017-T on questions identical to those presented in the present record, having judged the request for arbitral pronouncement not well-founded. The submission of the same substantive question in a new proceeding can always result in the modification of the position previously adopted, because from the new right of reply may result a deepening of the analysis and a reconsideration of the legal matter. From the present record there do not result elements that justify the alteration of the position that I have endorsed in the arbitral decision issued in case no. 240/2017-T.

  2. The first question that needs to be examined concerns the alleged lack of rationale of the Tax Inspection Report, identified in paragraph L) of no. 18.1 above, which constitutes the motivation of the tax acts subject of the present request for arbitral pronouncement.

22.1. In the legal framework of this question it is important to bear in mind the provision in article 268, no. 3, of the Constitution of the Portuguese Republic (CPR) and in article 77, no. 1 of the GTL.

Article 268, no. 3, of the CPR provides that "administrative acts are subject to notification to those interested, in the form provided for in law, and require express and accessible rationale when they affect legally protected rights or interests".

Article 77, no. 1 of the GTL provides that "(…) the decision of the procedure is always rationed by means of a brief statement of the reasons of fact and of law that motivated it, and the rationale may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that integrate the tax inspection report".

22.2. The jurisprudence of the Supreme Administrative Court has sustained that "(…) the duty to provide rationale requires that a normal recipient, placed in the position of the appellant, in light of the express content of the act, may grasp the logical-legal path traveled by the summoned authority to reach such a decision, so as to be able to determine oneself, consciously, in the sense of impugning or not impugning." (see, Judgment of the STA of 11-11-1998, case no. 31339).

22.3. The Tax Inspection Report, supra identified, in point III "Description of facts and grounds for corrections that are merely arithmetic to the taxable matter" exposes with clarity the position of the Tax and Customs Authority that led to the appraisal of corrections to the taxable matter of IRS of the Claimants, even referring to the provision in Circular no. 5/2013, of 02-07-2013, and in binding information nos. 477 and 1369 requested by J… (Portugal) Tourist Undertakings S.A. From the reading of the said Tax Inspection Report it is perfectly knowable the legal framework used, allowing a normal recipient to "grasp the logical-legal path" of the Respondent in the decision taken. Consequently, nothing prevents the Claimants from knowing and grasping the reasons invoked by the Tax and Customs Authority. Indeed, the Claimants, both in the exercise of the right of hearing regarding the Draft Tax Inspection Report (see, paragraph K) of no. 19.1 above) as in the request for arbitral pronouncement itself (see, article 34 of the request for arbitral pronouncement), reveal having fully understood the reasons of fact and of law exposed by the Respondent in the Tax Inspection Report. The Claimants may obviously not agree with the reasons invoked by the Tax and Customs Authority, but that is not a question of lack of rationale.

22.4. For the foregoing, we conclude that the defect of lack of rationale of the Tax Inspection Report, which gave rise to the additional assessment acts challenged by the Claimants in the present request for arbitral pronouncement, is not verified.

  1. The second question relates to the qualification of the income obtained by the Claimants arising from the tourist exploitation cession contract they entered into. It is necessary to ascertain whether the said income is classifiable as Category B (Business and Professional Income) of IRS, or whether they should, instead, be qualified as Category F (Property Income) of IRS.

23.1. From the constituent deed of the undertaking (see, paragraph G) of no. 19.1 above) it appears that it is subject to the legal regime for the installation and operation of tourist undertakings.

The legal regime for the installation and operation of tourist undertakings (hereinafter "LRIOTU") in force on 08-02-2008, the date of the deposit of the said constituent deed of the undertaking, was contained in Decree-Law no. 167/97, of 4 July, amended by Decree-Law no. 305/99, of 6 August, by Decree-Law no. 55/2002, of 11 March and by Decree-Law no. 217/2006, of 31 October.

The LRIOTU, in article 1, no. 1, defined tourist undertakings as "establishments that are intended to provide temporary accommodation services, restaurants or tourist entertainment, having, for their operation, an adequate set of structures, equipment and complementary services".

Article 44, no. 1, of the LRIOTU provided that "The exploitation of each tourist undertaking must be the responsibility of a single entity." And no. 2 of the same article provided that "The unit of exploitation of the undertaking does not prevent the ownership of the various real property fractions that compose it from belonging to more than one person."

23.2. Decree-Law no. 39/2008, of 7 March, approved a new LRIOTU, and maintained the legal consecration of the rule of uniqueness of exploitation, contained in article 44, no. 1, and reinforces it in article 45 by establishing the following:

"1- Without prejudice to the provision in article 49, the accommodation units are permanently in the tourist exploitation regime, and the operating entity must assume the continued exploitation of all of them, even if occupied by their respective owners.

2- The operating entity must ensure that the accommodation units remain at all times furnished and equipped in full conditions to be leased for tourist accommodation and that the mandatory services of the category assigned to the tourist undertaking are provided in them.

3- When the ownership and tourist exploitation do not belong to the same entity or when the undertaking is in a plural ownership regime, the operating entity must obtain from all owners a legal title that enables it to exploit all accommodation units.

4- The title referred to in the previous number must provide for the terms of the tourist exploitation of the accommodation units, the participation of the owners in the results of the exploitation of the accommodation unit, as well as the conditions for the use of this by the respective owner.

5- The owners of the accommodation units, when they occupy them, enjoy the mandatory services of the category of the undertaking, which are covered by the periodic provision provided for in article 56.

6- The accommodation units referred to in no. 3 cannot be directly exploited by their owners, nor can they be the subject of contracts that compromise the tourist use of the same, namely contracts of lease or constitution of rights of use and habitation."

As was stated in the Arbitral Decision issued in case no. 275/2017-T:

"53. The legislator here clearly distinguished between the ownership of the various real property fractions that compose the undertaking, which may be plural, and the exploitation of this, which 'must be the responsibility of a single entity'.

  1. In other words, the legislator admits plural ownership, but imposes the uniqueness of exploitation.

  2. From this arises the indispensability of entering into contracts for the cession of tourist exploitation between the owners of the real property fractions and the entity responsible for the tourist exploitation.

  3. The entry into such contracts arises from the necessity of compliance with the law, and not from the will of the contracting parties – it is therefore not a matter of a management option on the part of the owner of the fraction, but rather a necessary condition for the acquisition of the real property fraction."

23.3. The tourist exploitation of the property of which the Claimants are owners was ensured by the managing company, in accordance with the rule of uniqueness of exploitation enshrined in article 44, no. 1, of the LRIOTU.

From the tourist exploitation cession contract described above (see, paragraphs F.3) to F.12) of no. 19.1 above) it follows that it is incumbent upon the managing company to ensure the tourist exploitation of the real property fraction of which the Claimants are owners. Indeed, the Claimants, in their capacity as owners, during the term of the tourist exploitation cession contract, are prevented from exploiting, leasing or in any other way making the property available to third parties (see, paragraph F.16) of no. 19.1 above).

Under paragraph a) of no. 1 of article 3 of the IRS Code, business and professional income (Category B) are considered those "(a) Arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity".

The legislator indicates, in paragraph h) of no. 1 of article 4 of the IRS Code, the "hotel and similar activities, restaurants and beverages, as well as the sale or exploitation of the real right of periodic habitation" in the list of various activities considered commercial and industrial.

But the commercial activity that consists of the tourist exploitation of the property is not developed by the Claimants, but by the managing company. In such a context, the income obtained by the Claimants does not arise from the tourist exploitation of the real property fraction of which they are owners, but rather from the cession of the said property for exploitation by another entity (the so-called managing company or manager, in accordance with the tourist exploitation cession contract).

As is stated in the Arbitral Decision in case no. 275/2017-T "69. What is decisive is that, by legal requirement, the tourist exploitation of the real property fraction of which the Claimants are owners cannot be ensured by them, whereby the income obtained by them, (…) cannot, logically, be attributed to such activity."

23.4. The present record does not intend to ascertain whether the Claimant is or is not exercising the commercial activity in which he is registered. Therefore, the registration of the Claimant in the CAE, as well as the VAT regime in which he is classified, is not determinative for the solution of the present case. What is intended to be ascertained is whether the income obtained, resulting from the exercise of the tourist exploitation activity, can be attributed to the Claimant as business income (IRS Category B).

23.5. Article 8 of the IRS Code, relating to Category F income, establishes the following:

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

2 - Are considered rents:

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

Thus, the income obtained by the Claimants arises from the cession of the property, whereby they have the nature of property income and are covered by the provision in the above cited article.

23.6. In this sense, at least the decisions of CAAD in cases nos. 211/2017-T, 235/2017-T, 275/2017-T and 240/2017-T have already ruled.

  1. The third question that now needs to be examined is the claim of the Claimants, presented on a subsidiary basis, that the deduction of all costs borne in the years 2012, 2013 and 2014 with maintenance and conservation expenses relating to personnel salaries, cleaning, electricity, water and gas be accepted (see, article 122 of the request for arbitral pronouncement).

24.1. In accordance with no. 2 of article 13 of the IRS Code, IRS taxpayers are "(…) natural persons who reside in Portuguese territory and those who, not residing there, obtain income there."

IRS applies to "the annual value of income of the following categories, even when arising from unlawful acts, after the corresponding deductions and reductions are made." (see, article 1, no. 1, of the IRS Code).

The amounts received by the Claimants as rent are considered property income – Category F (see, article 8 of the IRS Code).

The expenses that may be deductible from property income are provided for in article 41 of the IRS Code.

Article 41 of the IRS Code, in the wording in force in 2012, provided that "from the gross income referred to in article 8, the expenses of maintenance and conservation that are incumbent upon the taxpayer, that are borne by him and that are documentally proven are deducted, as well as the property tax and the stamp duty that applies to the value of the properties (…) whose income has been consolidated."

The wording in force in 2013 and 2014 provided that "from the gross income referred to in article 8, the expenses of maintenance and conservation that are incumbent upon the taxpayer, that are borne by him and that are documentally proven are deducted, as well as the property tax and the stamp duty that applies to the value of the properties (…) whose income is subject to taxation in the fiscal year."

Given the provision in article 41 of the IRS Code, the legal assumptions for the consideration of expenses and charges incurred depend on: i) Maintenance and conservation expenses that are incumbent upon the taxpayer; ii) Expenses actually borne and documentally proven; iii) Property tax on the value of the leased property, whose income is subject to taxation in the fiscal year, that is, paid in the year of the income to be taxed in IRS.

24.2. The rule of deductibility of Category F costs is associated with the costs of maintenance and conservation necessary for obtaining taxable property income, but that the legislator has never specified. Indeed "(…) the IRS Code does not define what is meant by "maintenance and conservation expenses", so the interpretation of that concept should be carried out with reference to article 11 of the GTL. Taking into account the civil law notion contained in the Urban Leasing System (ULS), as it is the act that defined the rules of urban leasing and defined which works were incumbent upon the landlord, despite the lack of terminological correspondence between "maintenance and conservation expenses," provided for in article 41 of the IRS Code, and the ULS, which distinguishes between "ordinary conservation works," "extraordinary conservation works" and "improvement works," article 11 provided that:

1 - In urban properties, and for the purposes of this act, ordinary conservation works, extraordinary conservation works and improvement works may take place.

2 - Ordinary conservation works are:

a) The repair and general cleaning of the property and its dependencies; b) Works imposed by the Public Administration, in accordance with applicable general or local law, and intended to give the property the characteristics presented when the license was granted;

c) In general, works intended to keep the property in the conditions required by the purpose of the contract and existing at the date of its execution.

3 - Extraordinary conservation works are those caused by a defect in the construction of the property or by fortuitous event or force majeure, and, in general, those that, not being attributable to unlawful acts or omissions perpetrated by the landlord, exceed, in the year in which they become necessary, two-thirds of the net rent of that same year.

4 - Improvement works are all those not covered in the two previous numbers."

See, in this regard, the Judgment of the Supreme Administrative Court of 06.07.2016, issued in case no. 088/16, where, among other things, one can read: "Maintenance and conservation expenses will be expenses that are necessary for the conservation and maintenance of the properties that generate income. They may be, as previously defined in the Urban Leasing System, article 11, expenses incurred with ordinary conservation works - repair and general cleaning of the property, works imposed by the Public Administration, and, in general, those intended to keep the property in the conditions required by the purpose of the contract and existing at the date of its execution; extraordinary conservation works – repair of construction defects of the property or supervenient; or even improvement of the property, but always with impact on the property and on its susceptibility to generate income."

Thus, maintenance and conservation expenses will be expenses that are necessary for the conservation and maintenance of properties generating income. They may be expenses incurred with ordinary conservation works, repair and general cleaning of the property, works imposed by the Public Administration, and, in general, all those intended to keep the property in the conditions required by the purpose of the contract and existing at the date of its execution; extraordinary conservation works, repair of construction defects of the property or supervenient or even improvement of the property, but always with impact on it and on its susceptibility to generate income. And only ordinary conservation works are incumbent upon the landlord. Conversely, extraordinary conservation works and improvement works are only incumbent upon the landlord when their execution is ordered by the competent municipal council or when there is written agreement of the parties to their execution, with specification of the works to be carried out."

Taking into account the foregoing, expenses relating to electricity, water and gas consumption do not fall within the concepts of "maintenance and conservation" and consequently cannot be deducted from the gross income of Category F, in accordance with the provision in no. 1 of article 41 of the IRS Code.

24.3. As for the other expenses invoked by the Claimants, they are included in the concept of maintenance and conservation expenses, but, in accordance with the tourist exploitation cession contract in question, such expenses are the responsibility of the managing company (see, paragraph F.13) of no. 19.1 above and Section 6 and clauses 5.3, 5.4 and 5.5 of the tourist exploitation cession contract which is attached, as document no. 4, to the request for arbitral pronouncement).

Therefore, payments relating to this type of expense are made by the managing company, and the managing company is remunerated in exchange for the services it provides (see, paragraph F.14) of no. 19.1 above). The deductible cost for the Claimants is that corresponding to the remuneration paid to the managing company, which is not contested by the Claimants.

24.4. In conclusion, the request of the Claimants for consideration, for purposes of deduction from the income of Category F of IRS, of expenses with personnel salaries, cleaning, electricity, gas and water in the years 2012, 2013 and 2014 is not well-founded.

  1. Having this Tribunal concluded that the contested tax acts do not suffer from any defect, consequently, in accordance with the provision in article 43 of the GTL, the Claimants have no right to compensatory interest.

IV - DECISION

In light of the foregoing, the Arbitral Tribunal decides to judge the request for arbitral pronouncement not well-founded and, in consequence, absolves the Respondent of the request, with the due legal consequences.

V - VALUE OF THE PROCEEDING

Given the provision in articles 32 of the Code of Administrative Procedure and Process, 306, no. 2, of the Code of Civil Procedure and 97-A of the CTPP, applicable by virtue of the provision in article 29, no. 1, paragraphs a) and b) of the LFTA, and in article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the proceeding is set at €17,912.14 (seventeen thousand, nine hundred and twelve euros and fourteen cents).

VI - COSTS

Costs to be borne by the Claimant, in the amount of €1,224.00 (one thousand two hundred and twenty-four euros), in accordance with the Table I of the RCPAT, in compliance with the provision in articles 12, no. 2, and 22, no. 4, both of the LFTA, as well as the provision in article 4, no. 4, of the RCPAT.

Notify.

Lisbon, Centre for Administrative Arbitration, 1 March 2018

The Arbitrator

Olívio Mota Amador

Frequently Asked Questions

Automatically Created

How are income payments from tourist exploitation contracts classified for IRS purposes in Portugal?
Income from tourist exploitation contracts can be classified as Category B (business/professional income) or Category F (property income) for IRS purposes depending on the contractual arrangement's nature. The critical distinction lies in whether the activity constitutes active business exploitation or passive property rental. In Process 272/2017-T, the Tax Authority classified income from tourist exploitation cessation contracts as Category F, but the claimants contested this classification, arguing it should be Category B. The Tax Authority must demonstrate "founded indications" to support its classification under Article 74(1) of the General Tax Law. The tribunal examined whether reliance on administrative Circulars alone, without substantive factual analysis, suffices for proper income qualification. This classification significantly impacts tax treatment, available deductions, and compliance obligations for both resident and non-resident taxpayers operating in Portugal's tourism sector.
Can non-resident taxpayers challenge IRS additional tax assessments through CAAD arbitration?
Yes, non-resident taxpayers have full access to CAAD arbitration to challenge IRS additional assessments. Process 272/2017-T demonstrates this right, as two Irish residents successfully initiated arbitral proceedings under Article 2(1)(a) and Article 10 of the Legal Framework of Tax Arbitration (RJAT - Decree-Law 10/2011, as amended by Law 66-B/2012). The arbitral tribunal was properly constituted on July 3, 2017, confirming that residency status does not bar access to Portugal's tax arbitration system. Non-residents must follow identical procedural requirements as residents, including filing requests through CAAD, identifying contested tax acts, and complying with RJAT framework provisions. This access ensures non-residents have effective, expedited remedies against Portuguese tax assessments without requiring prior payment of contested amounts or engaging in lengthy administrative court procedures, thereby protecting their procedural rights and access to justice.
What is the legal procedure for requesting arbitral pronouncement under Portugal's RJAT (Decree-Law 10/2011)?
The RJAT procedure under Decree-Law 10/2011 follows these steps: (1) Filing a written request for arbitral pronouncement with CAAD identifying contested tax acts, legal grounds, and requested relief; (2) CAAD's President accepts the request and automatically notifies the Tax and Customs Authority; (3) The Deontological Council appoints an arbitrator for single tribunals, or parties select arbitrators for three-member panels under Article 6(2) and 11(1)(b) of RJAT; (4) Parties may refuse arbitrator appointments within the legal deadline per Articles 6 and 7 of the Deontological Code; (5) The tribunal is constituted; (6) The Tax Authority submits its reply and administrative file within the prescribed period; (7) Evidence production occurs, including document filing, witness examination if requested under Article 29(1)(e) of RJAT; (8) Parties submit written arguments; (9) The tribunal issues its decision within six months, extendable by two months under Article 21(2) of RJAT. Process 272/2017-T exemplifies this timeline: request filed April 18, 2017; tribunal constituted July 3, 2017; deadline extended to March 3, 2018.
How does the Portuguese Tax Authority treat compensatory interest on additional IRS assessments?
The Portuguese Tax Authority automatically assesses compensatory interest on additional IRS assessments pursuant to Article 35(10) of the General Tax Law (LGT) and Article 61(5) of the Tax Procedure Code (CPPT). Compensatory interest compensates the State for delayed tax receipt and accrues from the original payment deadline until actual payment or settlement. The applicable rate is established by Ordinance 291/2003 of April 8. In Process 272/2017-T, the Tax Authority issued separate compensatory interest assessment acts for 2012, 2013, and 2014 alongside the principal additional assessments. When additional assessments are annulled, related compensatory interest must also be cancelled. Importantly, taxpayers have reciprocal rights: the claimants expanded their request under Article 265(2) of the Civil Code to seek compensatory interest at the maximum legal rate from the Tax Authority under Articles 43(1) and 35(10) of LGT and Article 559 of the Civil Code for amounts improperly collected, recognizing bidirectional interest obligations.
What are the grounds for annulling additional IRS tax assessments related to tourism income in Portugal?
Grounds for annulling additional IRS assessments related to tourism income include: (1) Tax Authority's failure to satisfy its burden of proof under Article 74(1) of the General Tax Law regarding legal assumptions and factual bases for taxation; (2) Incorrect legal qualification of income, such as misclassifying Category B business income as Category F property income; (3) Insufficient motivation or legal foundation in the tax inspection report; (4) Improper reliance solely on administrative Circulars without substantive legal or individualized factual analysis; (5) Absence of "founded indications" demonstrating the income classification; (6) Procedural irregularities during inspection or assessment. In Process 272/2017-T, claimants argued the Tax Inspection Services' final report was "neither congruent nor clear," constituting mere "conclusive judgment" without proper evidentiary support. They contended the Tax Authority failed to demonstrate specific facts justifying Category F classification for tourist exploitation contract income. The tribunal examined witness testimony, binding VAT information, comparative inspection reports, and contractual documentation to evaluate whether the Tax Authority met its evidentiary obligations.