Summary
Full Decision
ARBITRAL DECISION
I – REPORT
A… CF[1] … and B…, CF…, both residing in …– … …-…, United States of America, filed a request for arbitral pronouncement, pursuant to the provisions of paragraph a) of no. 1 of Article 2, no. 1 of Article 3 and paragraph a) of no. 1 of Article 10, all of the RJAT[2], with the ATA[3] being requested, for the purpose of reviewing the legality of the tax acts consisting of additional assessments for the year 2012, in accordance with assessments nos. 2016… of IRS[4], 2016…, of compensatory interest 2016… of statement and account settlement; for the year 2013, in accordance with assessments nos. 2016… of IRS, 2016… of Statement and account settlement, 2016…, of IRS and 2017… of compensatory interest and, 2017… of Statement and account settlement; for the year 2014, in accordance with assessments 2016… of IRS, 2016… of Statement and account settlement, 2016…, of IRS, 2017… of compensatory interest and 2017… of Statement and account settlement, in the total amount of € 19,198.21 seeking the declaration of their illegality with the consequent annulment.
The request was filed without exercising the option of designating an arbitrator, and was accepted by His Excellency the President of the CAAD[5] on 20/04/2017 and notified to the ATA on the same date.
Pursuant to the provisions of no. 2 of Article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within the legally applicable time limits, on 12/06/2017, Arlindo José Francisco was designated as arbitrator of the tribunal, who communicated acceptance of the appointment within the legally prescribed time limit.
The tribunal was constituted on 03/07/2017 in accordance with the provisions contained in paragraph c) of no. 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December.
With their request, the applicants seek the annulment of the acts of Personal Income Tax assessment and compensatory interest, already indicated and duly identified in point 6 of the petition which is hereby fully reproduced, for all legal purposes, in the total amount of € 19,198.21.
They support their position, in summary, on the understanding that the ATA, through the inspection report that supports the tax acts under challenge, which is insufficiently reasoned, fails to meet the burden of proof of verification of the indications of taxation that no. 1 of Article 74 of the LGT[6] imposes on it, given the legal presumption of the truthfulness of the taxpayers' declarations, as per Article 75 of the LGT.
That is, the ATA failed to prove the founded indications that would lead to the conclusion that the income in question is income of category F and not category B, as declared by the applicants, without justifying this reclassification.
They also consider there to be a violation of law due to error as to the factual and legal prerequisites when they consider the income received to be classifiable under category F and not under category B, when in truth, the income in question results from the activity of tourist accommodation operation, exercised by the applicants and should be taxed under the provisions of paragraph a) of no. 1 of Article 3 of the CIRS[7] and not in another category, namely in category F, as the ATA intends.
The ATA's inspection services reclassified the income in question pursuant to administrative circular 5/2013 of 2 July and, while it is true that the ATA is bound by compliance with these administrative guidelines, it is also true that they do not have direct normative character for taxpayers or for the courts, so it appears to them illegitimate and illegal that the ATA intends to tax under category F, based on the said circular, the income earned by the applicants under the provisions of paragraph a) of no. 1 of Article 3 of the CIRS and declared under category B.
Concluding that the lack of reasoning of the tax inspection report and the taxation, based on the erroneous circular interpretation, can only lead to the annulment of the tax acts under challenge.
In its response, the respondent, also in summary, understands that the inspection report is duly reasoned and allows any ordinary recipient to understand the cognitive and evaluative path followed by the author of the act and, such is the case that in the concrete case, the applicants not only understood the factual and legal framework on which the decision was based, given that they contested it point by point, concluding that the assessment acts under challenge do not suffer from the defect of lack of reasoning.
And such is the case that the applicants did not avail themselves of the mechanism provided for in Article 37 of the CPPT[8], for lack of legally required reasoning, so it is necessary to conclude that the tax acts in question did not suffer, nor do they suffer, from the defect invoked or if they eventually did, it was remedied by the non-use of this mechanism.
As to the alleged violation of the prerequisites, it also considers that it does not exist and confronts Article 3 of the CIRS, no. 1 paragraph a) with Article 8 of the same statute in order to justify what was advocated in the inspection report.
It considers that for the income in question to be considered business income and to be taxed under category B, the law requires the exercise of some business activity which is not the case for the applicants.
The applicants are merely owners of the property and nothing more, given that they immediately ceded the right to its operation to the managing company, not assuming any responsible role in the operation of the accommodation, so the income earned can only be classified under category F, concluding for the maintenance of the tax acts in question, since the reasons and arguments put forward by the applicants are entirely lacking.
II - CASE MANAGEMENT
The tribunal was duly constituted, the parties have legal capacity and standing, show themselves to be legitimate and are duly represented in accordance with Articles 4 and 10, no. 2 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.
Having attached the response of the respondent, the tribunal issued, on 23/09/2017, the following order: "In the response, the dispensing of the production of the witness evidence offered by the respondent is raised, considering that the issues to be determined are only matters of law, thus notify the respondent so that within 10 days, if so wished, it may pronounce on this understanding.
Within the same period the parties shall, if so wished, pronounce themselves on the tribunal's understanding as to the unnecessary holding of the meeting referred to in Article 18 of the RJAT and also as to the production of oral or written submissions."
On 10/10/2017 the applicants came to inform the tribunal that they did not waive the witness evidence, the tribunal issuing, on the 13th of the same month, the following order: "Having viewed the case file, in particular the request, filed on the 10th instant, by the applicant, the tribunal designates the 30th of this month of October at 10:30 hours, for the holding of the meeting referred to in Article 18 of the RJAT and the examination of the witnesses offered, with the applicant being required to ensure their presence on the scheduled date and time".
On 17/10/2017 the tribunal issued a new order: "Given the logistical impossibility of the CAAD, the proceedings scheduled in my order of the 13th instant, are rescheduled for the 15th of November next, at 10:30 hours".
On the same date the respondent came to inform of the absolute impossibility of being able to be present at the proceedings and on 18/10/2017, the applicants requested a new scheduling for the proceedings, coming on 19/10/2017, to suggest the 21st of November 2017.
By order of 27/10/2017 the proceedings were rescheduled for 21/11/2017, which took place on that day, at 10:30 hours.
The tribunal complied with no. 1 of Article 18 of the RJAT and the representative of the applicants requested that documents be allowed to be filed, which was granted, after hearing the respondent who did not object.
The witness evidence presented was only from the applicants, with two witnesses to be heard, the tribunal having previously questioned which articles of the petition the witness evidence was intended to prove, the representative having informed that they were articles 9 to 29, 31, 62, 68, 112, 113, 115 and 118.
Called the 1st witness who identified themselves and was sworn, the tribunal gave the floor to the representative of the applicants to proceed directly with the examination, the deposition concluded the tribunal gave the floor to the representatives of the respondent to directly examine the witness, who dispensed with doing so.
The same procedure was followed with respect to the second witness and the representatives of the respondent also declared themselves satisfied without examining them.
Following the conclusion of the examination which was recorded, the tribunal granted a period of 10 days for written submissions with successive exchange and complied with no. 2 of Article 18, setting 03/01/2018 for the issuance of the decision.
Thus, as the proceedings do not suffer from any nullities, it is necessary to decide.
III - GROUNDS
1 – The issues to be determined, of interest to the case, are the following:
The applicants seek the annulment of the tax assessment acts already identified, based on their illegality, supported on the following grounds:
Defect of lack of reasoning of the tax inspection report that supports the tax acts in question;
Defect of violation of law, due to error as to the factual and legal prerequisites, in that the income earned is classified under category F by the ATA, when it should be classified under category B;
Subsidiarily, should it be considered that the income should be taxed under category F, all expenses incurred in the calculation of the respective income be considered deductible, a situation not verified in the production of the assessment acts in question.
2 - Factual Matters
The Personal Income Tax assessment acts, Statement of Account Settlement and compensatory interest are duly identified in documents I to V filed by the applicants.
On 28 August 2007 the applicants entered into a purchase and sale agreement with company C…, NIPC[9] …, concerning the property designated "Apartment…", registered in the urban property register of the present Union of Parishes of … and … under article …, letter B, located at …–… …, in the development "…", with which they also signed a contract for the cession of the right to tourist operation of the unit already identified, this reserving the right to appoint a managing entity, which was later materialized with the establishment of company D…, SA NIPC …, hereinafter D….
On 8 February 2008 the constitutive deed of the "…" was deposited with the then DGT[10] and on 7 July of the same year the CMA[11], granted the respective license for use, without any intervention by the property owners who are applicants here.
The female applicant was registered between 31 January 2012 and 2 January 2014 for the activity of operating tourist apartments without a restaurant CAE[12] 55123, classified under the normal regime of quarterly periodicity in VAT[13] and under the organized accounting regime, by option, for Personal Income Tax purposes.
Between 30 June 2008 and 31 January 2012 and also from 2 January 2014, the male applicant was registered for the activity of operating tourist apartments without a restaurant CAE 55123, classified under the normal regime of quarterly periodicity in VAT and under the simplified taxation regime, for Personal Income Tax purposes.
In accordance with the contract for the cession of operation already referred to, it was established that the tourist operation would be assured by the managing entity D…, to whom the owner applicants were obligated to remunerate for the services rendered.
The applicants recognized and accepted that, during the entire duration of the contract, they would not operate, lease or in any other way make the unit available to third parties in exchange for payment, rent, remuneration or any other means of payment (including on a gratuitous basis), further recognizing and accepting not to disclose nor to permit any other natural or legal person to disclose the unit as being available for occupation, among other things.
Under the terms of the said contract, the managing entity D… is responsible for administering the Tourist Operation Program, providing property administration services, maintenance and cleaning and arrangement of the unit, all as is best shown in sections 3, 4, 5 and 6, respectively.
The managing entity D… was further obligated to manage the operational aspects inherent to the operation of the tourist apartment identified, namely collection of amounts due, collection of expenses, reservation management and rate determination, as well as general administration of the unit, including accounting, sales, marketing, travel agency costs, tour operator commissions and respective expenses incurred, expenses for central services related to the Tourist Operation Program and expenses for reception services and other related expenses.
In the general administration services, to be provided by D…, are included routine maintenance services which it freely considers indispensable and appropriate for guest occupancy, such as light bulb replacement, unclogging toilets, restoring and connecting circuits, garden and landscape maintenance, arrangement and cleaning of the unit, bed linens, emptying trash, changing towels, kitchen cloths, bedding, daily arrangement of the kitchen, dining rooms and living areas, bathrooms and bedrooms, dishwashing, counters, sweeping the floor, dusting, vacuuming, mirror cleaning, making beds, cleaning after guest departure and annual deep cleaning, specifically including steam cleaning of carpets and upholstery, waxing floors, external window cleaning, among others.
For the provision of the services described, the managing entity D… would receive 25% of the gross revenue from the tourist operation, or such other percentage as may be agreed by the parties and is obligated to provide a monthly report within 15 days following the month to which it relates and also an annual audited report.
The applicants were responsible for expenses not included in the operational management of the tourist operation and furnishing the unit through a standard furniture package which represented an expense of € 40,660.00, performing all expenses of all operations not related to operational management, such as all charges and expenses pending or due related to the unit, such as taxes, charges collected by creditors or suppliers, condominium charges, management and reserve costs, all applicable insurance premiums, auditor fees, telephone accounts, electricity costs, oil, gas, water and other basic services.
The applicants jointly filed in the years 2012, 2013 and 2014 their respective income declarations, Personal Income Tax form 3 with taxable results of € -37,750.32, € 1,192.15 and € 35.76, respectively, coming later to be subject to inspection procedures for the said years, pursuant to service order O12016…/…/… of 29 August 2016, having been notified of the project report by dispatch … of 06 December 2016, in which corrections to income for the year 2012 of € 58,665.34, year 2013 € 18,235.94 and 2014 € 26,695.38 were proposed.
The inspection services classified the income earned by the applicants as income of category F, considering that the same derive only from the provision to third parties of the property in a passive manner, that is, without any intervention and resulted from commercial activity on the part of D….
Charges relating to salaries, cleaning, electricity, gas, water, were not considered by the SIT[14], given that they did not consider them maintenance or conservation expenses, a position with which the applicants did not agree and on 18 October 2016, they filed a prior hearing request where they set forth their disagreement, coming later to be notified of the final inspection report, in which the corrections initially proposed were maintained, regarding the taxable income for the years 2012, 2013 and 2014, in the amounts already referred to, which gave rise to the respective assessments, in the total amount of € 19,198.21.
From the witness evidence offered by the applicants which concerned articles of the petition 9 to 29, 31, 62, 68, 112, 113, 115 and 118, they confirmed what was alleged in them and which had not been challenged by the respondent, which when invited to pronounce on the testimony of the witnesses said nothing.
The facts described are proven in the documents attached to the case file or in the administrative proceedings, in the witness testimony and were not challenged by the parties, being considered by the tribunal as relevant to the decision of the case.
3 - Legal Grounds
3.1 – Violation of the duty to provide reasoning for the tax acts practiced by the respondent
The reasoning contained in the report of the SIT that served as the basis for the tax acts here under challenge, as well as the reading that the ATA makes of the application of the law to these facts, one may not agree with it, but the tribunal does not perceive a breach either of no. 3 of Article 268 of the CRP[15], nor of Article 77 of the LGT, nor of paragraph a) of Article 99 of the CPPT.
In truth, the regulations referred to require notification to the interested parties of the proceedings, in express and reasoned form, even if this consists merely in agreement with the grounds of previous opinions, information or proposals, including the reports of the inspection services.
The jurisprudence of the STA[16], namely its judgment of 11/11/1998, issued in case 31339, tells us that "… the duty to provide reasoning requires that an ordinary recipient, placed in the position of the appellant, given the express tenor of the act, may apprehend the logical-legal path traveled by the authority concerned to reach such a decision, so that it may determine itself, consciously, as to the impugnation or non-impugnation of the act"
Also, in its judgment of 13/04/2000 in case 31616, it states that the density of the reasoning may be situated "… at a minimum limit that does not deprive it of its character, that is, the "quantum" indispensable to meet the minimum requirements of formal reasoning is guaranteed: the revelation of the existence of reflection and the indication of the main reasons that moved the agent"
From the analysis of the petition, the tribunal concludes that the reasoning put in issue not only allowed the applicants to react against the acts practiced by the ATA, but also, at the same time, revealed a complete understanding of the reasons that led to the practice of the same by the respondent and that enabled them to rebut them point by point.
Given such findings, the tribunal considers that the defect of insufficiency of reasoning invoked with regard to the SIT report and which supported the assessment acts here under challenge is without merit.
3.2 – Defect of violation of law, as to the classification of the income earned
The income of natural persons is divided into categories, as per Article 1 of the CIRS and the divergence existing between the applicants and the ATA resides in the fact that the former understand that the income earned from the operation of the already identified property is classified under category B and the ATA considers that the same is classified under category F.
The applicants, as has been seen, were registered for the activity of operating tourist apartments without a restaurant CAE 55123, with taxation under category B, registration carried out as a consequence of declarations of commencement of activity, duly presented by them and which enjoy the presumption of truth, as per Article 75 no. 1 of the LGT, however the ATA, despite accepting this registration, came, in its inspection action, which is its responsibility, to disregard such registration, rebutting that presumption, given its conclusion that the applicants not only did not exercise such activity but did not reveal having any structure for its exercise.
Let us see:
Paragraph a) of no. 1 of Article 3 of the CIRS establishes that business and professional income, taxed under category B, are those arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity. In no. 1 of Article 4, of the said Code, in an open enumeration, a series of activities considered commercial or industrial are listed, among which appears in paragraph h) that for which the applicants were registered.
No. 1 of Article 8 of the CIRS established, at the time, that property income, taxed under category F, are the rents of rural, urban and mixed properties paid or made available to their respective owners and its no. 2 tells us, paragraph a), that amounts relating to the cession of the use of the property or part thereof and services related to that cession are deemed to be rents and in paragraph b) that amounts relating to the rental of machinery and furniture installed in the leased property are also deemed to be rents.
In this framework we will have to determine whether the income in question results from the exercise of a commercial activity by the applicants as they understand, or whether, on the contrary, it results from mere cession by them of the property to third parties, as the respondent understands.
From the elements attached to the case file, from the contract for the cession of tourist operation, from the witness testimony and from the petition itself, as per Articles 15 and 16 thereof, the operation is carried out by D… on behalf of the respective owners, with the expression "on behalf of" not being equivalent to the expression "in the name of", and such are distinct figures that the CC[17] treats, the former, in its Article 1180, and the latter in no. 1 of Article 1178, different institutes that allow us to conclude, as indeed the applicants do, that the operation of the fraction in question is carried out by D… on behalf of the applicants their owners, but not in their name.
From the proven factual matters it can be concluded that the applicants did not exercise the activity for which they were registered and that the SIT, in fulfillment of the functions that are legally assigned to it, made this finding and corrected it, as is evident from the respective report.
The jurisprudence of the STA has been reiterating that the concept of commercial or industrial activity will be determined by the economic concept of commercial or industrial activity, which encompasses activities of mediation between supply and demand and activity of incorporation of new utilities into matter, in both cases with speculative purposes, with a view to the obtaining of profits (see in this sense the judgment of the STA of 11/01/2017, issued in case 01622/15).
As it has been concluded, the applicants did not exercise any commercial activity, with the same being carried out by the managing entity D….
It should be noted that these tourist operation contracts are regulated by the RJIFET[18], at the time of installation, approved by DL 167/97 of 4 July, with amendments introduced by DL 305/99 of 6 August and by DL 55/2002 of 11 March which in its Article 44 no. 1 establishes that the operation of each tourist enterprise must be the responsibility of a single entity and, its no. 2 states that unified operation is not preventive of the property of the various real property fractions that make up the enterprise belonging to one or more persons.
In summary, the property of the enterprise may be plural but its operation must be carried out by a single entity, so that, by legal imperative, the necessity of entering into contracts for the cession of tourist operation between the owners of the fractions and the entity responsible for the operation derives, with them being excluded from any activity also by legal imposition.
In this perspective, it is verified that the tourist operation of the fraction in question, owned by the applicants, was in the years 2012, 2013 and 2014, carried out by the managing entity D…, with the applicants limiting themselves to ceasing it for operation and earning in return the income that configures the nature of rents provided for in paragraph a) of no. 2 of Article 8 of the CIRS.
It is apparent that such income does not result from any activity exercised by the applicants who, despite being registered for that purpose, did not exercise it nor could legally exercise it with respect to the fraction in question, so the income in question can only be qualified and classified under category F of income of natural persons, the defect of the alleged violation of law as to the classification of the income being equally without merit.
3.3 – Non-acceptance by the ATA of certain expenses in determining the net income of category F
Although subsidiarily the applicants seek that the ATA, when determining the net income under category F, accept the deduction of all expenses incurred with the maintenance and conservation of the property, such as expenses with the cleaning lady, with the gardener, with electricity, water, gas, repairs and painting.
No. 1 of Article 41 of the CIRS determines that from the gross income, to which Article 8 of the same statute refers, there are deducted the expenses of maintenance and conservation that are the responsibility of the taxpayer, incurred and properly documented by them.
But, immediately, expenses with electricity, water and gas are operating expenses, not falling within the concept of maintenance or conservation expenses, being thus excluded from the provision of the norm of no. 1 of Article 41 of the CIRS, already referred to.
The expenses with cleaning personnel, gardening, repairs and painting are perfectly classifiable as conservation and maintenance expenses, it is important to know whether or not they were borne by the taxpayers.
Now, from the factual matters considered proven, those expenses were the responsibility of the managing entity D… (see paragraph j of the factual matters), who was responsible for making such payments and for which the owners remunerated it, so the deductible cost is the corresponding to the remuneration paid by them to the manager and that was considered as is evident from the SIT report, through the application of the unit percentage for S502 (0.00556300), of which the applicants are owners, to the values evidenced in Annex I of the RIT[19].
Thus, the applicants' request is equally without merit, as to the non-acceptance of expenses by the ATA in determining the net income of category F.
IV – DECISION
Given the foregoing, the tribunal decides:
To declare the request for arbitral pronouncement totally without merit and consequently to maintain in the legal system the assessment tax acts identified and under challenge in the present proceedings.
To fix the value of the Case at € 19,198.21, considering the provisions contained in Articles 299 no. 1 of the CPC[20], 97-A of the CPPT and 3 no. 2 of the RCPAT[21].
To fix the costs, in the amount of € 1,224.00 in accordance with the provisions in Table I referred to in Article 4 of the RCPAT, which shall be borne by the applicants, pursuant to no. 4 of Article 22 of the RJAT.
Let notice be given.
Lisbon, 3 January 2018
Text prepared by computer, in accordance with Article 131, no. 5 of the CPC, applicable by reference to Article 29, no. 1, paragraph e) of the RJAT, with blank lines and reviewed by the tribunal.
The Arbitrator
Arlindo José Francisco
[1] Acronym for Fiscal Taxpayer
[2] Acronym for Legal Framework for Tax Arbitration
[3] Acronym for Tax Authority and Customs Authority
[4] Acronym for Personal Income Tax
[5] Acronym for Administrative Arbitration Center
[6] Acronym for General Tax Law
[7] Acronym for Personal Income Tax Code
[8] Acronym for Tax Procedure and Process Code
[9] Acronym for Company Identification Number
[10] Acronym for General Directorate of Tourism
[11] Acronym for Municipal Chamber of Albufeira
[12] Acronym for Classification of Economic Activities
[13] Acronym for Value Added Tax
[14] Acronym for Tax Inspection Services
[15] Acronym for Portuguese Constitution
[16] Acronym for Supreme Administrative Court
[17] Acronym for Civil Code
[18] Acronym for Legal Framework for Installation and Operation of Tourist Enterprises
[19] Acronym for Tax Inspection Report
[20] Acronym for Civil Procedure Code
[21] Acronym for Regulation of Costs in Tax Arbitration Procedures
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