IRS Tax on Periodic Housing Exploitation Income: CAAD Arbitration Ruling 286/2017-T

ARBITRAL DECISION

I - REPORT

A - IDENTIFICATION OF THE PARTIES

Petitioners: A…, tax identification number…, and B…, tax identification number…, married, with residence located in…, Northern Ireland, hereinafter designated as Petitioner or Petitioners or liable party.

Respondent: Tax and Customs Authority, hereinafter designated as Respondent or AT.

The Petitioner submitted a request for establishment of an Arbitral Court in tax matters and a request for arbitral pronouncement, pursuant to the provisions of article 2(1)(a) and article 10(1)(a), both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters), hereinafter abbreviated as RJAT.

The request for establishment of the Arbitral Court was accepted by the President of the Centre for Administrative Arbitration (CAAD), and in accordance with the provisions of article 11(1)(c) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Tax Authority was notified on 2017-07-03.

The Petitioner did not proceed with the appointment of an arbitrator, therefore, pursuant to the provisions of article 6(1) and article 11(1)(b) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Committee appointed Rita Guerra Alves as Arbitrator, having this appointment been accepted by her according to the legally provided terms.

On 2017-06-14, the parties were duly notified of this appointment, and did not manifest any intent to refuse the arbitrator's appointment, in accordance with article 11(1)(a) and (b) of the RJAT and articles 6 and 7 of the Ethics Code.

The Singular Arbitral Court was regularly constituted on 2017-07-03, to examine and decide the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 2017-07-03 as appears in the respective minutes.

On 04-01-2018, the hearing referred to in article 18 of the RJAT was held, and witness testimony was taken. Both parties submitted successive written submissions.

B - REQUEST

The Petitioner seeks that the illegality of the tax assessment acts for Personal Income Tax (IRS) no. 2016…, no. 2016… and 2016… relating respectively to the years 2012, 2013 and 2014, in the total amount of 13,881.62€ (thirteen thousand eight hundred and eighty-one euros and sixty-two cents), be declared.

C - GROUNDS FOR THE CLAIM

To support its request for arbitral pronouncement, the Petitioner alleges, with a view to declaring the illegality of the Personal Income Tax (IRS) assessment acts above described in point 1 of this Award, the following:

The Petitioner seeks that the illegality of the aforesaid IRS assessment acts be declared and, as a consequence, the same be annulled, pursuant to article 2(1)(a) and article 10(1)(a), both of Decree-Law no. 10/2011, of 20 January.

The Petitioner requests the annulment of the aforesaid IRS assessment acts, as they suffer from the vice of lack of reasoning and the vice of violation of law, due to error as to the factual and legal prerequisites in the part where they considered the income received as falling under Category F and not Category B, in accordance with article 99(a) of the Tax Procedure Code;

The Petitioner alleges that: on 27 June 2006, they entered into a promise-to-sell contract with company C…, S.A. (NIPC…), hereinafter designated "C…" having as object a real property designated "Apartment…", property later registered in the urban real estate register of the Union of parishes of… and… under article…, under letter F, located in the enterprise "…";

By option, on the same date, the Petitioners signed with C…, S.A., a contract for assignment of tourism exploitation of the unit… above identified, reserving the right to appoint a management entity, which later materialized with the creation of company D…, S.A., NIPC…;

On 8 February 2008, the constituent document of the "…" was filed with the then General Directorate of Tourism;

On 7 July 2008, the Municipal Chamber of… granted a license for tourist use of the enterprise "…";

From 1 January 2008 onwards, the Petitioner spouse began to exercise the activity of exploitation of tourist apartments, being registered for this purpose with CAE 55123 "tourist apartments without restaurant" and framed in the normal quarterly periodicity regime in VAT and in the organized accounting regime, by option, under IRS (Category 8);

Pursuant to the aforementioned tourism exploitation assignment contract, it was established that the Petitioners would ensure tourism exploitation through the services of the management entity C… (D…) and in accordance with the terms of the same contract;

The Petitioner defends that the management entity (D…) would exploit the tourist apartments of unit… on behalf ("on behalf") of the respective owners, providing them with all services necessary to effect such exploitation;

The exploitation of the aforementioned tourist apartment was carried out directly by the Petitioners, however resorting to the management entity (D…) to operationalize this tourism exploitation given its consolidated experience and reputation in this sector of activity, receiving this entity remuneration for the services provided;

The parties agreed in the context of the aforementioned exploitation assignment contract that the management entity (D…) accepted the appointment and, consequently, accepted to provide, on an exclusive basis, the services comprised within the scope of the Contract;

The Petitioners recognized and accepted that throughout the duration of the Contract, they would not exploit, 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 of a gratuitous nature), further recognizing and accepting not to disclose nor allow any other natural or legal person to disclose the unit as being, among others, available for occupation.

For its part, the management entity (D…) 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 the Contract, more precisely:

• Administer the Tourism Exploitation Program (…) described in Section 3;

• Provide the Property Administration Services described in Section 4;

• Provide the Property Maintenance Services described in Section 5; and

• Provide the Cleaning and Arrangement Services of the Unit described in Section 6.

In the context of the aforementioned Tourism Exploitation Program, the management entity (D…) was obliged to manage, on behalf of the Petitioners, the operational aspects (current management) inherent to the exploitation of the aforementioned apartment tourist activity, namely, dealing with the collection of payments due, collection of expenses, management of reservations, determination of rates.

The Petitioner wife was equipped with all means of control over the results of the exploitation of the aforementioned apartment, being the manager (D…) obliged to provide a monthly report of accounts to the Petitioner, within 15 (fifteen) days from the end of the month in question, in addition to an annual audited report (report) of the Petitioner's account identifying, for the prior calendar year: all revenues from tourism exploitation of all units participating in the Program, the manager's remuneration, net revenue from tourism exploitation, the Petitioner's remuneration; and all other expenses and charges the responsibility of the Petitioner, made available in accordance with the terms of this Contract;

The Petitioner defends that from the contractual clauses above transcribed the manager always acted on behalf and in the interest of the Petitioner wife while exercising the operations necessary to carry out the tourism exploitation of the aforementioned apartment;

That the charges and revenues of the said tourism exploitation directly impact the sphere of the Petitioners, and that the activity of exploitation of tourist apartments is developed by the respective owners, with no transfer of "business risk" to the management entity (D…) nor participating this entity in the exploitative activity with its own interest;

In fulfillment of their reporting obligations, with reference to the years 2012, 2013 and 2014, the Petitioners filed jointly their IRS income declaration Form 3;

The Petitioners were subsequently subject to a tax inspection procedure, directed to the analysis of what was declared under IRS with reference to the years 2012, 2013 and 2014, in compliance with Service Order no. OI2016…/…/… of 10 August 2016, the Petitioner being notified, through Office no.…, dated 7 October 2016 of the respective Draft Report;

In the said Draft Tax Inspection Report, corrections were proposed to the taxable income of the Petitioners of €53,587.16 for the year 2012, of €22,430.78 for the year 2013 and also of €32,571.99 for the year 2014;

The Petitioner alleges the lack, incongruity or insufficiency of the reasoning in general of the inspection report;

And defends its position of framing the income under Category B. It argues that the tourism exploration activity exercised by it and the income generated in that context were obtained within the scope of a commercial activity (even if resulting from the exploitation of a real property), the Petitioners treated the same within Category B of the IRS Code, by force of the principle of preponderance of this Category over the income falling within the other categories of income, but which are obtained in connection with a business activity (in this case, a commercial activity);

The Petitioner alleges that all income calculated within commercial activity exercises are taxed by Category B, namely those resulting from hotel activities and similar;

And for income to be attributable, the activities generating income from business or professional activities, with the liable party registered with the respective CAE, all that will be necessary is that the income received is related to that activity;

And that being the case of income arising from tourism exploitation, which is the activity exercised by the Petitioner wife, the same cannot be taxed as Category F income, completely disconnected from the aforementioned commercial activity exercised;

The Petitioner maintains that within article 3(1)(a) of the IRS Code, having the legislator used the expression "activity" without (restrictively) delimiting its extent, it is evident that it intended to include all income obtained, in any form, from direct exploitation or through contracting services to achieve the income in question;

It understands that it is evident that "activity" for purposes of taxation within Category B should not be limited - when the legislator did not do so - to the consideration of operational activity, excluding titleholders who will obtain income as a result of assignment of exploitation and consequent contracting of services, as happened in the present case;

For the Petitioners, the term "activity" also comprises the set of operations aimed at achieving investments and choosing the appropriate form of management, which in the present case becomes even more pertinent, considering that the Petitioners are non-resident liable parties, to the extent that to optimize such exploitation in the most convenient form and thereby obtain income, which would then be subject to taxation, they opted to manage their unit through the manner herein presented;

And for that reason the income in question allocated to the tourism exploitation activity exercised by the Petitioners should be taxed within article 3(1)(a) of the IRS Code and not pursuant to article 8(2) of the IRS Code;

Furthermore, as to other expenses, even if by hypothesis the income obtained by the Petitioners were effectively Category F income of the IRS Code, however the taxable matter of the Petitioner would never be in the amount calculated by the tax inspection services in the course of tax inspection;

It understands that contrary to the position taken by the Tax Inspection Services in the Final Tax Inspection Report notified to the Petitioners and underlying the tax acts contested here, should be understood as expenses deductible from Category F income of IRS, the expenses for maintenance and conservation relating to the cleaning staff, gardener's wages, electricity, water and gas, expenses for the lease of a house with equipment, repairs and paintings, insurance premiums and costs of property administration;

The position taken in the Inspection Report did not take into account for all legal purposes, the totality of the expenses incurred by the Petitioners with the maintenance of the source of income in question;

It alleges that the expenses with wages of personnel, cleaning, electricity, gas and water, incurred by the Petitioners in the years 2012, 2013 and 2014, should be considered, in accordance with and for purposes of article 41.0 of the IRS Code;

The Petitioner, in the context of its written submissions, alleged the following:

In fact, the Petitioners do not conform to the tax acts above identified, nor with the conclusions of the tax inspection procedure underlying the same, for which reason they invoked, in summary, in the context of the present arbitral request and demonstrated fully - as will become evident - the following arguments: (i) The lack of reasoning of the additional assessments made to the Petitioners, due to the lack of reasoning of the Tax Inspection Report, as regards the corrections to the taxable matter made to the Petitioners; (ii) The illegality of the additional IRS assessment acts, relating to the years 2012, 2013 and 2014 and respective compensatory interest, due to the activity exercised by the Petitioners corresponding to the exercise of a commercial activity (i.e., Category B), in accordance with article 3(1)(a) and article 4(1)(h) of the IRS Code; (iii) Alternatively, the partial illegality of the additional IRS assessment acts, due to the Tax Administration not having taken into account all deductible expenses under Category F.

By not conforming to the additional IRS assessments relating to the years 2012, 2013 and 2014, the Petitioners alleged - and demonstrated documentally - in the context of the Request for Establishment of an Arbitral Court, in summary, that:

the additional assessments made to the Petitioners lack reasoning, due to the lack of reasoning of the Tax Inspection Report, as regards the corrections to the taxable matter made to the Petitioners, to the extent that the Tax Inspection Services limited themselves to supporting the corrections made on the idea that the Petitioners obtain their income in a passive manner (whereas taxation under Category B makes no distinction as to the manner of obtaining income), and for that reason reclassify the Category B income as Category F income, based on a merely generic analysis of the Petitioners' activity, without having collected a single concrete indication that would justify this reclassification;

the property exploitation services in question, provided by company D…, S.A., NIPC… (hereinafter "D…") under the tourism exploitation assignment contracts entered into with the owners of the tourist apartments forming part of the tourism enterprise…- which include the Petitioners - fall within the provision of accommodation services in an establishment of hotel type to third parties, within the scope of a hotel activity;

the income obtained by the liable party, arising from the tourism exploitation contract entered into, is capable of being subsumed within the typology of income from hotel activity and similar connected with the exercise of a commercial activity, in accordance with article 3(1)(a) and article 4(1)(h) of the IRS Code;

even if it is understood that the activity of the liable party falls within Category F, which it admits by way of precaution, all the expenses incurred by the Petitioners should always be taken into account, in accordance with process no. 1793/94 analyzed by the Tax Administration in which it was referred that the following were deductible expenses: "cleaning staff, gardener's wages, electricity, water and gas expenses, expenses for house lease with equipment, repairs and paintings, insurance premiums and property administration costs",

in the same sense, see the Award rendered by the Centre for Administrative Arbitration (CAAD) in process no. 435/2014-T, of 10.11.2014, in which it was held that expenses for IMI, for supply and installation of kitchen equipment, for supply of water, for accident insurance and charges for the payment of contributions to Social Security of the cleaning staff and porter are deductible.

The Petitioner concludes: The Tax Inspection Services, by not sustaining in the Conclusions of the Final Tax Inspection Report, in a clear and unequivocal manner, the facts on which they based themselves to conclude that the income obtained by the Petitioners was Category F income did not comply with the legal duty, constitutionally enshrined, of express, clear and full reasoning of the decisions to which they are subject, and should, therefore, annul the tax acts contested;

The fact that the Petitioners did not resort to the mechanism provided in article 37 of the CPPT does not determine that the Petitioners cannot allege the lack of reasoning of the act, for the mechanism provided in article 37 of the CPPT constitutes a faculty available to the liable party and not a mandatory or necessary expedient;

From the analysis of article 37(1) of the CPPT - in particular from the expression "the interested party may" - it is possible to conclude that the legislator places the possibility of obtaining the elements missing in the notification as a mere faculty conferred upon the liable party and not a burden, for which reason the lack of reasoning of the Tax Inspection Report and, in consequence, of the contested assessment acts, determines the illegality of the notified tax acts;

The burden of notifying the liable party of all elements of the reasoning is not precluded or set aside by the fact that the legislator has placed, at the disposal of the same, an expedient to petition for the notification of the missing elements;

The Tax Inspection Services failed to meet the burden of proof of the verification of the respective indications or prerequisites of taxation that rests upon them, in accordance with article 74(1) of the General Tax Law, that is, of the legal prerequisites of their action, in the face of the legal presumption of truthfulness of the declarations of taxpayers (article 75 of the General Tax Law), not having demonstrated, as regards the Petitioners, in particular as concerns the Petitioner wife, the existence of "founded indications" demonstrating that the income in question is Category F income and not Category B as declared;

The framing as Category B by the Petitioners was, in a first phase, effected by guidance of their tax representatives and by the management entity (C… and, later, D…), which adopted this same framing from the opening of the enterprise in 2006 and, subsequently, by the IVA Services Directorate. Indeed, it follows from the VAT Code that the assignment of a furnished and licensed apartment for services, to a third entity in exchange for remuneration, obliges the liable party to register as a self-employed businessman with CAE 55123 - Category B and to charge VAT to the purchasers of the services, the property becoming part of the business sphere of the liable party - hence its registration as a permanent establishment in the declaration of commencement of activity of the Petitioner wife;

The position of the Petitioners - as regards VAT, since the IRS Services Directorate had never pronounced itself on the matter before the publication of Circular no. 5/2013 - was already supported by the VAT Services Directorate in the binding information process no. 3626, of 09.10.2012, in which it is stated that a lease contract with inclusion of services configures "thus, an operation subject to VAT calculation at the rate defined in article 18(1)(c) of the said Code";

After the emanation of Circular no. 5/2013, of 2 July 2013 and already in the course of 2014, the tax representative of the Petitioners had access to binding information, in which the VAT Services Directorate stated that the type of business in question configures a "concession of exploitation of an accommodation unit forming part of a tourism enterprise, framed in article (c) of the same provision and, as such, covered by the concept of provision of services, in harmony with article 1(1)(a), combined with article 4(1) of the VAT Code, the "Remuneration of the Assignor for the assignment of the accommodation unit" being subject to payment of tax at the rate defined in article 18(1)(c) of the said Code";

By a matter of coherence of the system and of good faith action by the AT, it must be concluded that (i) either the income of the Petitioner wife is framed as being a business income (Category B) and, as such, is subject to VAT, (ii) or the income of the Petitioner wife is framed as being real property income and, for that reason, is not subject to VAT, for which reason, being AT unified, being the same beyond its (dis)organization, the tax treatment to be given to its income - in concrete to the tax facts underlying these - must also be unified and coherent, not being able to use one criterion for IRS and another criterion for VAT;

The reform of IRS, in which the possibility of liable parties opting for taxation of real property income under the terms and rules applicable to business and professional income (Category B) came to merely clarify the manner in which the matter should be treated, thus resolving the conflicts that existed between the application of VAT and IRS on this matter, and in any case, the Petitioners understand that, by force of the provisions of the VAT Code, the assignment of a properly furnished and equipped real property, is a provision of services whatever the nature of the liable party (individual or company) and, as such, in the case of natural persons, the same shall always be subject to a framing under Category B;

Given the provision in article 11(2) of the General Tax Law, the concepts imported by tax law from other branches of law must be interpreted, as a principle, in the same sense as they have there, unless otherwise directly derives from the Law, for which reason, in the absence of a definition in the tax codes of the operation of "hotel activities and similar", attention should be paid to the provisions of Decree-Law no. 39/2008, of 7 March, which establishes the legal framework for the installation, operation and functioning of tourism enterprises, and the Unit…, which forms part of the tourist apartments in question, was constituted under the legal framework of tourism enterprises, the respective fractions falling within the typology of "tourist apartments" which, in accordance with article 14(1), are capable of being traced to "(…) tourism enterprises constituted by a coherent set of accommodation units, furnished and equipped, intended to provide accommodation and other complementary and support services to tourists.";

The real property in question was delivered by the Petitioners (and other owners) to D…, not to be occupied by the same, but instead with the purpose of ensuring its management and exploitation, as accommodation units integrated in a tourism enterprise, being therefore the occupation effected by third parties in an accommodation regime, within the scope of a hotel activity, and this delivery does not have as consideration the payment of a rent by D…, which, in fact, finds itself in the opposite position, that is, that of entity providing the set of services necessary for the exploitation of the real properties as accommodation units of a tourism unit;

Within article 3(1)(a) of the IRS Code, having the legislator used the expression "activity" without (restrictively) delimiting its extent, it is evident that it intended to include all income obtained, in any form, from direct exploitation or through contracting services to achieve the income in question. At no point does the law make any limitation, therefore it is not the role of AT to make this limitation;

Just as the concept of income for purposes of taxation under Category B of the IRS Code is not limited to results obtained by direct means, being excluded the income from exercise of activity through contracted services. And if the law does not make this distinction, it is not the role of AT to make it;

The term "activity" also comprises the set of operations aimed at achieving investments and choosing the appropriate form of management, which in the present case becomes even more pertinent, considering that the Petitioners are non-resident liable parties;

Given the tenor of the arbitral decision rendered in process no. 271/2017-T and the case at hand, it is evident that these are similar situations, for which reason the Court should apply, as it is bound to do, article 8(3) of the Civil Code, which establishes that "[i]n the decisions to be rendered, the judge shall take into account all cases that merit analogous treatment, in order to obtain a uniform interpretation and application of the law";

In the present case, we are before judicial processes that, although relating to different liable parties, have an identical factuality - the qualification of income as Category B and the correction made by the Tax Administration to Category F - for which reason the same should have identical treatment and a uniform interpretation and application of the law, in accordance with the cited article 8(3) of the Civil Code, but also in compliance with the provision in article 6(1) of the European Convention on Human Rights, as to the guarantee of fair process and legal certainty;

Administrative guidance - and in particular the cited Circular no. 5/2013, of 2 July 2013 - only bind the organs of AT and are not considered a source of tax law, therefore they have no external binding force of their own, not being even subject to publication, for which reason liable parties are in no way obliged to comply with the provisions thereof, nor are the Courts (including the Arbitral Court);

The administrative circulars, although, when disclosed, are aimed at clarifying the position taken by AT, are weakened from the point of view of their constitutionality and opposability against taxpayers, especially from the moment they add to or have an innovative character relative to what is in the text of the law (as is the case sub judice), for which reason it seems illegitimate and illegal that AT intends to tax the income obtained by the Petitioners within article 3(1)(a) of the IRS Code (Category B) in accordance with article 8(2)(a) of the same statute (Category F), through its own interpretation and against the law as regards the exercise of activity;

Even if it were understood that the Circular emanated by AT could prevail in the legal order, which without conceding is admitted for purposes of allegation, the reality is that the same could only be applied prospectively, that is, from its publication, under penalty of frustration of the expectations of liable parties and, furthermore, of violation of the provision in article 68(2) of the General Tax Law, which prohibits retroactive application of general guidance;

The action of AT, whether at the inspection stage or at the position taken in the present action, configures an abuse of right, in the aspect of venire contra factum proprium which violates the principle of justice and good faith to which it is bound in accordance with article 55 of the General Tax Law, for which reason, following the emanation of Circular no. 5/2013, of 2 July, the representatives of the Petitioners requested clarifications from the Tax Office of Loulé - … - which validated their understanding with the Financial Directorate of Faro -, having obtained the information that the legal framework they had been making was correct, for which reason they should maintain the same;

The action of AT - whether through contacts with its officials or by force of the position taken by the VAT Financial Directorate - created in the minds of the Petitioners a trust (quite) reasonable, of a legitimate character, since they could reasonably presume that the position taken reflected, at the date, the legal understanding of AT before all cases that merited analogous treatment, in compliance with article 8(3) of the Civil Code. That is, the action of AT constituted a trust-creating administrative action, the situation of trust materialized and the Petitioners invested in that trust to the extent that they acted in accordance with AT's guidance (verbal as to IRS and written as to VAT);

In the context of a tax inspection effected on liable party E… (TIN…), the Financial Directorate of Faro began by refusing VAT refund - based on the information that the said liable party would be improperly framed under Category B - to, subsequently, come to authorize the said refund;

The inspection in question is not an isolated case, to the extent that it had as target at least 28 owners (natural persons) of the same tourism enterprise ("…") and with the same representative for VAT purposes and was based not only on VAT, but also on IRS - including the Petitioner husband, who, at that date, was exercising the activity - at which time AT proposed, in a first phase, the framing of the income of the said liable parties under Category F (instead of Category B) - which, as was seen, was later altered in the final inspection report;

Given the framing (accepted by AT) of the Petitioners under the registry, it must be concluded that until 2016 - the date of the inspection - their registration was correct and, as such, one is before taxable income under Category B in IRS and not exempt from VAT;

And, even if the position of AT regarding the alleged incorrect framing is accepted, the reality is that, having AT advocated for the same in 2016, only after that date - and still, after the alteration of the registration of the Petitioners with the System for Management of Registry of Taxpayers - can any corrections be applied;

Even if it were admitted - which is done by mere caution and duty of representation - that the income obtained by the Petitioners is effectively Category F income of the IRS Code, the reality is that the taxable matter of the Petitioner wife would never be in the amount calculated by the Tax Inspection Services in the course of tax inspection, for which reason the expenses with wages of personnel, cleaning, electricity, gas and water, incurred by the Petitioners in the years 2012, 2013 and 2014, would always have to be considered;

The Petitioner concludes by upholding the illegality and voidability of the said assessment acts under Personal Income Tax (IRS) due to violation of law.

D - RESPONSE OF THE RESPONDENT

The Respondent, duly notified for this purpose, timely presented its response, in which, in brief summary, alleged the following:

On 27-06-2011, on the same date of acquisition of the property, a contract for assignment of tourism exploitation of the said property was entered into between the Petitioner husband, C… (Portugal) and D…, SA;

It results from that contract that the tourism exploitation of the real properties in question is developed through the services of company D…, SA, which holds the exclusive authorization to exploit tourist use, on its own behalf, the real property in question;

In these terms, the Petitioner mandated the Manager, company D…, SA to, in its own name and on its own behalf, receive the remuneration relating to the exploitation of its real property, the latter retaining the right to retain 25% of the gross revenue from the respective exploitation;

It also results from the contract that the real property is managed and maintained by company D…, SA, which also manages the short-term leases, collecting the amounts due, and providing all other associated services, such as maintenance, cleaning and painting, holding control of the keys of the property.

With the Manager being responsible for, also, the allocation of 5% of the gross revenue obtained with tourism exploitation monthly to the constitution of a common fund (the "Reserve Fund"), in order to facilitate the financing of improvements to the unit (clause 3.13 of the Assignment Contract);

The Manager makes available to the owner (the now Petitioner) the amounts contractually agreed, being that, in accordance with clause 20.4.2 of the Assignment Contract, in the first five years of the said contract, the Manager guarantees the Petitioner a minimum guaranteed return, which consists of a minimum annual remuneration of 5% calculated on the purchase price of the property, i.e., one million and twenty-five thousand euros.

It further states that, in clause 20 of the aforementioned tourism exploitation assignment contract, it is stated that: «[…] THE FIRST CONTRACTING PARTY acknowledges and agrees that the execution of this Contract and its participation in Tourism Exploitation for the Unit are not optional, constituting a requirement for the ownership of the Unit in accordance with applicable legislation.»;

The Petitioners did not request the registration of the tourism enterprise in the National Registry of Tourism Enterprises;

The Petitioners do not hold and do not exploit, in the scope of this activity, any real property;

As to the alleged lack of reasoning of the corrections now challenged, it disagrees with such understanding, for which reason, from the reading of the inspection report it results that an average person placed in the position of recipient can apprehend its meaning and conclusion.

It further alleges that the fact of having declared commencement of activity, asserting the intention to exercise an activity of tourism exploitation (when, in fact, nothing more was done beyond acquiring a property), should not be valued as sufficient for the qualification of income as attributable to Category B, when afterwards it is not actually exercised;

It understands that the Petitioner acquired a property for a period of five years, without ever having practiced any act that would indicate an intent to exercise any type of exploitation thereof, for which reason it was not even in his availability the possibility of not assigning such exploitation;

It further states that the mere act of purchase of a property and its consequent and immediate assignment of exploitation to a third party must be subsumed as simple acts of management of particular patrimony, not constituting, in themselves, signs of exercise of activity of exploitation of a property by the one who assigned the exploitation, as, wrongly, the Petitioner intends.

As to the pretension, by the Petitioners, that all expenses with wages of personnel, cleaning, electricity, gas and water (art.º 122 of the request for arbitral pronouncement) be accepted, for these were not accepted in the analysis performed in the inspection procedure, it argues to evaluate whether those expenses mentioned in abstract by the Petitioner, and not demonstrated at the arbitral hearing, bear the character of conservation and/or maintenance expenses incumbent upon the liable party;

Concluding that the expenses mentioned by the Petitioner do not constitute conservation expenses nor, either, maintenance expenses.

On the other hand, and as regards the expenses with wages and cleaning, it alleges that it appears from sections 5 and 6 of the assignment contract that these charges are the responsibility of the Manager, which means that they are not the responsibility of the Petitioners, here landlords.

Concluding, the Respondent sustains the legality of the assessment acts under Personal Income Tax (IRS), and in substantive terms, understands that they did not violate any legal or constitutional provision, and should be maintained in the legal order, arguing for the dismissal of the request with consequent acquittal of the Respondent from the Instance.

E - FINDINGS OF FACT

Previously to entering the examination of the questions raised, it is necessary to present the factual matter relevant to its respective understanding and decision to be rendered, having as basis the facts alleged and the documentary and testimonial proof produced in the records.

As to relevant factual matter, this Court finds established the following facts:

The Petitioner A…, married to B… with the Portuguese Tax Identification numbers… and… respectively, is registered for the exercise of the activity "Tourist apartments without restaurant" CAE 55123, since 2012-02-03, being framed in the normal quarterly periodicity regime in VAT and in the organized accounting regime, by option, in IRS.

The Petitioners are both liable parties not resident in national territory and in accordance with the computer system to which the AT has access, was appointed as tax representative of both the firm F…, Lda NIPC:….

The Petitioners, in 2012, 2013, 2014, were owners of a property registered in the urban real estate register of the Union of parishes of… and… under article…", located in "…", which they acquired from C… SA NIPC….

The said property was acquired on 03-08-2011.

Between the Petitioner husband and the selling Company a tourism exploitation assignment contract of the unit "…" was entered into, in accordance with which the company C… SA was granted the right to constitute a commercial company for the management of "…", a situation that materialized with the creation of company D… SA NIPC….

On 27-06-2011, a tourism exploitation assignment contract of the said property was entered into between the Petitioners and company C… (Portugal) and D…, SA.

The Petitioners were notified of the following acts:

As to the fiscal period of 2012, the act of additional assessment of Personal Income Tax (IRS) no. 2016…, and respective act of assessment of compensatory interest no. 2016… and the Statement of Account Settlement no. 2016…, from which resulted a calculated income of €33,179.50, and a total amount to be paid of €7,492.87;

As to the fiscal period of 2013, the act of additional assessment of Personal Income Tax (IRS) no. 2016…, and respective act of assessment of compensatory interest no. 2016… and the Statement of Account Settlement no. 2016…, from which resulted a calculated income of €3,528.45, and a total amount to be paid of €1,075.76;

As to the fiscal period of 2014, the act of additional assessment of Personal Income Tax (IRS) no. 2016…, and respective act of assessment of compensatory interest no. 2016… and the Statement of Account Settlement no. 2016…, from which resulted a calculated income of €18,117.68, and a total amount to be paid of €5,313.79.

F - FACTS NOT PROVEN

Of the facts with interest for the decision of the case, contained in the claim, all subject to concrete analysis, those not contained in the factuality above described were not proven.

G - QUESTIONS TO BE DECIDED

Attending to the positions of the parties, assumed in the arguments presented, the following constitute central questions to be decided, which it is therefore necessary to examine and decide:

The one alleged by the Petitioner:

The declaration of illegality of the tax assessment acts under Personal Income Tax (IRS) no. 2016…, no. 2016… and 2016… relating to the years 2012, 2013 and 2014, in the total amount of 13,881.62€ (thirteen thousand eight hundred and eighty-one euros and sixty-two cents).

H - MATTER OF LAW

Attending to the positions of the parties assumed in the pleadings presented, the central question to be decided by the present Arbitral Court consists in examining the legality of the Personal Income Tax (IRS) assessment acts.

The Petitioner in its request for arbitral pronouncement raises two main requests, respectively:

The lack, incongruity or insufficiency of the reasoning in general of the inspection report;

Vice in the determination of the legal tax framing of the income obtained by the Petitioner in the additional assessment notes.

The Petitioner requests, subsidiarily, should the present Court understand that there is no vice as to the acts challenged and the proceedings of the above-mentioned requests, that the expenses incurred by the Petitioner be considered for deduction from Category F income, in accordance with article 41 of the IRS Code.

Let us proceed immediately to examine the first request of the Petitioner, concerning the alleged lack, incongruity or insufficiency of the reasoning in general of the inspection report.

The Petitioner requests that the assessment subject to the present arbitral request suffers from lack of reasoning, since the recipient cannot know what facts it is based on, in manifest violation of article 77(1) and (2) of the General Tax Law.

As to the said request, the present court has the following to say:

The Tax Administration has the duty to reason the assessment acts challenged in harmony with the principle set forth in article 268 of the Constitution and taken up in articles 125 of the Code of Administrative Procedure and 77 of the General Tax Law.

It results from article 77(1) and (2) of the General Tax Law the following: "1 - The decision of proceedings is always reasoned through a succinct exposition of the reasons of fact and law that motivated it, the reasoning being capable of consisting in mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those that form part of the tax inspection report. 2 - The reasoning of tax acts may be done summarily, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations of calculation of the taxable matter and the tax.".

And as to the question of reasoning, the Supreme Court of Justice decided, in the context of process no. 01674/13, of 03-12-2014, that: "The reasoning referred to in this legal provision must, therefore, be based on reasons of fact and law that formally support the administrative decision.

And, as is consensual in jurisprudence, the requirements of reasoning are not rigid, varying in accordance with the type of act and the concrete circumstances in which it was made: the act will be sufficiently reasoned when the administered person, placed in the position of normal recipient - the reasonable man referred to in article 487(2) of the Civil Code – can come to know the factual and legal reasons that are at its genesis, in order to allow him to choose, in an informed manner, between acceptance of the act or the activation of the legal means of challenge, and so that, in the latter circumstance, the court can also exercise effective control of the legality of the act, assessing its correctness in the face of its contextual reasoning.

This means that the reasoning, even if made by referral or in summary form, cannot fail to be clear, congruent and enclose the aspects of fact and law that allow knowing the cognitive and evaluative route pursued by the Administration in determining the act. And, therefore, the insufficiency, obscurity and contradiction of the motivation are equivalent to lack of reasoning (article 125(2) of the Code of Administrative Procedure), for preventing a full apprehension of the iter volitivo and cognitive that determined the Administration to practice the act with the decisory sense that it conferred.

As regards the reasoning of law, the jurisprudence of this Court has decided that for the same to be considered sufficient it is not always necessary the indication of the applicable legal provisions, sufficient being the reference to the pertinent principles, to the legal regime or to a well-determined legal framework, the act being to be considered reasoned in law when it falls within a legal framework. As is noted in the award of the Full Section of 25/03/93, in proc. no. 27387, the duty of reasoning is assured whenever, notwithstanding the non-existence of express reference to any legal provision or legal principle, the decision falls within a determined and unequivocal legal framework, perfectly cognizable from the point of view of a normal recipient, concluding thus that there will be reasoning in law whenever, in the face of the text of the act, the legal reasons that determined it are perfectly intelligible."

In an identical sense, says ANTÓNIO LIMA GUERREIRO in note to article 77 of the General Tax Law: «It has been uniform jurisprudence of the Supreme Administrative Court (followed from the Award of 11 December 1991, appeal 11897), that the failure to notify the reasoning does not affect the legality of the act. It is an element external to the act and not a requirement of its perfection. The failure to notify the reasoning leads only to the consequence provided in article 37 of the Tax Procedure Code, in accordance with which, if the notification does not contain all the requirements provided in the law, the interested party may request the notification of those that have been omitted or the passage of a certified copy that contains them free of any payment, with the period for reclamation, appeal or judicial challenge only counting from the notification of the omitted facts or the passage of a certified copy that contains them.»

It results from the foregoing that for the reasoning required by article 77 of the General Tax Law, it is absolutely fundamental that the acts contain sufficient elements to understand the aspects of fact and law that allow knowing the cognitive and evaluative route pursued by the Administration in determining the act.

This evaluation is made from the point of view of a normal recipient, and as can be gathered from the acts issued by the AT, the aspects of fact and law that allow knowing the cognitive and evaluative route pursued by the Administration in determining the act become comprehensible to a normal recipient.

From the reading of the inspection report, which was at the basis of the corrections now under examination, it results that an average man placed in the position of recipient is able to apprehend its meaning and conclusion, and from it flow sufficient elements to understand the aspects of fact and law that allow knowing the cognitive and evaluative route pursued by the Administration in determining the act.

However, and if there were lack of reasoning, the Petitioner could always make use of the mechanism provided in article 37 of the Tax Procedure Code, which would allow her to "request the notification of the requirements that have been omitted or the passage of a certified copy that contains them, free of any payment".

Being to be concluded that the AT proceeded in accordance with the provision in article 77 of the General Tax Law, and as such the vice of lack of reasoning does not exist.

In these terms and in all other respects regarding law, this Court understands that the request of the Petitioner as to the vice of lack of reasoning is dismissed.

Let us proceed next to the examination of the second request, which consists in determining the legal tax framing of the income obtained from the exploitation of the property, namely: whether the same are framing as Category B income as the Petitioner requests or in Category F as the AT argues.

The crux of the present question is limited to the analysis of the facts and the proof brought to the records, and on the basis of that analysis to ascertain whether the legal requirements of income within Category B under IRS are fulfilled.

First of all, let us see, as concerns the interpretation of Tax Norms, for the case sub judice, the provision in article 11 of the General Tax Law:

"Article 11

Interpretation

In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

Whenever, in tax norms, terms proper to other branches of law are employed, the same must be interpreted in the same sense that they have there, unless otherwise directly results from the law.

Persisting doubt over the meaning of the applicable norms of incidence, attention must be paid to the economic substance of the tax facts.

Gaps resulting from tax norms covered in the reservation of law of the Assembly of the Republic are not susceptible to analogical integration."

To this provision, it is also necessary to resort to the general principles of interpretation of laws, as provided by article 9 of the Civil Code by referral of article 11(1) of the General Tax Law, which establishes the following:

"Article 9

Interpretation of the law

The interpretation should not be limited to the letter of the law, but reconstruct from the texts the legislative thought, taking into account above all the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

The legislative thought which does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, cannot, however, be considered by the interpreter.

In fixing the meaning and scope of the law, the interpreter will presume that the legislator established the most correct solutions and knew how to express its thought in adequate terms."

Before the said legal provision, referring to the interpretation of Tax Norms, it becomes relevant to make a brief reference and legal-framework of the different types of income available to a liable party.

The Personal Income Tax was introduced by the fiscal reform on 1 January 1989, with the objective of codification and fiscal simplification. SALDANHA SANCHES tells us, on the fiscal reform of 1989, that "Natural persons began to be taxed as natural persons holding various types of income and as companies of a natural person nature, without resorting to commercial companies (J.L. Saldanha Sanches, Manual of Tax Law, 3rd Ed. Coimbra Publisher)".

And in accordance with the Preamble of the IRS Code of 1 January 1989, the distinction among the different categories of income, was due to the following:

"The basic innovation resides in the substitution of the current mixed system, with preponderance of the cedulary elements, by the formula of unitary taxation, achieving globally the individual income, informing the model now adopted for the taxation of natural persons.

In light of the modern requirements of equity, the unitary solution is unequivocally superior either to the pure cedulary system, consisting of this in separate and mutually unarticulated taxes, falling on the different sources of income, or to the composite system itself, resulting, as a rule, from evolution operated from a structure originally cedulary, in which to a scheme of partial taxes is superimposed a second-level taxation with global character."

"Even in systems of global taxation of income persists the differentiated treatment of the different types of personal income, cannot, in truth, be dispensed with, as a prior operation, the analysis or identification of income according to their different origins; only after proceeding to the synthesis of income from the various categories, subjecting their aggregated value to a single rate table.

The global "unique" tax thus entails, in greater or lesser measure, analytical elements which, in the perspective of passage from cedulary systems to the "unique" tax, constitute reminiscence of the separate treatment, that in the previous system was done in differentiated schedules until the end.

It becomes thus possible, without prejudice to the globalizing character of taxation, to maintain pronounced analytical characteristics, ranging from the qualitative discrimination of income through specific deductions in a determined category to the consecration of withholding at the source only in the categories in which this method proves technically possible."

Regarding Categories B and F, let us see what the said preamble tells us:

"7 - Categories A and B relate to income from work. A choice was made to create two distinct categories for dependent and independent work, respectively, with own rules concerning incidence, determination of taxable matter and collection, providing for a special deduction for income from the first of these categories.

As regards incidence, was maintained the breadth of the concept of dependent work income, as results from the legislation now replaced.

A more rigorous conceptual formulation of independent work was carried out, in face of the difficulty of delimiting the boundary of this income category, having been elaborated a list of activities susceptible of being exercised on their own account, although different from the table annexed to the Professional Tax Code.

Taxed as income attributable to independent work are the copyright on intellectual works and income resulting from the concession or temporary assignment of patents of invention, exploitation licenses, models, marks, etc., as well as those received by the transfer of Know-how, both when obtained by original titleholders.

Inevitably there will always remain a margin of indefinition as regards the delimitation of work income as those obtained by businessmen, and hence that are included under business and industrial income (Category C) those obtained in certain activities situated in zones of confluence.

8 - The idea that income from work should be taxed less heavily than those from capital is at the basis of the hierarchy of rates applicable to different taxes in cedulary systems."

(…) "11 - In the field of real property income (Category F), are included in the base of incidence only the income actually received from leased properties, both urban and rural, and not already, as was the case under the real property tax system, the locative value or ground rent of unleased properties, for it is aimed to tax only the income actually obtained.

Taxed are still the income arising from the assignment of exploitation of commercial or industrial establishments.

Concomitantly, a municipal contribution on the patrimonial value of rural and urban properties is created, due by their owners, being the collection of this deducted from the collection of IRS, in the part proportional to the income of properties amalgamated and up to the amount thereof.

Beyond this deduction, also in this income category the deduction is provided for all expenses relating to properties and not only the presumed charges provided for in the current regime of the real property tax."(our emphasis)

From the provision in the preamble and the regime provided for in the IRS Code, there results a clear distinction of the categories, being that Categories A and B, stem from the work of the liable party, on behalf of another or through its "individual enterprise".

The distinction of real property income or Category F income, arise in a category apart from capital income (Category E).

Let us pay attention to J.L. Saldanha Sanches, Manual of Tax Law, 3rd Ed. Coimbra Publisher: Real property income has substantial nature of capital income - it arises from the application of real estate capital - but counts with an autonomous normative provision. The justification for the existence of a distinct taxation of capital income in the concept of IRS resides in the fact that it is necessary to spend expenses for the maintenance of the productive source (the real properties).

Let us see the legislation applicable to the situation now under analysis, in concrete, article 3(1)(a) and article 3(2)(a) and article 4(1)(h), all of the IRS Code:

"Income from Category B":

"1 - Consider themselves to be business and professional income:

a) Those arising from the exercise of any commercial, industrial, agricultural, forestry or livestock activity;

(…)

2 - Are still considered income of this category:

a) Real property income attributable to activities generating business and professional income."

And by commercial and industrial, agricultural, forestry and livestock activities, it further establishes article 4(1)(h) of the IRS Code:

"1 - Are considered to be commercial and industrial activities, in particular, the following: h) Hotel activities and similar, catering and beverages, as well as the sale or exploitation of the right of real property of periodic habitation;".

And attending to the meaning to be conferred to the concept of commercial, industrial activity, provided for in article 3(1), the jurisprudence has already pronounced itself uniformly and extensively, more recently, we have the Award of the Supreme Administrative Court, in process 0580/15 of 02/24/2016, and equally the Award of 4-12-91, made in process no. 13398, published in Appendix to the Official Gazette of 10-8-94, page 1430; of 29-11-1995, process no. 12130, published in Appendix to the Official Gazette of 14-11-97, page 2737; of 15-5-1996, process no. 20244, published in Appendix to the Official Gazette of 18-5-98, page 1646; of 23-10-1996, process no. 20381, published in Appendix to the Official Gazette of 28-12-98, page 3020; of 1-4-1998, made in process no. 20832, published in Appendix to the Official Gazette of 30-11-2001, page 1116; of 3-5-2000, process no. 22608, published in Appendix to the Official Gazette of 23-12-2002, page 1620; of 2-5-2005, process no. 371/04

Let us pay attention to the said award no. 0580/15 of 02/24/2016 of the Supreme Administrative Court:

"The tax law does not define what is the exercise of a commercial or industrial activity, and the jurisprudence of the Supreme Administrative Court long established, (…) has accepted that commercial activity is revealed in an action of mediation between supply and demand with susceptibility of generating profits, gains, income for anyone who undertakes it, which susceptibility may not, in the end, be realized and may even generate losses, while industrial activity is an activity of construction or alteration of goods. The jurisprudence of the Supreme Administrative Court, established during the period of industrial contribution, maintains in face of IRS, in this particular, all its current relevance when indicating that the concept of commerce adopted by the tax legislator does not identify with the legal-private concept of the Commercial Code, being a concept of its own, of an economic nature where is inscribed any activity (even if expressed in a sole act) that has as its objective purpose profit, as was said in the Award of the S.A.C., of 12/05/65, in App. Official Gazette, of 01/03/66 and of 03/12/91 and 26/02/92, in Appeals. 13.398 and 13.529). It points out there that, as long as there exists an increase in value arising to a patrimony by virtue of the exercise of an economic activity (even if expressed in a sole act) translated into creation of an economic utility, resulting from any relation of the agent/taxpayer with a third party in which, satisfying the economic needs of this, exits increased the patrimony of the former (mediation between supply and demand) there will be a commercial activity and, if there exists the incorporation of new utilities in the good object of the activity in question, there will be an industrial activity.

Analyzed thus the commercial and industrial activity, stays outside it all economic reality in which existing, although, also an increase of any patrimony by virtue of activity with itself, of fortuitous appreciation of goods or in which that increase is not the objective purpose of the relation with a third party."

In consonance with the Award above transcribed and the other Awards listed, there results the following jurisprudential position: «the concept of commercial or industrial activity must 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 in matter, in both cases with speculative purposes, that is, with the objective of obtaining profits».

Succinctly, the concept of commercial, industrial activity is any activity (even if expressed in a sole act) that has as its objective purpose profit.

We can state that, in general terms, the activity of exploitation of a property for periodic habitation and tourism is a commercial activity, and as such falls within the legal framework of article 3(1)(a) and article 4(1)(h), both of the IRS Code.

However, and citing Manuel Pires "dealing with, as it is, individual enterprises, the IRS Code establishes that are only "considered revenues and costs those relating to goods or values that form part of the assets of the individual enterprise of the liable party or that are affected by the business and professional activities developed by him"(article 29). Thus, if a businessman is owner of a property that has nothing to do with the exercise of its business or professional activity, the respective income will be taxed in Category F and not in Category B [cfr. Article 3, no. 2, (a) by opposition]." (Manuel Pires, Rita Calçada Pires, 2012, 5th Ed., Almedina).

Now, and attending to the position of the parties, the question to be decided by the present Court consists in determining whether the Petitioner directly develops the commercial activity of exploitation of the property for periodic habitation registered in the urban real estate register of the Union of parishes of… and… under article… fraction "F".

Let us see:

The Petitioners acquired the above mentioned property, located in "…", from company C… S.A., and entered into with this same company a tourism exploitation assignment contract of unit….

It was provided in the tourism exploitation assignment contract that company C… S.A. would constitute a company that would be responsible for the tourism exploitation of unit….

Company that was constituted with the name D… S.A..

Note that as to the factual matter and respective analysis of the documentary and testimonial proof presented, and in concrete of the analysis of the tourism exploitation contract entered into with unit "…", in consonance with the principles of immediate observation, orality and concentration, it falls to the Court to freely assess the proof, according to its prudent conviction, (article 607(5) of the Code of Civil Procedure).

As to the principle of free assessment of proof enshrined in article 607(5) of the Code of Civil Procedure, we note the award of the S.A.C. in process 907/13.5TBPTG.E1.S1 of 02/11/2017 "It is important, once again, to note that in the judgment of factual matters and in the sequence of the principles of immediate observation, orality and concentration, the court freely assesses the proofs, according to its prudent conviction, article 607(5), of the Code of Civil Procedure (principle of free assessment of proof), that is, after the proof is produced, the court draws its conclusions, in accordance with its freshly collected impressions and the conviction that through them was being generated in its spirit, in accordance with the rules of science, reasoning, and the maxims of experience, that may be applicable, unless foreseen in no. 2 of the same article. And this free assessment of proofs must be understood as a convinced assessment of the judge, subordinated only to its experience and prudence and always guided by factors of probability and never of absolute certainties, these almost always intangible, never understood in an arbitrary sense, of mere whim or simple product of the moment, but as a serene and objective analysis of all the factual elements that were brought to judgment."

From the assessment of the proof produced, of the document joined to the records (tourism exploitation contract of unit "…"), which is partially transcribed:

"3.4 "Reservations. Subject to the rights of the OWNER as established in Section 3.10 below, the OWNER authorizes the MANAGER to accept reservations for the occupation of the Unit by Guests for any period of time and at any time until, but not beyond, the expiration of the term of the Contract.

All reservations are binding upon the OWNER.

3.5 Rents. The OWNER grants to the MANAGER the sole and exclusive authority for tourism exploitation (rental), in its name, of the Unit at the rents that the MANAGER must establish, in its sole discretion, based on a series of factors, including, without limitation, occupancy levels, display rating, seasonal demand, changes in operational costs, rates of competing properties and other applicable conditions in a competitive market (all as determined by the MANAGER). By written request of the OWNER, the schedule of rents may be provided to the OWNER.

The MANAGER shall also have the right to introduce changes in the applicable rents, at its sole discretion, and in circumstances such as, but not limited to, prolonged duration, group discounts, manager or corporate discounts, package discounts and/or in similar situations and when the MANAGER considers it is advantageous to charge a reduced rate.

3.6 Remuneration. The OWNER grants a mandate to the MANAGEMENT COMPANY so that, in its own name and on behalf of the OWNER, the MANAGER or its agents (being accepted and understood by the OWNER that it will not collect part of this remuneration) may charge all remuneration relating to the exploitation of the Unit, being these remuneration subject to payments as specified in the Contract and to other expenses of the responsibility of the OWNER as established in this Contract.

The MANAGER must collect and remit any amounts related to the sale, use and/or other costs associated with the exploitation of the Unit.

3.7 Free Use. The OWNER acknowledges that the MANAGER must have authority, at its discretion and from time to time, to use the Unit for complementary uses in connection with the general promotion of the Resort and….

3.8 No Tourism Exploitation (Rental) by the OWNER. The OWNER accepts and agrees that, during the term of the Contract, it/she must not exploit, lease, rent or, otherwise, make the Unit available to third parties in exchange for a fee, rent or other payment (including if free), and the OWNER must not, in any way, advertise or allow or authorize any other person or entity to disclose the Unit as available.

If the OWNER violated this Section 3.8, the OWNER will have breached under this Contract and will be subject to the provided herein for such breach.

3.9 Use by Guests. Reservations for the Unit by Guests will be handled through the reservation system maintained by the MANAGER in accordance with the policies and procedures governing that reservation system.

The MANAGER must have the right to establish policies and procedures relating to access control and check-in and check-out procedures, including, without limitation, the right to require that all Guests remaining in the Unit present a valid credit card at check-in to pay for fees and expenses associated with the stay."

It results from the contractual clauses that the Petitioner, under the principle of freedom of contract, (article 405 of the Civil Code), transferred to company D… SA, the exclusivity of tourism exploitation of its property, as results from the clauses above transcribed and in concrete, let us see the provision in clause "3.8 - THE OWNER accepts and agrees that, during the term of the Contract, it/she must not exploit, lease, rent or, otherwise, make the Unit available to third parties in exchange for a fee, rent or other payment (including if free), and the OWNER must not, in any way, advertise or allow or authorize any other person or entity to disclose the Unit as available".

In fact, the Petitioner, beyond transferring the management of tourism exploitation of its property, bound itself expressly, under penalty of incurring sanctions, not to exploit the property for tourism purposes.

Therefore, the Petitioner cannot now invoke that it was exploiting the property, for there exists and joined to these records, a tourism exploitation contract entered into by it, developed exclusively by another entity.

In truth, the Petitioner did not demonstrate in these records the development of a business activity on this property, that activity of exploitation of apartments, enshrined in CAE "55123".

Before the foregoing, from the proof brought to the records, the present Court cannot reach any other conclusion, if not that company D… SA, managed in the fiscal periods here under consideration 2012 to 2014, the tourism exploitation of the property in an exclusive regime.

And attending to the jurisprudential and doctrinal position above cited, it would be necessary for the framing in Category B, that the liable party develops a business activity, as if it were an individual enterprise, because it is not sufficient to hold a property and declare that income in Category B.

It was incumbent on the liable party to demonstrate that it develops a commercial activity and that this activity consists in exploitation for periodic habitation, in accordance with CAE "55123".

Case the liable party does not develop this activity, the income is, (and subscribing to the position of Manuel Pires), taxed under Category F, and in the present records, it was not demonstrated that the income now under consideration are related to its business or commercial activity.

In these terms, the request of the Petitioners for framing of the income obtained, in Category B, is dismissed, by understanding this Court that the income obtained by the Petitioners arising from the exploitation of the property, are framing as provided in article 8(1) and article 8(2)(a) of the IRS Code, respectively in real property income or Category F.

Thus and attending to that the Court considered that the framing carried out by the Respondent in the assessment acts here challenged does not suffer from vice as to its correct insertion of the income in Category F, it falls to the present Court to look into the subsidiary request of the Petitioner as regards the consideration of other expenses, in the scope of the provision in article 41 of the IRS Code, which it shall do next:

The Petitioner requests that the expenses with wages of personnel, cleaning, electricity, gas and water, incurred by the Petitioners in the years 2012, 2013 and 2014, be considered, for deduction purposes under article 8 of the IRS Code;

However for the Arbitral Court to analyze the alleged expenses incurred by the Petitioner, it was incumbent upon it to enumerate in the facts brought to this Court, the specified value of the expenses it intended to have examined, as well as the respective documentary proof evidencing the said expenses.

In the case at hand, by the non-existence of facts brought to the records nor documentary proof, it prevents the Court from examining the legality and deductibility of expenses in Category F income as the Petitioner requested.

In these terms, understands the Arbitral Court that the request of the Petitioner as to the deductibility of expenses from Category F income, as it requested, is considered dismissed.

The Arbitral Court, pursuant to articles 608(2), 663(2) and 679 of the Code of Civil Procedure by application of article 29 of the Legal Framework for Tax Arbitration, is not obliged to examine all arguments alleged by the Petitioner nor in the response given by the Respondent, when the decision becomes prejudiced by the solution already rendered, as is the case in these records, reason for which the remaining questions submitted to request of pronouncement remain prejudiced for examination.

I - DECISION

Therefore, attending to all the foregoing, the present Arbitral Court decides:

To dismiss the request for declaration of illegality of the Personal Income Tax (IRS) assessment acts no. 2016…, no. 2016… and 2016… relating to the years 2012, 2013 and 2014, in the total amount of 13,881.62€ (thirteen thousand eight hundred and eighty-one euros and sixty-two cents).

To dismiss the request for deductibility of expenses from Category F income of the IRS Code.

The value of the process is fixed at 13,881.62€, which is equivalent to the value of the assessment attending to the economic value of the process, measured by the value of the tax assessments challenged, and in conformity the costs are fixed, in the respective amount of 918.00€ (nine hundred and eighteen euros), to the charge of the Petitioner in accordance with article 12(2) of the Legal Framework for Tax Arbitration, article 4 of the Regulation of Procedural and Process Costs in Tax Arbitration and Table I annexed to the latter. – no. 10 of article 35, and nos. 1, 4 and 5 of article 43 of the General Tax Law, articles 5(1)(a) of the Regulation of Procedural and Process Costs in Tax, 97-A(1)(a) of the Tax Procedure Code and 559 of the Code of Civil Procedure).

Notify.

Lisbon, 29 January 2018

The Arbitrator

Rita Guerra Alves