IRS Tax on Tourist Apartment Income: CAAD Arbitration on Tourism Enterprise Exploitation (Case 289/2017-T)

ARBITRAL DECISION

I – REPORT

Request

The taxpayer no. …, resident in …, …, …, Ireland, hereinafter referred to as the Claimant, submitted, on 24-04-2017, pursuant to the provisions of paragraph a) of article 2(1) and article 10 of Decree-Law No. 10/2011, of 20 January, which approves the Legal Regime of Arbitration in Tax Matters (RJAT), a request for arbitral pronouncement, in which the Respondent is the AT - Tax and Customs Authority, with a view to the annulment of the tax acts:

• Additional assessment of Personal Income Tax no. 2016 … referring to the year 2012;

• Additional assessment of Personal Income Tax no. 2016…, assessment of compensatory interest no. 2016 … and the statement of account adjustment no. 2016…, referring to 2013;

• Additional assessment of Personal Income Tax no. 2016…, the respective assessment of compensatory interest no. 2016… and statement of account adjustment no. 2016…, referring to the year 2014.

Grounds of the Request

To support its request, the Claimant alleges, in summary:

• On 5 June 2007, the Claimant entered into two promise-to-purchase contracts with the company B…, S.A. (NIPC …), having as their object an immovable property designated "Apartment S504" and another immovable property designated "Apartment S505", registered in the urban property matrix of the Union of parishes of … and … under article…, under letters D and E, located in the "Apartments …" development;

• On the same date, the Claimant signed with B…, S.A. two contracts for the cession of tourist exploitation of the units … S504 and S505 identified above, reserving for itself the right to appoint a management entity, which it later implemented with the incorporation of the company C…, S.A., NIPC … (hereinafter "C…");

• On 8 February 2008, the constitutive deed of the tourist development "Apartments …" was deposited with the then General Directorate of Tourism, and on 7 July 2008 a tourist use license was granted to it by the Municipal Chamber of …;

• From 30 January 2008 onwards, the Claimant began to exercise the activity of operating tourist apartments, being registered for this purpose with CAE 55123 "tourist apartments without restaurant" and classified in the normal periodic VAT regime quarterly and in the regime of organized accounting, by choice, for IRS purposes (Category B);

• Pursuant to the aforementioned contract for cession of tourist exploitation, the managing entity (C…) would exploit the tourist apartments of the units … on behalf of ("on behalf") the respective owners.

• Thus, the exploitation of the aforementioned tourist apartments was carried out directly by the Claimant, using the managing entity (C…) to operationalize this tourist exploitation;

• In exchange for the management services, the parties agreed that the managing entity (C…) would receive remuneration;

• It was, however, the responsibility of the Claimant to keep the units completely operational, which is why it was the one that acquired all the equipment and furnishings for the units;

• The VAT amount supported with these expenses gave rise to a VAT refund in the amount of € 22,916.77, in accordance with the final decision of a tax inspection action initiated by the Finance Directorate of Faro, in which it was recognized precisely that, in accordance with Information no. … of 17 September 2010 of the VAT Services Directorate — Design Division "(...) we are faced with a mandate contract in which the 'owner' of the Unit appoints another entity to, on its behalf, exercise the activity of tourist accommodation".

• The Claimant was equipped with all means of control of the results of the exploitation of the apartments, making it evident that the managing company always acted on its behalf and in its interest;

• The income from the tourist exploitation directly affects the sphere of the Claimant, such that the activity of exploitation of the tourist apartments is developed by the respective owners, with no transfer of the "business risk" to the managing entity (C…) nor this participating in the exploitative activity with its own interest;

• Even if it were understood, as the Tax Authority did, that the Claimant's activity falls within Category F, all expenses supported should always be taken into account, according to the process no. 1793/94 analyzed by the Tax Administration in which it was stated that expenses relating to "cleaning woman, gardener's salary, electricity, water and gas spent, with house rental with equipment, repairs and paintings, property insurance premiums and property administration" were deductible — and, furthermore, in accordance with the Judgment handed down by the Administrative Arbitration Center (CAAD) in process no. 43512014-T, of 10.11.2014, in which it was argued that expenses for IMI, for the supply and installation of kitchen equipment, for the supply of water, for work accident insurance and expenses for the payment of contributions to Social Security for the cleaning employee and porter are deductible.

• The reasoning of the Final Tax Inspection Report, which embodies the motivation of the tax acts that are the object of the present arbitral request, is neither congruent nor clear.

• The Tax Administration is subject to the legal duty of not only indicating all facts clearly and coherently, but also of indicating and supporting its conclusions with the corresponding legal provisions.

• In the case at issue, the Tax Administration understood that the Claimant's conduct is passive and for that reason the income that it declared as being income from category B should instead be taxed as income from category F, in accordance with Circular no. 5/2013 of 2 July 2013.

• However, since the Claimant is the holder of the exploitation of the tourist apartment described above and has ceded the exploitation of the same to C…, while maintaining in its sphere the risk of exploitation, it is incomprehensible how the Claimant exercises the tourist exploitation in a passive manner.

• Furthermore, the taxation within the scope of the provision in paragraph a) of article 3(1) of the IRC Code and paragraph h) of article 4(1) of the same statute does not condition the taxation within the scope of the aforementioned category to the alleged active or passive exercise of the activity, so it is incomprehensible the conclusion reached by the Tax Inspection Services.

• It appears from the reading of the Tax Inspection Report that the understanding of the Tax Inspection Services is nothing more than a conclusive judgment that has no support in the facts described above, nor even in the law, but only in a circular which, with due respect, is not above the law.

• Thus, as unanimously accepted in jurisprudence, where the facts are not indicated in the reasoning but only conclusive judgments of the decision, the act is not shown to be reasoned, as the recipient of the act is unable to know whether all the facts that actually took place were taken into consideration and even, based on them, whether the conclusions that were stated can be reached.

• It should therefore be concluded that the Tax Inspection Services, by not supporting in the Conclusions of the Final Tax Inspection Report, clearly and unequivocally, the facts on which they based themselves to conclude that the income earned by the Claimant were income from category F, did not comply with the legal duty, constitutionally enshrined, of express, clear and thorough reasoning of the decisions to which this duty applies, and therefore the contested tax acts should be annulled.

• Moreover, this circumstance is added to the fact that, in accordance with article 75(1) of the TGL "The statements of the taxpayers presented in accordance with the provisions of the law are presumed to be true and made in good faith, as well as the data and assessments recorded in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends"

• As far as we are aware, the Tax Inspection Services fail to fulfill the burden of proof of the verification of the respective indications or assumptions of taxation that falls upon them, in accordance with article 74(1) of the TGL, that is, of the legal assumptions of their action, in light of the legal presumption of truthfulness of the statements of taxpayers (article 75 of the TGL), when the judgment underlying the disregard of the operations results from conclusions of a generic character, without a case-by-case analysis of the Claimant's activity.

• In fact, article 75(1) of the TGL establishes a legal presumption of truthfulness of the statements of taxable persons, which means that, if the Tax Administration does not demonstrate the lack of correspondence with the reality of the content of the statements, accounting and records, these are considered true.

• For this purpose, it is sufficient that the Tax Administration demonstrates the existence of "well-founded indications" that behind the documents is not the reality that they normally reflect and prove, that is, in the concrete case, the Tax Inspection Services should have demonstrated which objective facts demonstrate that the tourist exploitation in question constitutes a source of income from category F and not from income from Category B, as declared by the Claimant;

• The Tax Inspection Services did not demonstrate, with respect to the Claimant, the existence of "well-founded indications" that demonstrate that the income in question are income from Category F and not from Category B as declared;

• As the Claimant understood that the exploitative activity carried out by it and the income generated in that context were earned within the scope of a business activity (even though they result from the exploitation of an immovable property), it treated the same within the scope of Category B of the IRS, by force of the principle of the preponderance of this Category in relation to income that falls within other categories of income, but that are obtained in connection with a business activity (in this case, a commercial activity)

• However, the Tax Inspection Services understood that the income declared by the Claimant with reference to the years 2012, 2013 and 2014 were not income from category B, but from Category F, because "(...) the owners had no intervention whatsoever in obtaining the licensing. Thus the income that the taxable person earns comes from a purely passive manner, as a result of the pursuit of a commercial activity by the company C… ."

• Pursuant to paragraph a) of article 3(1) of the IRS Code "Business and professional income is considered to be (...) a) Income resulting from the exercise of any commercial, industrial, agricultural, silvicultural or livestock activity (...)".

• In turn, pursuant to paragraph h) of article 4(1) of the IRS Code "Commercial and industrial activities are considered to be, in particular, the following (...) h) Hotel and similar activities, catering and beverages, as well as the sale or exploitation of the real right of periodic housing (...)".

• It is established jurisprudence that "as long as there is an increase in value accruing to an asset by virtue of the exercise of an economic activity (even if expressed in a single act) translated into the creation of an economic utility, resulting from any relationship of the agent/taxpayer with a third party in which, satisfying the economic needs of the latter, the patrimony of the former is increased (mediation between supply and demand) there will be a commercial activity" (Judgment of the Supreme Administrative Court, Process no. 580/15, dated 24 February 2016, available at www.dqsi.pt)

• With respect to the provisions of the norms described above and specifically, of the taxation of income within the scope of Category B, MANUEL FAUSTINO states, by reference to successive amendments to the IRS Code, that "The legislator of the IRS Code sought to avoid the controversy by using a double technique: on the one hand, he ceased to refer to 'activities of a commercial or industrial nature' to mention 'commercial or industrial activities'; and on the other, although not running the risks of a taxative enumeration, he listed a large number of activities considered commercial and industrial, which includes all those whose qualification could raise doubts. It can be said, then, that the material criterion continues to be essentially an economic criterion and not a strictly legal criterion" [on the list of 4.11 (cf. IRS — Theory and Practice, Lisbon, Edifisco, 1993, p. 132).

• Similarly, JOSÉ GUILHERME XAVIER DE BASTO states that "A very important point to be highlighted and which is indeed a special characteristic of this category is its 'predominant character' in relation to income of any other category." (cf. IRS: Real Scope and Determination of Net Income, Coimbra Publisher, 2007, p. 169)

• The Author further states that "Predominance thus means that all income, of all kinds, that can be attributed to professional or business activity ends up being qualified as income from the category, integrating into its operating account for purposes of calculating the taxable profit which is, in principle, the taxable subject matter of the category." (work cited, p. 170).

• This understanding is also shared by RUI DUARTE MORAIS who states that "In this orientation, the law considers taxable in this category [category B] income of different kinds — which, if considered autonomously, would be insertable in other categories — obtained in connection with the exercise of a business or professional activity. We thus have that they are taxed in this category, among others, property income, capital income and capital gains, when obtained in connection with activities of a business or professional nature (art. 3°, no. 2)" (cf. On the IRS, Almedina, 2008, p. 86).

• Now, taking into account the legal provisions transcribed above and the doctrine stated, it is clear that all income determined within the scope of income-generating activities, namely those resulting from hotel and similar activities, are taxed by Category B.

• From the examination of the norms transcribed above it should be concluded that, for income to be imputable to income-generating business or professional activities, with the taxable person being registered with the respective CAE, it will only be necessary that the income earned be related to that activity. Which clearly happened in the concrete case.

• In fact, since income resulting from tourist exploitation is at issue, which is the activity exercised by the Claimant, they cannot be taxed as income from Category F, completely disconnected from the aforementioned commercial activity exercised.

• Thus, and for a better analysis of the issue — which the Tax Administration reduces to the passivity of the Claimant in the exercise of the tourist exploitation of her property — it is necessary to analyze the concept of activity in light of the provision in paragraph a) of article 3(1) of the IRS Code.

• With respect to the concept of "activity", the IRS Code does not define its scope, which is why it is necessary to interpret the aforementioned concept in accordance with article 11 of the TGL, that is, by resorting to the general rule provided in article 9 of the Civil Code and by resorting to other areas of law.

• And, although the Tax Administration argues, in a tax inspection, for a restrictive interpretation of the concept of "activity", considering that for purposes of taxation in category B only profits resulting from the direct exploitation of the Unit are admissible, the Claimant believes that this interpretation finds no support in the literal content of paragraph a) of article 3(1) of the IRS Code, which is why all results obtained during the exercise imputable to the activity of operating a tourist development should be considered, whether they are results from direct exploitation or whether they are results of the outsourcing of an entity to exploit the unit.

• The Tax Inspection Services understood that it was necessary to requalify the Claimant's income based on the understanding that "(...) Circular no. 5/2013 of 2013-07-02 states: 1- The activity of operating a tourist development when exercised directly by the owner, an individual, is considered a commercial activity provided that the taxable person has requested the registration of the development in the National Register of Tourist Developments. (...) 3 — When by virtue of a contract for cession of tourist exploitation, the owner of an immovable property suitable for such exploitation relinquishes proceeding with such tourist exploitation, transferring, by remuneration, to another such activity and the transfer being prior to the registration of the tourist development in the National Register of Tourist Developments, the income earned will be considered as property income, in accordance with article 8, no. 2 paragraph a) of the Code of Personal Income Tax (CIRC)"

• However, and before any other considerations, it must be stated that notwithstanding the Tax Administration being bound by compliance with administrative guidelines, in accordance with article 68-A(1) of the TGL, the reality is that these guidelines will always have to be subject to a judgment of legality, so they will only be valid to the extent of their intrinsic legality.

• Such guidelines are neither binding on individuals nor on courts.

• It is therefore indisputable that administrative circulars that create additional obligations or new assumptions not expressly foreseen in the law violate the provisions of articles 103(2) and (3) of the CRP and article 8(2) of the TGL and, consequently, do not bind individuals (in this case, the Claimant) who, by force of those precepts and article 112(1) of the CRP, are only subject to regulations contained in legislative acts materialized in laws, decree-laws and regional legislative decrees.

• Furthermore, and by manifest relevance to the concrete case, it is not understood how the Tax Inspection Services concluded that the income obtained by the Claimant did not constitute income from Category B of the IRS Code by virtue of the cession of tourist exploitation, when with regard to the cession of the exploitation of local accommodation establishments, the Tax Administration expressly understands that the income obtained by the owners and cedents of the exploitation of the establishment — as happens in the concrete case in which the Claimant is the possessor and cedent of the tourist exploitation — are taxed within the scope of Category B.

• In fact, pursuant to Circular Letter no. 20180 of 19 August 2015, the Tax Administration understood that the income of taxable persons operating local accommodation establishments can be taxed as follows:

• It is not understood how, in light of the same legal provision – paragraph a) of article 3(1) of the IRS Code – the Tax Administration takes two such disparate positions.

• The Tax Administration is treating in a different manner two similar situations, since in each of the cases the owners, having opened an activity within the scope of Category B of the IRS and being holders of the right to tourist exploitation, ceded that right of exploitation to third parties, which constitutes manifestly a violation of the constitutional principle of equality, so also for this reason the tax acts are shown to be illegal.

Response

Regularly notified, the Tax Authority responded to the contestation, defending the maintenance of the assessment acts, and alleging, in summary, the following:

• Between the Claimant and the selling company was signed a contract for cession of tourist exploitation of the unit …, pursuant to which company B… SA was granted the right to constitute a commercial company for the management of the "…", a situation that it later implemented with the incorporation of the company C… SA NIPC … (hereinafter referred to only as C…);

• On 05-08-2007, on the same date as the acquisition of the immovable property, a contract for cession of tourist exploitation of the aforementioned immovable properties was concluded between the Claimant, B… (Portugal) and C…, SA;

• As a result of that contract, the tourist exploitation of the immovable properties in question is developed through the services of the company C…, SA, which holds the exclusive authorization to exploit the immovable property in question on its own account for tourist purposes;

• In these terms, the Claimant mandated the Managing company, C…, SA to, in its own name and on its own account receive the remuneration relating to the exploitation of its immovable property, being granted the right to retain 25% of the gross revenue from the respective exploitation;

• It also follows from the contract that the immovable property is managed and maintained by the company C…, SA, which also manages short-term rentals, collecting the amounts due, and providing all other associated services, such as maintenance, cleaning and painting, holding control of the keys to each immovable property;

• Being that the Managing company is responsible, including, for the monthly allocation of 5% of the gross revenue obtained from tourist exploitation for the establishment of a common fund (the "Reserve Fund"), in order to facilitate the financing of improvements to each unit (clause 3.13 of the cession contract);

• It is also important to note that the Managing company makes available to the owner (the now Claimant), the amounts contractually agreed, such that, pursuant to clause 20.4.2 of the cession contract, in the first five years of the aforementioned contract, the Managing company guarantees the Claimant a minimum guaranteed return, which consists of a minimum annual remuneration of 5% calculated on the purchase price of each immovable property;

• Furthermore, note that in clause 20 of the aforementioned contract for cession of exploitation it further states that: «[...] THE FIRST CONTRACTING PARTY acknowledges and agrees that the execution of this Contract and its participation in the Tourist Exploitation for the Unit are not optional, constituting a requirement for the ownership of the Unit in accordance with applicable legislation.»

• The Claimant did not request registration of the tourist development in the National Register of Tourist Developments;

• The Claimant does not hold and does not exploit, within the scope of this activity, any immovable property;

• As for the alleged lack of reasoning of the corrections now contested, such understanding must be disagreed with, not least because, from a reading of the inspection report it is apparent that an average person, placed in the position of recipient, is able to grasp its meaning and conclusion;

• As for this subject of reasoning, the jurisprudence of the Supreme Administrative Court (STA) has uniformly understood that the reasoning of the act is a relative concept that varies according to the type of act and the circumstances of the concrete case, and it is considered that there is sufficient reasoning when this allows a normal recipient to understand the cognitive and evaluative path followed by the author of the act, that is, when the recipient can know the reasons that led the author of the act to decide that way and not another;

• However, if there is a situation of lack or insufficiency of reasoning – a hypothesis which only in theory and without conceding is admitted, out of caution and a duty of representation – it was the responsibility of the Claimant to use the mechanism provided for in article 37 of the Tax Procedure and Process Code (CPPT) and request the respective notification or issuance of the certificate in accordance;

• Thus, even if the act under judgment suffered deficiencies at the level of the reasoned discourse – which is only hypothetically admitted for academic caution – such deficiencies would be degraded into mere non-essential irregularities, since, nonetheless, such deficiencies allow the full clarification of its recipient, enabling it to contest them, as, indeed, the Claimant did by way of the present request for arbitral pronouncement;

• Whence the application to the present case of the principle of administrative act utilization would always be justified;

• As for the error as to the assumptions, the law expressly states (art. 3, no. 1, al. a) of CIRS) that business income includes income resulting from the exercise of any commercial activity;

• Searching in a Portuguese dictionary for the meaning of the word "exercise" (exercício), it is found that this corresponds to the act of exercising or practicing, to the practice and use of something, therefore, for what concerns us here, to the performance of a professional activity;

• That is, the use of the word "exercise" in the wording given to the rule, as opposed to the words used in article 8 of the CIRS, to define what is income from category F, has underlying the practice of acts with a certain purpose which, in this case, will be the obtaining of profit;

• Should there be doubts, resorting to the Judgment of the STA handed down in process 01622/15, on 11.01.2017, we have it as certain that: «[...] 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. But the IRS code, in its third article does not use only the concept of commercial or industrial activity, as the Code of industrial contribution formerly did, also using the concept of business and professional income from which, those obtained in the exercise of a commercial or industrial activity, are one of the possible ones to be framed there.»;

• And further in the same judgment: «[...] To the concept of the exercise of a business activity, not defined in tax legislation, is necessarily linked the idea of stable or habitual exercise of a commercial activity as a means of livelihood, even though without perfect continuity, as happens with activities which, by their very nature, can only be exercised at certain times or from time to time, not ceasing, for that reason, to constitute, still, a normal and regular performance of one or more commercial or industrial activities. Moreover, the profit objective must be directly associated with the acts that qualify or identify the profession in question, it not being sufficient that such profit objective can be merely an accessory purpose of that practice. The profit objective is the main, if not the sole, motive of all business activity and its absence or existence in a merely accessory manner allows to foresee that we are not in the face of a business activity.(...) The inclusion of business income in category B of the IRS requires the elimination of the possibility of inclusion in other categories of income. But business income, to exist, in accordance with the provision of art. 4, no. 1 CIRS respects the exercise of genuine activities so it cannot constitute income of a commercial or industrial nature the acts of management of private property.»;

• What leads us to conclude, following the cited jurisprudence, that the «(...) CIRS does not allow fictitiously the exercise of a business activity where it does not exist. The income of business activities will be taxed as such and the income that does not fit here, because no business activity exists will be taxed in its proper seat, (...)» since such acts do not correspond to the exercise of an activity but rather constitute "(...) mere acts of management, in terms of civil law of their private property(...)».

• Thus, claiming, as the Claimant does, that the fact that it declared the beginning of activity, affirming the intention to exercise an activity of tourist exploitation (when, in fact, nothing more was done beyond acquiring an immovable property), should be valued as sufficient for the qualification of income as imputable to category B, when it does not actually exercise the declared activity, would give primacy to form over substance, contradicting the most elementary principles of tax law;

• In addition to all this is added the position conveyed in the judgment of the TCA North, handed down in the scope of process 325/04, on 20.01.2005, which dealt with facts that find parallelism with those which now concern us, and in that judgment the position here defended by the AT was accepted, in which it is said: «(...) the qualification as income from category C (which comprises income imputable to the exercise of any activity of a commercial or industrial nature as long as earned by individual taxpayers) depends on the effective exercise of one of the activities listed in article 4 of the Code of Personal Income Tax. From the settled factual matter it follows that the challenger never came to exercise, in the establishments in question, any activity of a commercial or industrial nature and, for that reason, never obtained any income susceptible of being imputed to a commercial or industrial activity. He chose to cede the exploitation of the establishments to third parties by verbal contract. Now, the cession of exploitation or concession of exploitation of the commercial establishment, also known as the lease of a commercial establishment, is a legal transaction by which the holder of the establishment temporarily provides to another, and by remuneration, the enjoyment and fruition of the establishment, considered this as a legal and economic unit, that is, an economic-legal organization of all the elements that make it up, affected to the realization of a certain mercantile or industrial activity. Article 106, no. 2, letter e) of the CIRS considers verified the cessation of commercial and industrial activities when the transfer of the exploitation of the establishment is given. Thus, for purposes of taxation in IRS, even if the challenger had exercised any activity of a commercial or industrial nature, with the transfer of the exploitation of the establishments, it would be considered ceased. In sum: the challenger never came to exercise any catering activity, and therefore cannot obtain commercial or industrial income imputable to the exercise of any commercial or industrial activity: by ceding the exploitation of the establishments he obtained property income that can be framed as income from category F, (and not E, as, certainly by oversight, was written in the sentence) in accordance with article 9, no. 2, letter d) of the CIRS". One entirely agrees with what was decided since, in fact, the challenger never came to exercise commercial or industrial activity in the installations in question, so that the situation is comparable to that of a mere individual who earned income subject to IRS. The fact that he acquired and equipped certain installations intended for trade does not itself constitute a commercial or industrial activity, but rather being equated to a financial investment which, later, resulted in the receipt of a certain amount for the rental of the installations»;

• Applying these teachings to the concrete case, we have that the Claimant acquired an immovable property, for a period of five years, never having practiced any act that would indicate a will to exercise some type of exploitation of the same, as it was also not within its availability the possibility of not ceding that exploitation, as was seen above in the description of the factual matter relevant to the present case;

• Concludingly, the mere act of purchase of an immovable property and its consequent and immediate cession of exploitation to a third party must be subsumed to simple acts of management of private property, not constituting in themselves signs of the exercise of an activity of exploitation of an immovable property on the part of the one who ceded the exploitation;

• From the reading of the contract for cession of exploitation, it clearly results that the Claimant never assumed the functions of responsible for the exploitation of the accommodation, being those assumed by the Managing company in its different aspects;

• By way of merely exemplary, see clauses 3.3, 3.4 or 3.5, in which it is defined that the Managing company is the one who develops efforts towards the tourist exploitation of the immovable property, that is responsible for all expenses relating to the collection of payments and/or eviction and that holds the exclusivity to exploit the immovable property according to the rates it freely determines;

• It thus results clearly that the Claimant does not undertake, nor can undertake any action of free use and utilization of the immovable property of which they are, or were, merely the owners;

• The Claimant further states that the position of the AT is also incoherent in light of the position adopted in 2010 in another inspection procedure in which a request for VAT refund was analyzed.

• However, as the Claimant itself states, not only is there a different fiscal year from those which now concern us, but also the tax under analysis is different, such that in the case at issue, the specific rules of the IRS applicable to the concrete case must be taken into account;

• On the other hand, and even if the exact terms in which the aforementioned information was provided are unknown, and which facts were considered in the case at issue, it will always be said that there is no equality in illegality;

• In this sense the Judgment of the STA referring to process no. 0509/05, of 2006-03-14, pronounced itself in the following terms: «[...] Furthermore, there cannot be equality in illegality, that is, the administered party does not have the right to claim for itself treatment identical to that which the Administration had for another individual, if it knows that that procedure is illegal. This would lead to the intolerable reedition of illegalities, supposedly under the cover of the principle of equality. Such a conception of this principle would lead to the subversion of the principle of legality, the mainstay of all administrative action and of the Rule of Law itself";

• As for the Claimant's claim that the entirety of the expenses with salaries of staff, cleaning, electricity, gas and water be accepted, in accordance with art. 41, no. 1 of the IRS Code, in the wording in force at the time of the facts, «To the gross income referred to in article 8 there are deducted the expenses of maintenance and conservation that are the responsibility of the taxable person, borne by it and documented, as well as the municipal property tax and the stamp duty that is levied on the value of the properties or part of properties whose income is subject to taxation in the fiscal year. (Wording given by Law no. 66-B/2012, of 31 December)»;

• In this way, it must be evaluated whether those expenses mentioned in abstract by the Claimant, and not demonstrated at arbitration, have the character of conservation and/or maintenance expenses that are the responsibility of the taxable person;

• It is verified, from the outset, that the expenses mentioned by the Claimant do not constitute conservation expenses nor, indeed, maintenance expenses;

• On the other hand, and as regards expenses for salaries and cleaning, it emerges from sections 5 and 6 of the cession contract that these charges are the responsibility of the Managing company, which means that they are not the responsibility of the Claimant, the landlord here.

Meeting Provided for in Article 18 of the RJAT and Pleadings

Having been requested by the Claimant for the production of testimony evidence, having the same been the subject of a request for rejection by the Respondent on grounds of unnecessariness, the production of testimony evidence was refused by the court, through an order of 05-11-2017, on the grounds that documentary evidence is the most appropriate to the confirmation of the facts to be proved.

In a subsequent request, the Claimant came to reiterate the need for the examination of witnesses, while requesting in the following terms: "which is why it is requested of Your Excellency that you deign, in the name of the principles of procedural economy, celerity and formal appropriateness, to take advantage of the evidence produced in the aforementioned process no. 271/2017-T".

Taking into account the ambivalence of the claims, the Claimant was invited to clarify its claim as to the procedural handling, through an order issued on 23-11-2107, to which no response was obtained.

In this way, there being no matter of exception on which the Parties should pronounce themselves, the exemption from the meeting provided for in art. 18 of the RJAT was determined.

It was further determined, at the request of the Claimant, the utilization of the testimony evidence produced and recorded in process 271/2017-T, which was for this purpose made available by the CAAD.

Claimant's Pleadings

In its pleadings, the Claimant listed the facts it considers proven as follows:

• On 5 June 2007, the Claimant entered into two promise-to-purchase contracts with the company B…, S.A. each having as its object an immovable property designated "Apartment S504" and another immovable property designated "Apartment S505", properties registered in the urban property matrix of the Union of parishes of … and … under article…, under letters D and E, located in the "Apartments …" development;

• On the same date, the Claimant signed with B… two contracts for the cession of tourist exploitation of the units … S504 and S505 identified above, reserving for itself the right to appoint a managing entity, which it later implemented with the incorporation of the company C…, S.A., NIPC …;

• On 8 February 2008, the constitutive deed of the "Apartments …" tourist development was deposited with the then General Directorate of Tourism;

• On 7 July 2008, a tourist use license was granted by the Municipal Chamber of … to the "Apartments …" development;

• Pursuant to the terms of the contracts for cession of tourist exploitation, it was established that the Claimant would ensure the tourist exploitation through the services of the managing entity B… and in accordance with the terms of the contracts, with it being stipulated that B… could appoint a third party entity for such management;

• The managing entity (C…) would exploit the tourist apartments of the unit … on behalf ("on behalf) of the respective owners providing them with all services necessary to effect such exploitation. That is, the exploitation of the aforementioned tourist apartments was carried out directly by the Claimant, resorting, however, to the managing entity (C…) to operationalize this tourist exploitation given its experience and consolidated reputation in this activity sector, receiving this entity remuneration for the services rendered;

• The parties agreed, within the scope of the aforementioned cession of exploitation contracts, that the managing entity (C…) accepted the appointment and, consequently, accepted to provide, in an exclusive regime, the services comprised within the scope of the Contracts. Taking into account what was contracted, the Claimant recognized and accepted that during the entire duration of the Contract, it would not exploit, rent or in any other way make available the units to third parties in exchange for payment, rent, remuneration or any other means of payment (including of a non-pecuniary or gratuitous nature), further recognizing and accepting not to disclose nor to allow another individual or legal person to disclose the units as being, among others, available for occupation;

• The managing entity (C…) accepted the appointment as manager of the tourist apartments and consequently accepted to provide the services described in Section 2.2 of the Contracts, during the entire duration of the same, more precisely: A. Administer the Tourist Exploitation Program (...) described in Section 3; B. Provide the Property Administration Services described in Section 4; C. Provide the Property Maintenance Services described in Section 5; and D. Provide the Cleaning and Tidying Services of the Unit described in Section 6;

• Within the scope of the aforementioned Tourist Exploitation Program, the managing entity (C…) was obligated to manage, on behalf of the Claimant, the operational aspects (current management) inherent to the tourist exploitation of the aforementioned apartments, namely dealing with the collection of payments due, collection of expenses, management of reservations, determination of rates;

• The managing company (C…) was further responsible for the general administration services of the units. The nature and object of these services to be provided in this scope will be determined by the managing company and will include accounting, sales and marketing, costs of travel agencies and/or commissions of tour operators and respective expenses incurred, expenses with central services related to the Tourist Exploitation Program and expenses for reception services and other expenses related thereto;

• Within the scope of the general administration services of the units the managing entity (C…) accepted to perform routine maintenance services that are freely considered necessary by it to maintain the unit appropriate for guest occupation, namely, routine maintenance, such as changing light bulbs, unclogging toilets, restoring/connecting circuits, and maintenance of gardens and landscaping;

• Also within the scope of general administration services of the units, the managing company (C…) would have to deal with the cleaning and tidying services of the units, namely, providing house linens and cleaning of the units, emptying trash, changing towels, kitchen cloths and bed linens, daily tidying of the kitchen, dining rooms and living rooms, bathroom and bedrooms (such as, washing dishes, counters, sweeping the floor, dusting, vacuuming, cleaning mirrors, and making beds) and also cleaning after the departure of guests and an annual deep professional cleaning of the interior of the Unit (which involves steam cleaning of carpets and upholstery, floor waxing, external window cleaning and other services);

• In exchange for the management services the parties agreed that the managing entity (C…) would provide the services identified above in return for remuneration described in the Services Section of the Contracts. It is this section that defines that the managing entity (C…) will have the right to receive and will retain 25% (twenty-five percent) of the Gross Revenue from the Tourist Exploitation, or any other percentage that may be agreed periodically between the managing company and the Claimant;

• To the managing entity (C…) was the responsibility for the performance of current management acts while to the Claimant was the responsibility for the performance of all operations not related to the operational management of tourist exploitation, namely, being responsible for all charges and expenses, pending or due, related to the Units, including any taxes and charges collected by creditors or suppliers, namely for the payment of any expenses of operation, condominium charges, management and reserve costs, all applicable insurance premiums, auditor fees, telephone bills and other expenses and all costs with basic services (electricity, oil, gas, water) ("Direct Unit Expenses")";

• It was the responsibility of the Claimant to keep the units completely operational, which is why it was the Claimant that acquired all the equipment and furnishings for the Units, equipping them with the standard furniture package, which represented an expenditure of € 56,000.00 (fifty-six thousand euros), plus VAT at the applicable legal rate (in total a value of € 67,760.00), relating to unit S504, and also an expenditure of € 46,000.00 (forty-six thousand euros), plus VAT at the applicable legal rate (in total a value of € 55,660.00), relating to unit S505, values that were exclusively supported and paid by the Claimant;

• The Claimant was equipped with all means of control of the results of the exploitation of the apartments identified above, with the managing company (C…) obligated to provide a monthly accounts report to the Claimant, within a period of 15 (fifteen) days from the end of the month in question, in addition to an audited annual report (report) of the Claimant's account, identifying, for the previous civil year: all revenue from the tourist exploitation of all units participating in the Program, the remuneration of the managing company, the net revenue from tourist exploitation, the remuneration of the Claimant; and all other expenses and charges the responsibility of the Claimant, made available in accordance with the terms of the Contract;

• The charges and income from the aforementioned tourist exploitation are directly reflected in the sphere of the Claimant, such that the activity of exploitation of the tourist apartments is developed by the respective owners, with no transfer of the "business risk" to the managing entity (C…) nor this participating in the exploitative activity with its own interest;

• From 13 August 2008 onwards the Claimant began to exercise the activity of operating tourist apartments, being registered for this purpose with CAE 55123 "tourist apartments without restaurant and classified in the normal periodic regime quarterly in VAT and, for IRS purposes, in Category 8 in the regime of organized accounting. The immovable properties owned by the Claimant - S504 and S505 - are allocated to "Services";

• The classification of the Claimant - in the normal periodic regime quarterly in VAT and, for IRS purposes, in Category 8 in the regime of organized accounting - results, not only from the instructions that the Claimant's tax representative always obtained, either from the Administration, or from the company operating the development, but also from the position assumed by the VAT Services Directorate in the binding information process no. 3626, of 09.10.2012;

• The Claimant's conviction, to the effect that its classification for IRS purposes (Category 8) was correct, also derived from the inspection to which it was subject and also from the tax inspections carried out on various owners of properties in the same tourist development;

• In compliance with its declarative obligations, with reference to the years 2012, 2013 and 2014, the Claimant filed its Model 3 income tax return for IRS;

• In accordance with the aforementioned income tax returns, the respective tax assessments were issued, in which the following net income values were determined to be taxed:

• The Claimant was subsequently subject to a tax inspection procedure, directed to the analysis of the declared facts for IRS purposes with reference to the years 2012, 2013 and 2014, in compliance with Service Orders nos. 012016…/…/… of 18 August 2016, the Claimant having been notified, through Office no. …, dated 11 October 2016, of the respective Draft Report;

• In the Draft Inspection Report corrections to the Claimant's taxable income were proposed, of € 143,442.98 as to the year 2012, of € 38,379.25 as to the year 2013 and also of € 56,818.50 as to the year 2014, by virtue of the requalification of the income obtained by the Claimant, from Category B to Category F, based on the administrative guidance contained in Circular no. 5/2013, of 2 July 2013;

• Not conforming to the aforementioned Draft Inspection Report, the Claimant submitted, on 19 October 2016, its request for prior hearing;

• Notwithstanding the arguments raised at the prior hearing, the Claimant was notified of the Final Inspection Report, in which the Tax Inspection Services maintained the corrections to the taxable income in accordance with the initially proposed terms;

• In accordance with the conclusions set forth in the Inspection Report, the Claimant was notified of the tax acts relating to the years 2012, 2013 and 2014;

In relation to the argument on which it bases its claim, the Claimant again adduces, and with interest for the decision of the case:

• Let it not be said, as the AT does in its Response, that "even if the act under judgment suffered deficiencies at the level of the reasoned discourse, such deficiencies would be degraded into mere non-essential irregularities", "[o]nce that, nonetheless, such deficiencies allow the full clarification of its recipient, enabling it to contest them, as, indeed, the Claimant did by way of the present request for arbitral pronouncement (articles 39 and 40 of the AT's Response), because, if the AT considers - as it results from the Response presented - that the act is insufficiently reasoned, then, in that case, all the consequences arising therefrom must be drawn, with the consequent annulment of the tax acts;

• In fact, accepting that the lack of submission of a request for reasoning of the notified act (in this case, of the Tax Inspection Report) - since the assessment acts, reasoned on the aforementioned Report, could not be reasoned a posteriori - would, improperly, cause the consequences of non-compliance with the law to fall on those whom it aims to safeguard (the taxpayers) and not on those who violate it (the AT), which in the opinion of the Claimant should not be admitted;

• Contrary to what the AT (erroneously) argues in its Response, the Claimant did not proceed with its classification in category B as "a simple act of management of its particular property";

• In fact, the classification as Category B by the Claimant was, in a first phase, effected by the guidance of its tax representatives and by the managing entity (B… and, subsequently, C…), which adopted this same classification since the opening of the development in 2006 and, subsequently, by the VAT Services Directorate;

• It is that, it follows from the VAT Code that the cession of a furnished apartment licensed for services to a third entity by remuneration binds the taxable person to register as an individual businessman CAE 55123- Category B and to collect VAT from the acquirers of the services, with the immovable property now being affected to the business sphere of the taxable person - hence the registration of the same as a stable establishment in the declaration of commencement of activity of the Claimant;

• For a matter of coherence of the system and of good faith action by the AT, it must be concluded that:

(i) Either the Claimant's income is classified as being business income (Category B) and, as such, is subject to VAT;

(ii) Or the Claimant's income is classified as being property income and, for that reason, is not subject to VAT.

• The services for the exploitation of the immovable properties in question, provided by C… under the contracts for cession of tourist exploitation concluded with the owners of the tourist apartments that make up the … tourist development - which includes the Claimant here - are provisions of hotel-type accommodation services to third parties, within the scope of a hotel activity, which is why, contrary to the position favored by the Tax Inspection Services in the tax inspection (underlying the contested assessment acts), it should be understood that the income earned by the Claimant resulting from the contracts for cession of tourist exploitation executed are subsumed to the typology of business and professional income connected with the exercise of a commercial activity, in particular the pursuit of an activity of a hotel nature and similar, provided for in paragraph a), of no. 1, of article 3 and paragraph h), of no. 1, of article 4 of the IRS Code (at the time of the facts).

• The Claimant exercises the activity which, in accordance with the contracts for cession of tourist exploitation and in accordance with Decree-Law no. 39/2008, of 7 March, it is permitted to exercise.

• Pursuant to article 45 of Decree-Law 167/97, of 4 July "[t]he exploitation of each tourist development must be the responsibility of a single entity" (no. 1, underlined and bold of the Claimant), and "[t]he unit of exploitation of the development is not an impediment to the ownership of the various real estate fractions that compose it belonging to more than one person" (no. 2).

• To that extent, it is verified that the Claimant could never — as the AT claims — manage the activity more than it actually does.

Respondent's Pleadings

In its pleadings, the Respondent, in addition to reiterating all the argument previously expended in the response and summarizing the testimonial evidence, added nothing, with relevance for the decision of the case, that should be specially reproduced.

Joinder of Documents by the Claimant with the Pleadings

With the pleadings, the Claimant joined fifteen documents.

The jurisprudence of the tax arbitration courts formed under the auspices of the CAAD has been to the effect of the non-admissibility of the joinder of documents at any moment subsequent to the request (see in this sense, the decisions handed down in process 75/2012-T and in process 212/2014-T).

Such orientation is mainly based on the content of paragraphs c) and d) of article 10(2) of the RJAT, pursuant to which the factual questions that ground the request must be identified with it (al. c)) and with it must be joined the evidence elements of the stated facts (as well as the indication of the evidence means to be produced) (al. d)).

From this it follows in fact that in the tax arbitration process, as a rule, the moment of presenting evidence documents is that of the presentation of the request itself.

Note that this rule on the presentation of evidence is different, and therefore special, in relation to art. 423(2) of the Civil Procedure Code, and should be interpreted as such.

It must therefore be concluded that the presentation of evidence elements at a moment subsequent to the presentation of the request itself will not, in principle, be admissible, unless there are reasons justifying that late presentation.

However, in the case at issue, the Claimant presented no reason for the presentation of the documents with the pleadings.

Being thus, it is considered that the joinder to the process of the documents joined by the Claimant with the pleadings should not be admitted, and the same should be withdrawn from the process.

This does not apply to document 11, which is a copy of a decision of an arbitration court, and therefore is not an evidence element but an auxiliary jurisprudential element for the court's decision.

II. SANATION

The Collective Arbitral Court was regularly constituted on 03-07-2017, the arbitrator having been designated by the Deontological Council of the CAAD, with the respective legal and regulatory formalities fulfilled (articles 11, no. 1, als. a) and b) of the RJAT and 6 and 7 of the Deontological Code of the CAAD), and is competent ratione materiae in accordance with article 2 of the RJAT.

The Parties have personality and legal capacity and are regularly represented.

The cumulation of claims is legally admissible, under art. 3, no. 1 of the RJAT.

No nullities were identified in the process.

III. QUESTIONS TO BE DECIDED

The main question to be decided is whether the income earned by the Claimant derived from the apartments integrated in a tourist development should be classified as income of a business character, falling within category B of the Personal Income Tax, or whether instead they should be classified as property income, falling within category F of the same tax.

IV – PROVEN AND UNPROVEN FACTS

The following are the proven facts considered relevant for the decision of the case:

• On 5 June 2007, the Claimant entered into two promise-to-purchase contracts with the company B…, S.A. each having as its object a fraction of immovable property designated "Apartment S504" and another fraction of immovable property designated "Apartment S505", registered in the urban property matrix of the Union of parishes of … and … under article…, under letters D and E.

• Pursuant to the terms of the contracts, the two fractions, to be constructed, are intended to be classified as tourist apartments for the purposes provided for in Portuguese law, being physically integrated in one of 13 buildings, to be constituted as horizontal property, which in turn are intended to be classified, through the respective licensing process, as a tourist unit, with the name "…".

• The contracts were subject to a resolving condition of obtaining the licensing of the tourist unit "…".

• On the same date and through the same instruments, the Claimant signed with B…, S.A two agreements on the exploitation of the units … S504 and S505.

• Pursuant to the terms of the contracts, the selling entity – the company B…, S.A – holds ab initio the quality of "administering entity" of the future tourist unit designated as "…".

• Pursuant to the terms of the contracts, B…, S.A. has the right to transfer the quality of "administering entity" to another entity to be designated by it.

• Through the contracts, the Claimant (acquirer of the fractions) entrusts the "administering entity" to exercise the tourist exploitation of the fractions.

• Through the contracts, the Claimant, future owner of the fractions, entrusts the "administering entity" and this accepts to provide, in exclusivity, certain "services".

• Pursuant to the terms of the contracts, the company D… is designated by the "Administering Entity" to assume the responsibilities of administration and operational management related to the tourist exploitation (rental) of the unit "…", on behalf of the owner".

• Pursuant to the terms of the contracts, the owner obligated itself to ensure the tourist exploitation (rental) of the tourist unit, through the services to be provided by the "administering entity".

• The tourist exploitation agreement had an initial duration of ten years.

• Pursuant to the terms of the contracts, the "administering entity" obligates itself to undertake reasonable commercial effort with a view to the tourist exploitation of the "tourist unit".

• Pursuant to the terms of the contracts, the "administering entity" exempts itself from the responsibility of bearing costs with the "commercial effort" incumbent upon it, directed to the exploitation of the unit, but assumes the responsibility of bearing costs with the marketing of the entire "…" resort.

• Pursuant to the terms of the contracts, the "administering entity" assumed the responsibility of bearing the necessary expenses with the collection of prices due by guests.

• Pursuant to the terms of the contracts, the "administering entity" is not obligated to deliver to the owner the amounts due but not paid by guests.

• Pursuant to the terms of the contracts, it is to the "administering entity" that falls, in the exercise of discretion, the fixing of prices to be paid by guests.

• Pursuant to the terms of the contracts, the responsibility for making payments related to the operational expenses of the exploitation fell to the "administering entity" which, however, would make such payments on account of the owner.

• For the purpose of bearing these expenses, the owner should periodically deposit and whenever requested, the necessary amounts to the order of the "administering entity".

• Pursuant to the terms of the contracts, the owner obligated itself to equip the acquired apartments with the equipment selected by the "administering entity".

• Pursuant to the terms of the contracts, the "administering entity" had the right to withdraw a part corresponding to 5% of the gross revenue of exploitation, which should allocate to a "reserve fund" intended to finance capital expenses.

• Pursuant to the terms of the contracts, to the "administering entity" falls the responsibility of ensuring the property administration services, being incumbent upon it to define what those services are.

• Pursuant to the terms of the contracts, the responsibility for making payments related to the expenses with the maintenance of the unit in conditions of operability falls to the "administering entity" which, however, makes such payments on account of the owner.

• Pursuant to the terms of the contracts, the "administering entity" was obligated to inform the owner of the maintenance interventions carried out in the fractions, by discretionary decision of the "administering entity".

• Pursuant to the terms of the contracts, the "administering entity" had the right to remuneration for the services provided to the owner, corresponding to 25% of the gross revenue from exploitation, this compensation being able to be altered by agreement between the parties during the term of the contracts.

• Pursuant to the terms of the contracts, the owner was entitled to the "net revenue from exploitation".

• Pursuant to the terms of the contracts, the "administering entity" was obligated to provide the owner with a monthly report on the owner's account, which includes the gross revenue of its units, the costs of exploitation thereof, and the net revenue from exploitation.

• On 8 February 2008, the constitutive deed of the "Apartments …" was deposited with the then General Directorate of Tourism.

• On 7 July 2008, a tourist use license was granted by the Municipal Chamber of… to the "Apartments …" development.

• The Claimant was subject to an inspection action by the Respondent relating to Value Added Tax and Personal Income Tax, with a temporal scope covering the years 2008 and 2009.

• The Claimant was notified, by office no. …, from the Finance Directorate of Faro, dated 8-11-2010, of the result of the inspection for the years 2008 and 2009.

• Such inspection procedure was motivated by the request for VAT refund made by the Claimant in relation to the period 2009-09T.

• In that office it is stated:

"However, information no. … of 2010/09/17, from the VAT Services Directorate – Design Division, subject to approval on 2010/09/20, by the Deputy Director General Dr. Manuel Prates) was received by this finance directorate, in which it is considered "...In the case of the contract for cession of tourist exploitation of the Unit…" we are faced with a mandate contract in which the owner of the unit appoints another entity to, on its behalf, exercise the activity of tourist accommodation (...). As a corollary of the above, it is proposed that the request for VAT refund in the amount of 22,916.77 euros be granted in full".

• In compliance with its declarative obligations, with reference to the years 2012, 2013 and 2014, the Claimant filed its Model 3 income tax return for IRS;

• In accordance with the aforementioned income tax returns, the respective tax assessments were issued, in which the following net income values were determined to be taxed:

• The Claimant was subject to a tax inspection procedure, directed to the analysis of the declared facts for IRS purposes with reference to the years 2012, 2013 and 2014, in compliance with Service Orders nos. 012016…/…/… of 18 August 2016, the Claimant having been notified, through Office no. …, dated 11 October 2016, of the respective Draft Report;

• In the Draft Inspection Report corrections to the Claimant's taxable income were proposed, of € 143,442.98 as to the year 2012, of € 38,379.25 as to the year 2013 and also of € 56,818.50 as to the year 2014, by virtue of the requalification of the income obtained by the Claimant, from Category B to Category F, based on the administrative guidance contained in Circular no. 5/2013, of 2 July 2013;

• The Claimant submitted, on 19 October 2016, its request for prior hearing;

• Notwithstanding the arguments raised at the prior hearing, the Claimant was notified of the Final Inspection Report, in which the Tax Inspection Services maintained the corrections to the taxable income in accordance with the initially proposed terms;

• The Claimant was notified of the tax acts relating to the years 2012, 2013 and 2014.

There are no facts given as unproven that have relevance for the decision of the case.

The facts considered proven were so based on the documents joined to the process.

VI – REASONING

Pursuant to art. 3, no. 1, al. a) of the CIRS, business and professional income is considered to be "Income resulting from the exercise of any commercial, industrial, agricultural, silvicultural or livestock activity".

Pursuant to article 8, no. 1 of the same code, with the wording in force at the time of the relevant facts, "property income" was considered to be "the rents of rural, urban and mixed properties paid or made available to their respective holders."

The question that divides the Parties in the present dispute is whether the income obtained by the Claimant, related to her ownership of the fractions she held and held during the relevant period in the tourist development "…", should be classified in the first or the second of these categories of income for IRS purposes.

As can be seen from the proven facts, and namely from those relating to the contracts by which the Claimant acquired the real estate fractions in question, such contracts are atypical contracts, which cannot be classified either in the category of lease contracts, nor in the category of contracts for cession of exploitation of a commercial establishment.

In a typical lease contract, as well as in a typical contract for cession of exploitation of an establishment, a rent is stipulated in favor of the lessor/cedent, with no obligation for the latter to finance the commercial activities that may be developed by the lessee/cessionee, nor is there any participation of the lessor/cedent in the risk of the activity to be developed by the lessee/cessionee.

When such circumstances are present, there is association of the lessor/cedent to the business of the lessee/cessionee, which makes it so that one is no longer dealing with a lease contract or cession of exploitation of a typical establishment.

In the case of the contracts concluded between the Claimant and the company B…, S.A., the Claimant assumes much of the risk of the tourist exploitation activity, since it does not have a right to fixed remuneration, but its income is the "net revenue from exploitation" of its fractions. On the other hand, the Claimant is obligated to finance most of the expenses with the exploitation of the fractions and their maintenance.

Nor can it be said that one is faced with a simple contract for provision of management services, between the Claimant and the "administering entity", whereby the latter would provide the former with the service of management of the tourist apartments, since the "administering entity" maintains a very significant degree of autonomy in management decisions, in which the Claimant cannot intervene even if it wanted to, and bears the responsibility of assuming at its own account some of the expenses related to the exploitation, such as marketing expenses and expenses for the collection of debts from guests.

There are already several decisions, all handed down by arbitral courts constituted under the auspices of the CAAD, on the same question that concerns us here.

This is not the case of the judgment of the TCAN, of 20-01-2005, handed down in proc. no. 325/04, cited by the Respondent in support of its thesis. In this process, there was at issue a contract by which an owner of a fraction allocated to services and commerce, but in which no commercial activity had never been exercised previously, cedes, by means of a rent, the use of that space.

In the case at issue, precisely, there is no rent.

The Claimant, owner of the apartments, has the right to the revenue from the tourist exploitation of those apartments, net of the charges resulting from the same.

Being included in those charges the charges directly borne by the administering entity (with marketing and collection of prices due by guests) and the remuneration of the administering entity itself.

The arbitral decisions that have so far pronounced that in a situation such as the one at issue in the present case, the income of the owner does not fall within category B (processes 270/2017-T and 275/2017-T) were based on the interpretation of the term "exercise of an activity" (inserted in paragraph a) of article 3(1) of the CIRS).

And such decisions concluded that in a situation such as the case at issue, the owner of the fraction does not exercise the commercial activity in question (tourist exploitation) because it is incumbent upon the "administering entity" to ensure the tourist exploitation of the real estate fraction.

It is true that it is the "administering entity" that practices the material acts of management, in the same way a manager would. On the other hand, it is not entirely certain, at least for us, that the "administering entity" is the one who, exclusively, ensures the exploitation of the apartments. The owner (the Claimant) also ensures the exploitation, since first of all, it is responsible for equipping the fractions so that they can be exploited in tourist terms; but also and in particular, ensures the exploitation when it is called to finance the expenses resulting from that exploitation. Note that only the net revenue from exploitation is delivered to the owner, which means that it is she who bears the expenses of the exploitation, and moreover, it can at any time be requested to make financings for the expenses of the exploitation.

A narrow concept of "exercise of commercial activity", understood as the direct practice of the material acts of management, such as that which is proposed, and which excludes one who exploits indirectly, through mandate, as with any manager, would lead to unacceptable results.

And if we use an equally restrictive and literal concept of the term "rents of properties", as it appears in article 8, no. 1, we will also arrive at the conclusion that the remuneration to which the Claimant is entitled based on the contract it concluded with the "administering entity" is not configured as a rent. Rent is a certain and regular sum that is paid as consideration for the right to enjoy an immovable property (in this sense art. 1040 of the Civil Code).

The remuneration of the Claimant is, by contrast, the profit, or, in other words, the net revenue from the exploitation of the apartments. This remuneration does not have the characteristics of a rent, even in the broad concept of art. 8, no. 2 of the CIRS.

Furthermore, the contract concluded between the Claimant and "administering entity" does not cede to the latter the enjoyment of the immovable property, and the proof that this is so is that the "administering entity" does not have the right to retain for itself the revenues from the exploitation, as these do not belong to it. On the other hand, pursuant to that same contract, the "administering entity" obligates itself to the owner to carry out the tourist exploitation of the apartments. What means that we are not dealing with a contract whereby the enjoyment of an immovable property is ceded.

In summary: if the contract does not have as its object the cession of the enjoyment of an immovable property; if through the contract the managing entity obligates itself to manage; if the managing entity cannot retain for itself the product of the exploitation, but this product falls to the owner; if the owner is the one who bears the cost of the tourist exploitation of the apartments; if the owner only has the right to the profit from the exploitation and not to a fixed rent, it cannot be said that one is dealing with property income. Rather it must be concluded that the income in question stems from the exercise of a commercial activity, in this case the exploitation of a tourist development, whose method of management is organized in a sui generis manner, but which does not prevent the holder of the exploitation from being the Claimant. And, to that extent, such income can only be classified in paragraph a) of article 3(1) of the CIRS.

That said, there is still something to be said about the relevance of the information provided by the Tax Authority to the Claimant.

In the office through which it notified the Claimant of the result of the inspection, the Tax Authority communicated its understanding about the tax classification of the Claimant's tax situation: "we are faced with a mandate contract in which the owner of the unit appoints another entity to, on its behalf, exercise the activity of tourist accommodation (...)."

As a consequence of that understanding, the Claimant was allowed to deduct the VAT borne with the equipment of the acquired apartments, which presupposes that the Claimant's activity is subject to VAT. It is not, therefore, an activity of lease of immovable property, as this is exempt from VAT (in accordance with art. 9 al. 29) of the CIVA).

However, the position that the Respondent now seeks to make prevail with respect to the classification of the Claimant's income is the opposite of the understanding that it then conveyed and brought to the knowledge of the Claimant. It is that the Claimant exercises no commercial activity, but merely makes a passive management of its immovable property, which would never be subject to VAT.

If, under the principle of reciprocal cooperation (art. 59 of the TGL), taxpayers have the right to be informed by the tax administration about their rights and obligations (al. m)), the tax administration cannot, under penalty of violation of that same principle of cooperation, act contrary to the information it provides to the taxpayer.

We align, as to this point, with what was decided in process 271/2017-T, in which it is said: "It is clear that the Claimants, in light of the proven factual matter, not only acted in good faith and on the basis of a plausible interpretation of tax law, but also acted in accordance with express indications from the AT that bind it (...)".

In light of all the arguments set out, it must be concluded that the assessments at issue in these proceedings suffer from the vice of violation of law and, as such, cannot subsist in the legal order, which is hereby declared.

VI. DECISION

For these reasons and with the reasoning described above, it is decided to judge entirely favorably the request for arbitral pronouncement, annulling the acts subject to pronouncement, with all legal consequences.

VII. Value of the Economic Utility of the Proceeding

In accordance with the provisions of art. 306, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulations for Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at 34,740.96 euros.

VIII. Costs

Pursuant to art. 22, no. 4, of the RJAT, the amount of costs is fixed at 1,836.00 euros, in accordance with Table I attached to the Regulations for Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, Administrative Arbitration Center, 5 March 2018

The Sole Arbitrator

Nina Teresa Sousa Santos Aguiar