Process: 289/2018-T

Date: March 15, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration case 289/2018-T addressed a dispute over IRS assessment for 2013 involving €4,819.75 in tax on interest income (Category E). Taxpayers A and B challenged corrections totaling €15,483.00 in taxable income related to debt securities purchased through German institution D... AG. The core issue concerned accrued interest paid upon securities acquisition. The taxpayers argued they paid €1,729.71 and €995.91 respectively for accrued interest to the sellers when purchasing the securities, but the Tax Authority (AT) included the full interest amounts of €5,955.00 and €9,528.00 received in 2013 as taxable income without deducting the previously paid accrued interest. The claimants invoked Article 5(5) of the IRS Code, arguing that capital income should only include interest accrued from the date of transmission to them, not interest periods when prior holders bore the risks and benefits. The AT countered that the IRS Code provides no deductions for Category E income. The case followed standard CAAD procedure: tacit denial of gracious complaint (reclamação graciosa) filed with Lisbon Tax Office, arbitration request accepted June 2018, arbitrator appointed August 2018, tribunal constituted August 28, 2018, with parties waiving oral hearing. This case illustrates the procedural path for challenging IRS assessments through administrative arbitration when tax authorities fail to decide complaints, and raises important questions about the proper calculation of taxable interest income when securities are acquired mid-period with accrued interest payments.

Full Decision

ARBITRAL DECISION

1. Report

On 18-06-2018, A..., taxpayer no. ..., and B..., taxpayer no. ..., residents at Travessa ..., ..., ..., ...-... Lisbon, hereinafter referred to as Claimants, submitted to the Administrative Arbitration Centre (CAAD) a request for the constitution of an arbitral tribunal with a view to, immediately, the declaration of illegality of the tacit dismissal of the administrative complaint no. ...2017..., and, mediately, the declaration of illegality of the assessment of Personal Income Tax (IRS) for the year 2013, in the total amount of €4,819.75.

The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 19-06-2018 and notified to the Respondent on the same date.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to article 6, section 2, paragraph a) of the RJAT, Dr. Suzana Fernandes da Costa was appointed as arbitrator by the President of the Deontological Council of CAAD on 06-08-2018, the appointment having been accepted within the time and legal terms provided for.

On the same date the parties were duly notified of this appointment and did not manifest any intention to challenge the appointment of the arbitrator, in accordance with article 11, section 1, paragraphs a) and b) of the RJAT, in conjunction with articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c), section 1, of article 11 of the RJAT, the Arbitral Tribunal was constituted on 28-08-2018.

On 04-09-2018, an order was issued ordering the notification of the Respondent to, within 30 days, submit a response and, if it so wished, request the production of additional evidence and remit to the arbitral tribunal a copy of the administrative file within the time limit for submission of the response.

On 02-10-2018, the Respondent submitted its response and attached to the proceedings the administrative file.

On 11-10-2018, an order was issued to notify the Claimants to, within 10 days, state whether or not they agreed to waive the hearing provided for in article 18 of the RJAT. The Claimants came before the proceedings on 16-10-2019 to inform that they agreed to waive the hearing.

On 17-10-2018, an order was issued waiving the hearing, taking into account the position of the parties, pursuant to articles 16, paragraph c) and 19 of the RJAT, and also considering the principles of procedural economy and prohibition of performance of useless acts. In the same order, the parties were notified to submit, if they so wished, written submissions. The date of 24-01-2019 was also set for delivery of the decision, and the Claimants were warned to attach to the proceedings, by that date, proof of payment of the subsequent arbitration fee.

The Claimants submitted written submissions on 02-11-2018, and the Respondent attached its submissions on 19-11-2018.

On 24-01-2019 an order was issued extending the date for delivery of the decision to 20-02-2019, given the complexity of the matter and because the analysis of the substantive issue and existing case law had not been completed.

On 20-02-2019, an order was issued extending to 15-03-2019 the date for issuance of the decision, taking into account that the judicial holidays occurring in these proceedings are 16 days and that the time limit referred to in section 1 of article 21 of the RJAT ends on 28-02-2019.

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

The arbitral request is timely, in accordance with article 10, section 1, paragraph a) of Decree-Law no. 10/2011 of 20 January and article 102, section 1, paragraph a) of the Tax Procedure and Process Code.

The proceedings do not suffer from nullities and no preliminary issues were raised.

2. Cause of Action

The Claimants begin by stating that, not agreeing with the IRS assessment for the year 2013, they filed an administrative complaint of said assessment with the Tax Office of Lisbon... Said complaint was not subject to any decision up to the date of entry of the arbitral request.

The Claimants allege that the Tax Authority (AT) corrected the taxable income of the Claimants for the year 2013 in the amount of €15,483.00, a value broken down as follows:

- Claimant B..., TIN...: correction value: €5,955.00;

- dependent, TIN...: correction value: €9,528.00.

The Claimants state that they were notified of the draft corrections made, that they exercised the right to a hearing, but that it was not heeded by the AT.

The Claimants allege that in 2013, various debt securities (securities) were subscribed in the name of the female Claimant and her dependent, C..., with D... AG, which is a credit institution with headquarters in Germany and which acted as an intermediary entity in the purchase and as agent paid in the placement at the disposal of income, in the form of interest.

They further state that, upon subscription of the securities, the value of accrued interest up to the date of acquisition was paid by the subscribers (Claimant and dependent) to the seller, the female Claimant paying the amount of €1,729.71 and her dependent the amount of €995.91.

The Claimants make reference to the fact that in 2013, the aforementioned securities generated capital income, with the following amounts being paid to their subscribers: €5,955.00 to the female Claimant and €9,528.00 to her dependent. The Claimants state that these amounts correspond to the entirety of accrued interest after the last maturity date, comprising the period during which the female Claimant and her dependent were not holders of the securities in question.

Thus, according to the Claimants, they only effectively earned the accrued interest after the acquisition of the securities, to the extent that the accrued interest up to the date of acquisition was paid to the original holders of the securities.

For the Claimants, the correction made by the AT does not consider the payment of accrued interest upon acquisition of the securities.

The Claimants attached to the arbitral request two statements from D..., referring to the value of accrued interest charged upon purchase of the securities.

In the opinion of the Claimants, the correction is excessive, because it should only include the amounts earned by the Claimants as net interest, that is, the AT should tax the interest received minus the value of the accrued interest paid to the seller upon acquisition of the aforementioned securities.

The Claimants allude to the fact that this income (interest) is qualified as capital income, in accordance with section 1 and paragraph c) of section 2 of the IRS Code.

The Claimants mention that, according to the position of the AT described in the information provided, the IRS Code does not provide for any deductions associated with income of category E. But, in the Claimants' view, it is not a question of identifying a rule that permits the deductibility of costs incurred in acquiring the securities, but rather of determining the income from interest actually paid to the Claimants during the relevant period. And they allude to article 5, section 5, first part, which states that "for purposes of paragraph c) of section 2, capital income includes the amount of accrued interest from the date of last maturity or issuance, first placement or endorsement (...) until the date on which any transmission of the respective securities occurs".

In the Claimants' view, the income only began to be generated from the moment the securities were transmitted, and up until that point the risks and benefit (interest) were borne by the transferor of the securities.

In conclusion, the Claimants request the partial annulment of the IRS assessment in question, taking into account that the correction made by the AT is excessive and unlawful, and should be revoked and replaced by one that conforms to the applicable legal framework and that takes into account the amounts paid upon endorsement of the securities.

Finally, the Claimants request the refund of improperly paid tax, plus compensatory interest for an error attributable to the services, in accordance with article 43 of the General Tax Law (LGT).

3. Response of the Respondent

The Tax and Customs Authority submitted a response alleging the legal conformity of the tax act subject to the arbitral request.

The AT begins by stating that, by force of the information transmitted to the AT, pursuant to the Savings Directive (Directive no. 2003/48/EC), by the tax authorities of Germany, it was found that in the year 2013, the female Claimant earned the amount of €9,528.00, and her dependent earned the amount of €5,955.00, from the paying entity D... AG, amounts which were not included in annex J of the IRS form 3 for that year.

The AT then states that, in light of such information, it notified the Claimants to exercise the right to a prior hearing or to send a replacement statement and to state their intention to deduct from the assessment tax borne abroad, under penalty of an official IRS assessment being issued.

The AT mentions that the Claimants exercised the right to a hearing, confirming that they earned interest income from the aforementioned entity, and that they agreed with the correction of the IRS form 3 income statement for the year 2013, but considering that the amounts to be included would be those of net interest.

The AT bases its position on articles 5 and 7 of the IRS Code and states that this Code does not provide for any type of deductions to category E income.

For the Respondent, the burden of proving and documenting the transactions in question falls on the Claimants, in accordance with article 74, section 1 of the LGT, taking into account that they present an omission from the IRS form 3 income statement of 2013, which ceases the presumption of truthfulness contained in article 75, section 1 of the LGT.

As to evidence, the AT states that the two statements attached are incomplete, as they make reference to an attached schedule that was not provided, and as they do not evidence that those amounts refer only and exclusively to deposits of securities that generated the interest in question.

As to evidence, the AT also alludes to the fact that the Claimants did not attach any bank statement that would allow verification of the amounts referred to as being paid as accrued interest upon acquisition. Thus, for the AT, the evidence brought to the proceedings is not sufficient to contradict the AT's position.

The Respondent concludes by stating that the amounts identified by the German tax authorities, as payment of interest made in bank accounts of which the female Claimant and her dependent are holders, were not subject to declaration for purposes of IRS for the year 2013, a fact accepted by the Claimants, who would not have been able to prove that the amounts paid as accrued interest should be deducted from the amounts communicated.

As to the request for payment of compensatory interest made by the Claimants, the Respondent states that no error attributable to the services was found, and therefore should not be condemned to pay the aforementioned compensatory interest.

4. Matters of Fact

4.1. Established Facts:

Having analyzed the documentary evidence produced and the position of the parties contained in the procedural documents, the following facts are considered proven and relevant to the resolution of the case:

- In 2013, various debt securities (securities) were subscribed in the name of the female Claimant and her dependent, C..., with D... AG, a credit institution with headquarters in Germany.

- Upon purchase of said securities in 2013, the credit institution D... received accrued interest in the amount of €1,729.71 in the case of the female Claimant and €995.91 in the case of her dependent, in accordance with statements attached as document 12 to the arbitral request.

- In 2013, the credit institution D... AG paid, as accrued interest, the amount of €5,955.00 to the female Claimant and the amount of €9,528.00 to her dependent.

- The Claimants were notified of the draft correction to their IRS form 3 income statement for the year 2013, in accordance with document 9 attached to the arbitral request.

- The Claimants exercised the right to a hearing on said draft correction, in accordance with document 10 attached to the arbitral request.

- The Claimants were notified of the amendment to the IRS form 3 income statement for the year 2013, in accordance with documents 8 attached to the arbitral request.

- The Claimants were subsequently notified of the IRS assessment no. 2017..., the interest calculation statement no. 2017... and the account reconciliation statement no. 2017..., for the year 2017, in accordance with documents 1 to 3 attached to the arbitral request.

- The above-mentioned IRS assessment was issued based on category E income (interest) obtained by the female Claimant in the amount of €5,955.00 and by her dependent in the amount of €9,528.00.

- The Complainants submitted, on 22-11-2017, an administrative complaint of the aforementioned assessments, in accordance with documents 4 and 5 attached to the arbitral request.

- Up to the date of entry of the present arbitral request, the Claimants had not been notified of any decision rendered on the administrative complaint submitted.

- The Claimants submitted the present arbitral request on 18-06-2018.

No other facts with relevance to the resolution of the case were proven.

4.2. Unproven Facts

The specific dates of transmission of the securities were not proven, nor that the credit institution D... paid, in 2013, to the Claimant and her dependent, only part of the amount of accrued interest communicated pursuant to Directive no. 2003/48/EC, and the amount of interest paid upon purchase, which corresponds to €4,225.29 (€5,955.00 - €1,729.71) in the case of the female Claimant, and corresponding to €8,532.09 (€9,528.00 - €995.91) in the case of the dependent.

4.3. Reasoning on the Established Facts of Law:

The arbitrator's conviction was based on the documents attached to the proceedings by the Claimant and the position of the parties demonstrated in the procedural documents produced.

5. Matters of Law:

5.1. Subject Matter and Scope of the Present Proceedings

The essential legal issue that arises in this case is whether the value of accrued interest paid upon acquisition of the securities to which the obtained interest relates should or should not be deducted from the interest earned by the female Claimant and her dependent in the year 2013, for purposes of taxation under IRS.

Interest earned in relation to securities is classified as capital income, covered by category E of income.

The tax act always has as its basis a specific factual situation, which is provided for in abstract and typical form in tax law as generating the right to tax. This factual and concrete situation is defined as a taxable event, which only exists from the moment all the legal requirements provided for are met.

The tax rules that contemplate the taxable event are those relating to real incidence, which define its objective elements (see Alberto Xavier, Conceito e Natureza do Acto Tributário, p.324; Nuno de Sá Gomes, Manual de Direito Fiscal, II, Cadernos de Ciência e Técnica Fiscal, 1996, p.57; A. José de Sousa and J. da Silva Paixão, Código de Processo Tributário anotado e comentado, 3rd edition, 1997, p.269).

Only with the occurrence of the taxable event does the tax obligation arise. The existence of the taxable event thus constitutes a sine qua non condition for determining the taxable matter and the assessment made (see decision of Court of Administrative Appeal of the South-2nd Section, 26/2/2013, case 5713/12; decision of Court of Administrative Appeal of the South-2nd Section, 12/12/2013, case 7073/13).

In constructing the concept of taxable income, the IRS Code adopts the increment-of-income conception, according to which the tax base of this tax covers all increases in the taxpayer's purchasing power, including therein, in a general manner, irregular receipts and fortuitous gains, which should also be considered manifestations of contributory capacity (see section 5 of the preamble to the IRS Code; Paulo de Pitta e Cunha, A Fiscalidade dos Anos 90, O Novo Sistema de Tributação do Rendimento, Almedina, 1996, p.20; José Guilherme Xavier Basto, IRS: Incidência Real e Determinação dos Rendimentos Líquidos, Coimbra Editora, 2007, p.379).

Interest earned in relation to securities is classified as capital income, covered by category E of income.

The Claimants themselves state, in their arbitral request, that the issue concerns income classified as capital income, in accordance with and for purposes of section 1 and paragraph c) of section 2 of article 5 of the IRS Code.

Indeed, article 5, sections 1 and 2, paragraph c) of the IRS Code, under the heading "Category E Income", provided at the time of the facts (2013), as follows:

"1 – Capital income shall be deemed to be the fruits and other economic benefits, whatever their nature or denomination, whether monetary or in kind, derived, directly or indirectly, from patrimonial elements, assets, rights or legal situations, of a movable nature, as well as their respective modification, transmission or termination, with the exception of gains and other income taxed in other categories.

2 - The fruits and economic benefits referred to in the preceding section include, in particular:

c) Interest, amortization or redemption premiums and other forms of remuneration of public debt securities, bonds, participation securities, consignment certificates, cash bonds or other similar securities, issued by public or private entities, and other financial investment instruments, in particular bills of exchange, promissory notes and other negotiable credit securities, insofar as used as such".

The definition of capital income contained in article 5, section 1 of the IRS Code expresses and incorporates a tax incidence rule so broad that it is capable of encompassing any situation involving securities that is not taxed in another of the income categories in which IRS operates (see decision of Court of Administrative Appeal of the South-2nd Section, 20/12/2012, case 3410/09; decision of Court of Administrative Appeal of the South-2nd Section, 27/3/2014, case 7384/14; José Guilherme Xavier Basto, IRS: Incidência Real e Determinação dos Rendimentos Líquidos, Coimbra Editora, 2007, p.226 et seq.).

For its part, the cited article 7 of the IRS Code defines the moment of subjection to taxation of capital income, that is, defines the moment when tax becomes due, and in the specific case, sections 1 and 3, paragraph a), 2) of the rule in question are relevant (see José Guilherme Xavier Basto, IRS: Incidência Real e Determinação dos Rendimentos Líquidos, Coimbra Editora, 2007, p.332 et seq.).

The Claimants state that they earned capital income in the amount of €5,955.00 in the case of the female Claimant and €9,528.00 in the case of her dependent. The Claimants allege that these amounts correspond to the entirety of accrued interest after the last maturity date, comprising the period during which the female Claimant and her dependent were not holders of the securities in question. They further allege that upon acquisition, they paid interest to the seller in the amount of €1,729.71 in the case of the female Claimant and €995.91 in the case of her dependent, interest which they seek to have deducted from the interest received, for purposes of determining taxable income. However, they did not prove which period during which the Claimants were allegedly not, in 2013, holders of the securities in question, nor do they prove what was effectively paid by D... They only prove what was paid by them to D... in 2013 for the purchase of the securities.

To support its position, the AT alleges that the IRS Code does not provide for any type of deductions to income, as the Claimants request.

The Claimants attach to the arbitral request two translated statements from D..., as proof of interest paid upon acquisition of the securities. However, said statements make reference to an attached schedule of results which was not provided. As the AT alleges, the two statements attached are incomplete, as they make reference to an attached schedule that was not provided, and as they do not evidence that those amounts refer only and exclusively to deposits of securities that generated the interest in question.

If the documentary evidence resulted in a clear manner that the Claimants only received as interest the amount corresponding to the difference between the value of accrued interest at the date of receipt and the value of interest paid upon purchase, it might be possible to decide in favor of the Claimants' claim.

It would have been necessary that the bank documents reflected that the female Claimant and her dependent would only have received as interest the net amounts invoked.

However, the Claimants did not attach any document proving this fact.

It is stated, both by the Claimants and by the Respondent, that the correction was made on the basis of information transmitted by D..., pursuant to Directive no. 2003/14/EC.

Now, article 76, section 1 of the LGT states that "information provided by tax inspection shall be conclusive when reasoned and if based on objective criteria, in accordance with law". And section 4 of the same article provides that "information provided by foreign tax administrations pursuant to international conventions for mutual assistance to which the Portuguese State is bound are covered by section 1, without prejudice to proof to the contrary by the taxpayer or interested party".

Thus, information provided by foreign entities is conclusive, without prejudice to proof to the contrary by the taxpayer, proof which we understand has not been made.

On the other hand, the Claimants refer to the year 2013 as the year of purchase of the securities in question. But they do not refer to the day or month. Indeed, the Claimants do not allege in which period the securities in question were held by the person who transferred them.

Likewise, were we dealing with a current account contract, one could subject to taxation only the difference between interest paid and interest received, in accordance with article 5, section 2, paragraph f) of the IRS Code. However, as we are dealing with interest that falls within paragraph c) of section 2 of article 5 of the IRS Code, and from the evidence produced it results that D... paid the amounts of €5,955.00 to the female Claimant and €9,528.00 to her dependent, it is necessary to conclude in favor of the inadmissibility of the Claimants' claim.

In these terms, the IRS assessment no. 2017..., the interest calculation statement no. 2017... and the account reconciliation statement no. 2017... for the year 2017 should be maintained in the legal order.

6. Compensatory Interest

The Claimants request that the Respondent be condemned to reimburse the improperly paid tax, plus compensatory interest, in accordance with article 43, section 1 of the LGT.

Given that the declaration of illegality of the assessment in question is inadmissible in the present proceedings, the request for condemnation of the AT to reimburse the amount paid and to pay compensatory interest is also inadmissible.

7. Decision

In light of the foregoing, it is determined:

- To find the claim submitted by the Claimants to be completely inadmissible, maintaining in the legal order the IRS assessment no. 2017..., the interest calculation statement no. 2017... and the account reconciliation statement no. 2017... for the year 2017.

- To find the request for condemnation of the Tax and Customs Authority to reimburse the Claimant the amount of tax paid, or for the payment of compensatory interest, to be inadmissible;

- To condemn the Claimants to pay the costs of the present proceedings.

8. Value of the Claim:

In accordance with article 306, section 2 of the CPC and article 97-A, section 1, paragraph a) of the CPPT and section 3, section 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the claim is set at €845.28.

9. Costs:

Pursuant to article 22, section 4 of the RJAT, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at €306, to be borne by the Claimants, in accordance with article 22, section 4 of the RJAT.

Notify.

Lisbon, 15 March 2019.

Text produced by computer, in accordance with article 138, section 5 of the Civil Procedure Code (CPC), made applicable by reference under article 29, section 1, paragraph e) of the Tax Arbitration Regime, reviewed by me.

The sole arbitrator

Suzana Fernandes da Costa

Frequently Asked Questions

Automatically Created

What was the IRS tax assessment amount disputed in CAAD arbitration case 289/2018-T?
The disputed IRS tax assessment amount in CAAD case 289/2018-T was €4,819.75 for the 2013 tax year. This assessment resulted from corrections to taxable income totaling €15,483.00 (€5,955.00 for taxpayer B and €9,528.00 for a dependent) related to interest income from debt securities. The taxpayers challenged the assessment as excessive because it failed to account for accrued interest they paid to sellers when acquiring the securities.
How does Category E (Categoria E) apply to interest income (juros) under Portuguese IRS tax law?
Under Portuguese IRS tax law, Category E (Categoria E) applies to capital income, including interest from debt securities as specified in Article 5(2)(c) and 5(5) of the IRS Code. According to Article 5(5), capital income includes accrued interest from the date of last maturity, issuance, or transmission until any subsequent transmission occurs. The IRS Code generally does not permit deductions for costs associated with Category E income, though taxpayers may argue that only net interest earned during their ownership period should be taxable, excluding amounts paid for pre-acquisition accrued interest.
What is the procedure for challenging an IRS tax assessment through CAAD arbitral tribunal in Portugal?
The procedure for challenging an IRS assessment through CAAD involves: (1) filing a gracious complaint (reclamação graciosa) with the relevant tax office; (2) if tacitly denied (no decision within the legal timeframe), filing an arbitration request with CAAD within the applicable deadline per Article 10(1)(a) of RJAT and Article 102(1)(a) of CPPT; (3) acceptance by CAAD President; (4) arbitrator appointment (by party or CAAD if not appointed); (5) tribunal constitution; (6) Tax Authority response with administrative file; (7) optional hearing or waiver; (8) written submissions; and (9) arbitral decision within extended deadlines if necessary.
What happens when a gracious complaint (reclamação graciosa) is tacitly denied by the Portuguese tax authority?
When a gracious complaint (reclamação graciosa) is tacitly denied by the Portuguese Tax Authority—meaning no decision is issued within the statutory period—taxpayers may proceed to challenge the underlying tax assessment through judicial or arbitral means. Tacit denial (indeferimento tácito) is treated as an implicit rejection of the complaint, triggering the taxpayer's right to seek administrative arbitration at CAAD or judicial review. The tacit denial serves as the immediate cause of action, while the underlying illegal assessment constitutes the mediate cause, allowing taxpayers to request declaration of illegality of both the tacit denial and the original assessment.
Can taxpayers request arbitration at CAAD to declare the illegality of an IRS income tax assessment?
Yes, taxpayers can request arbitration at CAAD to declare the illegality of an IRS income tax assessment, as demonstrated in case 289/2018-T. According to Article 10(1) and (2) of RJAT (Regime Jurídico da Arbitragem Tributária) and Portaria 112-A/2011, taxpayers possess legal standing and legitimacy to challenge IRS assessments through administrative arbitration. The request must be filed within applicable time limits (Article 10(1)(a) of Decree-Law 10/2011 and Article 102(1)(a) CPPT), typically after exhausting or awaiting resolution of administrative complaints. CAAD has jurisdiction over IRS disputes, providing an alternative to traditional judicial tax courts.