CAAD 313/2015-T: IRS Capital Gains – Deductible Expenses Under Art. 51(1)(a) CIRS on Inherited Property

ARBITRAL DECISION

I – Report

1. On 18 May 2015, A... and B..., married, resident at Av..., Lot..., 2nd Floor Left, ..., ...-... ..., with tax identification numbers ... and ..., respectively (hereinafter referred to as Requesters), hereby submit, in accordance with the provisions of Article 10 of the RJAT, a request for the constitution of an Arbitral Tribunal for the annulment of the personal income tax (IRS) assessment act no. 2014..., relating to the year 2013, in the amount of €4,373.25 (four thousand three hundred and seventy-three euros and twenty-five cents), and the subsequent acts denying the administrative appeal and the presumed implied denial of the hierarchical appeal filed by the requesters, against the Tax and Customs Authority (hereinafter referred to as Respondent). With the Request were attached, in addition to two powers of attorney and proof of payment of the initial fee, seventeen documents.

2. In the request submitted, the Requester did not appoint an arbitrator, and by decision of the President of the Deontological Council, in accordance with Article 6, paragraph 1 of the RJAT, the undersigned was appointed as sole arbitrator, and accepted the position within the legally stipulated period.

3. The arbitral tribunal was constituted on 28 July 2015.

4. The Tax and Customs Administration (AT or Respondent) sent the Response and the administrative file (PA) on 1 October 2015, respectively.

5. Having the Requesters responded, on 19 October 2015, to the exception raised by the Respondent, the tribunal, with the consent of both parties, dispensed with the holding of the meeting provided for in Article 18 of the RJAT, followed by a period for the presentation of successive written pleadings.

6. The parties presented their pleadings on 20 November and 10 December 2015, respectively, and the tribunal set 25 January 2016 as the deadline for issuing the final decision.

7. The Claim

The Requesters state, in summary (our responsibility):

• Notified of the assessment act, they filed an administrative appeal which was only partially granted, considering the costs of deed and registration in the amount of €829.99, and therefore filed a hierarchical appeal thereof on 14 January, and, this not having been decided within 60 days, they hereby submit the present claim in accordance with Article 66, paragraph 5 of the CPPT and Article 10, paragraph 1, letter a) of the RJAT.

• By death of C..., which occurred on 17 June 2009, he was succeeded by, as sole and universal heirs, his wife and two children – the Requester and her brother.

• By deed of partition, on 10 February 2011, the now Requester was assigned the autonomous fraction designated by Letter D, intended for habitation and constituted under the regime of horizontal property registered under Ap. no. … of 10 November 1993, located on ... Street no...., parish of ..., ..., with patrimonial value of €83,932.70, property encumbered by debts totaling €80,825.50.

• In the partition, the property was assigned a value of €90,000.00, with the fraction being encumbered with a passive consisting of: mortgages totaling €56,829.72 on the date of partition, to guarantee two loans in favor of Bank H..., S.A., one in the amount of €27,381.52 and another of €29,448.20; a seizure in favor of D..., in the amount under execution of €23,995.78; a debt claimed by Social Security, in that enforcement proceeding, of €16,320.50.

• By the deed of partition was awarded to the Requester the asset whose sole item was the aforesaid property, and all the passive encumbering such property.

• On 11 January 2013, the Requester sold the aforesaid fraction, free of liens or charges, for the value of €90,000.00, to the commercial corporation E..., S.A., and therefore had to liquidate all mortgage loans that burdened the property as well as the debts to D... and Social Security.

• The IRS assessment that is the object of the claim – whose debt the requesters paid on 27 October 2014 – considered as acquisition value of the property €88,482.87 and as realization value €130,020.00, not considering the passive with which the property was encumbered.

• The taxation of capital gains arises insofar as the alienation of a certain asset at a value higher than that at which it was acquired results in a patrimonial increase in the sphere of the alienating taxpayer; however, in the present case, the Requester had no patrimonial increase in her legal sphere due to expenses with the passive that encumbered the property and which she had to assume.

• For purposes of the IRS assessment, given the purpose of the rule (Article 51, letter a) of the CIRS), the expenses assumed by the requester regarding payments to banks with guarantees over the property should be added to the acquisition value – expenses incurred by the requester at the time of acquisition of the property should be encompassed within the second part of letter a) of Article 51 of the CIRS, understanding that regarding "necessary expenses and actually practiced, inherent to acquisition and alienation," it is not required that the obligations, liens or duties borne by the taxpayer have increased the value of the property, it sufficing that without the performance of those expenses the Requester would not have been able to sell the property.

• This interpretation is supported by the Doctrinal Note DGCI published in accordance with the binding information issued in Proc. .../2008, concerning the interpretation of the expression "necessary expenses" contained in letter a) of Article 51 of the CIRS.

• Should this interpretation not be adopted, there will be a violation of the principles of Contributive Capacity (Articles 13, 103 and 104 of the CRP, guarantee precepts of the principle of equality and private property, of just distribution of income and of progressivity), of Net Income, as a consequence of the principle of contributive capacity in the shaping of tax on income, according to which only the net amount constitutes (true) income for the payment of taxes.

• The legislator seeks to exclude the taxation of manifestations of wealth that do not correspond to reality and in which there was no patrimonial increase in the sphere of the taxpayer, under penalty of violation of Article 4, paragraph 1 of the LGT.

• As acquisition value, only the patrimonial value of €88,482.87 was considered, but completely disregarding a value of passive.

• The acquisition value to be considered should have been €182,426.11, a much more fair value and in accordance with material truth – corresponding to €90,000.00, patrimonial value assigned by the deed of partition, plus €56,829.72, relating to the mortgages, plus €23,995.78 relating to the seizure of D... and still €11,600.61 relating to the debt that encumbered the property claimed by the Social Security Institute, IP (these last two values, although not forming part of the patrimonial value assigned by the deed of partition, had to be paid by the requester at the time of acquisition of the property).

• Moreover, already in 2011 the property was taxed for IMI purposes in accordance with the value of €130,020.00, which reinforces that, regardless of the passive, the patrimonial value of the property was higher than that which was considered as the acquisition value.

• The challenged act, in not considering as an integral part of the acquisition value expenses that are inseparable from the alienation of the property, suffers from the defect of violation of law – of Article 51, letter a) of the CIRS, of Article 4 of the LGT – and even of unconstitutionality due to violation of Articles 13, 103 and 104 of the CRP.

• The impugned assessment has already been paid, so, in addition to the annulment of the challenged assessment act, the Respondent should be condemned to fully refund to the Requesters the amount paid, in the total amount of €4,449.68 and to pay compensatory interest from the date of payment until full and complete refund.

8. The Response

The Respondent responds, in summary (our responsibility):

As preliminary issues, it invokes:

• Illegibility of the assessment act that is the object of the claim and untimeliness of the submission of the request for arbitral decision presented on 18 May 2015, because the Requesters come to directly impugn the assessment act relating to the payment of IRS for 2013, whose payment deadline would end in November 2014, making no reference to the decision of the hierarchical appeal.

Regarding the object of the claim, it defends its lack of merit because:

• The Requesters' thesis that, in the assessment of IRS and application of the provision in letter a) of Article 51 of the CIRS, financial charges incurred to settle the encumbrances that weighed on the property received in partition by inheritance and which they subsequently alienated should be taken into account, is not well founded.

• It is to be confirmed the decision of the administrative appeal stating that "For purposes of determining capital gains resulting from the alienation of real property that has been acquired gratuitously, Article 45 of the CIRS establishes that the acquisition value to be considered corresponds to the value that has been considered for purposes of liquidation of stamp tax, or, if there has been no liquidation of that tax (because an exemption applies), the value that would have been considered had it occurred."

• The expense with the mortgages and seizures that encumbered the property are not necessary expenses inherent to alienation, provided for in letter a) of Article 51 of the CIRS.

• Although there may be some indeterminacy in filling the concept of encumbrances (Article 51), it is not certain to assert that the Respondent's interpretation violates the principles of contributive capacity and net income (Articles 13, 103 and 104 of the CRP).

• Necessary and actually practiced expenses are those inherent to acquisition and alienation, thus being considered notarial and real estate registration charges, without which the operation cannot be carried out, and which the AT has accepted, such as expenses that taxpayers have borne and presented, related to the payment of IMT, deeds and registrations.

• As for charges related to interest and amortization of encumbrances that weighed on the property, the same do not fit within the concept of property valuation, because whether they exist or not, the value of the property is the same.

• In the sense of the interpretation made by the AT that expenses resulting from payments of mortgages of debts in general that encumber the property are excluded from the scope of application of Article 51 of the CIRS, the Constitutional Court has already pronounced itself in Judgment no. 451/2010.

• Thus, the act of IRS assessment does not suffer from the defects indicated by the Requesters, nor were any errors committed by the services in the application of the law to the facts in question, there being no basis for the payment of compensatory interest, and the pretension of the Requesters should be considered lack of merit, with the Respondent being absolved of all claims.

9. Issues to be Decided

9.1. Preliminary Issue and Exception

Regarding the illegibility of the document relating to the assessment act subject to examination in this case, the argument is considered lack of merit because, although the very poor legibility of the copy of the collection document attached to the file is confirmed, the Respondent had no difficulty in locating the act and defending itself, and documentation was even attached confirming the content of the act.

Regarding the exception, it will be decided as a preliminary matter, following the establishment of the factual circumstances.

9.2. Issue that is the Object of the Claim

The fundamental issue that is the object of the claim consists in determining whether, in a case of onerous alienation of real rights over real property (letter a) of paragraph 1 of Article 10 of the CIRS), the determination of capital gains subject to IRS, when taking into account expenses and encumbrances of the property, in accordance with the provision in Article 51 of the CIRS, should include the costs borne by owners with the discharge of encumbrances of mortgages or seizures that weighed on those properties at the moment of their acquisition, namely in the case of partition of property acquired by succession mortis causa.

10. Preliminary Examination

The arbitral tribunal is materially competent, in accordance with the provision in Articles 2, paragraph 1, letter a) of the Legal Framework for Arbitration in Tax Matters.

The parties enjoy legal personality and capacity and have standing in accordance with Articles 4 and 10, paragraph 2 of the Legal Framework for Arbitration in Tax Matters (RJAT) and Article 1 of Ordinance no. 112-A/2011 of 22 March.

The proceeding does not suffer from any nullity and the conditions are met for the issuance of the arbitral decision.

II – Substantiation

11. Established Facts

11.1. On 11 July 2009, C... died, leaving as sole and universal successors his wife, F... and two children, G... and A..., the latter being the Requester in the present request for arbitral decision (Article 15 of the claim, Article 24 of the Response, Documents 7 to 17 attached with the claim, pages 22 and 23)[1].

11.2. In a deed executed on 10 February 2011, the heirs of C... declared they were carrying out the "partition of the following property and responsibilities that make up the undivided estate," indicating as assets to be partitioned the autonomous fraction designated by letter D, corresponding to the second floor left, intended for habitation, of the urban property under the regime of horizontal property, located at ... Street no...., in the parish of ... County of ..., registered on the matrix with number ... fraction D, with the patrimonial value of €83,932.70, and to which was assigned for purposes of partition the value of €90,000.00. (Article 18 of the claim, Article 24, 1. of the Response, Documents 7 to 17 attached with the claim, pages 25 to 31).

11.3. In the real estate register of the autonomous fraction referred to in the previous number, constituted as horizontal property in 1993, registered at the Property Registration Office under no. ... – ..., and acquired by the author of the estate and his wife on 14 November 1994, there was recorded, at the time of partition on 16 February 2009, a seizure in favor of D...-Bank ..., SA (Article 25 of the claim, Article 24, 5 of the Response, Documents 7 to 17 attached with the claim, pages 27 and 34).

11.4. The passive of the estate was, in the deed of partition, described under two items corresponding to two debts, in the total amount of €56,829.22, to Bank H... (H…), previously under the firm of Bank I..., SA, (both guaranteed by mortgage over the autonomous fraction contained in item one of the active) – the first debt (item one of the passive) in the amount of €27,381.52, derived from a loan contract entered into in 1994 for the acquisition of permanent housing, and the other (item two of the passive), in the amount of €29,448.20, from a loan contract entered into in 2009, for restructuring of prior credit (Articles 23 to 26 of the claim, Article 24, 5 and 6 of the Response and Documents 7 to 17 attached with the claim, pages 27 and 28 and 44 and 45).

11.5. For purposes of partition, the active was considered to have the value of €90,000.00 and the passive the value €56,829.22, so the value subject to partition was €33,170.28, with half of this value belonging to the surviving spouse, widow and mother of the Requester, and the hereditary share of each heir calculated at €5,528.38 (Documents 7 to 17 attached with the claim, pages 28 and 29).

11.6. Through the deed of partition was awarded to the daughter of the deceased, the Requester in the present case, the property related as an asset (11.2) and the responsibility to fully pay the debts under items one and two of the passive, which, taking into account the values of active and passive referred to in the previous number, resulted in the calculation of equalization payments to be made by the Requester in the total amount of €27,641.90, being €22,113.52 to the mother and €5,528.30 to the sibling, amounts which they declared had already been paid (Documents 7 to 17 attached with the claim, pages 28 and 29).

11.7. In the IMT model 1 declaration filed on 11 February 2011, identifying the taxable event as "excess of proportional share of real property in divisions or partitions," concerning the property registered under Article ... fraction D, the contract value is €75,000.00 and the property value €90,000.00 (PA, page 39).

11.8. On 11 January 2013, the Requesters sold to the commercial corporation E..., S.A. the fraction described in 11.2, free of liens and charges, for the value of €90,000.00 (Article 28 of the claim, Article 24, 8 of the Response, documents 7 to 17 attached with the claim, pages 39 to 42).

11.9. On 18 May 2014, the Requesters filed the IRS model 3 declaration for the year 2013, with Annex G (capital gains), indicating gains obtained from alienation in January 2013 of the property registered under Article ... of the parish..., having declared the following values:

Realization Value Date of Acquisition Acquisition Value

€21,674.34 2009 – 06 €13,485.87

€108,345.66 2011 – 02 €74,997.00

(Article 24, 10 and 11 of the Response and PA, page 25).

11.10. The property referred to in the previous number is that referred to in 11.2 and 11.5, and the declaration concerns the sale executed in January 2013 (11.8), resulting in a total alienation value of €130,029.00 (€21,674.34 + €108,345.66), and acquisition of €80,899.00, this value resulting from the sum of the items corresponding to the acquisition gratuitously of the proportional share of 16.67% of the property (€13,485.87) on 17 June 2009, by death of C..., and of the remaining proportional share of 83.33%, (€74,997.00) by deed of partition on 10 February 2011 (PA, pages 23 to 28 and 34).

11.11. The acquisition values of the property were determined as follows: the first of €13,485.87 corresponds to 16.67% of the patrimonial value of €80,899.00, value that would serve as the basis for the liquidation of stamp tax on gratuitous transmission, and the second, of €74,997.00, corresponds to 83.33% of €90,000.00 (PA, pages 23 to 28 and 34).

11.12. Assessment no. 2014..., relating to the year 2013, was made considering as acquisition value €88,482.87 (€13,485.87 + €74,997.00) and realization value €130,020.00 (Articles 32 and 33 of the claim).

11.13. The Requesters were notified of the IRS assessment referred to in the previous number, in the amount of €4,373.25 (four thousand three hundred and seventy-three euros and twenty-five cents) – (Article 1 of the claim and document no. 1 attached with the claim).

11.14. On 19 November 2014, the requesters filed an Administrative Appeal (...) and were notified by official letter no. ..., dated 2 December 2014, received by the requesters' agent on 5 December 2014, of the Draft Decision on the administrative appeal by the Head of Tax Services of ... ..., and to exercise the right to be heard, which they did on 19 December 2014 (Documents 2 to 6 attached with the claim, pages 34 to 39 and 41 to 45, and PA, pages 29 to 33).

11.15. The Administrative Appeal was subject to final decision on 22 December 2014, communicated to the Requesters, through their agent, first stating by oversight that it had been summarily denied (official letter no. ...) and, then (official letter no. ..., received on 13-02-2015), informing of the decision issued by the Head of Tax Services of ......, which granted only partial relief to the administrative appeal, considering the costs of deed and registration in the amount of €829.99 (eight hundred and twenty-nine euros and ninety-nine cents) (Article 5 of the claim, documents 2 to 6 attached with the claim, pages 47 to 60 and PA, pages 34 to 38).

11.16. Following the partial granting of the administrative appeal, a new assessment was processed, no. 2014..., and compensation no. 2014..., considering as acquisition value €88,482.87 and as realization value €130,020.00, altering the taxable income from €48,078.81 to €47,703.86, which resulted in an adjustment of €150.20, assessment of €4,223.05 (Article 5 of the claim, documents 7 to 17 attached with the claim, pages 20 to 21).

11.17. From the decision of partial denial referred to in 11.15, the Requesters filed, on 15 January 2015, at Tax Services ......, a Hierarchical Appeal, which on 18 May 2015, the date of submission of the present claim, had not been decided (Article 7 of the claim, documents 7 to 17 attached with the claim, pages 1 to 12 and PA, page 41).

11.18. On 27 October 2014, a payment was made via ATM in the amount of €4,449.68 which the AT admits to be for the assessment[2] (Article 105 of the claim, documents 6 to 17 attached with the claim, page 56, and Response, 6.l).

11.19. In enforcement proceedings that ran in the 1st Civil Court of the Court of ..., with no. .../07, the Social Security Institute claimed against F..., resident at ... Street, ..., ...Left, a credit in the total amount of €16,320.50, for debts of contributions as a self-employed worker, relating to the period between 2002-01 and 2007-07, and respective default interest (documents 7 to 17 attached with the claim, pages 46 to 50).

11.20. On 12 February 2015, the enforcement officer in the proceeding referred to in the previous number certifies that the amount subject to enforcement has been regularized, requesting the cancellation of the seizure incident on the property registered under matrix no. ..., and registered on 16/02/2009 (documents 7 to 17 attached with the claim, pages 53 to 55).

12. Unproven Facts

There are no unproven facts to be considered as relevant for the decision of the present proceeding.

13. Reasoning Regarding Established and Unproven Facts

The facts were established as proven and unproven based on the evaluation made by the tribunal of the procedural documents delivered by the parties and of the documents attached to the file, namely the administrative file, as referred to regarding each of the points of the matter of fact established.

14. Application of Law

14.1. The Exception of Untimeliness

The Respondent raises the question of lapse of the claim based on untimeliness of its submission, on the ground that the Requesters come to directly impugn the assessment act relating to the payment of IRS for 2013 – whose payment deadline would end in November 2014 – making no reference to the decision of the hierarchical appeal.

The Requesters explain in the request for arbitral decision that, not agreeing with the IRS assessment act no. 2014..., they filed an administrative appeal obtaining only partial relief. They further explain that they filed a hierarchical appeal from the decision of partial denial, requesting the complete annulment of the assessment act, and that it was following the expiration of the period for decision of this appeal that, expressly invoking Article 10, paragraph 1, letter a) of the RJAT, they submitted the present request for examination of the legality of the assessment act, where they argue that we are "facing a defect of violation of law of the aforesaid assessment act and of the subsequent acts denying the administrative appeal and of the presumed implied denial of the hierarchical appeal."

Given the situation, the Respondent's emphasis on the fact that the Requesters throughout the claim allege the defects directly to the IRS assessment asking that the assessment be annulled in its entirety and making no examination of the denial of the administrative appeal or the hierarchical appeal is considered excessive.

It is decided to take into account that the Requesters explain that there was no decision of the hierarchical appeal and that the decision of the administrative appeal was one of partial relief, and that it is implicit that they disagree with the reaffirmation therein of the legality of the tax act which they then proceed to directly attack.

On this issue, we subscribe to the understanding that the competence of arbitral tribunals is limited to the declaration of illegality of assessment acts, encompassing only acts denying second-degree acts (administrative appeals or hierarchical appeals) insofar as they entail the examination of the legality of primary acts[3].

However, the object of the claims, in these cases, is fundamentally the legality of the assessment, which will confirm that the most relevant is that the request for arbitral decision presented, following denial of administrative appeal, aims at the legality of the assessment meanwhile examined by the second-degree act. A requirement that is believed to be met in the present case, in which the illegality of a tax act is invoked due to wrong interpretation and application of Article 51 of the CIRS, a defect which the requesters invoke as having been maintained by the (partial) denial of the administrative appeal and not analyzed by the hierarchical appeal.

Thus, and taking into account the pro actione principle (Article 7 of the CPTA), the exception is considered lack of merit, concluding that the present request for constitution of an Arbitral Tribunal, submitted on 18 May 2015, is not shown to be untimely in light of the provision in letter a) of paragraph 1 of Article 10 of the RJAT, and thus we proceed to the examination of the substantive issue.

14.2. Taxation of Real Property Capital Gains

The present proceedings have as their object the examination of the legality of an IRS assessment that took into account the existence of income from capital gains, category G, resulting from the alienation of the ownership of a real property, a fraction of property under horizontal property regime.

The capital gains encompassed by the concept of patrimonial increases, category G of IRS, are gains obtained by individuals which, not being considered as business and professional income, income from capital or real property income, result from situations enumerated case-by-case in the CIRS, all in accordance with, in particular, Articles 1, paragraph 1, 9 and 10 of the same Code.

According to letter a) of paragraph 1 of Article 10 of the CIRS, the gains are encompassed from the "onerous alienation of real rights over real property (...)", a situation in which the gain subject to tax is, according to paragraph 4 of the same Article 10, "constituted by the difference between the realization value and the acquisition value."

The realization value will be, in principle, the value of the counter-performance[4], prevailing, however, when superior, the value at which the assets have been considered for purposes of IMT[5].

The acquisition value, when acquired gratuitously, will be the one that has been considered for purposes of stamp tax on gratuitous transmissions, or that would serve as the basis for the liquidation of such tax if it were due (Article 45, paragraph 1), and, when acquired onerously, the acquisition value is considered to be the one that has served for purposes of liquidation of the municipal tax on onerous transactions in real property (IMT), or, if there is no basis for the liquidation of such tax, the value that would serve as its basis, determined in accordance with the rules specific to that tax (Article 64, paragraphs 1 and 2 of the CIRS). Whenever more than 24 months have elapsed between the date of acquisition and the date of realization, the acquisition value will be corrected by the monetary correction coefficient (Article 50 of the CIRS).

At the time of the tax situation under examination in this case, Article 51 of the CIRS[6], with the heading "Expenses and Encumbrances," provided as follows: "For the determination of capital gains subject to tax, the following shall be added to the acquisition value: a) Charges for the enhancement of property, proven to be made in the last five years, and necessary expenses actually practiced, inherent to acquisition and alienation, in the situations provided for in letter a) of paragraph 1 of Article 10; b) Necessary expenses actually practiced, inherent to alienation, in the situations provided for in letters b) and c) of paragraph 1 of Article 10."

In the initial wording of the Code, the corresponding rule was Article 48, whose letter a) provided for the addition of "charges for the enhancement of property, proven to be made in the last five years, and necessary expenses actually practiced, inherent to alienation."

In commentary and notes to the IRS Code,[7] in a publication of the Tax Administration at the time of the 89/90 Fiscal Reform, it was stated: "this provision is in line with that advocated by the present model of income taxation, which in its capital gains component is characterized by the consideration of real and actual gains that were obtained by the taxpayer."

Further commenting on the scope of the rule, it was noted that "such charges for the enhancement of property will not include, by way of example, transfer tax and deed costs borne at the time of acquisition." In fact, it was not provided for at that time, as referred to, for charges with acquisition but only with alienation[8].

And in the situation in this case, taking into account the law then in force and the principles invoked by the Requesters and constitutionally enshrined, what expenses and encumbrances borne with the real property should have been recognized?

14.3. Doctrine, Jurisprudence and Legislative Evolution

The wording of either of the two letters of paragraph 1 of Article 51 was susceptible to raising doubts, as Xavier de Basto[9] refers to, when recalling the doctrine set by the tax administration in Decision of 4 March 2004 to the effect that, as for charges with the enhancement of real property made in the last five years, "only those that concern the enhancement of the property itself should be considered," "expenses that, by nature, bring additional value to the property, such as for example improvement works," and concluding, in this logic, that "the payment of compensation to a tenant makes it possible to have the property in better conditions, but does not increase its intrinsic value, although the market value may turn out to be higher."

The Author manifests resistance to accepting this doctrine and says: "we do not see in the letter of the law any support to restrict the relevance of charges for the enhancement of property proven to be made in the last five years to charges with physical or material enhancement, with exclusion of all others."

And, admitting the existence of jurisprudence from the TCAS (Judgment of 25 January 2005, proceeding no. 297/03[10]) in the same sense as the Administration's doctrine, he cites the very sharp criticism of that decision, made by Manuel Faustino[11] who considered that an "injustice" had been committed, because "a non-existent contributive capacity was taxed."

Expounding his position, Xavier de Basto considers in particular that "the open formulation 'charges for the enhancement of property' seems to indicate that there was no intention to restrict the scope of the rule, and on the other hand, the deduction of charges – through addition to the acquisition value – is a solution that flows from the principle of taxation of net income. «Not providing for the deduction of expenses actually borne that contribute to the occurrence of income – in this case, to the occurrence of the increase in the value of the property that allowed the realization of capital gain, in its alienation – is to violate an economic and technical principle of income taxation». He further criticizes the thesis of the increase in intrinsic value, observing that the law does not distinguish between "intrinsic value" and "market value," and such distinction cannot be operationalized through administrative means[12].

Xavier de Basto adds, however: "It is true that the relevance of compensation for eviction raises a difficulty and this may eventually justify that, in certain cases, its relevance cannot be accepted and compensation may end up being considered only as expenses related to physical or material enhancement of real property. This difficulty is that of knowing the limit of the compensation that should be considered as a charge for enhancement. Obviously, there must always be a limit, and one cannot accept as a charge 'compensation fixed by agreement between the parties to end a lease contract. It would open the door to collusion that would favor fraud"[13].

The Judgment of the Superior Administrative Court of 21 March 2012, issued in proceeding 587/11, citing the criticisms of the earlier TCAS decision mentioned above (proceeding 297/03), came to recognize that "the argument is not without merit." And despite recalling the other observations of Xavier de Basto (also referred to above) about the difficulties resulting from recognition of compensation for eviction, it admits that «all the argument set forth and, especially, the fact that income to be taxed as capital gain should, in principle, be net income, corresponding to the contributive capacity actually acquired, and on the other hand, double economic taxation should be avoided (since the compensation received by the tenant will be subject to IRS) and, equally, an interpretation that favors tax fraud should be avoided, those difficulties do not seem, as the Public Ministry notes, to oppose, interpreting extensively»[14].

This issue is, following the Reform of taxation of individuals, approved by Law no. 82-A/2014 of 31 December, expressly covered by the wording of letter a) of Article 51, which provides: "Charges for the enhancement of property, proven to be made in the last 12 years, and necessary expenses actually practiced, inherent to acquisition and alienation, as well as compensation proven to be paid for the onerous renunciation of contractual positions or other rights inherent to contracts relating to such property, in the situations provided for in letter a) of paragraph 1 of Article 10."

In the Draft[15] presented by the Commission of the aforesaid Reform of IRS, in the presentation of legislative proposals relating to category G, it is stated: «Alongside what, as we have already referred to, happens in the context of capital gains from partnership interests and other securities, also in the case of real property capital gains there is an unjustifiably restrictive regime at the level of eligible expenses for purposes of determining such capital gains, as the law excluded the deductibility of expenses actually and necessarily incurred for their obtaining. With the objective of ensuring fairer taxation, which takes into account real contributive capacity, it is understood that the range of expenses to be considered in the determination of capital gains and losses should be expanded, to include compensation proven to be paid for the onerous renunciation of contractual positions or other rights relating to real property. In return, it is expressly provided that such compensation constitutes patrimonial increases subject to taxation in the sphere of the respective beneficiaries. It is further proposed the expansion, from five to twelve years, of the period of eligibility of charges for the enhancement of property, proven to be made»[16].

Regarding, specifically, the charges inherent to acquisition and alienation (second part of letter a) of paragraph 1 of Article 51), Xavier de Basto, in the work we have been citing, considered that the formula "necessary expenses" also has some margin of indeterminacy.

He referred to how, in the Decision of 4 March 2004, the Tax Administration recognized that it had been considering "as necessary expenses and inherent like the IMT and notarial charges and real estate registration charges because without them the operation could not be carried out."

The Author admitted that the formula of the law certainly included "bureaucratic" and tax costs of the operation «but perhaps not already "brokerage costs" actually borne by the seller, which, nowadays, will be in many cases, however, unavoidable or very difficult to avoid, without disproportionate increase of the so-called "transaction costs"»[17].

In Binding Information (proceeding …/2008, 2008-07-14 and 2008-08-12) the DGCI came to admit, changing its earlier position,[18] that once all necessary requirements are met to unequivocally demonstrate the connection of the amount paid to the real estate broker with the concrete transaction that gave rise to the taxable capital gain and being properly documented the intervention of the respective broker in accordance with applicable legal terms, the brokerage commission may be considered a "necessary expense" for purposes of letter a) of Article 51 of the CIRS.

But the set of concerns underlying the rule continues to be emphasized, which is not limited to the intention to tax respecting contributive capacity but also to avoid tax fraud schemes[19].

14.4. The Tax Situation – Factuality and Legal Framework

14.4.1. Conclusions Regarding Factuality

From the facts established in this case, it results that the Requester succeeded, in 2009, by the death of her father, to the ownership of a share of the inheritance that integrated the property here in question, being awarded the title of ownership of the same in 2011, by partition, paying equalization payments to the remaining successors.

The author of the estate and his wife were debtors of two loans to H..., one made in 1994, for the purchase of their own housing, and another in 2009, for restructuring of the prior credit. Both loans were guaranteed by mortgage over the property transmitted by inheritance, and were described as passive of the estate. In the deed of partition, the Requester assumed responsibility for the payment of the passive, in the total amount of €56,829.72, corresponding to the sum of debts corresponding to those two aforementioned bank loans, and gave equalization payments for the net value of the inheritance.

For purposes of partition, the active was considered to have the value of €90,000.00 and the passive the value €56,829.22, so the value subject to partition was €33,170.28, with half of this value belonging to the surviving spouse, widow and mother of the Requester, and the hereditary share of each heir calculated at €5,528.38.

In 2013, the now Requester and her husband alienated the property for the contractual value of €90,000.00. An assessment was made considering as acquisition value €88,482.87 (sum of the value corresponding to the initial share in the amount of patrimonial value of €80,899.00 – which would serve as the basis for the liquidation of stamp tax on gratuitous transmission – and the value of the share acquired by partition, relative to the value declared in the act €90,000.00). As the realization value, the tax assessed value (VPT) of the property was considered in the amount of €130,000.00.

In administrative appeal proceedings, the AT accepted the deduction of expenses with deed and registration in the amount of €829.99, which led to alteration of the assessment initially notified and appealed.

The Requesters seek the annulment of the first assessment in its entirety, invoking that they had no patrimonial increase in their legal sphere, due to expenses with the passive that encumbered the property and which they had to assume, being applicable to them Article 51, letter a) of the CIRS when it provides that, for the determination of capital gains subject to tax, necessary expenses actually practiced, inherent to acquisition and alienation, shall be added to the acquisition value.

They explain that they do not intend to be encompassed by the concept of "charges for the enhancement of property." They argue that payments to banks (corresponding to the encumbrances assumed by the requesters) that had guarantees over the alienated real property should be encompassed by the concept of "encumbrances/expenses" and taken into account in the acquisition value. They reject a restrictive interpretation of Article 51, letter a) of the CIRS, arguing that it is not required that the obligations, liens or duties borne by the taxpayer have enhanced the property, it sufficing that, for expenses to be "necessary," they be inherent and inseparable from the property.

They argue that the AT's position in the decision of 4 March 2004, of the DGCI, accepting expenses with IMT, notarial charges and real estate registration charges, because, "without them, the operation could not be carried out," should be applied by analogy to the expenses borne by the Requesters because without them they would not have been able to sell the property, demonstrating inseparability between the expenses and the sale operation.

And they conclude that an interpretation of Article 51, letter a) of the CIRS that does not consider as an integral part of the acquisition value expenses that are inseparable from the alienation of the property, would be unconstitutional for violating the Principle of Contributive Capacity and the Principle of Net Income, the latter as a consequence of the former, and the constitutional precepts nos. 13, 103 and 104, as well as Article 4, paragraph 1 of the LGT, referring to contributive capacity.

They argue that the correct value to be considered as acquisition value should have been €170,825.50, corresponding to the patrimonial value of €90,000.00, assigned by the deed of partition, plus the amount of €56,829.72, relating to two mortgages over the property, and the amount of another two debts guaranteed by seizure over the property (one in the amount of €23,995.78, subject to enforcement against the requesters' parents, and another in the amount of €16,027.17, debt of the requester's mother for contributions to Social Security, claimed in the same enforcement proceeding).

The AT reiterated its understanding that expenses with mortgages and seizures that encumbered the property are not necessary expenses inherent to alienation and therefore do not fit within the provision of Article 51, paragraph 1 of the CIRS. The necessary and actually practiced expenses that the Requesters have borne and presented were those related to the payment of IMT, deeds and registrations, and the AT has already considered them. It cites in favor of its interpretation Judgment no. 451/2010 of the Constitutional Court.

14.4.2. Conclusions Regarding Applicable Law

As already explained in section 14.2, the concepts used in Article 51 of the CIRS, letter a), first and second part, and letter b), are relatively indeterminate concepts, which have raised some doubts about interpretation.

We referred above to examples of legislative expansion, greater flexibility by the Tax Administration in the interpretation of the concepts, and openness of jurisprudence to doctrinal criticism.

But we also observed that the legislator understood to expressly make changes to Article 51 of the CIRS, not leaving the evolution of the legal regime dependent only on doctrinal interpretation and application by the courts. Such was the case of admissibility, with respect to "charges for the enhancement of property," of inclusion of "compensation proven to be paid for the onerous renunciation of contractual positions or other rights relating to real property."

Is the provision of the rule – letter a) of Article 51 of the CIRS – susceptible to encompassing charges with discharge of mortgages and seizures existing over real property, as in the situation in this case? Is it admissible, as the Requesters contend, to resort to analogy?

Notwithstanding criticisms of some overly restrictive interpretations, the rule cannot permit, either as to the first part of letter a) ("charges for the enhancement of property") or as to the second part of the same letter ("necessary expenses inherent to acquisition or alienation"), an interpretation that contravenes the rationale of the set of rules relating to this matter.

Because very similar to the present case, we will cite the understanding adopted by the TCAS in the Judgment of 14 April 2015, in proceeding 06824/13[20]. There was a situation in which, through partition by divorce, the ex-husband became owner of the property, the family home, and alienates it after payment of the debt existing with the bank and discharge of the mortgage that guaranteed the loan.

The Tax Administration did not consider relevant for purposes of determining capital gains the value resulting from a loan contracted for the acquisition of the alienated property. The taxpayer, on the contrary, considered that the expenses inherent to the payment made to the banking entity beneficiary of the mortgage for its redemption should be considered as necessary to the alienation of the property, and therefore added to the acquisition value.

Identifying the issue to be decided as that of «assessing whether the lower court judge acted correctly in understanding that certain expenses borne by the Appellant do not fit within Article 51, paragraph 1, a) of the CIRS and, as such, cannot be deducted from the acquisition value of the property for purposes of capital gains», the TCAS decided in the manner that follows (underlined portions are ours):

«It is therefore important to know whether the expenses contained in the records and brought to evidence can be interpreted as "necessary expenses actually practiced, inherent to acquisition and alienation. In the absence of other elements that would lead to choosing the less immediate meaning of the text, the interpreter should in principle opt for that meaning that best and most immediately corresponds to the natural meaning of the verbal expressions used, in the assumption (imposed by paragraph 3 of Article 9 of the Civil Code, which holds until it is shown not to be correct) that the legislator knew how to express his thought in adequate terms. In the case in question there are no elements that justify making an interpretation different from that which immediately results from the legal text. Now, the legal text results in the expression of "necessary" and "inherent" expenses, so they must be interpreted in accordance with the necessity and inherence of the expense in relation to the alienation of the property, so the question is posed of whether such "assumption," with its inherent costs, constitutes an expense encompassed within that normative, to be considered for purposes of taxation of the respective capital gain. And there, the subordinate is, undoubtedly, "the inherence" of the expense to alienation. In the legal criterion, only inherent expenses are necessary, so only they are relevant. Such criterion contains an idea of inseparability, an intrinsic relationship – not merely extrinsic – with alienation: to be considered relevant, the expense must be so by its position relative to alienation, it must, in short, be indissociable therefrom. In other words: the expense must be integral to the alienation itself. It is not seen, in fact, what other meaning can be attributed to the expression "inherent to alienation." It is not sufficient, therefore, that the expenses be connected to the obtaining of income, it is necessary that they be indissociable from it. Now, this is not the case of the expenses in question, which are only connected to alienation, they are not inseparable from it. Returning to the concrete case, it is easy to conclude that the expenses which the Appellant presents related to obtaining the discharge of the mortgage, namely the amortization of capital, interest, stamp tax, insurance and provision for legal costs with reference to the property, are expenses inherent to the bank loan contract and not expenses inherent to the alienation of the property. The fact that the Appellant contracted with a banking institution a loan/mortgage with mortgage for acquisition of the property, cannot be relevant for purposes of calculating the capital gain. If it were, any taxpayer who resorted to bank credit when acquiring real property would always have a reduced capital gain upon its alienation, since it would deduct all expenses resulting from the contract for a loan with mortgage, including amortization of capital and respective interest. Such expenses might eventually be taken into account but only as deductions to the IRS collection. All amounts paid as amortization of the debt capital and expenses inherent to it obviously cannot be considered for purposes of the alienation of the property since they are not connected with it, but rather inherent to, or connected with, the financing itself. Furthermore, the acquisition value for purposes of IRS consists of the price paid for the property, so if the costs of amortization of the financing for acquisition of the property were also considered, there would be a duplication of the acquisition value. According to the most recent doctrine, examples of "necessary expenses actually practiced, inherent to acquisition and alienation," are registrations and public deeds – see Rui Duarte Morais in On IRS, 2nd Edition, page 141 and Paula Rosado Pereira in Studies on IRS, Income from Capital and Capital Gains, IDEFF Notebooks, no. 2. It may also be considered that real estate brokerage expenses, more specifically the brokerage commission, are necessary expenses inherent to the sale of the property for purposes of paragraph 1 letter a) of Article 51 IRS».

The understanding profiled by the quoted Judgment makes, in our view, a correct interpretation of Article 51, combined with the remaining rules relating to the taxation of real property capital gains, in accordance with the established criteria of legal interpretation. Article 10 of the CIRS provides for situations of tax subjection and exclusion, matters covered by the reserve of law of the National Assembly and in which the interpreter should exercise restraint in resorting to analogy (paragraph 4 of Article 11 of the LGT). Now, with respect to exclusion of taxation in capital gains of gains from the onerous transmission of real property, paragraph 5 of Article 10 of the CIRS provides for it only in cases of real property intended for primary residence of the taxpayer or his family unit, provided that the conditions cumulatively provided for in the different letters are met, as well as that provided in paragraph 6 of the same article.

Reinvestment in the acquisition, construction or improvement of another property used for the same purpose is required, the clear objective of the law being to eliminate tax obstacles to families' change of primary residence in own homes[21]. «Non-taxation is proportional to reinvestment, that is, to the extent that the amount obtained in the sale of the original residence (deducted – as the case may be – from the value used to repay loans contracted for its acquisition) has been used in the acquisition of the new residence. This means that if the price paid for the new property is financed by other means (for example, by a new bank loan), the value of reinvestment to be considered will be only the difference between the price paid and that of the loan; if the new property is of a lower price than the alienated one, there will be only partial reinvestment»[22].

From this, it is concluded that the deduction of amounts of loans in the consideration of the calculation of capital gains from alienation of real property is, even with respect to situations encompassed by a rule of tax exclusion, regulated in a very restrictive manner[23].

It should be noted that in the 2014 Reform a special exceptional measure was provided, justified in this way in the Report accompanying the draft: «With respect to category G, in addition to what has already been referred to regarding the delimitation between movable property capital gains and income from capital, it is noted, as for real property capital gains, the proposal of a rule, necessarily transitory, exempting gains obtained from the alienation of properties, used for primary residence, when the proceeds from alienation are used to pay or partially amortize loans contracted for their acquisition (...).» (underlined)

And thus, «Taking into account the current situation in which a significant number of taxpayers, in financial distress, are forced to proceed with the alienation of their own primary and permanent residence to solve financial obligations associated with loans contracted with its acquisition and in which, consequently, the proceeds of the sale are exclusively used for that purpose (with there being, therefore, no acquisition of new residence and, therefore, no reinvestment) (...)» (underlined), the Commission proposed an expansion, concretized through a transitory rule of the statute that approved the amendments to the CIRS, Article 11 of Law no. 82-E/2014 of 31 December"[24].

All considered, this tribunal considers that in the situation that is the object of this case there is no basis for exclusion of taxation with respect to the amounts paid to discharge the property of the two mortgages that guaranteed loans obtained by the Requester's parents – the first with the purpose of those acquiring their own home and the second granted in a process of debt restructuring – even though the debts were part of the passive of the inheritance and were assumed by the Requester.

And as for the debts of his parents that gave rise to seizures over the property, they have neither any connection with the property nor was their obligation of payment assumed by the Requester.

It should further be noted that neither the interpretation of the law nor the law as interpreted are susceptible to founding the imputation of unconstitutionality. From that point of view, the reference (made by the Respondent) to Judgment no. 451/2010 of the Constitutional Court is considered correct and appropriate, in a situation in which, being at issue the application of letter b) of Article 51 of the CIRS[25], it was invoked in the appeal that «under penalty of violation of the principle of contributive capacity, all expense that is assumed as a conditio sine qua non – inseparable, therefore – of income concretely obtained should be relevant to that title, because expressed in an expense necessary for the existence of the income itself subject to tax in the quantitative expression that it brings to increase, and not merely as an expense inherent to the act of alienation, independently, qua tale, of the costs that determine the existence of the capital gain itself», the Constitutional Court decided:

«With respect to the rule that is the object of the present appeal, it is not seen how it can be considered constitutionally inadmissible. Starting from the concept of capital gains legally established, under which capital gains constitute gains obtained that result from alienation or onerous cession of certain rights, values or property (Article 10, paragraph 1 of the CIRS), Article 51, letter b) of the CIRS provides for the deduction of necessary expenses actually practiced, inherent to alienation, in compliance with "a general principle of income taxation, which requires that only net income be subject to tax" (Xavier de Basto, IRS. Real Incidence and Determination of Net Income, Coimbra Editora, 2007, p. 460). That is to say, the gains obtained (the net gains) from the onerous alienation of rights, values or property previously acquired are subject to tax. It is not constitutionally required a normative criterion that permits the deduction of an expense that may be "materially necessary to the concrete alienation for the stipulated value." For example, the value of the amortization of an account held as guarantee guaranteed by partnership interests object of alienation. It is even to be concluded, as the Administrative and Fiscal Court of Coimbra well concludes (page 39 of the present record) that "the legislator was particularly restrictive here because the admissibility of deduction of expenses whose obligations result from bilateral negotiations more or less complex, would be difficult to supervise, being income from this category [category G], and would open the door to collusion that would favor tax fraud. Collusions that could occur, for example, through the issuance of statements that would elect certain expenses as necessary for strictly fiscal reasons". Reiterating what was already stated in Judgment no. 162/2004 of this Court, it is to be noted that "a system that does not permit control of income and tax evasion, to the extent approximately to the existing reality, leads in a straight line to the distortion, in practice, of the principle of contributive capacity and taxation according to actual income".

Concluding, the argument that the IRS assessment relating to the year 2013 suffers from violation of law or of constitutionally enshrined principles does not hold, because, contrary to what the Requesters maintain, the payments made to discharge the mortgages incident on the alienated property are not encompassed by the concept of necessary expenses actually practiced, inherent to acquisition and alienation, provided for in Article 51, letter a) of the CIRS.

Because the tax act does not suffer from the illegalities and unconstitutionalities that are imputed to it by the Requesters, nor were any errors committed by the Respondent, nor are there grounds for the payment of compensatory interest[26].

15. Decision

With the grounds set forth, the arbitral tribunal decides:

a) To find the request for arbitral decision for declaration of illegality of the IRS assessment relating to the year 2013 (no. 2014...) as well as the subsequent acts of (partial) denial expressed in the administrative appeal and of implied denial of hierarchical appeal, lack of merit.

b) To condemn the Requesters in costs.

16. Value of the Case

In accordance with the provision of paragraph 2 of Article 315 of the CPC, letter a) of paragraph 1 of Article 97-A of the CPPT and also paragraph 2 of Article 3 of the Regulations of Costs in Tax Arbitration Proceedings, the value of the case is set at €4,373.25 (four thousand three hundred and seventy-three euros and twenty-five cents).

17. Costs

For the purposes of the provision in paragraph 2 of Article 12 and paragraph 4 of Article 22 of the RJAT and paragraph 4 of Article 4 of the Regulations of Costs in Tax Arbitration Proceedings, the amount of costs is set at €612.00 (six hundred and twelve euros), in accordance with Table I attached to the aforesaid Regulations, to be borne entirely by the Requesters.

Let it be notified.

Lisbon, 25 January 2016.

The Arbitrator

(Maria Manuela Roseiro)

[1] The Requesters mention a numbering of documents whose individuation is not seen and will cite the page number, taking into account the mention in the submission and the digital viewing.

[2] This value does not coincide with the value of the assessment that was the subject of the appeal nor with that derived from the appeal (at that time still undecided) but the AT does not contest the fact and expressly admits that payment was made. On the other hand, as the assessment act was altered by the decision of the administrative appeal, doubt remains, not clarified, about the substantiation of the amount paid. It was considered, however, that given the issue to be decided and the interpretation of law that comes to be adopted in the sense of the admissibility of the request for arbitral decision, such clarification became not essential.

[3] Jorge Lopes de Sousa, Guide to Tax Arbitration, Almedina, 2013, pp. 120 to 125.

[4] Cf. Article 44, paragraph 1, letter f) (wording in force in 2013, at the time of alienation of the property).

[5] Cf. paragraph 2 of Article 44: "In the cases of letters a), b) and f) of the previous paragraph, if concerning real rights over real property, shall prevail, when higher, the values at which the property has been considered for purposes of liquidation of municipal tax on onerous transactions in real property or, if there is no basis for such liquidation, the ones that should be, if it were due" (wording given by Law no. 64-B/2011 of 30/12).

[6] This article corresponds to Article 48 in the wording prior to the revision of the articles made by Decree-Law no. 198/2001 of 3 July, and maintained with this wording until the Reform of the CIRS introduced by Law no. 82-E/2014 of 31 December.

[7] DGCI in 1990 (2nd updated edition), p. 186.

[8] Charges for acquisition only became part of the rule with the wording introduced by the State Budget for 1999, approved by Law no. 87-B/98 of 31/12.

[9] IRS, Real Incidence and Determination of Net Income, Coimbra Editora, 2007, pp. 460 et seq.

Pronouncing itself on one of the issues submitted for examination, in a case of assessment of capital gains from alienation of real property, the TCAS, taking into account the provision in letter a) of the (then) Article 48 of the CIRS, considered: «the amount paid to obtain the resolution of the lease contract of the aforesaid property could not be regarded as constituting a charge for that purpose aimed at in the cited rule (note that the argument of the appellants incorporates a contradiction within itself: if it is true that it follows from common sense that the property was sold at a higher price because of the evacuation, it is also true that, if it had been sold for a lower amount because it was leased, the realization value for purposes of capital gains would also be lower, neutralizing, therefore, that amount paid as compensation. In any case, we are not, given the aforementioned nature of the amount paid, in the presence of a charge for the enhancement of the property, nor does the same fall under any necessary expense and inherent to its respective alienation». (op. cit. pp. 461 et seq.).

[11] APECA Bulletin, 121, 2nd quarter 2005.

[12] Xavier de Basto also observes that while the legislative framework on leasing existed (at the time) between us, with legal obstacles to the updating of lease payments with blockage of rents, the value of properties was affected by decreasing rental income and the respective value (op. cit. p. 462).

[13] Thus, he ends up admitting, restrictively, that "compensation for lease termination contained within the limits of general lease law, fixed judicially, do not raise this problem, its amount being controllable" (ibidem, p. 463). The analysis of Ricardo Matos Ferreira, an author cited by the Requesters, does not refer (in "On the Determination of Capital Gains Article 51 of the IRS Code," May 2012, University of Minho, p. 7) to these difficulties. Recognizing a legitimate interest on the part of the owner in selling a property without any associated encumbrances, he concludes that compensation should be considered relevant with respect to these circumstances, that is, which are intended for the discharge of the property, and consequently, the increase of its value, whether they flow from a voluntary agreement or from a litigious decision.

[14] The Relator of this Judgment of the Superior Administrative Court (Counselor Casimiro Gonçalves) was also the Relator of the Judgment of the TCAS in proceeding 297/03. The Judgment now referred to of the Superior Administrative Court, although admitting the hypothesis of accepting "an interpretation to the effect that the aforesaid letter a) of Article 51 of the CIRS does not restrict charges for the enhancement of property, proven to be made in the last five years, to material or physical valuations, encompassing also actually borne charges that enhance them economically", did not decide, considering the facts insufficient, ordering the case to be sent back for expansion of the matter of fact.

[15] "Draft of the Reform of IRS, a reform of IRS oriented to Simplification, Family, Social Mobility," July 2014.

[16] Cf. Draft mentioned, section 4.1.12.10 (Expenses and Encumbrances), p. 38.

[17] In "IRS, Real Incidence and Determination of Net Income", p. 464.

[18] Defining the effect of the new interpretation, it is stated: "The understanding sanctioned is applicable to tax situations that are constituted in the future as well as those that are still subject to decision by the Tax Administration, including those situations that are the subject of pending litigation, as well as situations that may still be subject to administrative appeal or judicial impugnation, in accordance with Articles 70 and 102 of the CPPT respectively."

In the aforesaid binding information it is stated «The expression "necessary expenses" contained in letter a) of Article 51 contains some margin of indeterminacy, so it falls to the DGCI to fill it, for which it will have to appeal to, at least three types of fundamental considerations: (i) the income to be taxed as capital gain should, whenever possible, be net income, (ii) double economic taxation should be avoided; and (iii) potential tax fraud schemes must be guarded against».

[20] This judgment is cited by the Requesters but seeking incorrectly, we believe, to find in it a thesis contrary to that which underlies it.

[21] On IRS, Rui Duarte Morais, Almedina, 2014, 3rd edition, pp. 137 et seq. The deadlines for reinvestment must be complied with (letters a) and b)) and still other requirements, such as dedicating, within a maximum period of six months, the property to actual residence and other accessory obligations.

[22] Rui Duarte Morais, ibidem, pp. 138 et seq.

[23] The regime was even more restrictive before the amendment introduced by Law no. 109-B/2001 of 27 December. It was a prerequisite of the exclusion of taxation in IRS that the proceeds from the onerous transmission of property intended for the residence of the taxpayer or his family unit be reinvested in the acquisition of another property intended exclusively for the same purpose within a period of 24 months. The reinvestment to which paragraph 5 of Article 10 of the CIRS referred was only the reinvestment of the proceeds from alienation and not investment through a bank loan, so as the appellant, for the acquisition of a new property, had entirely resorted to bank credit, could not see capital gains excluded from taxation. Only with Law no. 109-B/2001 of 27 December did the charges resulting from the amortization of a loan contracted for the acquisition of property begin to be contemplated in the exclusion of taxation of gains from the onerous transmission of properties intended for primary residence (by all, Judgment of the Superior Administrative Court of 24 March 2010, proceeding 1241/09).

[24] «Special regime applicable to real property capital gains. 1 – The exclusion of taxation provided for in paragraph 5 of Article 10 of the IRS Code is extended to situations in which the realization value is applied to the amortization of a possible loan contracted for the acquisition of the alienated property. 2 – In the situations referred to in the previous number in which the realization value is only partially applied to the purpose provided therein, the exclusion of taxation encompasses only the proportional part of the gains corresponding to that application. 3 – The regime provided for in paragraph 1 does not apply if, on the date of alienation, the taxpayer is the owner of another residential property. 4 – The provision of the previous numbers applies to the alienations of properties occurring in the years 2015 to 2020, in which the loan contracts have been celebrated up to 31 December 2014".

[25] According to this provision, in the wording in force until the amendments introduced with the 2014 Reform, for the determination of capital gains subject to tax in the case of the situations provided for in letters b) and c) of paragraph 1 of Article 10, there were added to the acquisition value "necessary expenses actually practiced, inherent to alienation." Currently, letter b) of paragraph 1 of Article 51 also provides for the addition of "necessary expenses actually practiced, inherent to acquisition and alienation." In the case in this case, it is at issue the invocation of expenses relating to alienation, provided for in either wording of letter b) and letter a) of paragraph 1 of Article 51, so the citation of the Judgment is entirely pertinent.

[26] A matter not properly clarified, due to lack of documentation and because the Requesters did not sufficiently expressly attack the act denying the administrative appeal – it not falling to the tribunal to go further – is the relationship between different amounts referred to in the record, corresponding to the assessment appealed, the corrected assessment following appeal and payment made by the Requesters. Thus, the value attributed to the case is the one corresponding to that indicated as such in the Request for Arbitral Decision.