Process: 328/2018-T

Date: February 25, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 328/2018-T) addresses the IRS classification of income from isolated timber sales versus professional income subject to organized accounting. The claimants, a married couple where the husband practices law under the organized accounting regime, sold pine trees in 2015 through two isolated act invoices totaling €23,500. The Tax Authority assessed this forestry income as professional income under the organized accounting regime, resulting in a tax liability of €12,422.72. The claimants argued this income should be taxed as an isolated act under the simplified regime per Articles 30-31 CIRS, applying the 0.15 coefficient for goods sales. The AT contended that since 2001, all Category B income receives uniform treatment, and taxpayers under organized accounting must apply that regime to all Category B activities regardless of source. The central legal question involves whether isolated forestry income can be separately classified when the taxpayer maintains organized accounting for their primary professional activity. The claimants also raised procedural concerns that the tax portal (Anexo C, field 506) forced incorrect classification. This case illustrates critical issues in Portuguese IRS law regarding income categorization, the scope of organized accounting obligations, and taxpayer rights when administrative systems limit proper declaration options.

Full Decision

Arbitral Decision

I – REPORT

A..., with Tax Identification Number ..., and B..., with Tax Identification Number ..., married to each other, with tax residence at Rua da ..., ..., in ..., ...–..., hereinafter designated as "Claimants", submitted a request for constitution of an Arbitral Tribunal, pursuant to the provisions of Article 2, No. 1, paragraph a) and Article 10, of Decree-Law No. 10/2011, of 20 January (RJAT), to challenge the assessment of income tax on natural persons (IRS), with No. 2016..., in the amount of €12,422.72.

The request for constitution of the Arbitral Tribunal was submitted by the Claimant on 11-07-2018, was accepted by the Esteemed President of CAAD and notified to the AT on the same date, in accordance with the terms and for the purposes legally provided for. The Claimant opted not to appoint an arbitrator, wherefore, pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated, on 30-08-2018, the undersigned hereto as arbitrator of the arbitral tribunal to be constituted, who communicated her acceptance within the applicable deadline.

The singular arbitral tribunal was constituted on 19-09-2018. On 23/09/2018, an arbitral order was issued for the Tax and Customs Authority (AT) to submit its response within the legal deadline, in accordance with the terms and for the purposes of No. 1 and 2 of Article 17 of the RJAT. The Respondent joined to the proceedings its response and the respective Administrative Process (PA), on 18-10-2018, the content of which is deemed to be fully reproduced herein.

In light of the position of the parties evidenced in the pleadings, considering the absence of witness testimony to be heard and the nature of the disputed question, which appears to be exclusively a matter of law, an arbitral order was issued on 23/10/2018 dispensing with the holding of the meeting provided for in Article 18 of the RJAT, fixing a period of 15 days, equal and successive, for the parties to present their arguments. The probable date for the pronouncement of the arbitral decision was indicated as 09/02/2019.

On 07-02-2019 the Tribunal issued an arbitral order in which it informed the parties that the decision was in the preparation phase but not yet concluded, wherefore the deadline was extended by a further 15 days.

B) OF THE REQUEST FORMULATED AND OF THE CLAIMANT'S POSITION:

In summary, the Claimants base their arbitral request on the illegality of the IRS assessment for the tax year 2015, on the grounds of error in the characterization and quantification of the taxable fact and violation of law, due to errors in the factual and legal premises.

From the Claimants' perspective, the income earned in 2015 from the sale of pine trees through two isolated act invoices. This income had to be subsequently included in field 506 of Annex C of the annual income declaration Model 3, given that the computer system did not permit any other possibility, it being certain that it is neither obligated to be collected under the agricultural and livestock activity. From this resulted that in said assessment the AT considered this taxable income as incorporated in its activity subject to organized accounting, that is, the legal profession activity. They further allege that AT wrongly considered that, by reason of the Claimant exercising the legal profession, any other income, insofar as it falls within category B, even if resulting from an isolated act, must be incorporated in the income of its professional activity. In the Claimants' view, these forestry income should have been taxed as an isolated act, subject to the simplified regime, in accordance with the provisions of Articles 30 and 31, No. 1 of the CIRS, and not, as it was, under the organized accounting regime.

C – OF THE RESPONDENT'S RESPONSE

In its response, the AT argues for the legality of the assessment and, in summary, has contended that, since 2001, category B income is all qualified as business and professional income, regardless of the activity from which it results, whether professional or forestry, being subject to the same legal-tax treatment for determining net income. From the perspective of the Respondent AT, this is not the case, wherefore the Claimants' argument that income resulting from forestry activity should be taxed as an isolated act of category B, subject to the simplified regime, and to the determination of taxable income obtained through the following coefficient 0.15 on sales of goods and products, in accordance with the provisions of No. 1, Article 30 and paragraph a) of No. 1 of Article 31 of the CIRS, is not correct.

For the AT, the fact that the male Claimant is encompassed within the organized accounting regime determines that this is the regime for determining collectable income applicable to all income generated by activities covered by category B, regardless of whether the forestry activity is or is not the main activity. Thus, no defect is to be attributed to the contested assessment, arguing for the maintenance of the challenged act in the legal order.

II - PROCEDURAL REQUIREMENTS

The Arbitral Tribunal is regularly constituted. The Parties enjoy legal personality and capacity, are entitled and are legally represented (cf. Articles 4 and 10 No. 2 of the RJAT and Article 1 of Ordinance No. 112/2011, of 22 March).

The proceedings do not suffer from defects that would invalidate it.

It is appropriate to decide.

III – DECISION ON THE FACTUAL MATTER

Facts Established

  1. Facts considered established as relevant to the decision of the present proceedings are the following:

  • The male Claimant exercises the legal profession, in category B of the CIRS, and the determination of his professional income is subject to the organized accounting regime.

  • In the year 2015, in addition to other income of the couple, the male claimant sold pine trees which were invoiced with two isolated act invoices, in the total amount of €23,500.00, plus VAT at 6%;

  • From this resulted, with reference to the year 2015, the IRS assessment No. 2016..., attached to the proceedings, from which a tax amount of €12,422.72 results, with a payment deadline of 31/08/2016;

  • They submitted a gracious complaint regarding said assessment on 22-07-2016;

  • The Claimants paid the tax amount resulting from said assessment on 30-08-2016, in order to avoid the institution of tax enforcement proceedings;

  • After the deadline for tacit dismissal of the gracious complaint expired, the Claimants submitted a hierarchical appeal, on 2 December 2016, which was subsequently dismissed.

  • On 24-05-2018 the Claimant brought the present arbitral request for annulment of the 2015 IRS assessment and refund of the amount of tax paid in excess, in the amount of €8,964.80, plus compensatory interest.

FACTS NOT ESTABLISHED

There are no other facts relevant to the decision that should be considered as not established.

REASONING OF FACTS ESTABLISHED

  1. The Tribunal need not pronounce on all details of the factual matter that was alleged by the parties, it being incumbent upon it the duty to select the facts relevant to the decision and to discriminate the matter it deems proved and declare that which it considers not proved (cf. Article 123, No. 2, of the CPPT and Article 607, No. 3 of the CPC, applicable by virtue of Article 29, No. 1, paragraphs a) and e), of the RJAT).

In the present case the factual matter is of extreme simplicity, being supported in the documents attached to the proceedings by the Claimant and those contained in the Administrative Process (PA) attached by the Respondent and does not appear to be disputed.

Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the CPPT, the documentary evidence attached to the proceedings by the Claimant and that contained in the Administrative Process itself, the facts listed above were considered established, with relevance to the decision.

IV – DECISION ON THE LEGAL MATTER

In the present request for arbitral pronouncement, the disputed question concerns exclusively the assessment of forestry income (sale of pine trees) declared by the Claimants in Annex C (field 506) of the 2015 IRS assessment, relating to two isolated act invoices for the sale of pine trees, in the total amount of €23,500.00.

To assess this question, it is necessary, first and foremost, to determine whether in this particular case the income earned from the sale of pine trees should be characterized as an isolated commercial act, and, if so, to determine whether income resulting from isolated acts relating to commercial, industrial, agricultural, forestry or livestock activity (paragraph h), No. 2, Article 3 of the CIRS), carried out by taxpayers who, with respect to these acts, do not have organized accounting, but who exercise another activity with respect to which they do have organized accounting (paragraph b), No. 1, Article 28 of the CIRS), are determined, for purposes of IRS taxation, in accordance with the provisions of No. 2 of Article 30 of the CIRS, or in accordance with the rules established in the CIRC, by referral of Article 32 of that Code, with respect to all income of category "B".

Given that it is established that the Claimant exercises the legal profession, it follows that we are dealing with the exercise of a liberal profession, that is, the habitual and autonomous exercise of an intellectual activity regulated by the Bar Association, which does not consist of the practice of acts of commerce. Thus, his main activity is not of a commercial nature.

Having said this, as regards the sale of pine trees, there is no doubt that this constitutes the practice of a commercial activity, that is, the sale of goods or products with a view to profit. On this matter, the STA has already ruled, in a judgment of 24-02-2016[1], establishing case law to which we adhere and which determines the following: "The tax law does not define what constitutes the exercise of a commercial or industrial activity, being that the case law of the Supreme Administrative Court, long established, has accepted that commercial activity is revealed in an act of mediation between supply and demand with the susceptibility to generate profits, gains, income for those who undertake it, a susceptibility that may ultimately not materialize and may even generate losses, whereas industrial activity is an activity of construction or alteration of goods. (…) The concept of commerce adopted by the legislator is not identified with the private law concept of the Commercial Code, being a concept proper, of an economic nature in which is inscribed all activity (even if expressed in a single act) which has profit as its objective purpose. (…) Once there exists an increase in value accruing to a patrimony by virtue of the exercise of an economic activity (even if expressed in a single act) translated into the creation of economic utility, resulting from any relationship of the agent/taxpayer with a third party in which, in satisfying the economic needs of the latter, the patrimony of the former is increased (mediation between supply and demand), there will be a commercial activity and, if there exists the incorporation of new utilities in the good object of the activity in question, there will be an industrial activity (…)".

Returning to the present case, there must exist an increase in value accruing to a patrimony by virtue of the exercise of an activity (even if expressed in a single act) translated into the creation of economic utility that is the object of exchange, which in the case at hand did indeed occur, with the transaction of the sale of the pine trees. Naturally, in order to profit from the sale, the taxpayer had to care for and treat his property and wait for the results in order to be able to sell and realize some value from his pine trees.

Wherefore, we are dealing with an act of a commercial nature, but clearly an isolated act in light of the provisions of paragraph h), of No. 2, Article 3 of the CIRS, which finds express recognition in No. 3 of the same article, which considers "income resulting from isolated acts those which do not result from a foreseeable or reiterated practice".

No. 2 of Article 3 of the CIRS further provides:

"Income from the following are also considered to be in this category:

(…)

h) That arising from the practice of isolated acts relating to activity covered in paragraph a) of No. 1 (business and professional income resulting from the exercise of any commercial, industrial, agricultural, forestry or livestock activity)."

It follows thus, that isolated acts are those which do not assume the character of habituality or the exercise of a regulated profession, as we have already concluded from the case law of the STA cited above, as well as from various judgments of the Central Administrative Courts, among which we highlight the judgments of the TCAS of 18-04-2018 and 03-12-2015.

In the case at hand, the Claimant is a lawyer, does not engage in forestry exploitation with a character of habituality, which justifies the two invoices issued as isolated acts, occurring in the year 2015. On this matter, the judgment of the TCAN of 18-06-2009 states that "it is also important to bear in mind that the reference to an isolated act of a commercial nature does not correspond to a mandatory referral to the notion of an act of commerce, inscribed in Article 2 of the Commercial Code, but rather expresses the idea of an act not inserted in any activity, but if it were, would originate a commercial or industrial activity. That is, in line with the previous exposition, among other things, one must consider the hypothesis of being confronted with the existence of an isolated act of a commercial nature which is nonetheless insusceptible to being qualified as an act of commerce. (…) To characterize suitably an isolated act as commercial, it becomes necessary to find underlying it, albeit in an indicative manner, the intention to exercise an activity of a commercial nature, with the purpose of obtaining a gain. (…) It thus becomes decisive the requirement of the performance of activities, actions of a certain kind, in which the common denominator of addition, promotion, increase in value, new potential is conferred, adding the pursuit of a specious purpose, a marked and unequivocal objective, the receipt of profit, the pursuit of patrimonial increase. (…) In linear terms, to affirm the presence of an isolated act with commercial nature, in an IRS note, the accounting determination of profit is not sufficient, it being necessary that such gain be, in some measure, the result, effect, of activities capable of promoting an increase in the initial value of the realities involved".

Thus, the sale of pine trees, invoiced as an isolated act, resulted from a single operation carried out in the year 2015, notwithstanding that, according to the Claimant, another sale occurred in 2014 processed in the same manner. Thus, the income does not result from a habitual and reiterated practice, whereby the said sale fulfills the requirements provided for in No. 3 of Article 3 of the CIRS, to be considered as an isolated act of a commercial nature.

Having reached this point, it is necessary to verify whether income resulting from isolated acts carried out in accordance with paragraph h), No. 2, Article 3 of the CIRS), practiced by taxpayers who, with respect to these acts, do not have organized accounting, but who simultaneously exercise one of the referred activities with organized accounting (paragraph b), No. 1, Article 28 of the CIRS), are determined, for purposes of IRS taxation, in accordance with the provisions of No. 2 of Article 30 of the CIRS, or in accordance with the rules established in the CIRC, by referral of Article 32 of that Code, with respect to all income of category "B".

Now, Article 28 of the CIRS provides, in the version in force at the time of the taxable facts, that:

"1 - The determination of business and professional income, except in the case of the imputation provided for in Article 20, is made:

a) On the basis of the application of the rules arising from the simplified regime;

b) On the basis of accounting.

2 - Taxpayers who, in the course of their activity, have not exceeded in the immediately preceding taxation period an annual gross amount of income of this category of €200,000 are covered by the simplified regime.

3 - Taxpayers covered by the simplified regime may opt for the determination of income on the basis of accounting.

(…)"

In turn, Article 30 of the CIRS provides that:

"1 - Taxpayers who practice isolated acts are always dispensed from having organized accounting with respect to such acts.

2 - In determining taxable income from isolated acts:

a) The coefficients provided for the simplified regime are applied, when the respective annual gross income is less than or equal to €200,000;

b) Where the annual gross income is greater than €200,000, the rules applicable to taxpayers with organized accounting are applied, with the necessary adaptations"

Articles 31 and 32 of the CIRS further provide:

"[Article 31]

1 - Under the simplified regime, the determination of taxable income is obtained through the application of the following coefficients:

a) 0.15 to sales of goods and products, as well as to the provision of services within the scope of hotel and similar activities, catering and beverages;

(…)

3 - Collectable income is subject to aggregation and taxed in accordance with general rules.

"Article 32 – Referral

In determining business and professional income not covered by the simplified regime, the rules established in the Corporate Income Tax Code are applied, with the exception of that provided for in Articles 51, 51-A, 51-B, 51-C and 54-A, with the adaptations resulting from this Code".

Given the foregoing, in the case at hand, as regards income earned in the exercise of the legal profession, the Claimant has organized accounting, in accordance with paragraph b), No. 1 of Article 28 of the CIRS, wherefore the determination of taxable income was carried out in accordance with the CIRC, by express referral of Article 32 of that Code. But, as regards isolated acts, No. 1 of Article 30 of the CIRS dispenses taxpayers from having organized accounting with respect to that income, even if exceeding €200,000.00, applying in this case, with the necessary adaptations, the rules applicable to taxpayers with organized accounting.

Therefore, as the Claimant does not have organized accounting with respect to the isolated act, taxable income is determined in accordance with paragraph a), No. 2 of Article 30 of the CIRS, since the annual gross income obtained of €22,500.00 is less than €200,000.00, applying the coefficients provided for the simplified regime, in this case the applicable coefficient of 0.15 shall apply, relating to sales of goods and products.

Thus, the taxable income from the isolated act is €3,457.92 (€23,500.00 x 0.15), whereby it is confirmed that the Claimant, as a result of the AT's erroneous interpretation and the conditioning of the computer system itself, paid tax in excess, in the amount of €8,964.80 (€12,422.72 – €3,457.92 = €8,964.80).

Furthermore, as we have seen from what is set forth above, the normative references, applicable and transcribed above, are clear and objective, not lending themselves to any interpretative doubt.

Thus, the argument of the Respondent AT, invoked in its response, in stating that "In consequence, and because with respect to the income of category B, with the exercise of the legal profession, the Claimant A... is encompassed within the organized accounting regime, it is that regime which applies to all income of that nature, which he may have obtained or may come to obtain, regardless of whether they result from activities of a different nature") evidences manifest error regarding the factual and legal premises applicable and also a violation of the provision of No. 1 of Article 30 of the CIRS.

In light of the foregoing, it is to be concluded that the contested assessment as well as the decision dismissing the hierarchical appeal brought by the Claimants suffer from the defect of violation of law due to error in the legal premises, having been based on an erroneous interpretation of paragraph a), No. 2 of Article 30 of the CIRS. Wherefore, this arbitral request is deemed to be well-founded.

AS TO COMPENSATORY INTEREST

The Claimant paid the full amount of the issued assessment. Thus, she is entitled to be refunded the amount of overpaid tax. The Claimant further requested the payment of compensatory interest with respect to the overpaid tax.

Indeed, it follows from Article 43 of the LGT and Article 61 of the CPPT that compensatory interest is due "when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in the payment of the tax debt in an amount greater than legally due".

As provided in No. 5 of Article 24 of the RJAT, the right to compensatory interest may be recognized in arbitral proceedings. It will be necessary, however, to determine whether or not there was an error attributable to the services.

Now, by all that is set forth in the reasoning of this decision, the interpretation which led to the contested assessment is based on an error regarding the factual and legal premises underlying the tax act, wherefore the error attributable to the AT is demonstrated. We are thus dealing with an error attributable to the services, as stated in Article 43 of the LGT. Having regard to what is established in Article 61 of the CPPT and given that the existence of an error attributable to the services of the Tax Administration has been verified, from which resulted the payment of undue tax debt (see Article 43, No. 1 of the LGT), we can understand that the Claimant is entitled to compensatory interest at the legal rate, calculated on the amount of the request which shall be counted from the date of payment made until complete refund of that same amount. Compensatory interest is due at the supplementary legal rate, in accordance with Articles 43, No. 4, and 35, No. 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

V. DECISION

In accordance with the foregoing, this Arbitral Tribunal decides:

  • To judge the arbitral request formulated by the Claimant as wholly well-founded and, in consequence, to annul the contested tax act;

  • To order the Respondent to refund to the Claimant the amount of tax unduly paid, plus interest accrued from the date of payment until the date of complete payment of the refund due.

  • To order the Respondent to pay the arbitral costs due.

VI. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €8,964.80 in accordance with Article 97-A, No. 1, a), of the CPPT, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VII. COSTS

The arbitration fee is fixed at €918.00, in accordance with Table II of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 5 of the cited Regulation, to be paid by the losing party.

Notify.

Lisbon, 25-02-2019

The Singular Arbitral Tribunal,

(Maria do Rosário Anjos)

[1] Cf. Judgment of the STA, of 24-02-2016, Proceeding 0580/15, in www.dgsi.pt.

Frequently Asked Questions

Automatically Created

How are isolated acts (ato isolado) for timber sales classified under Portuguese IRS tax law?
Under Article 3 CIRS, isolated acts of timber sales typically qualify as Category B income and may be subject to the simplified regime with a 0.15 coefficient applied to sales proceeds per Article 31(1)(a) CIRS. However, when the taxpayer already operates under organized accounting for another Category B activity, the Tax Authority argues all Category B income must follow the same regime, eliminating separate isolated act treatment.
What is the correct IRS category for income from selling pine trees through isolated invoices under Article 3 of the CIRS?
Income from selling pine trees through isolated invoices falls under Category B of the CIRS as business income. The classification dispute centers on whether such forestry income constitutes an isolated act eligible for simplified regime taxation (Articles 30-31 CIRS) or must be incorporated into existing organized accounting activities. The Tax Authority's position since 2001 treats all Category B income uniformly based on the taxpayer's primary regime.
Can taxpayers challenge IRS assessments when the tax portal forces incorrect income classification in Anexo C Model 3?
Yes, taxpayers can challenge IRS assessments through CAAD arbitration when technical limitations in tax portal systems force incorrect income classification. The arbitral request can invoke grounds of error in legal characterization and quantification of taxable income, violation of law, and errors in factual premises. However, success depends on demonstrating actual legal error rather than mere system limitations, as administrative convenience does not override substantive tax law requirements.
What are the grounds for annulling an IRS tax assessment based on error in qualification and quantification of taxable income?
Grounds for annulling an IRS assessment based on error in qualification and quantification include: (1) incorrect legal characterization of income category or subcategory; (2) misapplication of tax regime (simplified vs. organized accounting); (3) erroneous calculation of taxable base or applicable coefficients; (4) violation of specific CIRS provisions governing income determination; and (5) fundamental errors in factual premises underlying the assessment. Articles 99-100 LGT govern the annulment of illegal tax acts.
How does CAAD arbitral tribunal handle disputes involving isolated act income classification for natural resource sales?
CAAD arbitral tribunals handle isolated act income classification disputes by examining whether income genuinely constitutes an isolated transaction under Articles 3 and 30-31 CIRS or must be integrated with ongoing business activities. The tribunal analyzes the taxpayer's overall activity structure, applicable accounting regime, legislative evolution of Category B treatment, and whether separate classification serves legitimate tax purposes or constitutes improper regime fragmentation. Documentary evidence from the administrative file and legal arguments determine whether the AT's classification was lawful.