Process: 36/2017-T

Date: November 6, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Decision 36/2017-T addresses the taxation of rental income from undivided estates under Portuguese IRS law. The claimant, an heir to three undivided estates, challenged an IRS assessment for 2015 that included €21,820.20 in property income attributed to him based on his ideal quota in those estates. The claimant argued that since the estate representatives had not distributed any income by December 31, 2015, he should not be taxed on amounts he never received. The Portuguese Tax Authority maintained that rental income is automatically attributed to heirs at the moment it is paid or made available to the undivided estate, regardless of actual distribution to individual heirs. This automatic imputation occurs by operation of law, treating heirs as co-owners of estate assets. The tribunal confirmed that IRS taxation on rental income from undivided estates is triggered when rents are paid to or made available to the estate representative, not when distributed to heirs. The heirs are taxed proportionally to their quotas in the estate, independent of whether they have actually received cash distributions. This decision clarifies that the cash-basis principle does not apply to inherited property income in undivided estates. Instead, Portuguese tax law applies an accrual-based attribution system for co-owners of estates. The ruling has significant implications for estate planning and tax compliance, as heirs may face IRS liability on estate income before receiving actual distributions, potentially creating liquidity challenges. Tax professionals advising clients with undivided estate interests should consider this automatic attribution mechanism when planning distributions and managing tax obligations.

Full Decision

ARBITRAL DECISION

The Arbitrator Dr. Maria Antónia Torres, appointed by the Deontological Council of the Administrative Arbitration Centre ("CAAD") to form the Singular Arbitral Tribunal, constituted on 22 March 2017, hereby decides as follows:

REPORT

1.1. A…, taxpayer no.…, with domicile at Avenue …, no.…, … – Lisbon, … – … Lisbon (hereinafter "Claimant"), notified of the rejection of Gracious Complaint no. …2016…, requested the constitution of an arbitral tribunal, under article 2, no. 1, paragraph a), and article 10, both of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"[1]).

1.2. The request for arbitral pronouncement has as its object the declaration of illegality, and consequent annulment, of the tax assessment act bearing number 2016…, relating to the financial year 2015, better identified in the initial petition presented by the Claimant, and which is hereby taken as articulated and reproduced, for all legal purposes.

The Claimant further requests the condemnation of the Respondent to restitution of the amount unduly paid and that recognition be given to the right to compensatory interest on that same amount.

According to the initial petition, the Claimant was notified of the said IRS assessment notice, which had a payment value of €3,981.58 (three thousand, nine hundred and eighty-one euros and fifty-eight cents), showing that the Claimant, in the financial year 2015, obtained a global income of €39,389.79 (thirty-nine thousand, three hundred and eighty-nine euros and seventy-nine cents).

It results from the same document that, in the section relating to autonomous taxation, there appears a tax value of €5,079.91 (five thousand and seventy-nine euros and ninety-one cents), relating to property income that will have been attributed to the Claimant and which, consequently, were taxed on the basis of that attribution.

Not agreeing with that attribution of income, the Claimant presented a Gracious Complaint against the said tax assessment, having this given rise to the Gracious Complaint proceedings no. …2016….

1.3. The Claimant presented the request on the ground that he is a son and heir of B…, holder of NIF…, who died on 28-01-2015, to which corresponds the Undivided Estate with NIF…; The Claimant also took the place of his mother in the Undivided Estate opened by the death of C… (his maternal grandfather), who died on 09-08-1975, to which corresponds the undivided estate with NIF…; The Claimant is also grandson of D…, holder of NIF…, who died on 04-03-2015, to which corresponds an Undivided Estate with NIF…;

The Claimant states that he was automatically attributed the overall amount of €21,820.20 (twenty-one thousand, eight hundred and twenty euros and twenty cents), as property income, in proportion to his ideal quota held in the aforesaid estates, which are broken down as follows:

  • Property Income in the amount of €14,256.91 (fourteen thousand two hundred and fifty-six euros and ninety-one cents), relating to the Undivided Estate with NIF…;

  • Property Income in the amount of €7.92 (seven euros and ninety-two cents), relating to the Undivided Estate with NIF…;

  • Property Income in the amount of €7,555.37 (seven thousand, five hundred and fifty-five euros and thirty-seven cents), relating to the Undivided Estate with NIF…;

Now, the Claimant declares that he did not receive any income from the aforesaid Undivided Estates, whereby the said amounts did not enter his patrimonial sphere, but rather in the sphere of the respective Undivided Estates, the respective Estate Representatives having not distributed any amount by 31-12-2015.

The Claimant considers that we are facing a grave and notorious injustice, given the difference between the amount determined in the assessment notified to the Claimant and the amount that would have been determined had he not been taxed for property income not received. The Claimant concludes by requesting the partial annulment of the IRS assessment no. 2016…, relating to the financial year 2015, by removing the property income not received and the refund of the amounts that were determined.

1.4. From the outset, the understanding of the Tax Authority (AT), as explained in the Reply and subsequent Pleadings, is that there is no disputed matter of fact since heirs are taxed for their ideal quota in the estate, regarding property income that has been paid or made available to the estate, independently of its actual distribution.

The Tax Authority states that, by force of law, the income generated by the undivided estate are attributed, automatically, to the legal sphere of the respective heirs, in the capacity of co-owners of the same, which occurs independently of whether the estate representative of the undivided estate has proceeded to distribute among the heirs the income received.

In this manner, and regarding the taxation now in discussion, it is verified that IRS is levied on the rents at the moment of their payment or placement at the disposal of the undivided estate, and in the sphere of the respective co-owners of the estate, in proportion to their respective quotas.

Differently from what the Claimant defends, the Respondent understands that the taxation of rents in the sphere of the respective heirs, once paid or made available to the respective estate representative, does not depend on the actual distribution of the income obtained. That is, the property income now in controversy exists from the moment it is paid or made available to whoever has the legitimacy for its collection. In the case of undivided estates that role falls to the estate representative.

In any case, and regarding the burden of proof, the Respondent also emphasizes that the autonomous taxation of property income, carried out in the context of the 2015 IRS, has its origin in the income statement form model 3 submitted, via internet, by the Claimant. The Respondent also understands, as a result of the examination of witnesses carried out at the request of the Claimant, that there was, in accordance with the testimonies heard, an actual receipt by the Claimant, albeit subsequent.

For which reason, it concludes by defending that the pending request should be judged as unfounded.

1.5. The arbitral tribunal meeting provided for in article 18 of the RJAT was held and the witnesses listed by the Claimant were examined. Both Parties also presented their Pleadings.

2. PRELIMINARY EXAMINATION

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2 of the RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No procedural nullities were identified.

3. MATTERS OF FACT

With relevance for the merit decision, the Tribunal considers the following facts proven:

  • The Claimant was in 2015, the year to which the disputed IRS assessment relates, one of the heirs of the undivided estates better identified in point 1.3 above;

  • In the Claimant's 2015 IRS statement there appears property income originating from leased properties that are assets of the undivided estate, as well as expenses that were understood to be associated with the generation of that property income and which were therefore declared as such by the Claimant;

  • Such property income was paid and made available to the undivided estate through the respective estate representatives;

  • The Claimant presented the statement and was notified to settle the respective IRS, having made the payment of the tax;

  • For which reason part of the total amount of IRS paid corresponds to the tax due for the property income mentioned above;

  • The Claimant does not question at any time his quota share in the undivided estates.

Facts Not Proven

No essential facts, with relevance for the assessment of the merits of the case, which were not proven, were found.

Grounds for the Matters of Fact

The conviction regarding the facts taken as proven was based on the evidence presented by the Claimant and by the Respondent, whose authenticity and correspondence to reality were not questioned by either of the Parties.

4. ON THE LAW

With the matters of fact established, it is important to address the legal issues raised by the parties.

As identified above, the question to be decided concerns whether the taxation of property income obtained by an undivided estate is dependent upon there having been actual distribution of the amounts of the rents by the estate representative to the respective heirs.

Let us see. Article 8 of the IRS Code establishes that property income paid or made available to the respective titleholders are subject to IRS.

Existing co-ownership of income, the attribution of the same to the respective titleholders is made "in proportion to their respective quotas, which are presumed equal when indeterminate", in accordance with the provisions of article 19 of the same Code.

Now, in the case of undivided estates, as are the situations at issue here, these are autonomous patrimonies, represented by the estate representative to whom falls various acts of management, in particular ensuring that the undivided estate receives all the income to which it is entitled. Such, in accordance with the facts taken as proven, occurred in the present case, the rents having been received by the respective estate representatives.

That is, the property income relating to the real estate held by the undivided estates here identified in this proceeding were received and integrated into the respective autonomous patrimonies.

The heirs of each undivided estate are co-owners of the assets (and, therefore, income) of each one of the autonomous patrimonies, falling to the one who is the estate representative the management and collection of the same.

Now, as mentioned above, in accordance with article 19 of the IRS Code, in the case of co-ownership the attribution of income is effected in proportion to the respective quotas, which in case of doubt are presumed equal. In the case at issue, the quota that falls to the Claimant is at no point put into question.

Furthermore, article 64 of the IRS Code establishes that when the death of a person occurs, the income relating to the period following death are considered in the aggregations of the persons who come to earn them (the heirs), proceeding in the absence of partition to their attribution according to the ideal quota in the said assets.

Now, in light of this entire framework, it is concluded that the income paid or made available to the estate through its estate representative is taken as earned in the legal sphere of the heirs, given that both article 19 and article 64, mentioned above, use presumptions regarding the quota of each heir for purposes of the attribution of income. That is, in truth, despite being collected by the estate representative, the rents earned by the estate are income of which the heirs are co-owners.

There being no delivery of the amounts of the rents to the heirs by the estate representative, the question cannot be raised from the fiscal point of view, but possibly from the civil point of view, in the sense of the exercise by the heir of the heir's rights as such.

In light of the foregoing, one can only conclude that the Claimant was correctly taxed in IRS, and for the quota-share that corresponds to him, for the property income of the undivided estates of which he is heir.

5. DECISION:

In these terms, and with the grounds set out above, this arbitral tribunal decides to judge the request for partial declaration of illegality of the tax assessment act of IRS, relating to the year 2015, better identified above, as unfounded.

The value of the case is fixed at €5,079.91 (five thousand and seventy-nine euros and ninety-one cents), in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Process (CPPT) and 306 of the Code of Civil Procedure (CPC).

The amount of costs is fixed at €612 (six hundred and twelve euros) under article 22, no. 4 of the RJAT and Table I annexed to the RCPAT, to be paid by the Claimant, in accordance with the provisions of articles 12, no. 2 of the RJAT and 4, no. 4 of the RCPAT.

Let notification be made.

Lisbon, 6 November 2017

The Arbitrator

(Maria Antónia Torres)

Text prepared by computer, pursuant to article 131, no. 5 of the Code of Civil Procedure, applicable by reference of article 29, no. 1, paragraph e) of the RJAT.

The drafting of this arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Acronym for Legal Regime of Tax Arbitration.

Frequently Asked Questions

Automatically Created

How are rental income (rendimentos prediais) from undivided inheritances (heranças indivisas) taxed under Portuguese IRS?
Rental income from undivided inheritances is taxed automatically in the hands of individual heirs based on their ideal quota in the estate. Under Portuguese IRS law, when rental income is paid or made available to the undivided estate through the estate representative, it is immediately attributed to each heir proportionally to their inheritance share, regardless of whether the estate representative has actually distributed the income. This means heirs are taxed on an accrual basis for their share of estate rental income, not on a cash basis when they receive distributions.
Can a taxpayer challenge the automatic imputation of inherited rental income in their IRS tax return?
Yes, a taxpayer can challenge the automatic imputation of inherited rental income through administrative procedures (gracious complaint) or by filing an arbitral claim at CAAD. However, as Decision 36/2017-T demonstrates, such challenges face significant legal obstacles. Portuguese tax law establishes automatic attribution of estate income to heirs based on their quotas as a matter of law, independent of actual receipt. Successful challenges typically require proving factual errors in the income calculation or quota determination, rather than contesting the attribution principle itself.
What is the role of autonomous taxation (tributações autónomas) on rental income attributed to heirs in Portugal?
Autonomous taxation (tributações autónomas) refers to special tax rates applied to specific categories of income that are taxed separately from other income categories. In the context of rental income from undivided estates attributed to heirs, the property income appears in the heir's IRS return and is subject to the general progressive tax rates applicable to Category F income (property income), not autonomous taxation rates. The term 'autonomous taxation' in the decision appears in the assessment breakdown but refers to the separate calculation of this income category within the overall IRS assessment structure.
What legal grounds support filing an arbitral claim (pedido de pronúncia arbitral) against an IRS tax assessment involving inherited property income?
The legal grounds for filing an arbitral claim against an IRS assessment involving inherited property income include Article 2(1)(a) and Article 10 of Decree-Law 10/2011 (RJAT), which establish CAAD's jurisdiction over disputes concerning tax assessments. Claimants must first exhaust administrative remedies by filing a gracious complaint (reclamação graciosa). After rejection of the gracious complaint, taxpayers can request arbitration at CAAD. Valid grounds include illegality of the assessment act, incorrect application of tax law, factual errors in income determination, or violations of taxpayer rights. The claim must be filed within 90 days of notification of the gracious complaint rejection.
Are compensatory interest (juros indemnizatórios) available when an IRS tax assessment based on imputed rental income is annulled?
Yes, compensatory interest (juros indemnizatórios) is available when an IRS tax assessment is annulled, pursuant to Article 43 of the Lei Geral Tributária (LGT). These interests compensate taxpayers for amounts unduly paid and retained by the tax administration. The interest is calculated from the date of payment until the date of refund, at the legally established rate. In cases involving imputed rental income from undivided estates, if the assessment is annulled and the taxpayer is entitled to a refund, compensatory interest automatically accrues. However, in Decision 36/2017-T, the tribunal upheld the tax authority's position, so compensatory interest would not apply.