Summary
Full Decision
ARBITRAL DECISION
I. Report
1. On 05-06-2017, the taxpayers A… and B…, Tax Identification Numbers … and …, submitted a request for the constitution of a singular arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), with a view to annulling the Personal Income Tax (IRS) assessments No. 2016…, of 2 August, 2016…, of 10 August 2016 and 2016…, of 5 September 2016, all relating to the financial year 2015.
2. In accordance with Article 6(1) of RJAT, the Ethics Council of the Arbitration Centre appointed the herein signatory arbitrator, notifying the parties thereof.
3. The tribunal is duly constituted to review and decide on the subject matter of the proceedings.
4. The allegations supporting the Claimants' request for arbitral pronouncement are, in summary, as follows:
4.1. In the financial year 2015, the Claimants chose joint taxation of their income in their Personal Income Tax Form 3 declaration relating to the year 2015, having earned a total of gross real property income of € 79,031.64.
4.2. They incurred the total amount of € 4,913.91, as expenses for conservation and maintenance incurred after the beginning of the lease contracts, and the amount of € 21,893.83, as expenses for conservation and maintenance incurred before the beginning of the leases.
4.3. Regarding the leased properties, they also incurred (i) condominium expenses in the amount of € 14,977.74; (ii) Municipal Real Estate Tax ("IMI") in the amount of € 3,072.27; (iii) Stamp Duty ("IS") in the amount of € 55.00; and (iv) municipal taxes in the amount of € 281.63.
4.4. In this way, the household incurred in 2015 expenses totaling € 45,194.38 to obtain real property income, whereby, in total, the household earned net real property income in the amount of € 33,837.26.
4.5. Making the relationship between the ownership of the leased properties and the income generated/expenses incurred, it will be verified that:
i. taxpayer A earned gross income of 59,380.40 €, incurring expenses in the amount of € 19,596.21, resulting in net income of € 39,784.19;
ii. taxpayer B earned gross income of € 19,651.24, incurring expenses in the amount of € 25,598.17, resulting in negative net income of € 5,946.93, having perceived no income, but instead recording a loss in the financial year;
iii. the household earned net real property income in 2015 of € 33,837.26.
4.6. The Claimants were notified of the Personal Income Tax assessment notes No. 2016…, of 2 August 2016, No. 2016…, of 10 August 2016, and No. 2016…, of 5 September 2016, resulting from their income declaration for 2015 and their respective substitute declarations.
4.7. From the last of these assessment notes – assessment note No. 2016… – it emerges that the Claimants incurred the total amount of € 11,489.47, in the form of tax relating to autonomous taxation.
4.8. Of this amount, € 11,139.57 relate to tax on real property income, resulting from the application of the 28% rate to the positive net income from rental properties owned by taxpayer A – i.e.: € 39,784.19 x 28% = € 11,139.57.
4.9. The Claimants filed a Gracious Complaint against this tax assessment, on the grounds that it is illegal by not considering the losses determined within Category F in the financial year 2014, which should have been carried forward to subsequent financial years, namely to the financial year 2015.
4.10. Within the scope of said gracious procedure, the Claimants attached to these proceedings the Arbitral Decision issued within the scope of case 338/2016-T, of 10 March 2017, which recognizes the losses determined within category F in the year 2014 by the now Claimants to be carried forward to subsequent years, and which deemed illegal the Personal Income Tax assessment relating to the financial year 2014 of the Claimants for not reflecting such losses.
4.11. In accordance with that decision, the Claimants determined in the financial year 2014 a total joint loss in the amount of € 41,748.02 (i.e. € 40,470.36 + € 1,277.66) within category F, which should have been recognized in the financial year 2015.
4.12. This should have resulted in the non-existence of positive net income to be taxed in the year 2015 and in the persistence of a negative net result in the amount of € 1,963.83 to be carried forward to subsequent years (2016 onwards).
4.13. Had such carryforward been recognized, as is legally due, the Claimants would not have incurred any tax within category F in the financial year 2015, with there still remaining a loss to be carried forward to subsequent years in the amount of € 1,963.83 [i.e. € 39,784.19 (net real property income earned by taxpayer A) - € 41,748.02 (losses to be carried forward within category F, recognized by Arbitral Decision) = - € 1,963.83].
4.14. Article 55, under the heading "deduction of losses", provided, in the version in force at the date of determination of said loss (year 2014), that the negative net result determined in any category of income was deductible from the aggregate of net income subject to taxation, with the result that negative net result determined in category F could only be carried forward to the five subsequent years to that to which it relates, deducting itself from the positive net results of the same category".
4.15. The wording of said article was altered with the entry into force of Law No. 82-E/2014, of 31 December.
4.16. Nevertheless, under the heading "Production of effects", it was provided in Article 17(6) of said Law No. 82-E/2014 that Article 55 of the Personal Income Tax Code, in the wording given by this law, would only be applicable to losses occurring after 1 January 2015.
4.17. As such, to the negative net result determined by the Claimants within Category F of Personal Income Tax by reference to the year 2014, the application of Article 55 in the wording prior to the amendment introduced by said Law is required.
4.18. Within Category F, the household may deduct the negative net result determined in a given year in that Category, provided that such deduction occurs in the five years following that to which the negative net result relates, in accordance with the wording of the rule in force at the date of the facts.
4.19. In addition to the temporal limitation on the deduction of losses determined within Category F, Article 55 of the Personal Income Tax Code does not establish any other requirement for such deductibility, namely, it is not required that one opts for pooling.
4.20. Had the legislator wished, in fact, to only accept the deduction of losses within Category F in the exclusive case that the household had opted for pooling, it would have provided so expressly.
4.21. In this way, it is apparent that the Personal Income Tax Assessments, by not considering the deductibility of the negative net real property income determined by the household in the year 2014, to the net real property income relating to the year 2015, in accordance with the terms expressly provided in Article 55 of the Personal Income Tax Code, are illegal, on the grounds of an error in the application of the law, which constitutes a defect of violation of law and consequently, under the provisions of Article 163(1) of the Code of Administrative Procedure ("CPA"), applicable ex vi of Article 2, letter d), of the Code of Tax Procedure and Practice (CPPT), determines the annulability of said Personal Income Tax assessment.
4.22. Additionally, the legality of said Assessments (relating to Personal Income Tax for 2015) is equally tainted, by not indicating the remaining negative net result determined by the Claimants within category F in the financial year 2014 as a loss to be carried forward to subsequent financial years (2016 onwards), in accordance with the terms expressly provided in Article 55(2) of the Personal Income Tax Code (which would also result from the decision issued within the scope of arbitral case No. 338/2016-T).
4.23. This illegality constitutes a defect of violation of law, the said Personal Income Tax assessment is annulable, under the provisions of Article 163(1) of the CPA, applicable ex vi of Article 2, letter d), of the CPPT.
4.24. Similarly disregarded, in the calculation of tax, was the negative net result determined in the financial year 2015 by taxpayer B, in the amount of € 5,946.93.
4.25. Thus, regardless of what was stated above on the 2014 losses to be deducted from the real property income of 2015, the aforementioned Personal Income Tax assessments are equally illegal because the Tax Authority did not effect the compensation of said real property income earned by the two taxpayers in the same financial year 2015.
4.26. Had the Tax Authority considered that amount in the Personal Income Tax assessment, the Claimants would have incurred, within Category F, a tax corresponding to € 9,474.43 – i.e. (€ 39,784.19 - € 5,946.93) x 28% = € 9,474.43.
4.27. This entails a difference between the taxation suffered and that which would have been required (if we disregarded the losses generated in 2014, in which case there would be, altogether, no category F income) in the order of € 1,665.14.
4.28. And such form of taxation was required, because dictated by a constitutional imperative of taxation taking into account the needs and income of the household, inherent in Article 104(1) of the Portuguese Constitution (CRP), a precept that finds infra-constitutional consecration in the wording of Article 6 of the General Tax Law (LGT), which, in delineating the characteristics of direct taxation, requires attention to the "patrimonial situation, including legitimate charges, of the household".
4.29. This also results from Article 13, numbers 2 and 3, of the Personal Income Tax Code.
4.30. The Claimants exercised, within the legal deadline for this purpose, in accordance with Article 59(2) of the Personal Income Tax Code (CIRS), the option for joint taxation of their income for the year 2015.
4.31. Now, by "income of the persons constituting the household" must necessarily be understood the net income of each Category of Personal Income Tax, since the tax due is determined by the application of the respective rate to taxable income, which results, in the case of Category F, from the subtraction of the amount of expenses and charges incurred from the amount of rents earned, in accordance with the provisions of Article 41 of the Personal Income Tax Code.
4.32. Through a simple arithmetic calculation, it will be understood that the sum of net real property income attributable to taxpayer A (i.e. € 39,784.19) with net real property income attributable to taxpayer B (i.e. - € 5,946.93) results in a total value of income earned in 2015 of € 33,837.26.
4.33. Income for which the 28% tax is due under the provisions of Articles 13(3) and 72(1)(e) of the Personal Income Tax Code, which (if the 2014 losses referred to were not considered) would result in a tax of € 9,474.43.
4.34. The non-consideration of the net income of taxpayer B in the calculation of taxable matter within Category F results in the inflation of real property income earned by the household.
4.35. In the specific case of the Claimants, such inflation led to an additional tax of € 1,665.14.
4.36. These expenses and charges for the maintenance and preservation of the source of income (i.e. the leased properties) burdened not only taxpayer B, but the household which bore its costs, being deductible in accordance with the provisions of Article 41 of the Personal Income Tax Code.
4.37. The Personal Income Tax Assessments of the Claimants, by not reflecting the sum of net real property income attributable to taxpayer A with net real property income attributable to taxpayer B, in accordance with the terms expressly provided in Article 13, numbers 2 and 3, of the Personal Income Tax Code, are illegal on the grounds of an error in the application of the law, which constitutes a defect of violation of law and consequently, under the provisions of Article 163(1) of the Code of Administrative Procedure ("CPA"), applicable ex vi of Article 2, letter d), of the Code of Tax Procedure and Practice (CPPT), determines its annulability.
4.38. The Personal Income Tax assessments relating to the year 2015 should be partially annulled, for the reasons stated above.
4.39. Notwithstanding the Claimants' non-conformity with the legality of the assessments in question, they proceeded to the full payment thereof corresponding to the amount of € 22,337.90.
4.40. Compensatory interest is due on the amount that should be annulled, from the date of voluntary payment of the undue tax until the date of issuance of the respective credit note, calculated at the legal rate of interest in force.
5. In turn, the Respondent Tax Authority and Customs Authority presented a response, in which it defended itself, in summary, as follows:
5.1. The Claimants filed a request for arbitral pronouncement, in which they submitted to the scrutiny of that Arbitral Tribunal, the legality of the Personal Income Tax assessment No. 2016-…, relating to the period of 2014, in the amount of € 5,051.43, which was pending before that Arbitration Centre under number 338/2016-T.
5.2. Within the scope of the claim, the Claimants raised the existence of an error in the application of the law resulting from the violation of the provisions of Article 5(2) of the Personal Income Tax Code, on the grounds of the disregard of the negative net result determined within said Category F, in the amount of € 40,470.36, to be carried forward to the positive net results determined in subsequent years within that Category.
5.3. By arbitral decision rendered on 10.03.2017, the Arbitral Tribunal decided to partially uphold the request for arbitral pronouncement, determining the partial annulment of the contested assessment, which should be reformulated as follows:
- Acceptance of the declared expenses relating to the acquisition of electrical appliances, in the amount of € 1,277.66;
- Non-consideration, as a deductible charge, of the amount of € 12,320.05, relating to common works on the property, in full ownership, partially leased;
- Consideration, as losses to be carried forward to subsequent years, of the amount which, after the aforementioned corrections are made, is not capable of being deducted in determining the net income of Category F of Personal Income Tax for 2014, due to insufficiency of the corresponding gross income.
5.4. Having the Personal Income Tax income declaration by the Claimants been received on 07.08.2016, and having been issued the assessments in question – assessment No. 2016-… of 02.08.2016, No. 2016 … of 10.08.2016 and No. 2016 … of 05.09.2016 – between August and September 2016, the same could never reflect the losses recognized in a decision that would only be issued on 10.03.2017.
5.5. The decision was only notified to the parties by electronic mail on 13.03.2017, with the period for purposes of appeal commencing with the lapse of 3 days on 17.03.2017, whereby the 30-day period for filing an appeal would expire – unless there is a counting error – on 24.04.2017.
5.6. This means, therefore, that the arbitral decision issued in Case No. 338/2016-T only became final on 24.07.2017.
5.7. The period for spontaneous execution of the judgment would commence on 26.04.2017 (taking into account that 25.04.2017 is a national holiday), and the deadline for the Respondent entity to execute the judgment would be 08.06.2017.
5.8. Having the Claimants filed the present request for arbitral pronouncement on 05.06.2017, it means that at the time of filing the request, the deadline for the Respondent entity to execute the judgment had not yet expired, namely to determine in the assessment proceedings which losses the Claimants are entitled to carry forward to the year 2015 and onwards, after making the necessary corrections, as determined by the arbitral decision issued in Case No. 338/2016-T.
5.9. There is a lack of subject matter with respect to the request for arbitral pronouncement since the tax facts – Personal Income Tax assessments – occurred 8 months before the arbitral decision that recognized the carryforward of losses to the years 2015 and onwards, which constitutes a peremptory exception, which is invoked for all legal purposes, in accordance with the provisions of number 3 of Article 577 of the Code of Civil Procedure (CPC), in the wording given by Law 41/2013 of 26 June applicable ex vi Article 2 of the Code of Tax Procedure and Practice (CPPT), which gives rise to the absolution of the Respondent from the claim, in accordance with the terms and for the purposes provided in number 3 of Article 576 of the CPC.
5.10. It is widely demonstrated that the tax facts in question – Personal Income Tax assessments No. 2016-… of 02.08.2016, No. 2016 … of 10.08.2016 and No. 2016 … of 05.09.2016 – are much earlier than the knowledge by the Claimants of the consideration of losses to be carried forward by the arbitral decision issued in Case No. 338/2016-T and issued on 10.03.2017.
5.11. Therefore, the assessments under scrutiny could never evidence facts or values that only occurred with the issuance and finality of the arbitral decision issued in Case No. 338/2016-T.
5.12. Hence, if the Claimants intend the determination of losses to be carried forward to the year 2015 and onwards - after the charges considered in the arbitral decision as non-deductible in the amount € 12,320.05, relating to common works on the property, in full ownership, partially leased – are released, such intention will always have as its underlying basis the issuance of a new Personal Income Tax assessment, where the exact amount of losses to be carried forward is determined.
5.13. Therefore, the appropriate procedural means for this purpose is not subsumed into the request for arbitral pronouncement, but rather to the execution of judgments, to which Article 170 and following of the Code of Administrative Court Procedure (CPTA) allude.
5.14. The arbitral decision issued in Case No. 338/2016-T never peremptorily recognized in the operative part that the Claimants could carry forward losses to the years 2015 and onwards, in the amount of € 40,470.36.
5.15. What the arbitral decision No. 338/2016-T determined was the "consideration, as losses to be carried forward to subsequent years, of the amount which, after the aforementioned corrections are made, is not capable of being deducted in determining the net income of Category F of Personal Income Tax for 2014, due to insufficiency of the corresponding gross income".
5.16. Therefore, if the Claimants intend to carry forward the losses to the years 2015 and onwards, the exact amount of losses to be carried forward must first be determined – taking into account the non-acceptance as a deductible charge of the amount of € 12,320.05, relating to common works on the property, in full ownership, partially leased – in the assessment proceedings, to subsequently proceed with the deduction in subsequent years.
5.17. It is noted that the execution of judgments, contained in Article 170 and following of the Code of Administrative Court Procedure (CPTA), constitutes the appropriate procedural means with a view to determining the exact amount of losses to be carried forward to the year 2015 and onwards, and not the request for arbitral pronouncement, all the more so that, as we have mentioned, the value of the losses must always be determined in the execution of judgment proceedings, with the Claimants not having been granted the possibility of deducting in full the amount of losses in the amount of € 40,470.36, in light of the partial success of the claim, in addition to which the Claimants intend to see recognized in the assessment in question the losses, whose success only occurred with the issuance of the arbitral decision 8 months later.
5.18. In this endeavor, the dilatory exception of unsuitability of the procedural means is raised, which impedes the knowledge of the merits of the case, in accordance with Article 577 of the CPC applicable by virtue of the provisions of Article 1 of the Code of Administrative Court Procedure (CPTA), which prevents the knowledge of the claim and the absolution of the defendant from the instance in accordance with Article 278 of the CPC.
5.19. As a consequence of the unsuitability of the procedural means, the Arbitral Tribunal also lacks competence to review the acts in question.
5.20. Although the Personal Income Tax assessments for the year 2015 are at issue, the claim, as formulated by the Claimants, in addition to intending to retroactively apply the effects of the arbitral decision to assessments issued eight months earlier, does not appear correct, and can only be determined in new tax assessment proceedings in which the exact amount of losses to be carried forward is determined.
5.21. As prescribed by letter a) of number 1 of Article 2 of the RJAT, it is incumbent on arbitral tribunals to declare the illegality of acts of tax assessment, self-assessment, withholding at source and payment on account.
5.22. In the case at hand, the claim formulated by the Claimants is dependent on the determination of losses in the execution of judgment proceedings and, in that endeavor, nothing contends with the legality of the assessment.
5.23. Therefore, as the procedural means is not subsumed into the request for arbitral pronouncement, but rather into the execution of judgments, the Arbitral Tribunal is incompetent to review the acts that influence the claim and which can only be determined in the execution of judgment proceedings.
5.24. Thus, concluding that the execution of judgments is the appropriate means, the Arbitral Tribunal constituted is materially incompetent to review the claim formulated by the Claimants, given the lack of determination of the exact amount of losses and the fact that the tax acts in question occurred 8 months before the arbitral decision that recognized the right to carry forward losses, which constitutes a dilatory exception impeding the knowledge of the merits of the case, in accordance with the provisions of Article 576, numbers 1 and 2 of the CPC ex vi Article 2 letter e) of the Code of Tax Procedure and Practice (CPPT).
5.25. The arbitral decision, issued on 10/3/2017, in light of the partial success of the claim, determined that the amount of losses to be carried forward to the years 2015 and onwards will be determined after the necessary corrections are made.
5.26. Now, having the Claimants filed the Personal Income Tax Form 3 Income Declaration No. ...-...-... for the year 2015, whose receipt occurred on 07.08.2016, and which gave rise to the Personal Income Tax assessments here under scrutiny, namely assessment No. 2016-… of 02.08.2016, No. 2016 … of 10.08.2016 and No. 2016 … of 05.09.2016, relating to the period of 2015, which were issued about 8 months before the arbitral decision that recognized the right to carry forward losses.
5.27. Therefore, the discussion of the legality of the tax acts of Personal Income Tax assessment relating to 2015, will always be dependent on the compliance with what was determined in the scope of arbitral decision No. 338/2016-T, through the issuance of a new assessment for the year 2014 where the losses to which the Claimants are entitled to carry forward to the year 2015 and onwards are clearly determined and evidenced.
5.28. Depending, as it does, the review of the tax acts of assessment for the year 2015, on the implementation of arbitral decision No. 338/2016-T, and the concrete determination, through the issuance of a new assessment, of losses to be carried forward, it is necessary to conclude that we are faced with a prejudicial question.
5.29. In these terms, the Respondent requests that the present arbitral instance be suspended, with all legal effects, until the arbitral decision issued in Case No. 338/2016-T is implemented, and the losses to be carried forward to the year 2015 and onwards are determined, through the issuance of a new assessment for the year 2014.
5.30. The income earned by the Claimants and underlying the Personal Income Tax assessments sub judice is not limited exclusively to category "F".
5.31. Indeed, in addition to real property income, the Claimants declared income classified in categories "A" and "B" of Personal Income Tax, income which is minimally contested in its assessments.
5.32. As such, and by mere duty of professional representation, naturally that in case of success of the action, the request for annulment deduced by the Claimants could never result in a total annulment of the assessment sub judice, but, at most, in a partial annulment of the assessment here in question with respect to income of category "F".
5.33. Although Article 22(1) of the Personal Income Tax Code prescribes that "taxable income in Personal Income Tax is what results from the pooling of income from the various categories earned in each year, after the deductions and abatements provided in the following sections", it equally determines letter b) of number 3 of Article 22 of the Personal Income Tax Code that "income referred to in Articles 71 and 72 earned by residents in Portuguese territory are not pooled for purposes of taxation (…), without prejudice to the option for pooling provided therein."
5.34. It further establishes number 7 of Article 72 of the Personal Income Tax Code that "real property income is taxed autonomously at the rate of 28%", and number 8 of that article provides that "income provided in numbers 4 to 7 may be pooled by option of their respective holders resident in Portuguese territory."
5.35. Reuniting the Claimants, as they did, the requirement of national residence embodied in letter b) of number 3 of Article 22 of the Personal Income Tax Code and having opted, as they indeed did, for non-pooling of income of category "F", naturally they are now prevented from the possibility of having reflected the negative net result of the year 2015 of taxpayer B in the total value of € 5,946.93.
5.36. Furthermore, not having the Claimants opted for pooling, they cannot now come – to use the expression – "to obtain the best of both worlds", that is:
• The application of a liberatory rate to income of category "F" to the detriment of the option for pooling; and,
• simultaneously, the carryforward of losses underlying an option for pooling that was not taken.
6. On 12/09/2017, an arbitral order was issued, as follows:
"The Claimants are notified to pronounce themselves within a period of ten days on the exceptions and prejudicial question raised by the Respondent in its response".
7. The Claimants pronounced themselves on the exceptions and prejudicial question raised by the Respondent, invoking, in summary, the following:
7.1. The expenses of € 40,470.36 were accepted as lawful and valid by the Respondent, with only the carryforward of those losses determined to subsequent years being truly at issue in that other case, despite the then and here Claimants not having opted for pooling of their respective income.
7.2. The only portion of the expenses not accepted by the Respondent and whose acceptance was sought in that case was instead in the amount of € 13,597.71, with the learned Arbitral Tribunal determining the acceptance of € 1,277.66 additional and rejecting expenses of € 12,320.05.
7.3. It is illogical to defend oneself by stating that the carryforward of losses in 2015 is decided in a prior case (whereby the present case lacks subject matter) and simultaneously to understand that the carryforward of losses in 2015 will only be admissible through the alleged additional requirement of opting for pooling (requirement not dictated by the said judgment).
7.4. To this is added the fact that the subject matter of the present request for arbitral pronouncement also covers the illegality of the assessment resulting from the sum of net income of the taxpayers relating to real property income determined in 2015, as an effect of the option for joint taxation, not having been calculated by the Tax Authority, because in the understanding thereof, this would also require opting for pooling.
7.5. In accordance with Articles 579 and 580 of the CPC, applicable ex vi of Article 29(1)(e) of the RJAT, res judicata presupposes the repetition of a case, which in turn presupposes an identical action as to subjects, claim and cause of action.
7.6. If it is true that there is identity of subjects, the remaining identities presupposed do not occur.
7.7. On the one hand, there is no identity of claim, as in that case the claim was the annulment of Personal Income Tax assessments relating to the year 2014 and in this case the claim is the annulment of Personal Income Tax assessments relating to the year 2015.
7.8. In that sense points number 4 of Article 24 of the RJAT, when establishing that "The arbitral decision precludes the right of the tax administration to practice a new tax act with respect to the same taxpayer or obligated party and taxation period".
7.9. On the other hand, there is no identity of cause of action because the intention deduced in the two actions does not proceed from the same legal fact (cf. Article 581(3) of the CPC):
- in that case, the non-acceptance of some expenses in 2014 and the existence of losses to be carried forward to subsequent years was discussed;
- in this case, it is discussed (i) the admissibility of the carryforward of losses provided for in Article 55 of the Personal Income Tax Code (namely as to the necessity of opting for pooling provided in Article 22(3)(b) of the same Code, so that such carryforward can be carried out), as well as (ii) the (dis)consideration by the Tax Authority of the negative net real property income of taxpayer B in the calculation of tax due by the household, in light of the option for joint taxation.
7.10. It further adds that, in accordance with number 1 of Article 24 of the RJAT, the final arbitral decision binds only the Respondent "in the exact terms of the success of the arbitral decision", and the decision issued in case No. 338/2016-T did not have as its subject any tax assessment act relating to the financial year 2015.
7.11. Even if the Respondent had executed that judgment, the cause of action of the present request for arbitral pronouncement would persist, because, in the understanding of the Respondent, the losses would continue illegally not to be deducted from real property income earned in 2015 because the Claimants did not effect the option for pooling provided in Article 22(3)(b) of the Personal Income Tax Code.
7.12. The exception previously invoked being unfounded, i.e., the request for arbitral pronouncement being the appropriate means for the satisfaction of the Claimants' intentions, consequently the alleged incompetence due to subject matter will be unfounded.
7.13. The Respondent chose not to resort to its "right to repentance", enshrined in Article 13(1) of the RJAT, revoking the assessments sub judice and seeking to avoid litigation.
7.14. And note that it was not simply an "expiration" of the 30-day period legally established in said rule: once in the administrative proceedings already attached to the case, on 14 July 2017 (that is, already after the expiration of the period for spontaneous execution), an order was issued to the effect that the acts sub judice "(…) should be maintained, given the regularity of the procedure".
7.15. From which it results that the Respondent itself understands that the decision issued in case No. 338/2016-T produces no effects on the assessments sub judice (which contradicts even the arguments used to support its defense by exception and the alleged prejudicial question).
7.16. There is no objective fact supervening the order by which the Respondent chose not to alter the tax act, since such order was issued on 14 July 2017, a date posterior not only to the issuance of the arbitral judgment in case No. 338/2016-T, but also posterior to the expiration of the period of spontaneous execution!
7.17. The request for suspension of arbitral instance should thus be rejected, by total absence of legal support.
7.18. It clearly results from the reasoning and from all the claim made by the Claimants that, if they allege the disregard of losses within category F, obviously the request for annulment relates only to such income and only to the extent that such losses were disregarded.
8. On 28/09/2017, an arbitral order was issued, dispensing with the meeting provided for in Article 18 of the RJAT, as the circumstances object of the various letters of number 1 of this provision were not present and it was not deemed necessary, in accordance with number 2 of Article 18 of the RJAT, the production of oral arguments, as the positions of the parties in their respective pleadings were perfectly defined, it being permitted, however, for the parties to request such meeting.
9. The parties did not request that the meeting provided for in Article 18 of the RJAT be conducted.
II. Proven Facts
On the basis of the documentation attached to the case file and the administrative proceedings, the following facts are considered proven:
1. In the financial year 2015, the Claimants chose joint taxation of their income in the Personal Income Tax Form 3 Income Declaration No. ...-...-..., relating to the year 2015, whose receipt occurred on 07.08.2016, having earned a total of gross real property income of € 79,031.64.
2. The Claimants incurred the total amount of € 4,913.91, as expenses for conservation and maintenance incurred after the beginning of the lease contracts, and the amount of € 21,893.83, as expenses for conservation and maintenance incurred before the beginning of the leases.
3. Regarding the leased properties, the Claimants further incurred (i) condominium expenses in the amount of € 14,977.74; (ii) Municipal Real Estate Tax ("IMI") in the amount of € 3,072.27; (iii) Stamp Duty ("IS") in the amount of € 55.00; and (iv) municipal taxes in the amount of € 281.63.
4. Taxpayer A earned gross income of 59,380.40 €, incurring expenses in the amount of € 19,596.21, resulting in net income of € 39,784.19;
5. Taxpayer B earned gross income of € 19,651.24, incurring expenses in the amount of € 25,598.17, resulting in negative net income of € 5,946.93, having perceived no income, but instead recording a loss in the financial year;
6. The Claimants earned, in 2015, net real property income of € 33,837.26.
7. The Claimants were notified of Personal Income Tax assessment notes No. 2016…, of 2 August 2016, No. 2016…, of 10 August 2016, and No. 2016…, of 5 September 2016, resulting from their income declaration for 2015 and their respective substitute declarations.
8. From the last of these assessment notes – assessment note No. 2016… – it emerges that the Claimants incurred the total amount of € 11,489.47, in the form of tax relating to autonomous taxation.
9. Of this amount, € 11,139.57 relate to tax on real property income, resulting from the application of the 28% rate to the positive net income from rental properties owned by taxpayer A – i.e.: € 39,784.19 x 28% = € 11,139.57.
10. The Claimants filed a Gracious Complaint against the tax assessment, which was entered into the Finance Service of Lisbon - … on 7 November 2016.
11. An arbitral decision was issued in this arbitration centre, within the scope of case 338/2016-T, of 10 March 2017, which recognizes the losses determined within category F in the year 2014 by the now Claimants to be carried forward to subsequent years, and partially deemed illegal the Personal Income Tax assessment relating to the financial year 2014 of the Claimants for not reflecting such losses.
12. The arbitral decision was issued on 10.03.2017, having been notified to the parties by electronic mail on 13.03.2017.
13. The Claimants proceeded to the full payment of the Personal Income Tax assessments, corresponding to the amount of € 22,337.90.
III – Unproven Facts
There are no unproven facts relevant to the decision of the case.
IV - On the Law
The following questions are to be reviewed:
- On the peremptory exception of lack of subject matter, as regards the carryforward of losses determined in 2014, to the years 2015 and onwards
- On the unsuitability of the procedural means
- On the incompetence of the Arbitral Tribunal, due to subject matter
- On the prejudicial question regarding the carryforward of losses to the year 2015 and onwards and consequent request for suspension of the instance
- On the partial illegality of the Personal Income Tax declarations corresponding to the year 2015
- On the right to compensatory interest
Let us analyze these questions:
1) ON THE PEREMPTORY EXCEPTION OF LACK OF SUBJECT MATTER, AS REGARDS THE CARRYFORWARD OF LOSSES DETERMINED IN 2014, TO THE YEARS 2015 AND ONWARDS
The Respondent invokes that there is lack of subject matter with respect to the request for arbitral pronouncement since the tax facts – Personal Income Tax assessments – occurred 8 months before the arbitral decision that recognized the carryforward of losses to the years 2015 and onwards, which constitutes a peremptory exception.
The Claimant responded, in its response to the exceptions, that, absent the repetition of a case, the present request for arbitral pronouncement is not devoid of subject matter.
It verifies that an arbitral decision was issued, within the scope of case 338/2016-T, of 10 March 2017, from this arbitration centre, which recognizes the losses determined within category F in the year 2014 by the now Claimants to be carried forward to subsequent years, and partially deemed illegal the Personal Income Tax assessment relating to the financial year 2014 of the Claimants for not reflecting such losses.
The learned Decision of the CAAD referred to above, decided as follows:
"In these terms, and with the grounds set forth, the Arbitral Tribunal decides to partially uphold the request for arbitral pronouncement, determining the partial annulment of the contested assessment, which should be reformulated as follows:
- Acceptance of the declared expenses relating to the acquisition of electrical appliances, in the amount of € 1,277.66;
- Non-consideration, as a deductible charge, of the amount of € 12,320.05, relating to common works on the property, in full ownership, partially leased;
- Consideration, as losses to be carried forward to subsequent years, of the amount which, after the aforementioned corrections are made, is not capable of being deducted in determining the net income of Category F of Personal Income Tax for 2014, due to insufficiency of the corresponding gross income".
It appears that the Respondent understands that, having the Claimants filed the present request for arbitral pronouncement on 05.06.2017, before the deadline for the Respondent entity to execute the judgment had expired, determining the losses, as determined by the arbitral decision issued in Case No. 338/2016-T, there exists lack of subject matter with respect to the request for arbitral pronouncement since the tax facts – Personal Income Tax assessments – occurred 8 months before the arbitral decision that recognized the carryforward of losses to the years 2015 and onwards.
However, such understanding cannot prevail.
The subject matter of the present arbitral pronouncement is the declaration of illegality of the Personal Income Tax declarations No. 2016…, of 2 August 2016, No. 2016…, of 10 August 2016, and No. 2016…, of 5 September 2016, which are earlier than the request for arbitral pronouncement and have not, so far, been annulled, with Case No. 338/2016-T concerning the annulment of the declaration of the prior year, the only one that was annulled and ordered to be reformulated.
Therefore, the invoked peremptory exception of lack of subject matter is deemed unfounded.
2) ON THE UNSUITABILITY OF THE PROCEDURAL MEANS
The Respondent further maintains that, as it is demonstrated that the tax facts in question – Personal Income Tax assessments No. 2016-… of 02.08.2016, No. 2016 … of 10.08.2016 and No. 2016 … of 05.09.2016 – are earlier than the knowledge by the Claimants of the consideration of losses to be carried forward by the arbitral decision issued in Case No. 338/2016-T and issued on 10.03.2017, the assessments could never evidence facts or values that only occurred with the issuance and finality of the arbitral decision issued in Case No. 338/2016-T. Thus, if the Claimants intend the determination of losses to be carried forward to the year 2015, the appropriate procedural means for this purpose would be the execution of judgments, to which Articles 170 and following of the Code of Administrative Court Procedure (CPTA) allude.
The Claimant responded, considering the present request for arbitral pronouncement the appropriate means for the satisfaction of its intention.
It being clear that the decision issued in case No. 338/2016-T did not have as its subject any tax assessment act relating to the financial year 2015, and that, in accordance with number 1 of Article 24 of the RJAT, the final arbitral decision binds only the Respondent "in the exact terms of the success of the arbitral decision", it appears clear to us that the Claimant has no means of seeing its intention satisfied if the assessments relating to the year 2015 are not annulled, thus making this case the appropriate means for its intention.
3) ON THE INCOMPETENCE OF THE ARBITRAL TRIBUNAL DUE TO SUBJECT MATTER
The Respondent further maintains that, as a consequence of the unsuitability of the procedural means, the Arbitral Tribunal also would lack competence to review the acts in question, since, although Personal Income Tax assessments for the year 2015 are at issue, the claim formulated by the Claimants is dependent on the determination of losses in the execution of judgment proceedings and, in that endeavor, it is in no way related to the legality of the assessment.
The Claimants responded, maintaining that, since the exception of unsuitability of the procedural means is unfounded, given that the request for arbitral pronouncement is the appropriate means for the satisfaction of the Claimants' intentions, the alleged exception of incompetence due to subject matter will equally be unfounded.
The competence of arbitral tribunals comprises the review, in accordance with Article 2(1) of the Legal Regime of Tax Arbitration, of the following intentions:
a) the declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;
b) the declaration of illegality of acts of fixing the taxable matter when they do not give rise to the assessment of any tax, of acts of determining taxable matter and of acts of fixing patrimonial values.
The Claimants came to request the declaration of illegality of the Personal Income Tax declarations relating to the year 2015, a matter that is clearly covered by the competence of the Arbitral Tribunal, in accordance with Article 2(1)(a) of the RJAT.
Therefore, the dilatory exception of incompetence of the arbitral tribunal due to subject matter is deemed unfounded.
4) ON THE PREJUDICIAL QUESTION REGARDING THE CARRYFORWARD OF LOSSES TO THE YEAR 2015 AND ONWARDS AND CONSEQUENT REQUEST FOR SUSPENSION OF THE INSTANCE
The Respondent invokes that the discussion of the legality of the tax acts of Personal Income Tax assessment relating to 2015, will always be dependent on the compliance with what was determined in the scope of arbitral decision No. 338/2016-T, through the issuance of a new assessment for the year 2014 where the losses to which the Claimants are entitled to carry forward to the year 2015 and onwards are clearly determined and evidenced.
The Claimants responded, stating that there is no prejudiciality and furthermore that "in the administrative proceedings already attached to the case, on 14 July 2017 (that is, already after the expiration of the period for spontaneous execution), an order was issued to the effect that the acts sub judice "(…) should be maintained, given the regularity of the procedure" – cf. pp. 9-10 of the administrative proceedings attached to the case."
In fact, the request for annulment of assessments relating to the financial year 2015, is not prejudiced by the fact that an identical request concerning the assessments of the prior year has occurred, all the more so when these have already been decided by arbitral decision in that case.
Therefore, the request for suspension of the instance is deemed unfounded.
5) ON THE PARTIAL ILLEGALITY OF THE PERSONAL INCOME TAX DECLARATIONS CORRESPONDING TO THE YEAR 2015
The Respondent emphasizes the fact that we cannot be faced with a declaration of total illegality of the assessments, since the issue is limited to taxation in category F, and one can only speak of partial illegality.
However, it appears clear, in accordance with the request for arbitral pronouncement in question, that the Claimants only intend the annulment of the Personal Income Tax assessments of 2015, insofar as they relate to income of category F, never having pronounced themselves regarding other income, and having, throughout their pleadings, referred multiple times to the expression "partial".
The Claimants confirmed, in their response to the exceptions, that they intend only the partial annulment of the aforementioned Personal Income Tax declarations, relating to category F.
Therefore, it is understood that we are only faced with a request for partial annulment.
It is necessary, first of all, to decide on the non-consideration, within the scope of the assessments relating to 2015 of the loss to be carried forward to subsequent years, in the amount of € 1,963.83, following the decision in the case pending before this Arbitration Centre under number 338/2016-T.
The issue under analysis resides in the interpretation of the norm of Article 55, numbers 1 and 2, of the Personal Income Tax Code, in the version prior to Law No. 82-E/2014, since, in accordance with Article 17(6) of said Law, the same continues to be applicable to losses occurring before 1 January 2015:
Article 55
Deduction of losses
1 - Without prejudice to the provisions of the following numbers, the negative net result determined in any category of income is deductible from the aggregate of net income subject to taxation.
2 - The negative net result determined in category F can only be carried forward to the five years following that to which it relates, deducting itself from the positive net results of the same category.
The understanding of the Respondent is that, being concerned with losses relating to real property income not entirely deducted from the gross income of the respective category due to insufficiency thereof in the year in which they were earned, the respective carryforward to subsequent years is conditioned to the option for pooling of such income.
However, it does not appear that one can understand it in that sense, nor has that been the jurisprudence of this Arbitration Centre.
As stated in the Decision of the CAAD No. 96/2015-T:
"It remains to be determined whether, it not being possible to pool, there will not be a place for the "deduction" of specific deductions and the deduction of losses, as the Tax Authority contends.
It should be noted, first of all, that the assertion of the Tax Authority, regarding specific deductions, is contradicted by the reality of the facts, since, according to the facts established, both assessment No. 2012... (Personal Income Tax for 2011) and assessment No. 2014... (Personal Income Tax for 2013), issued by the Tax Authority, contemplate the specific deductions to the declared income.
Nor could it be otherwise, given the legislative consecration of the principle of income-accrual, which, as already stated, provides for the taxation of net income.
Now, taking into account that the losses to carry forward are nothing more than the accumulation of specific deductions which, in each year, can only be deducted from the taxable matter of that same year, up to their concurrence, and can be deducted from the positive taxable matter of subsequent years, within the time limit legally established, it is not clear how the said principle of taxation of net income can be satisfied without the losses to carry forward from prior years being taken into account.
On the other hand, there is no rule that excludes the possibility of deduction of losses by non-resident taxpayers.
If it is true that pooling operates at a phase subsequent to the subtraction of the "deductions and abatements provided in the following sections", as provided in number 1 of Article 22 of the Personal Income Tax Code (the word "deductions" will refer to both the specific deductions of each category of income, as well as the deduction of losses, while there ceased to be "abatements", since the repeal of Article 56 by Law No. 64-A/2008, of 31 December), it does not necessarily follow that, should it not be possible to pool, it ceases to be possible to benefit from the "deductions" provided in the following sections".
In the same sense was that decision in case 338/2016-T, where it was written that, "thus understands the Arbitral Tribunal that the carryforward of losses to subsequent years, within Category F, is not dependent on the option for pooling, the same being admitted in case of non-manifestation of such option as there is no legal provision that removes such possibility, on the one hand, and, on the other, in obedience to the principle structuring the taxation of net income earned by the respective taxpayers".
It is, thus, clear that the application of the carryforward cannot be excluded due to the fact that the taxpayer did not exercise the option for pooling, and we must agree with the challenge as to this issue.
Regarding the second issue, the non-consideration of the negative net real property income of taxpayer B in category F in the calculation of tax due by the household is at issue, with the Claimants maintaining that the tax assessed within Category F did not take into account the negative net result determined in the year 2015 by taxpayer B in the amount of € 5,946.93.
In response, the Respondent equally maintains that the Claimants could not have opted for autonomous taxation of income of category "F", and should instead have opted for pooling so that such negative net result could have been taken into account.
Being certain that we have already rejected the position of the Respondent regarding the necessity of the option for pooling, there is, however, another aspect to be considered, which is the amendment made by Law No. 82-E/2014 to Article 55(1) of the Personal Income Tax Code, which applies to this situation, since it is not a loss sustained in prior years, but rather a negative net income in the same year of 2015.
Article 55(1) of the Personal Income Tax Code, as worded, after the entry into force of that law, provides:
"For each income holder, the negative net result determined in any category is only deductible from its positive net results of the same category, as follows:
a) The negative net result determined in category B can only be carried forward, in accordance with the applicable part of Article 52 of the Corporate Income Tax Code, to the 12 years following that to which it relates;
b) The negative net result determined in a given year in category F can only be carried forward to the six years following that to which it relates;
c) The percentage of the negative balance referred to in number 2 of Article 43 can only be carried forward to the five years following that to which it relates;
d) The negative balance determined in a given year, relating to the operations provided for in letters b), c), e), f), g) and h) of number 1 of Article 10, can be carried forward to the five subsequent years when the taxpayer opts for pooling".
Thus, although the Claimants exercised the option for joint taxation in the year 2015 within the legal deadline for this purpose, in accordance with Article 59(2) of the Personal Income Tax Code, the fact is that the law ceased to allow losses obtained by one of the taxpayers to be deducted from the income of the other, whereby in this regard the challenge to the Personal Income Tax assessments is unfounded.
Although this argument was not used by the Respondent in its Response, the fact is that the Arbitral Tribunal knows the law ex officio and is not bound by the position of the parties on this matter.
Therefore, the Personal Income Tax assessments in the case at hand are only illegal by the non-consideration of the carryforward of losses in prior years, as decided in the ruling issued in case 338/2016-T, with the non-consideration of the negative net result of taxpayer B being legal, as results from the wording of Article 55 of the Personal Income Tax Code after Law No. 82-E/2014
6) ON THE RIGHT TO COMPENSATORY INTEREST
It is now necessary to determine whether or not there is a right to compensatory interest, regarding the portion of the assessment deemed illegal.
As stated in number 1 of Article 43 of the General Tax Law "when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services that resulted in payment of the tax debt in an amount superior to what is legally due".
As further results from number 5 of Article 24 of the RJAT, the right to compensatory interest can be recognized in arbitral proceedings.
It will be necessary, however, to determine whether or not there was an error attributable to the services.
As a result of only a declaration of partial illegality as to the non-consideration of the sum of net real property income attributable to taxpayer A with net real property income attributable to taxpayer B earned in 2015, only with respect to that amount can there be a right to compensatory interest.
Now, regarding this issue, we must understand that there was an error on the part of the Tax Administration, in the application of the law.
We are, in this case, faced with negligence on the part of the Tax Authority, negligence that is reflected in an "error attributable to the services", as stated in Article 43 of the General Tax Law (LGT).
Taking into account the provisions of Article 61 of the Code of Tax Procedure and Practice (CPPT) and having verified the existence of an error attributable to the services of the Tax Administration, from which resulted payment of the tax debt in an amount superior to that legally due (see Article 43(1) of the General Tax Law), we can understand that the Claimant has the right to compensatory interest at the legal rate, on the amount of tax paid in excess in category F, which will be counted from 05-06-2017, until the complete reimbursement of that amount.
IV – Decision
In these terms, and with the grounds set forth, the Arbitral Tribunal decides to partially uphold the request for arbitral pronouncement, determining the partial annulment of the contested assessment as to category F, which should be reformulated, as follows:
- Consideration in the financial year 2015, as losses to be carried forward, of the amount which, after the corrections referred to in case 338/2016-T are made, is not capable of being deducted in determining the net income of Category F of Personal Income Tax for 2014, due to insufficiency of the corresponding gross income.
The Arbitral Tribunal further decides to deem unfounded the request for annulment of the Personal Income Tax assessment on the grounds that the negative net income of taxpayer B in category F relating to that year of € 5,946.93 was not considered in the same financial year 2015.
The value of the proceedings is set at € 47,694.95 (value indicated and not contested), and the corresponding arbitration fee value at € 2,142.00 in accordance with Table I of the Costs Regulations of Tax Arbitration Proceedings.
Given the partial success of both parties in the proceedings, it is deemed appropriate to distribute the costs between them at 2/3 for the Respondent and 1/3 for the Claimants.
Lisbon, 27 November 2017
The Arbitrator
(Luís Menezes Leitão)
Frequently Asked Questions
Automatically Created