Process: 374/2018-T

Date: January 24, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 374/2018-T) addresses a dispute concerning IRS capital gains tax (mais-valias) under Article 51 of CIRS for a self-construction real estate project. The taxpayer challenged an IRS assessment of €60,859.30 plus compensatory interest of €428.17 for the 2016 tax year, relating to the disposal of properties acquired through a self-construction consortium arrangement initiated in 2007. The claimant acquired 4% quotas in two urban properties through a mandatary (B... Ltd.) for €96,000 total, with an additional price adjustment of €1,150,000 in 2010 due to increased construction area. The Tax Authority disputed the acquisition values and expenses/charges declared in Schedule G of the IRS Form 3 declaration, arguing they did not match IMT records. The core legal issue centers on whether self-construction costs and consortium-related expenses can be properly deducted when calculating taxable capital gains under CIRS Article 51. The taxpayer relied on schedules provided by the consortium manager (B...) to determine deductible costs. The Tax Authority initiated corrections based on discrepancies between declared values and official IMT liquidation records. This case illustrates the evidentiary burden taxpayers face when claiming deductions for self-construction projects and the importance of maintaining comprehensive documentation of all acquisition costs, construction expenses, and charges throughout multi-year development projects for IRS capital gains purposes.

Full Decision

ARBITRAL DECISION

I - REPORT

  1. A..., taxpayer no. ..., domiciled at Street ..., no. ... ...-... ...- ... (hereinafter referred to as Claimant or Taxpayer), filed on 2018-08-06 a request for arbitral decision, in accordance with the provisions of subparagraph a) of article 2, paragraph 1, article 10, paragraphs 1 and 2, of Decree-Law no. 10/2011, of 20 January (hereinafter referred to as RJAT), in which the Tax and Customs Authority is requested (hereinafter referred to as TA or Respondent), with a view to declaring illegal and subsequently partially annulling the Personal Income Tax (IRS) assessment act no. 2018... in the amount of EUR 60,859.30, and the compensatory interest assessment no. 2018..., in the amount of EUR 428.17, which generated the settlement statement no. 2018..., in the amount of EUR 13,809.01 issued by the TA, relating to the year 2016.

  2. The request for constitution of a Tax Arbitration Court was accepted by His Excellency the President of CAAD on 2018-08-07 and notified to the Respondent in accordance with legal procedures on that same date.

  3. In accordance with and for the purposes of the provisions of subparagraph a) of paragraph 2 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Council of CAAD, duly notified to the parties within the prescribed deadlines, the undersigned was appointed as arbitrator, who communicated to that Council the acceptance of the appointment within the deadline set forth in article 4 of the Code of Ethics of the Center for Administrative Arbitration.

  4. On 2018-09-26 the parties were notified of this appointment, and they did not express any intention to refuse the designation of the arbitrator, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs a) and b), in the wording conferred by Law no. 66-B/2012, of 31 December.

  5. The Singular Tribunal was constituted on 2018-10-17, in accordance with the provision in subparagraph c) of paragraph 1 of article 11 of RJAT, in the wording conferred by article 228 of Law no. 66-A/2012 of 31 December.

  6. Duly notified for such purpose, through an order issued on 2018-10-17, the Respondent submitted on 2018-11-14 its reply, and on that same date proceeded to attach the administrative file to the process.

  7. By order issued on 2018-11-28 duly notified to the parties, which substantiated, among other things, the waiver of the meeting referred to in article 18 of RJAT and the submission of final arguments, the probable deadline for issuance and notification of the final decision was set as twenty-one January two thousand and nineteen.

  8. To substantiate its request, the Claimant invoked, in summary, and with relevance to what matters here, the following (mentioned mainly by transcription):

8.1. "(...) the Claimant, for purposes of acquisition, development and disposal of the real property [naturally those in dispute in the present proceedings] resorted to a model designated 'self-construction' (see article 16 of the request for arbitral decision);

8.2. "(...) on 27 September 2007, the Claimant executed with the commercial company B..., Ltd. (...) together with other natural and legal persons, a self-construction contract" (see article 17 of the request for arbitral decision and document no. 7 attached thereto);

8.3. "(...) on the same date, the Claimant (also represented there by C..., in the capacity of business manager) executed an instrument of mandate and power of attorney in favor of B... (see article 19 of the request for arbitral decision and document no. 8 attached thereto);

8.4. "(...) in the capacity of mandatary-attorney, B... executed on 27 September 2007 a public deed of purchase and sale having as its object the said real property, [those itemized on pages 10 to 13 of document no. 8] for the total amount of EUR 2,400,000.00 (see article 23 of the request for arbitral decision and document no. 9 attached thereto);

8.5. "For the price of EUR 2,296,500.00 (...) the urban property corresponding to registration article ..." was acquired and for "the price of EUR 103,500.00 the urban property corresponding to registration article ..." was acquired (see subparagraphs a) and b) of article 23 of the request for arbitral decision and document no. 9 attached thereto);

8.6. "(...) in the name and on account of the Claimant the following were acquired:

a. A quota corresponding to 4% of the urban property corresponding to registration article ...;

b. A quota corresponding to 4% of the urban property corresponding to article ... (see article 24 of the request for arbitral decision and document no. 9 attached thereto, subparagraphs d) of paragraph 2 of clause 2 and subparagraph d) of paragraph 4 of the same clause);

8.7. "(...) the Claimant bore, in this act, the following acquisition values:

a. registration article ...: EUR 91,860.00; [1]

b. registration article ...: EUR 4,140.00.

8.8. "(...) by virtue of an additional price condition contractually provided, related to a possible increase in the construction area, the price was to be subject to modification (...) in an increase of the price by EUR 1,150,000.00 (...) formalized on 13 October 2010 (see article 27 of the request for arbitral decision and document no. 10 attached thereto);

8.9. "For purposes of completing Form 3 declaration, and in particular its Schedule G, B... provides to the consortiums a schedule in which it summarizes the various relevant items, particularly that relating to expenses and charges (see article 31 of the request for arbitral decision);

8.10. "For purposes of completing the declaration relating to the year 2016, the Claimant took as a starting point the schedule delivered to him by B..., taking as reference the values contained in the sixth column, insofar as it concerns co-owners with a quota share of 4% in both properties" (see article 33 of the request for arbitral decision and document no. 12 attached thereto);

8.11. The Claimant concludes, as may be inferred from its request, that "the present request for arbitral decision should be judged well-founded by proof established, partially annulling the Personal Income Tax assessment act no. 2012..., as well as the respective compensatory interest assessments no. 2019... and settlement statement no. ..., with the necessary legal consequences, namely the reimbursement of the amounts of tax paid in excess by the claimant, plus indemnity interest calculated from the date of payment until actual and complete reimbursement"

  1. As mentioned, on 2018-11-14, the Tax and Customs Authority proceeded to attach the administrative file (PA) and submitted its reply by way of opposition.

9.1. Where, fundamentally, and in very brief summary (which is likewise mentioned mainly by transcription) it argues for the following:

9.2. The Claimant submitted the income declaration, Form 3 IRS, and completed Schedule G intended for "Capital Gains and Other Patrimonial Increments" declaring the following values (contained in the "print" attached under article 6 of the reply):

  • article ...:

realization value EUR 149,872.62 - acquisition value EUR 132,640.85 - expenses and charges EUR 46,658.41

  • article ...:

realization value EUR 6,710.71 - acquisition value EUR 5,977.04 - expenses and charges EUR 2,102.63;

9.3. "The Claimant was notified, by Office ... of the Finance Service of Oeiras -..., of the existence of discrepancies in the IRS declaration relating to the year 2016, because:

'Schedule G - table 4; You must provide proof of the acquisition values that do not match those contained in form 11 and that were used for the Municipal Tax on Onerous Real Estate Transactions (IMT) liquidation. You must provide proof of the expenses and charges values" (see article 7 of the reply);

9.4. [The Claimant] "was further informed of the intention of the TA to make corrections to the values entered in the said income declaration, Form 3, Schedule G (see article 8 of the reply):

9.5. Having judged the justification of the discrepancies presented by the Claimant insufficient, "an official IRS assessment no. 2018... was issued, relating to the year 2016, in which the values relating to acquisition and expenses and charges were corrected (...) (see article 10 of the reply and respective print):

  • article ...:

realization value EUR 149,872.62 - acquisition value EUR 91,860.00 - expenses and charges - 0

  • article ...:

realization value EUR 6,710.71 - acquisition value EUR 4,140.00 - expenses and charges - 0

9.6. Confined to this segment the subject matter of the present arbitration process reflected in the disagreement (apparent dissent as will be seen) of the parties as to the acquisition values, and fundamentally as to "expenses and charges," the TA proceeds (see articles 13 et seq. of the reply) with the interpretation of article 51 of IRS Code, invoking arbitral jurisprudence produced within the scope of CAAD and the Supreme Administrative Court to conclude as follows: "in order for charges and expenses to be eligible for the determination of capital gains, it must be proven that they are necessary and inherent to the acquisition and disposal" (see article 24 of the reply);

9.7. The Respondent further proceeds (under articles 27 to 54 of the reply) with the analysis of various documents attached by the Claimant, either with the request for arbitral decision or at a later time, to conclude that:

9.8. "(...) as to the alleged charges borne, by all documents, they cannot be accepted because it is not possible to establish a connection between the values therein contained and the necessity and inherence to the acquisition and disposal of the identified real property" (see article 55 of the reply);

Finally,

9.9. On the alleged adjustment (increase) of the acquisition price of the contested real property (due to the change in construction area), it invokes article 46 of IRS Code to conclude that the legally considered value is that which served as the basis for the IMT assessment and that for the real property corresponding to registration article ..., the Claimant paid the respective IMT on EUR 91,860.00, and regarding the real property corresponding to registration article ..., the Claimant proceeded with the IMT assessment on the value of EUR 4,140.00 (see article 60 of the reply and document attached thereto);

9.10. Concluded the Tax and Customs Authority (see articles 61 and 62 of its reply) that:

"(...) given that the real property was acquired for valuable consideration, there was no exemption but payment of IMT, which was levied on the amounts of EUR 91,860.00 and EUR 4,140.00, these are the acquisition values that will be valid and considered for the determination of capital gains, as provided in art. 46 of IRS Code"

9.11. The Respondent concludes its reply arguing that "the present request for arbitral decision should be judged unfounded as not established by proof, with the contested act remaining in the legal order, and the requested entity being absolved accordingly of the claim".

  1. The Singular Arbitration Tribunal is materially competent and is regularly constituted in accordance with the provisions in articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1 of RJAT.

  2. The parties have legal personality and capacity, are legitimate and are duly and legally represented (articles 3, 6 and 15 of the Code of Tax Procedure and Process, by reference to article 29, paragraph 1, subparagraph e) of RJAT).

  3. The process does not suffer from any nullities, and no exceptions requiring decision were invoked.

  4. There is thus no obstacle to the examination of the merits of the case.

II. SUBSTANTIATION

A. MATTERS OF FACT

A.1. Facts Established as Proven

With relevance for the examination and decision of the questions raised, the following facts are established as proven and agreed:

i. On 27/09/2007 the Claimant executed with the commercial company denominated "B..., Ltd." together with other natural and legal entities a self-construction contract.

ii. On that same date the Claimant, represented by C..., executed an instrument of mandate and power of attorney in favor of the said company "B...".

iii. This company, in turn, and on the same date, acquired for the total price of EUR 2,400,000.00 the real properties at issue here, one for the price of EUR 2,296,500.00 and another for the value of EUR 103,500.00.

iv. The Claimant acquired 4% of the value of each of the properties, more specifically, EUR 91,860.00, corresponding to registration article ... and

v. EUR 4,140.00 as a result of his quota share of 4% on the value of EUR 103,500.00, corresponding to registration article ....

vi. In the month of August 2016 the Claimant proceeded with the disposal of the contested real property.

vii. The Claimant entered in Schedule G of Form 3 IRS for the year 2016 and the field provided therefor the following values, respectively of realization, acquisition and expenses and charges, as follows:

article ...

realization value - EUR 149,872.62,

acquisition value - EUR 132,640.85

expenses and charges - EUR 46,658.41

article ...

realization value - EUR 6,710.71

acquisition value - EUR 5,997.04

expenses and charges - EUR 2,102.83

viii. The Claimant was notified by office of the Finance Service of Oeiras - ... of the existence of a discrepancy process in the IRS declaration relating to the year 2016 concerning the acquisition values and proof of expenses and charges borne with the acquisition and disposal of the property at issue.

ix. The Claimant's justification was judged insufficient by the TA, which consequently proceeded with the issuance of official IRS assessment no. 2018....

xi. In the assessment in question, the acquisition values of both properties were corrected and any amounts concerning "expenses and charges" were disregarded.

xii. The TA considered as acquisition values EUR 91,869.00 (registration article ...) and EUR 4,140.00 (registration article ...)

xiii. These acquisition values differ from those reflected in Schedule G of Form 3 IRS; however, they appear uncontested in light of the Claimant's position, set forth in articles 54 and 55 of the request for arbitral decision, wherein it states that "the acquisition value of EUR 91,860.00 (...) should be fully accepted and considered for purposes of calculating the contested real property capital gain regarding the property corresponding to registration article ..." and "regarding the property corresponding to registration article ..., (...) the acquisition value of EUR 4,140.00"

xiv. On 2018-08-06, the Claimant submitted to CAAD a request for arbitral decision which gave rise to the present process (see CAAD's information system and process management).

A.2. Facts Established as Not Proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of Matters of Fact Established as Proven and Not Proven

Regarding matters of fact, the tribunal does not need to pronounce on all that was alleged by the parties; rather it is the tribunal's duty to select the facts that matter for the decision and discriminate between matters proven and not proven [(see art. 123, paragraph 2 of CPPT and articles 607, paragraph 3 of the Civil Procedure Code, applicable by reference to article 29 paragraph 1, subparagraphs a) and e) of RJAT)].

Thus, the facts pertinent for the adjudication of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) at issue (see article 596 of the Civil Procedure Code, applicable by reference to article 20, paragraph 1, subparagraph e) of RJAT);

Therefore, taking into account the positions assumed by the parties in light of article 110, paragraph 7 of CPPT, the documentary evidence and the attached PA, the facts above listed are considered proven with relevance for the decision, recognized and accepted by the parties.

B. LAW

The issue to be resolved in the present proceedings is whether the amounts documentally presented by the Claimant constitute, or not, expenses and charges ineligible in light of the provisions of article 51 of IRS Code and to what extent they increase or not the cost of acquisition and disposal of the real property at issue here, with reflection on the IRS assessment relating to the year 2016.

The subject matter and scope of the present arbitration process is thus confined, fundamentally, to (i) the subject of taxation of income of category G, specifically capital gains provided for in subparagraph a) of paragraph 1 of article 10 of IRS Code and (ii) the interpretation to be given to the second part of subparagraph a) of article 51 of the same normative body, namely to "necessary expenses and actually incurred inherent to acquisition and disposal".

Article 10 - Capital Gains

1 - Capital gains constitute gains obtained that, not being considered business and professional, capital or real estate income, result from:

a) Onerous disposal of real rights over real property and allocation of any assets of personal patrimony to business and professional activity exercised in the individual name by its owner."

Providing, in turn, article 51 of IRS Code,

Article 51 - Expenses and Charges

For determination of capital gains subject to tax, the acquisition value is increased by:

a) Charges for enhancement of assets, evidently accomplished in the last 12 years, and necessary expenses actually incurred, inherent to acquisition and disposal, as well as compensation evidently paid for onerous waiver of contractual positions or other rights inherent to contracts relating to those assets, in the situations provided for in subparagraph a) of paragraph 1 of article 10 (wording of Law no. 82-E/2014, of 31 December, entering into force on 2015-01-01)

At issue in the present proceedings, as mentioned, are expenses inherent to the acquisition and disposal of real property.

The Personal Income Tax Code (IRS Code) configures patrimonial increments [2] as a residual category, taxing only gains not covered under the remaining categories.

In article 9 of IRS Code concerning income of category G, various categories of patrimonial increments are aggregated, provided they are not considered income of another category, capital gains, indemnifications that compensate for non-patrimonial damages, amounts earned by virtue of non-competition obligations, and, further, unaccounted for patrimonial increases established in accordance with articles 87, 88, and 89 A) of the General Tax Law.

Capital gains are enumerated casually in article 10 of IRS Code, and it may be said that they are characterized by their occasional and fortuitous nature, and for what matters here, regarding the source of the "gain obtained," those from real property in accordance with subparagraph a) of paragraph 1 of article 10 of IRS Code resulting from "onerous disposal of real rights over real property (…)"

Constituting, as already signaled, capital gains subject to tax those occurring with "gains obtained that, not being considered business and professional, capital or real estate income, result from the 'onerous disposal of real rights over real property and allocation of any assets of personal patrimony to business and professional activity exercised in the individual name by its owner'".

Given that the personal income tax code does not provide us a concept of capital gains, we may here assume that constituting the same natures of increments of patrimonial nature "they correspond, essentially to gains resulting from a valorization of assets due to external circumstances, occurring, independently of a productive activity by its holder. They are 'gains brought by the wind' (windfall gains)[3]

Regarding the effective gain for tax purposes, it may be said that "capital gain is a gain that is materialized in the difference between the value at which an asset entered the individual patrimony and the value at which it left as a result of an act of disposal or another fact which, according to law, constitutes the realization of the capital gain." [4]

Such gains, and following the traditional solution in our tax legal order, will only be taxed at the moment of disposal of the asset, in accordance with the provision in subparagraph a) of paragraph 3 of article 10 of IRS Code, thus enshrining, as a general principle of taxation of capital gains, the realization principle.

Gains, apart from the exceptions provided for in subparagraphs a) and b) of paragraph 3 of article 10, are considered obtained at the moment of performance of the acts provided for in its paragraph 1, "gains are considered obtained at the moment of performance of the acts provided for in paragraph 1, without prejudice to the provisions of the following subparagraphs".

Underlying the gains occurring with capital gains resulting from onerous disposal of real rights over real property (or equivalent act) is the difference between the realization or disposal value of the asset or right at issue and the acquisition value.

In light of the provisions of article 51 of IRS Code, and refocusing on the fundamental issue of the present proceedings, for the determination of capital gains subject to tax it will be necessary to confine ourselves to the second segment of the norm contained in subparagraph a), namely to "necessary expenses actually incurred, inherent to acquisition and disposal (…)"

The acquisition value in the specific case results from the provision in paragraph 1 of article 46 of IRS Code: "in the case of subparagraph a) of paragraph 1 of article 10, if the real property was acquired for valuable consideration, the acquisition value is considered to be that which was used for purposes of Municipal Tax on Onerous Real Estate Transactions (IMT) assessment"

The acquisition value should further and in accordance with the provision in article 50 of IRS Code be corrected "by application of coefficients approved for such purpose by ministerial regulation of the Ministry of Finance, whenever more than 24 months have elapsed between the date of acquisition and the date of disposal or allocation" in observance of monetary correction rules.

Thus stated:

Regarding the deduction of expenses and charges for the determination of capital gains that the law establishes, it is easy to discern the reason for its existence: "The solution results, as is evident, from a general principle of income taxation, which imposes that only net income should be subject to tax, thus requiring the deduction of expenses necessary for the income to occur" [5]

It is recognized that the wording given to subparagraphs a) and b) of article 51 of IRS Code being generic as to "charges for enhancement of assets" and "necessary expenses," gives rise to interpretation doubts, and concedes a reasonable interpretative margin, since the legislator did not even exemplify which charges and which expenses it refers to, contrary to what it adopted in other provisions of a tax character.

We are, it appears, in the realm of indeterminate concepts, allowing a high margin of interpretation as to the scope of what should be understood by necessary expenses and inherent ones, since as to their practical implementation there should be no doubts whatsoever.

Notwithstanding what has just been said, the truth is that prior to the consideration of expenses as "necessary" and "inherent to acquisition" and their eventual relevance for purposes of the acquisition value it is necessary to prove their implementation so that it can be concluded (or not) from their inherence and necessity, as predicted by subparagraph a) of article 51 of IRS Code.

That is to say, it will be incumbent upon the interested party seeking to have such expenses recognized for determination of capital gains subject to tax to provide unequivocal proof, in a first step of their accomplishment, and subsequently of their connection, inherence and inseparability regarding the disposal of the real property/properties at issue.

Now,

We cannot fail to agree with the TA in the sense that from the documentary evidence presented by the Claimant "(…) it is not possible to establish a connection between the values therein contained and the necessity and inherence to the acquisition and disposal of the identified real property".

In fact, having analyzed the pertinent documents attached with the request for arbitral decision, specifically documents nos. 13 to 22, the judgment that may be produced from them is that there is no mention, identification, or written reference from which any relationship can be inferred with the values relating to the Claimant and that the latter proceeded to any payment, even in the context of his status as consortuum with 4%.

"Under the legal criterion, only expenses inherent are necessary, so only they are relevant. This criterion contains an idea of inseparability, an intrinsic relationship - that is not merely extrinsic - with the disposal: to be considered relevant, the expense must be, in short, indissociable from it. The expense must be integral to the disposal itself. It is not seen, effectively, what other meaning can be attributed to the expression 'inherent to disposal'. It is thus not enough that the expenses be connected to obtaining the income; it is necessary that they be indissociable from it." (see Court of Appeal of the South Central Administrative Court of 14/04/2015 (case no. 06824/13).

Even the invoices attached under document no. 23, although issued by the entities "D..., LDA.", E... and F... S.A" in favor of the Claimant do not clarify what eventual connection or relationship exists with expenses inherent and necessary to the acquisition or disposal of the real property at issue here, and are, moreover, dated beyond August 2016, the date on which the Claimant proceeded with the disposal of the properties.

It was consequently concluded that the expenses presented by the Claimant are ineligible for purposes of the provision in subparagraph a) of article 51 of IRS Code.

The Claimant further raises (articles 26 and 27 of the request for arbitral decision) "(…) an alteration in an increase of the price by EUR 1,150,000.00, [which] was to be formalized on 13 October 2010".

Although we understand that this issue is overcome in light of what was referred to above - the Claimant's conformity with the realization and acquisition values carried out by the TA - it nevertheless deserves to highlight, in a brief note, the following:

In the Draft Reform of IRS (presented in July 2014), the respective Commission proposed regarding the possibility of setting aside the IMT criterion by means of proof of the actual transmission price the following:

"At the level of real property capital gains - and differently from what occurs in the context of IRC and, also, of IRS, in this case when such capital gains are taxed in the context of category B - taxation in the context of category G does not provide for the possibility of setting aside the rule that determines that the realization value corresponds to the value to be considered for purposes of IMT assessment whenever this is higher than the declared one.

No reasons being perceived that prevent the rebuttable presumption from being overcome in the context of category G and this prevention possibly having grave and unjustified consequences for taxpayers, the express establishment is proposed that, also in this case, such a possibility exists"

However, this legislative amendment proposal did not receive the support of the legislature, the regime regarding the acquisition value for valuable consideration of real property remaining unalterable since the wording conferred by Law no. 55-A/2010, of 31 December (2011 Budget Law), entering into force on 2011-01-01, as follows:

ARTICLE 46

Acquisition value for valuable consideration of real property

"1. In the case of subparagraph a) of paragraph 1 of article 10, if the real property was acquired for valuable consideration, the acquisition value is considered to be that which was used for purposes of Municipal Tax on Onerous Real Estate Transactions (IMT) assessment."

The Claimant further raises, in the request for arbitral decision, specifically in segment 2 of V - Legal Framework, questioning the lack of substantiation concerning the assessment promoted by the TA as to compensatory interest in the amount of EUR 428.17, arguing, in addition to other arguments, the provisions of articles 286, paragraph 3 of the Constitution and articles 35 and 77 of the General Tax Law to conclude regarding the "absence of substantiation of compensatory interest assessments"

Regarding this question, unless I am mistaken, this arbitral tribunal subscribes to the understanding that flows from the arbitral decision rendered in the context of case no. 211/2017-T, rendered within the scope of CAAD and which is reproduced:

"It is unquestionably acquired and consensual that administrative acts must be subject to substantiation, a duty which, moreover, has constitutional acceptance in paragraph 3 of article 286 of the Constitution, whereby 'administrative acts are subject to notification to interested parties, in the form provided by law, and require express substantiation and accessible when they affect rights or legally protected interests', being detailed in ordinary law in articles 152 and 153 of the Administrative Procedure Code for the generality of administrative acts, and in article 77 of the General Tax Law for tax administrative acts.

Paraphrasing Diogo Freitas do Amaral [6] 'the substantiation of an administrative act consists in the explicit enumeration of the reasons that led its author to practice that act and to endow it with certain content'.

Regarding the substantiation of tax acts, paragraph 2 of article 77 of the General Tax Law provides that 'the substantiation of tax acts may be carried out summarily, and must always contain the applicable legal provisions, the characterization and quantification of tax facts and the operations for determining the taxable matter and the tax'

Such substantiation which, moreover, assumes some singularities depending on the presence of situations of relevance 'abnormal' for taxpayers.

Furthermore, and as a corollary of the obligation to substantiate administrative acts, the exercise of the right to be heard arises which, ultimately will have the virtue that the administered person may face the arguments produced against them.

It is today settled in doctrine and in national jurisprudence, including arbitral jurisprudence, that the legally required substantiation must meet the following characteristics:

  • officiousness; it must always proceed from the initiative of the administration, inadmissible being substantiation upon request,

  • contemporaneity; it must be coeval with the practice of the act, substantiation cannot be deferred or upon request,

  • clarity; it must be comprehensible by a standard recipient, avoiding polysemic concepts or deeply technical ones;

  • completeness; it must contain all essential elements that were determining of the decision taken, this characteristic unfolding in the duty of justification (legal norms and facts – domain of legality) and in the duty of motivation (domain of discretion or opportunity, when a valuation is necessary).

The Supreme Administrative Court has consistently understood that the substantiation of administrative or tax acts is a relative concept that varies depending on the type of acts and the circumstances of the concrete case, but that substantiation is sufficient when it allows a standard recipient to perceive the cognitive and evaluative path followed by the author of the act to pronounce the decision, that is, when that person may know the reasons why the author of the act decided as it did and not differently so as to be able to set in motion the administrative or contentious mechanisms of challenge.

By way of merely illustrative example, it may be read in the Supreme Administrative Court Opinion of 10/09/2014, handed down by Counselor Dulce Neto, in the context of case 01\2226/13 the following: "I - The Tax Administration has the duty to substantiate official tax assessment acts in harmony with the principle set forth in art. 286 of the Constitution and adopted in arts. 125 of the Administrative Procedure Code and 77 of the General Tax Law.

II - The act will be sufficiently substantiated when the administered person, placed in the position of a standard recipient - the bonus pater familiae of which art. 487, paragraph 2 of the Civil Code speaks - may come to know the factual and legal reasons underlying it, so as to be able to choose, in an informed manner, whether to accept or not the act."

Furthermore, we cannot fail to invoke the commentary produced by Diogo Leite Campos, Benjamin Silva Rodrigues and Jorge Lopes de Sousa, to article 35 of the General Tax Law [7] regarding this precise segment – substantiation of compensatory interest assessment:

"The assessment of compensatory interest (together with the tax debt no. 8) must be duly substantiated.

In the assessment the amounts of the tax debt and compensatory interest will be itemized, explaining with clarity the respective calculation and distinguishing them from other obligations owed (paragraph 9 of art. 35).

This requirement to demonstrate the calculation of compensatory interest is part of the general duty of express and accessible substantiation of injurious acts, constitutionally imposed (art. 286, paragraph 3 of the Constitution).

In general, substantiation should make it possible to know integrally the path followed by the assessing entity to calculate the interest.

Furthermore, since the taxpayer's fault is necessary to be imputed responsibility for compensatory interest, the substantiation of the assessment of the interest should indicate the conduct imputed to him that justifies the imposition of the payment of interest.

Thus, the integral knowledge of the evaluative and cognitive path followed by the entity assessing the interest will not dispense with:

  • the indication of the amount of interest, separated from the amount of the tax, if assessed concurrently;

  • the initial and final terms of the interest count;

  • the rate or rates and the periods to which each of them applies, if not the same rate applied for calculating the totality of the interest;

  • the indication of the legal instruments providing for the responsibility for compensatory interest and those providing for the rates applied;

  • the factual situation violating the law that justifies the assessment of the interest or the facts that led the Tax Administration to conclude that the delay in assessment was due to the culpable conduct of the taxpayer"

Now,

In the present proceedings and regarding the act of assessment of compensatory interest, the Claimant was notified of the respective assessment (document no. 2 attached with the request for arbitral decision and administrative file attached), where, among other things, it is clear, perceptible and of crystal-clear comprehension that one is faced with the assessment of compensatory interest.

In light of what has just been said, there is nothing to censure regarding the duty of substantiation of the tax assessment acts object of the present arbitration process, which we understand to have been observed.

III - INDEMNITY INTEREST

The Claimant requests payment of indemnity interest.

The reimbursement of the amounts relating to it depends on the success of the request for declaration of illegality of the assessment acts.

Consequently, the request for declaration of illegality being unfounded, the requests for reimbursement and indemnity interest are necessarily also unfounded.

IV - DECISION

In accordance with the foregoing, this Singular Arbitration Tribunal decides:

  • to judge unfounded the requests made by the Claimant, absolving the Tax and Customs Authority therefrom;

  • to maintain in the legal order the tax acts object of the present proceedings;

  • to condemn the Claimant to payment of procedural costs.

V - VALUE OF THE PROCESS

In accordance with what is established in articles 206, paragraphs 1 and 3 of the Civil Procedure Code, approved by Law no. 47/2013, of 26 June, 97-A, paragraph 1, subparagraph a) of the Code of Tax Procedure and Process and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the process is assigned the value of EUR 13,809.01 (thirteen thousand eight hundred and nine euros and one cent).

VI - COSTS

In accordance with the provisions of articles 12, paragraph 1, 2, 22, paragraph 4 of RJAT and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is set at EUR 918.00 (nine hundred and eighteen euros).

BE NOTIFIED

Text prepared by computer, in accordance with the provision in article 131 of the Civil Procedure Code, applicable by reference from article 29, paragraph 1, subparagraph e) of the Legal Regime of Tax Arbitration, with blank lines and reviewed by the arbitrator.

[The drafting of this decision is governed by the spelling prior to the 1990 Orthographic Agreement, except as regards transcriptions made].

Twenty-four January two thousand and nineteen

The Arbitrator

(José Coutinho Pires)

[1] Certainly by writing error the value of EUR 91,060.00 is indicated.

[2] For Paulo Pitta e Cunha, "The pseudo-reform of taxation of the century and the simplified regime of IRS", in Journal of Public Finance and Tax Law, Year 1, no. 1, Coimbra, Almedina, 2008, page 20, the correct designation for this category would be "other increments" since the denomination of "patrimonial increments" is a redundancy, since all income is an increment of the patrimony of the taxpayer.

[3] Rui Duarte Morais, On IRS, Almedina, 2006, page 109.

[4] José Guilherme Xavier de Basto, IRS, Real Incidence and Determination of Net Income, Coimbra Editor, pages 431 et seq.

[5] José Guilherme Xavier de Basto, op. cit. page 460.

[6] Course in Administrative Law, Volume II, pages 352 et seq.

[7] General Tax Law, Annotated and Commented, Encounter of Writing, 4th Edition 2012, pages 284 and 285.

Frequently Asked Questions

Automatically Created

What are the IRS capital gains tax rules under Article 51 of the CIRS for self-constructed properties in Portugal?
Article 51 of the CIRS governs IRS capital gains (mais-valias) taxation for real estate in Portugal. For self-constructed properties, taxpayers may deduct documented acquisition costs, construction expenses, and charges from the realization value. The calculation follows the formula: taxable gain = realization value - (acquisition value + expenses and charges). Critical for self-construction scenarios is maintaining comprehensive documentation of all costs incurred through consortium arrangements, including initial land acquisition, construction costs, financing charges, and any subsequent price adjustments. The Tax Authority cross-references declared values with IMT records and official property registrations, requiring taxpayers to substantiate any discrepancies with detailed proof of all expenditures throughout the development period.
How does the CAAD arbitral tribunal handle disputes over IRS capital gains calculations on real estate?
CAAD arbitral tribunals handle IRS capital gains disputes through a structured process under Decree-Law 10/2011 (RJAT). Taxpayers file a request for arbitral decision (pedido de pronúncia arbitral) challenging specific assessment acts. The tribunal president appoints an arbitrator within prescribed deadlines, and parties may refuse the designation. The Tax Authority submits a reply and attaches the administrative file (processo administrativo). The tribunal examines whether the Tax Authority properly applied Article 51 CIRS provisions, evaluating documentary evidence of acquisition values, expenses, and charges. The tribunal assesses the legitimacy of corrections made by the Tax Authority, particularly when discrepancies exist between taxpayer declarations and official records. The burden of proof typically falls on taxpayers to substantiate claimed deductions with contemporaneous documentation.
Can self-construction costs be deducted when calculating capital gains (mais-valias) for IRS purposes in Portugal?
Yes, self-construction costs can be deducted when calculating IRS capital gains under Article 51 CIRS, provided they are properly documented and verified. Deductible expenses include: initial land acquisition costs, construction and development expenses incurred through the self-construction consortium, professional fees paid to mandataries managing the project, financing charges directly related to the acquisition and construction, and contractually agreed price adjustments (such as increases due to expanded construction areas). However, the Tax Authority scrutinizes these deductions carefully, comparing declared values against IMT liquidation records and Form 11 submissions. Taxpayers must retain comprehensive documentation including self-construction contracts, mandate agreements, purchase deeds, payment receipts, consortium schedules detailing cost allocations, and any supplemental agreements modifying the original price. Discrepancies between declared expenses and official records trigger verification procedures requiring substantiation.
What is the procedure for filing an arbitral tax claim (pedido de pronúncia arbitral) with CAAD against the Portuguese Tax Authority?
Filing an arbitral tax claim with CAAD against the Portuguese Tax Authority follows specific procedures under RJAT (Decreto-Lei 10/2011). The taxpayer submits a 'pedido de pronúncia arbitral' identifying the contested assessment acts (including act numbers and amounts), stating factual and legal grounds for the challenge, and attaching supporting documentation. The CAAD President accepts or rejects the request, then notifies the Tax Authority. Upon acceptance, an arbitrator is appointed from the CAAD roster based on availability and expertise. Both parties receive notification of the appointment and may refuse the designation within prescribed deadlines. Once constituted, the singular or collective tribunal orders the Tax Authority to submit its reply ('resposta') and attach the complete administrative file ('processo administrativo'). The tribunal may waive the oral hearing if parties agree, setting deadlines for written submissions and final arguments before issuing the arbitral decision within statutory timeframes.
How are compensatory interest (juros compensatórios) calculated in IRS capital gains tax assessments in Portugal?
Compensatory interest (juros compensatórios) in IRS capital gains assessments are calculated under Article 35 of the LGT (Lei Geral Tributária). These interest charges compensate the State for delayed tax revenue when taxpayers underpay IRS due to incorrect capital gains calculations. The interest accrues from the date the tax should have been paid (typically the IRS payment deadline for the relevant tax year) until the date of the corrective assessment. The applicable rate is set annually by ministerial order (Portaria). For capital gains disputes, compensatory interest becomes due when the Tax Authority determines that declared acquisition values, expenses, or charges were inflated, or realization values understated, resulting in lower taxable gains than legally required. Taxpayers challenging assessments through CAAD arbitration must contest both the principal tax amount and the compensatory interest assessment, as these constitute separate but related administrative acts subject to independent challenge and potential annulment.