IRS Category F Income Deductions and Tax Assessment Grounds – CAAD Arbitration 394/2014-T

ARBITRAL DECISION

I. REPORT

1. On 23 May 2014, A, TIN …, with tax residence at … Lisbon (hereinafter, Claimant), filed an application for the establishment of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012 of 31 December (hereinafter, abbreviated as RJAT), seeking the appraisal of the legality of the additional Personal Income Tax assessment No. 2014 …, relating to the year 2012, the corresponding assessment of compensatory interest No. 2014 … and the account settlement statement No. 2014 ….

The Claimant attached 174 (one hundred and seventy-four) documents and listed 5 (five) witnesses.

The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).

In essence and in brief summary, the Claimant alleged the following:

The Claimant is the usufructuary of 10 (ten) autonomous units integrated in the urban property located at … Lisbon, of 11 (eleven) floors or independently used divisions integrated in the urban property located at … Lisbon, and of 11 (eleven) floors or independently used divisions integrated in the urban property located at … Lisbon.

In the year 2012, the Claimant earned, in addition to other income, income from the receipt of rents from some of the aforesaid units and floors, and submitted her Personal Income Tax return, model 3, accompanied, in addition to others, by the respective Annex F.

Subsequently, the Claimant was notified of the Personal Income Tax assessment No. 2013 …, relating to the year 2012, in which the tax payable was calculated at €23,155.64, which was promptly paid by the Claimant.

Later, through internal analysis, the Claimant's income return was subject to a tax audit by the competent services of AT, and the Claimant then delivered to the respective Financial Services a dossier containing all the documentation supporting the income return she had submitted.

As a result of this audit, the Claimant was notified of the additional Personal Income Tax assessment No. 2014 …, the assessment of compensatory interest No. 2014 … and the account settlement statement No. 2014 ….

In the aforementioned additional Personal Income Tax assessment, a final amount of tax payable of €35,307.39 was calculated, and the Claimant paid the differential amount between this figure and the amount of tax initially assessed, namely, €12,151.75.

The Claimant maintains that AT never justified the differences in amounts between the aforementioned initial and additional Personal Income Tax assessments, that is, AT never explained the concrete reasons that led it to make the additional tax assessment and what the concrete grounds were for which it considered that the initially assessed tax was not correct; and, by comparing those assessments, it appears that AT did not take into account many of the deductions declared by the Claimant.

Thus, the Claimant states, she was never notified of any reasoned justification for AT's decision, having only learned that she had to pay an additional €12,151.75 in Personal Income Tax. In that regard, AT's decision that led to the additional Personal Income Tax assessment and the compensatory interest assessment is vitiated by a formal defect, due to lack of reasoning, because AT merely calculated a certain amount of tax, allegedly owed, without ever explaining what the legal and factual requirements were on which its calculations were based.

The Claimant therefore submits that the impugned tax acts should be annulled, due to formal defect for lack of reasoning.

Notwithstanding, since, by making a comparative analysis between the initial and additional Personal Income Tax assessments, it is possible to perceive that the difference between them results from the amounts of specific deductions that were taken into account in one and the other – the amount of specific deductions in the initial assessment amounted to €38,982.80, whereas in the additional assessment it amounted to €11,711.20 – the Claimant listed the expenses she allegedly incurred in the year 2012 with the aforesaid autonomous units and floors of which she is usufructuary and which, in her view, are capable of being deductible, in the Personal Income Tax return, from the property income she earned in that same year.

Among the expenses she lists, the Claimant places particular emphasis on those resulting from alleged service provision contracts she entered into with a law firm and with an accounting firm, stating that these should, like the others, be considered deductible, in light of the provisions of Article 41 of the Personal Income Tax Code, because, in her view, an interpretation of that legal norm that excludes those expenses from its scope would be offensive to the constitutional principles set forth in Articles 13 and 104 of the Constitution of the Portuguese Republic.

Finally, the Claimant, under the provisions of Articles 43 and 100 of the General Tax Law, petitions for the payment of compensatory interest, which, according to her, is owed from the "date of the judicial impugnation decision" to the "date of issuance of the respective credit note".

1. The application for the establishment of an arbitral tribunal was accepted and automatically notified to AT on 27 May 2014.

2. The Claimant did not proceed to appoint an arbitrator, so, under the provisions of Article 6, paragraph 1, and Article 11, paragraph 1, subparagraph a) of RJAT, the President of CAAD's Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the office within the applicable time period.

3. On 14 July 2014, the parties were duly notified of this appointment and did not express any will to reject the arbitrator's appointment, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs b) and c) of RJAT and Articles 6 and 7 of CAAD's Deontological Code.

4. Thus, in accordance with what is prescribed in Article 11, paragraph 1, subparagraph c) of RJAT, the singular Arbitral Tribunal was constituted on 29 July 2014.

5. On 1 October 2014, the Respondent, duly notified for this purpose, submitted its Response in which, in addition to having raised a preliminary question concerning the delimitation of the subject matter of this action, specifically impugned the arguments adduced by the Claimant and concluded that the action was unfounded, with its consequent dismissal of the claim. The Respondent did not attach any document, did not list witnesses, nor did it request the production of any other evidence.

Subsequently, the Respondent attached to the file the respective administrative proceedings (hereinafter, abbreviated as AP).

In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent based its response:

The Respondent begins by raising a preliminary question regarding the delimitation of the subject matter of this action, because, in its view, the Claimant formulated, surreptitiously, in Article 110, subparagraph b), of the initial petition, a claim that cannot be granted, because if the Arbitral Tribunal concludes that there are defects that affect the legality of the additional Personal Income Tax assessment, nullifying it, such fact does not imply, directly or indirectly, that the legality of the initial Personal Income Tax assessment be declared.

Subsequently, the Respondent contested that the impugned assessments are vitiated by the defect of lack of reasoning, all the more so because the Claimant demonstrated, throughout the request for arbitral determination, to have fully understood the factual and legal framework on which AT's decision was based, since she attempted therein to rebut all of AT's actions. Thus, the Claimant fully understood the cognitive path that led the Respondent to decide as it did, so that, even if there were deficiencies in the reasoning of those tax acts, they would be reduced to mere non-essential irregularities.

Next, the Respondent pronounced itself on the various expenses listed by the Claimant, specifically impugning some of them – not accepting them at all or accepting them only partially – and the respective documents that support them.

Still in the context of pronouncing on the expenses presented by the Claimant, the Respondent rejected the Claimant's understanding that expenses for the provision of legal services and for the provision of accounting services fall within Article 41 of the Personal Income Tax Code, refuting that such interpretation of that legal norm raises any constitutional issues, in particular due to violation of the constitutional principles set forth in Articles 13 and 104 of the Constitution of the Portuguese Republic; apart from that interpretive question, the Respondent maintains that the connection between those services and the immovable properties of which the Claimant is usufructuary is not proven, so that they could never be accepted.

Finally, the Respondent contests that the Claimant is entitled to compensatory interest, since the Claimant alleges that the impugned tax acts are vitiated by a formal defect due to lack of reasoning and Article 43 of the General Tax Law only contemplates cases in which there are errors concerning the factual assumptions and/or legal assumptions, thus excluding cases of formal defect.

1. On 1 October 2014, an order was issued determining notification of the Claimant to, if she wished, within 10 (ten) days file observations regarding the preliminary question raised by the Respondent and to inform whether she intended or not the production of witness evidence, and, if affirmative, she should indicate the subjects of proof regarding which she intended the examination of the witnesses listed and the grounds of knowledge that supported them, so that the Tribunal could decide on the admission or not of the production of witness evidence.

2. On 15 October 2014, the Claimant filed observations on the aforesaid preliminary question, as well as indicated the subjects of proof regarding which she intended the examination of the witnesses listed and the respective grounds of knowledge.

Notified of this request, the Respondent came to reiterate what it had previously said in the response submitted, to the effect that the production of witness evidence was inadmissible, in view of the provisions of Article 41, paragraph 1, of the Personal Income Tax Code.

By order of 6 October 2014, the production of witness evidence was admitted, within the narrow parameters outlined therein.

1. On 2 December 2014, the meeting provided for in Article 18 of RJAT took place.

On the same date, 3 (three) witnesses listed by the Claimant were examined.

After the examination of the aforesaid witnesses was completed, oral arguments were produced in succession, by Claimant and Respondent, maintaining, in essence, the positions previously stated, reinforced, in their view, by the witness evidence produced.

II. PRELIMINARY MATTERS

The Arbitral Tribunal was regularly constituted.

The proceedings do not suffer from any nullities.

The parties have procedural personality and capacity, are duly represented and are legitimate.

The Respondent raises a preliminary question concerning the delimitation of the subject matter of this action, because, in its view, the Claimant formulated, surreptitiously, in Article 110, subparagraph b), of the initial petition, a claim that cannot be granted, because "the fact that the arbitral tribunal concludes that there are defects that affect the legality of the additional Personal Income Tax assessment does not entail, directly or indirectly, the declaration of legality of the preceding tax act (i.e., the initial Personal Income Tax assessment)".

Called upon to pronounce itself on this question, the Claimant came to say that "the conclusion contained in subparagraph b) of Article 110 of the Initial Request does not contain any surreptitious claim for declaration of the validity or legality of prior tax returns or acts, but rather constitutes a logical and argumentative prerequisite of the claim for annulment of the tax acts actually impugned".

By examining the request for arbitral determination, it appears that the Claimant does not petition, directly or indirectly, for the issuance of a judgment of legality regarding the Personal Income Tax return she submitted for the year 2012. In fact, the Claimant delineates with crystalline clarity what is the subject of her request for arbitral determination – the additional Personal Income Tax assessment No. 2014 …, relating to the year 2012, the assessment No. 2014 …, corresponding to compensatory interest, and the account settlement statement No. 2014 … – and, for AT, no doubt resulted in this regard, as it correctly and fully identifies, from Article 1 of its response, the tax acts in question in this arbitral proceeding.

Furthermore, we understand the allusion that the Claimant makes to the validity of the Personal Income Tax return she submitted, relating to the year 2012, with the simple and understandable sense of meaning to say that the expenses that were deducted from the property income earned in that year have legal coverage and, therefore, should be accepted and considered for tax purposes.

In these terms, without need for further considerations, the preliminary question raised by the Respondent is deemed to lack any substantive basis and, to that extent, entirely inconsequential.

There are no other exceptions or preliminary questions that prevent the merits from being examined and that need to be examined.

III. REASONING

III.1. ON THE FACTS

Regarding factual matters, it is important to note and make clear that the Tribunal need not pronounce on everything that was alleged by the parties, and it is its duty to select the facts that matter for the decision and discriminate between proven and unproven facts (cf. Article 123, paragraph 2, of the Tax Procedure Code and Article 607, paragraphs 3 and 4, of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of RJAT). In this way, the facts relevant to the trial of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law.

§1. PROVEN FACTS

Taking into account, in particular, the positions assumed by the parties, the documentary evidence produced, the AP attached to the file and the testimony given by the witnesses examined, the following facts with relevance to the decision are considered proven:

a) The Claimant is the usufructuary of the autonomous units designated by the letters A, B, C, D, E, F, G, H, I and J of the urban property, under the horizontal property regime, located at …, municipality and city of Lisbon, registered in the respective urban property tax roll under article number … – cf. Article 1 of the initial petition, accepted by agreement, and documents attached under nos. 1 to 10.

b) The Claimant is the usufructuary of the following floors or independently used divisions: LJ 5A, LJ 5B, R/C, 1st D, 1st E, 2nd D, 2nd E, 3rd D, 3rd E, 4th D and 4th E of the urban property located at …, municipality and city of Lisbon, registered in the respective urban property tax roll under article number … – cf. Article 2 of the initial petition, accepted by agreement, and document attached under no. 11.

c) The Claimant is the usufructuary of the following floors or independently used divisions: CV, LJ, L28B, RCD, RCE, 1st D, 1st E, 2nd D, 2nd E, 3rd D and 3rd E of the urban property located at …, municipality and city of Lisbon, registered in the respective urban property tax roll under article number … – cf. Article 3 of the initial petition, accepted by agreement, and document attached under no. 12.

d) In the year 2012, the Claimant earned, in addition to other income, income from the receipt of rents from some of the units and divisions mentioned above, and therefore submitted her Personal Income Tax return, model 3, accompanied, in addition to others, by the respective Annex F, in which she entered the following amounts of rents and expenses – cf. Article 4 of the initial petition, accepted by agreement, and AP attached to the file (file PA1.pdf):

[TABLE WITH PROPERTY, UNIT/FLOOR, RENTS, EXPENSES DATA]

e) The Claimant was notified of assessment No. 2013 …, relating to Personal Income Tax of 2012, in which the amount of tax payable was calculated at €23,155.64 (twenty-three thousand one hundred fifty-five euros and sixty-four cents) – cf. Article 5 of the initial petition, accepted by agreement, and document attached under no. 13.

f) On 29.08.2013, within the respective period for voluntary payment, the Claimant paid the aforementioned amount of tax of €23,155.64 (twenty-three thousand one hundred fifty-five euros and sixty-four cents) – cf. Article 6 of the initial petition, accepted by agreement, and document attached under no. 14.

g) AT deemed it necessary to audit all the documentation supporting the Personal Income Tax return, model 3, relating to the year 2012, submitted by the Claimant, and the latter, following notification for this purpose by the Financial Services of Lisbon …, delivered to this Financial Services a complete dossier with all such documentation – cf. Article 7 of the initial petition, accepted by agreement.

h) After analyzing the documentation presented by the Claimant, AT, through office no. …, of 15.11.2013, from the Financial Services of Lisbon… (postal registration …), notified her to, if she wished, exercise the right of prior hearing, the following being mentioned in that office (the part that is relevant here) – cf. AP attached to the file (file PA4.pdf):

"From the analysis made of the documents/elements presented regarding the Personal Income Tax return, Model 3, for the year 2012, with identification …, the following incorrect item(s) were noted:

Submit a replacement declaration, correcting the values of expenses with the leased properties, since they contain expenses that are not eligible under Article 41 of the Personal Income Tax Code, namely consumables, legal support, accounting support and stamp duty."

i) In the context of the aforementioned audit, AT disregarded the amount of €36,814.74 (thirty-six thousand eight hundred fourteen euros and seventy-four cents) that the Claimant entered in Annex F to her Personal Income Tax return, model 3, for 2012, as expenses, accepting only expenses in the total amount of €9,543.14 (nine thousand five hundred forty-three euros and fourteen cents) and, in that sequence, prepared an "Official Declaration/DC", Personal Income Tax model 3, in whose Annex F it entered the following amounts of rents and expenses – cf. AP attached to the file (file PA1.pdf):

[TABLE WITH PROPERTY, UNIT/FLOOR, RENTS, EXPENSES DATA]

j) As a result of the aforementioned audit, the Claimant was notified of the additional assessment No. 2014 …, relating to Personal Income Tax of 2012, in which the amount of tax payable was calculated at €35,307.39 (thirty-five thousand three hundred seven euros and thirty-nine cents), the assessment of compensatory interest No. 2014 …, in the amount of €288.61 (two hundred eighty-eight euros and sixty-one cents), and the account settlement statement No. 2014 …, in which a balance/amount of tax payable of €12,151.75 (twelve thousand one hundred fifty-one euros and seventy-five cents) was calculated – cf. Articles 8 and 10 of the initial petition, accepted by agreement, and documents attached under nos. 15, 16 and 17.

k) On 25.02.2014, within the respective period for voluntary payment, the Claimant paid the aforementioned amount of tax of €12,151.75 (twelve thousand one hundred fifty-one euros and seventy-five cents) – cf. Article 11 of the initial petition, accepted by agreement, and document attached under no. 18.

l) In the year 2012, concerning the urban property located at …, municipality and city of Lisbon, the Claimant incurred the following expenses relating to both the autonomous units of which she is usufructuary and their common areas:

(i) Municipal Property Tax (IMI): the total amount of €1,299.66 (one thousand two hundred ninety-nine euros and sixty-six cents), corresponding to the autonomous units designated by the letters A (€58.49), C (€228.14), D (€228.14), E (€228.07), F (€157.52), H (€228.07) and J (€171.23) – cf. Articles 38 and 39 of the initial petition, accepted by agreement, and document attached under no. 19;

(ii) Sewer conservation fee: the total amount of €237.72 (two hundred thirty-seven euros and seventy-two cents) – cf. Articles 41 and 42 of the initial petition, accepted by agreement, and document attached under no. 20;

(iii) Water supply by Portuguese Water Company (EPAL), for maintenance and cleaning of the common parts of the property: the total amount of €90.59 (ninety euros and fifty-nine cents) – cf. Article 43 of the initial petition and documents attached under nos. 21 to 25;

(iv) Electricity supply by EDP, for lighting of the common areas of the property: the total amount of €253.08 (two hundred fifty-three euros and eight cents) – cf. Article 45 of the initial petition, accepted by agreement, and documents attached under nos. 26 to 32;

(v) Purchase of cleaning materials for the common parts of the property: the total amount of €7.19 (seven euros and nineteen cents) – cf. Article 50 of the initial petition and documents attached under nos. 34 and 35; and

(vi) Maintenance and cleaning of the chimneys of the property: the total amount of €140.99 (one hundred forty euros and ninety-nine cents) – cf. Article 54 of the initial petition and document attached under no. 50.

m) In the year 2012, it was necessary to carry out works in the unit designated by the letter C, corresponding to the first floor right, of the property located at …, municipality and city of Lisbon, in which the Claimant spent the following amounts:

(i) For labor and purchase of materials by the contractor in charge of the work: €1,814.25 (one thousand eight hundred fourteen euros and twenty-five cents) – cf. Article 52, subparagraph a), of the initial petition and documents attached under nos. 36 to 38;

(ii) Separate purchase of materials necessary for the work: €824.09 (eight hundred twenty-four euros and nine cents) – cf. documents attached under nos. 39 to 46; and

(iii) For fees paid to Architect B, who supervised the execution of the work: €150.00 (one hundred fifty euros) – cf. Article 52, subparagraph c), of the initial petition and document attached under no. 48.

n) In the year 2012, concerning the urban property located at …, municipality and city of Lisbon, the Claimant incurred the following expenses relating to both the floors or independently used divisions of which she is usufructuary and their common areas:

(i) Municipal Property Tax (IMI): the total amount of €1,680.86 (one thousand six hundred eighty euros and eighty-six cents), corresponding to R/C (€239.09), 1st E (€239.09), 2nd D (€239.09), 2nd E (€239.09), 3rd D (€241.50) and 4th D (€241.50) – cf. Articles 56 and 57 of the initial petition, accepted by agreement, and document attached under no. 19;

(ii) Sewer conservation fee: the total amount of €307.08 (three hundred seven euros and eight cents) – cf. Articles 59 and 60 of the initial petition, accepted by agreement, and document attached under no. 20;

(iii) Water supply by Portuguese Water Company (EPAL), for maintenance and cleaning of the common parts of the property: the total amount of €192.42 (one hundred ninety-two euros and forty-two cents) – cf. Article 61 of the initial petition and documents attached under nos. 51 to 55;

(iv) Electricity supply by EDP, for lighting of the common areas of the property: the total amount of €790.54 (seven hundred ninety euros and fifty-four cents) – cf. Article 63 of the initial petition, accepted by agreement, and documents attached under nos. 56 to 66; and

(v) Elevator maintenance services: the total amount of €962.47 (nine hundred sixty-two euros and forty-seven cents) – cf. Article 68 of the initial petition, accepted by agreement, and documents attached under nos. 91 to 95.

o) In the year 2012, the Claimant spent a total amount of €2,520.82 (two thousand five hundred twenty euros and eighty-two cents), for remuneration, including the respective social charges, paid to C, who performs the functions of janitor of the property located at …, municipality and city of Lisbon – cf. Article 65 of the initial petition and documents attached under nos. 67 to 90.

p) In the year 2012, it was necessary to carry out works in the dwelling of the first floor left of the property located at …, municipality and city of Lisbon, in which the Claimant spent the following amounts:

(i) For fees paid to Architect B, who prepared the project necessary for municipal licensing of the work and directed its execution: €1,200.00 (one thousand two hundred euros) – cf. Article 69, subparagraph a), of the initial petition and document attached under no. 96;

(ii) For fees paid to Civil Engineer D, who prepared the structural specialty project in view of the change in typology of the said dwelling and oversaw the execution of the work: €492.00 (four hundred ninety-two euros) – cf. Article 69, subparagraph b), of the initial petition and document attached under no. 97;

(iii) Purchase of materials necessary for the work: €22.90 (twenty-two euros and ninety cents) – cf. Article 69, subparagraph c), of the initial petition and document attached under no. 98; and

(iv) For fees paid to Civil Engineer E, who prepared the sewer network project: €270.00 (two hundred seventy euros) – cf. document attached under no. 49.

q) In the year 2012, concerning the urban property located at …, municipality and city of Lisbon, the Claimant incurred the following expenses relating to both the floors or independently used divisions of which she is usufructuary and their common areas:

(i) Municipal Property Tax (IMI): the total amount of €1,829.75 (one thousand eight hundred twenty-nine euros and seventy-five cents), corresponding to LJ (€96.26), L28B (€48.86), RCD (€189.31), RCE (€189.31), 1st D (€217.67), 1st E (€217.67), 2nd D (€217.67), 2nd E (€217.67), 3rd D (€217.67) and 3rd E (€217.67) – cf. Articles 73 and 74 of the initial petition, accepted by agreement, and document attached under no. 19;

(ii) Sewer conservation fee: the total amount of €241.26 (two hundred forty-one euros and twenty-six cents) – cf. Articles 76 and 77 of the initial petition and document attached under no. 20;

(iii) Water supply by Portuguese Water Company (EPAL), for maintenance and cleaning of the common parts of the property: the total amount of €251.15 (two hundred fifty-one euros and fifteen cents) – cf. Article 78 of the initial petition and documents attached under nos. 99 to 103;

(iv) Electricity supply by EDP, for lighting of the common areas of the property: the total amount of €501.57 (five hundred one euros and fifty-seven cents) – cf. Article 80 of the initial petition, accepted by agreement, and documents attached under nos. 104 to 115;

(v) Purchase of cleaning materials for the common parts of the property: the total amount of €31.63 (thirty-one euros and sixty-three cents) – cf. documents attached under nos. 128 to 132, 134, 136 and 137;

(vi) Execution and installation of a new water supply column of the property: the total amount of €6,148.00 (six thousand one hundred forty-eight euros) – cf. Article 86, subparagraph a), of the initial petition and document attached under no. 138; and

(vii) Execution of electrical installation work in the janitor's room and in the storerooms: the total amount of €688.80 (six hundred eighty-eight euros and eighty cents) – cf. Article 86, subparagraph b), of the initial petition and document attached under no. 139.

r) In the year 2012, it was necessary to carry out works in the dwelling of the ground floor left of the property located at … municipality and city of Lisbon, in which the Claimant spent the following amounts:

(i) For labor and purchase of materials by the contractor in charge of the work: €924.96 (nine hundred twenty-four euros and ninety-six cents) – cf. Article 86, subparagraph c), of the initial petition and document attached under no. 140; and

(ii) Purchase of materials necessary for the work: €231.53 (two hundred thirty-one euros and fifty-three cents) – cf. Article 86, subparagraph d), of the initial petition and documents attached under nos. 141 to 145.

s) In the year 2012, the Claimant spent a total amount of €2,520.82 (two thousand five hundred twenty euros and eighty-two cents), for remuneration, including the respective social charges, paid to F, who performs the functions of janitor of the property located at …, municipality and city of Lisbon – cf. Article 82 of the initial petition and documents attached under nos. 79 to 90 and 116 to 127.

t) The Claimant entered into a legal services provision contract with the law firm "G, RL", which was not reduced to writing, aimed at providing legal support and resolution of all legal matters arising in relation to the aforementioned immovable properties of which she is usufructuary, by means of payment of a monthly fee of €553.50 (five hundred fifty-three euros and fifty cents), having paid, during the year 2012, a total amount of fees of €6,088.50 (six thousand eighty-eight euros and fifty cents) and, further, the amount of €80.00 (eighty euros), as reimbursement of an expense relating to Stamp Duty concerning a lease agreement that had as its object the ground floor left of the property located at …, in Lisbon – cf. Articles 90 and 91 of the initial petition and documents attached under nos. 148 to 159.

u) The Claimant entered into an accounting services provision contract with the company "H, Lda.", which was not reduced to writing, aimed at organizing and supervising all accounting and tax aspects related to the aforementioned immovable properties of which she is usufructuary, by means of payment of a monthly fee of €369.00 (three hundred sixty-nine euros), having paid, during the year 2012, a total amount of fees of €4,428.00 (four thousand four hundred twenty-eight euros) and, further, the amount of €96.88 (ninety-six euros and eighty-eight cents), as reimbursement of expenses – cf. Articles 92 and 93 of the initial petition and documents attached under nos. 160 to 174.

v) On 23 May 2014, the Claimant filed the application for the establishment of an arbitral tribunal that gave rise to the present proceedings – cf. CAAD's case management information system.

§2. UNPROVEN FACTS

With relevance to the appraisal and decision of the case, the following facts were not proven:

a) In the year 2012, concerning the urban property located at …, municipality and city of Lisbon, the Claimant incurred the following expenses relating to both the autonomous units of which she is usufructuary and their common areas:

(i) The total amount of €51.59 (fifty-one euros and fifty-nine cents) to I, S.A. – fact stated in Article 47 of the initial petition and to which reference is made in the document attached under no. 33;

(ii) The amount of €2.47 (two euros and forty-seven cents) for the separate purchase of materials necessary for the execution of works in the autonomous unit designated by the letter C – to which reference is made in the document attached under no. 47 to the initial petition; and

(iii) The amount of €270.00 (two hundred seventy euros) for fees paid to the engineer who supervised the renovation of the autonomous unit designated by the letter C, more specifically the sewer network – fact stated in Article 52, subparagraph d), of the initial petition and to which reference is made in the document attached under no. 49.

b) In the year 2012, concerning the urban property located at …, municipality and city of Lisbon, the Claimant incurred the following expenses relating to both the floors or independently used divisions of which she is usufructuary and their common areas:

(i) The amount of €4.02 (four euros and two cents) for the purchase of cleaning materials for the common parts of the property – to which reference is made in the documents attached under nos. 133 and 135 to the initial petition; and

(ii) The amount of €80.00 (eighty euros) for fees paid to the architect who oversaw the work on the replacement of the water line of the property – fact stated in Article 86, subparagraph e), of the initial petition and to which reference is made in the document attached under no. 146.

c) In the year 2012, the Claimant paid to the law firm "G, RL" the amount of €553.50 (five hundred fifty-three euros and fifty cents), for fees, titled by invoice No. 289, dated 30.12.2011, attached under document no. 147 to the initial petition.

d) The Claimant is 71 years old and the accounting and legal knowledge she possesses is that of the average citizen, that is, basic knowledge, and therefore she does not have the conditions to discharge on her own the legal and accounting obligations that are imposed on her regarding the immovable properties of which she is usufructuary – factuality stated in Article 88 of the initial petition.

e) The Claimant is forced to resort to specialized technicians who help her maintain this "business" of hers, managing payments and receipts, the accounts in general and their respective tax and accounting obligations, in addition to all occurrences that arise with her tenants and that require legal-type follow-up – factuality stated in Article 89 of the initial petition.

§3. REASONING REGARDING FACTUAL MATTERS

Regarding the proven factual matters, the Tribunal's conviction was based on the administrative proceedings, on the statements made in the pleadings, on the points indicated, in which the accuracy thereof was not questioned, on the documents attached to the file, referenced in relation to each of the points, whose correspondence to reality was not questioned, and also on the witness evidence produced.

As for the unproven facts, these were thus considered as a result of both the witness evidence produced and the absence of any evidentiary elements capable of, unequivocally, proving them.

Regarding the testimony given by the witnesses examined – who testified in a clear, objective and impartial manner on the facts to which they were examined, revealing unequivocal direct knowledge thereof, and their testimony deserves our complete credibility – it is important to give here a very brief summary of the same, referring to their essential aspects:

(i) J

He is a civil construction contractor and, in that capacity, was contracted, about 2 or 3 years ago, to carry out some work in some of the autonomous units and floors of the urban properties located at … and …, at issue in these proceedings.

He was confronted with the documents attached, under numbers 35 to 47 and 140, to the request for arbitral determination, and stated the following: the invoices attached as documents numbers 36, 37, 38 and 140 correspond to civil construction works carried out by him in the Claimant's properties, having clarified that the first three invoices relate to interventions made in the property located at …, in Lisbon, and the last of those invoices relates to an intervention made in the property located at …, in Lisbon.

Regarding documents numbers 39 to 47, he clarified that some of the materials mentioned in those invoices were used by him in the works he carried out in the Claimant's properties. In this regard, he clarified that the Claimant bought small materials, such as armatures, outlets, locks and handles, for him to install in the properties where he intervened. He does not know what invoices attached as documents numbers 44 and 47 refer to.

He further stated that in the property located at …, he worked in two apartments, in the sewer network and in the water network (water supply line); at … he worked in two apartments and in the janitor's room.

(ii) D

He is a civil engineer and, in that capacity, was contracted in 2012 by Architect B, on behalf of the Claimant, to prepare a structural specialty project in view of the change in typology of an apartment located on the 1st floor of the property located at ….

He clarified that, in addition to the preparation of that project, he also gave support to the execution of the respective work, which was being directed by Architect B.

He stated that the receipt attached as document number 97 to the request for arbitral determination titles the payment of his fees for the provision of the aforementioned service.

(iii) L

She is the Claimant's daughter, and is responsible for the current management of her mother's properties, namely regarding works, leases and payment of services. She clarified that for this purpose she resorts to both her colleagues – she is an interior architect – as well as to lawyers and accountants, with whom she maintains constant contact, and she is also the one who chooses and hires civil construction contractors. She further stated that she is the one who purchases some of the materials to be applied in the works, such as handles, outlets, locks, doors and cabinets, because in addition to not giving up choosing them to her taste, she gets discounts in their purchase, due to her profession.

She was confronted with the documents attached, under numbers 34, 35, 39 to 49, 50 to 55, 67 to 90, 96, 98 to 103, 116 to 137, 141 to 174, to the request for arbitral determination, and stated the following: documents numbers 34, 35, 128 to 132, 134, 136 and 137 are invoices for products purchased for cleaning of the Claimant's properties, and the invoices attached as documents numbers 39 to 46 and 141 to 145 are for materials applied in works carried out in the same properties; the invoice attached as document number 44 concerns elements of a kitchen that was installed in an apartment located on the 1st floor of the property located at …. She has no idea what work the material described in the invoice attached as document number 47 was intended for.

The receipt attached as document number 48 relates to fees paid to Architect B for the supervision of works carried out in apartments of the property located at Rua …. Still regarding this architect, the receipt attached as document number 96 concerns the fees paid to her for the preparation of the remodeling project of the apartments on the 1st floor left and right of the property located at …. The receipt attached as document number 49 concerns the payment of fees to Civil Engineer E, for the sewer network project that she made to change the location of a bathroom in the apartment of the 1st floor left of the property located at …. She cannot specify what the receipt attached as document number 146 refers to, being able only to state that, given its amount, it will be the payment of an hourly value for the supervision of a work which, however, she cannot identify.

The invoice attached as document number 50 relates to the cleaning of the chimneys of the property located at …, and the name "M" that appears there is that of her maternal grandmother, the former owner of that property.

Regarding the EPAL invoices attached as documents numbers 51 to 55, she said that they relate to water consumption used for cleaning the common areas of the property at …. In this regard, she clarified that there is an autonomous water consumption meter assigned to the common areas of that property.

Regarding the documents attached under numbers 67 to 90 and 116 to 127, she stated that these relate to the monthly remuneration paid to the janitors of the properties located at … – the janitor is F – and at … – the janitor is C – which are paid from the Claimant's bank account.

The document attached under number 98 relates to a padlock and a chain that she had to purchase to close the door of the shop in the property located at …, following its vacation and while it was not possible to place a new lock.

She stated that documents numbers 133 and 135 do not evidence any expenses incurred by the Claimant.

The documents attached under numbers 147 to 159 relate to the payment of fees to the law firm identified therein, with whom a verbal service provision contract was entered into aimed solely at the follow-up and handling of all legal matters arising regarding the Claimant's properties.

The documents attached under numbers 160 to 174 relate to the payment of fees to the accounting firm identified therein, with whom a verbal service provision contract was entered into aimed at controlling and receipt of rents paid by the various tenants of the Claimant, the issuance of rent receipts, the processing of the salaries of the janitors of the properties and the accounting and tax treatment of the Claimant's income.

III.2. ON THE LAW

In light of the positions assumed by the parties in their respective pleadings, the following are the questions to be examined and decided:

(i) The lack of reasoning of the impugned tax acts;

(ii) The illegality of the impugned tax acts, due to error regarding legal assumptions, as a result of the incorrect interpretation of the provisions of Article 41 of the Personal Income Tax Code;

(iii) The right to compensatory interest.

Before entering into the examination and decision of the questions that constitute the subject matter of this arbitral proceeding, it is important that we first establish the order of examination of the defects pointed out in the impugned tax acts.

Article 124 of the Tax Procedure Code, applicable by virtue of Article 29, paragraph 1, subparagraph a), of RJAT, provides as follows:

Article 124

Order of examination of defects in the decision

1. In the decision, the tribunal will prioritarily examine the defects that lead to a declaration of non-existence or nullity of the impugned act and, then, the defects argued that lead to its annulment.

2. In the aforesaid groups the examination of the defects is made in the following order:

a) In the first group, that of defects whose substantiation determines, according to the prudent criterion of the judge, the most stable or effective protection of the offended interests;

b) In the second group, the one indicated by the impugning party, provided that it establishes a relationship of subsidiarity between them and no other defects are argued by the Public Prosecutor or, in the remaining cases, the one fixed in subparagraph a).

This legal provision establishes a priority for the examination of defects whose substantiation determines, according to the prudent criterion of the judge, the most stable or effective protection of the offended interests.

For a correct understanding of this topic, it seems opportune to cite, as quite clarifying, the judgment of the Supreme Administrative Court, delivered on 17.11.2010, in case No. 01051/09, available at www.dgsi.pt, in which the following is stated:

"…the case law of this Supreme Court has repeatedly explained, within the scope of the interpretation of the normative content of the analogous rule contained in Article 57 of the Administrative Court Procedure Act, that despite the fact that more effective protection of the interests of the appellant demands, in principle, the priority examination of substantive or substantive defects in relation to formal defects, namely the defect of lack of reasoning (given that the verification of this does not prevent the renewal of the act with the same legal configuration, purged, naturally, of the defect that led to annulment) – cf., among others, the judgment of the 1st Section of the Supreme Administrative Court, delivered on 23.04.97, in case No. 35.367 – such rule is not, however, absolute, because it can happen that only the reasoning can reveal substantive defects by clarifying the factual and legal framework on which the impugned act was based. That is, the precedence of the formal defect can be justified when the inquiry into the concrete motivation of the act proves to be indispensable to the control of substance defects. For this reason, it has been recognized that the more effective protection of the interests of the appellant can go through the priority examination of formal defects, specifically the defect of lack of reasoning, whenever the discovery of the motivation of the act can offer elements necessary for the judgment of verification of substance defects, which happens whenever there is an absolute lack of reasoning (of fact and/or of law), because it implies the impossibility of knowledge of the facts on which the act was based and/or its legal framework, making impossible the jurisdictional control of substance defects – cf., among others, the judgments delivered by the 1st Section of the Supreme Administrative Court on 08.07.1993, in case No. 31.138, on 22.09.1994, in case No. 32.702, and on 20.05.1997, in case No. 40.433.

As was stated in the judgment delivered by the 1st Section of this Court on 4/06/98, in case no. 41.223, "the priority examination of the formal defect will only be required of the judge when the lack of prior examination of this defect decisively makes impossible the examination of the alleged substance defects, concerning the intrinsic legality of the act, which the rule of Article 57, paragraph 2, subparagraph a), of the Administrative Court Procedure Act orders to examine prioritarily. Or, saying the opposite way, the priority examination of the formal defect will cease to be required, and the rule of examination in Article 57, paragraph 2, subparagraph a), should be respected, whenever the alleged lack or insufficiency of reasoning is shown, in the concrete case (and the examination must, obviously, be case-by-case) irrelevant to the examination and possible substantiation of the substance defect or defects also alleged."

Reverting to the case at hand and continuing to follow closely the cited judgment, it appears to us unequivocal that none of the defects invoked by the Claimant can be considered as resulting from situations that might determine the nullity of the impugned tax acts in light of the legal criteria that characterize them, so that the maximum effectiveness in protecting the Claimant's interests would, in principle, require the priority examination of the defect of violation of law in relation to the formal defect of lack of reasoning.

However, the invocation of this formal defect is based on the absolute omission of the factual and legal motivation of the impugned tax acts, because no reference was made to the factual and legal assumptions on which AT's decision, which underlay the practice of those same acts, was based.

Since the illegality pointed out in the impugned tax acts results from error regarding legal assumptions, due to the incorrect interpretation of the provisions of Article 41 of the Personal Income Tax Code, it is necessary to conclude that the examination of this substantive defect depends on the prior determination of the reasoning base of the acts. In other words, the examination and possible substantiation of this defect depends on the content of the reasoning of the impugned acts, as only it can provide the reason or basis, whether factual or legal, that supports the acts, and the examination of this defect becomes impossible without this prior disclosure and clarification of the framework in which it was based.

Concerning the Claimant's right to compensatory interest, this will necessarily, and always, be dealt with last, as its examination will be informed by what results from the decision on the defects pointed out by the Claimant in the impugned tax acts.

In this framework, we therefore opt for the priority examination of the formal defect of lack of reasoning of the impugned tax acts, which we will now proceed to do.

§1. ON THE LACK OF REASONING OF THE IMPUGNED TAX ACTS

The Claimant alleges that AT's decision, which led to the additional Personal Income Tax assessment and the compensatory interest assessment, is vitiated by a formal defect due to lack of reasoning, because AT merely calculated a certain amount of tax, allegedly owed, without ever explaining what the legal and factual assumptions were on which its calculations were based and, consequently, the impugned tax acts should be annulled, due to formal defect.

The Respondent, for its part, asserts that the impugned tax acts do not suffer from a formal defect due to lack of reasoning, because the Claimant fully understood the cognitive path that led the Respondent to decide as it did. So much so that the Claimant demonstrated, throughout the request for arbitral determination, to have fully understood the factual and legal framework on which the Respondent's decision was based, since she attempted therein to rebut all of AT's actions.

It is necessary to examine and decide.

Reasoning is a requirement of tax acts in general, being an imposition, from the outset, constitutional (cf. Article 268, paragraph 3, of the Constitution of the Portuguese Republic), but also legal (cf. Article 77 of the General Tax Law).

However, as Paulo Marques and Carlos Costa note, contrary to what happens in the constitutional text (Article 268, paragraph 3, of the Constitution), in which reasoning of acts is required "when they affect rights or legally protected interests", in tax proceedings (Article 77 of the General Tax Law), it was not intended to restrict the requirement of reasoning of the decision only to unfavorable acts for the taxpayer, although there should be greater density of reasoning in these latter cases."

It is today settled in Portuguese doctrine and case law that the reasoning required must have the following characteristics:

1. Spontaneity: it must always emanate from the administration's initiative, not permitting reasoning on request;

2. Contemporaneity: it must be contemporary with the practice of the act, with no possibility of deferred or requested reasoning;

3. Clarity: it must be comprehensible by an average recipient, avoiding polysemous or deeply technical concepts. Completeness: it must contain all essential elements that were determinative of the decision taken. This characteristic breaks down into two requirements, namely: the duty of justification (legal norms and facts – domain of legality) and of motivation (domain of discretion or opportunity, when a value judgment is required).

As Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa report, within the tax realm, "the duty of reasoning of decisions in tax proceedings and tax acts is concretized in Article 77 of the General Tax Law.

As the Supreme Administrative Court has understood it, the legal and constitutional requirement of reasoning aims, primarily, to enable interested parties to know the reasons that led the administrative authority to act, in order to enable them to make a conscious choice between accepting the legality of the act and contesting it.

For this objective to be attained, the reasoning must provide the recipient of the act with the reconstruction of the cognitive and evaluative path taken by the authority that practiced the act, so that it can be clearly known the reasons why it decided as it did and not differently.

In the present Article 77 [of the General Tax Law] the duty of reasoning is extended to all decisions in tax proceedings, so that it is mandatory even in decisions favorable to taxpayers.

This requirement is understood in light of the plurality of reasons that impose the requirement of reasoning of administrative acts, which range from the need to enable the taxpayer to formulate a conscious judgment on the advisability or not of contesting the act, to the guarantee of transparency and consideration of the administration's actions and the need to ensure the possibility of hierarchical and jurisdictional control of the act."

Still according to these authors, the reasoning must "consist, at a minimum, of a brief exposition of the factual and legal grounds that motivated the decision, or a statement of agreement with the grounds of prior opinions, information or proposals, including those forming part of the tax audit report."

As advocated by Joaquim Freitas da Rocha, the reasoning – "which, in general, encompasses both the duty of motivation (i.e., the exposition of the reasons or motives justifying the decision, namely when there are discretionary spaces) and the duty of justification (that is, the orderly reference to the factual and legal assumptions that support that same decision)" – must be done spontaneously, completely, clearly, currently and expressly, with a view to "permitting a 'normal recipient' to reconstruct the cognitive and evaluative path followed by the author of the act to make the decision. The lack of these requirements – incomplete, obscure, abstractly remissive reasoning – as well as the lack of reasoning itself, constitutes illegality, capable of leading to the annulment of the act in question, through gracious or contentious means."

Since it is certain that reasoning must be done through a brief exposition of the factual and legal reasons that motivated it, nothing prevents, however, that it can be done by reference and appropriation of prior opinions, information and proposals as well as to the tax inspection report, as postulated by paragraph 1 of Article 77 of the General Tax Law, then taking on the designation of reasoning by reference or by remission (per relationem or per remissionem), since it is expressed in another document. Thus, "assessments deriving from inspection corrections must be considered reasoned when the reasons for that correction and subsequent assessment are contained in the inspection report. In that case, to determine whether the assessment act is reasoned or not, the interpreter cannot disregard the inspection report, since it constitutes the culmination of a procedure that a broad concept of assessment necessarily entails. (…)

In the plan of the tax inspection procedure, admitting the modality of reasoning "per relationem" or "per remissionem", Article 63, paragraph 1, of the Tax Inspection Procedure Regulation provides that tax acts or matters in tax that result from the report may be reasoned in its conclusions, through adhesion or agreement therewith, and in all cases the entity competent for its practice must reason its divergence from the conclusions of the report. (…)

The importance of the factual and legal motivation contained in the tax inspection procedure, subsequently absorbed by the tax decision, is understood in light of the fact that the assessment act strictly speaking represents the culmination and an extensive and complex administrative procedure based on preparatory acts practiced by the tax inspection services that form part of the assessment procedure broadly understood (Article 11 of the Tax Inspection Procedure Regulation)."

Now, if reasoning is, as referred to above, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required of a concrete tax act should be that which is functionally necessary so that it does not present itself to the taxpayer as a pure demonstration of arbitrariness.

In this regard, our superior courts have repeatedly decided in terms that, by way of example and for completeness of analysis, we now cite from the judgment of the Central Administrative Court of the South, delivered on 04.12.2012 in case No. 06134/12, available at www.dgsi.pt:

"Reasoning is a relative concept that can vary depending on the type of administrative act we are examining.

It has been the constant understanding of case law and doctrine that a given act (in this case an administrative-tax act) is properly reasoned whenever it is possible, through the same, to discover what cognitive path was used by its author to arrive at the final decision (cf. judgment of Supreme Court of Justice of 26/4/95, Collection of Decisions – Supreme Court of Justice, 1995, II, page 57 et seq.; A. Varela and others, Manual of Civil Procedure, Coimbra Publisher, 2nd edition, 1985, page 687 et seq.; Alberto dos Reis, Personal Income Tax Code Annotated, Coimbra Publisher, 1984, V, page 139 et seq.). That is to say. Using the language of various Supreme Administrative Court judgments (cf. all, judgment Supreme Administrative Court-1st Section, 6/2/90, Court Decisions, no. 351, page 339 et seq.) the administrative act is only reasoned if a normally diligent or reasonable recipient – an average person – placed in the concrete situation expressed by the reasoned statement and before the concrete act (which will determine, depending on its diverse nature or type, a greater or lesser requirement of the density of reasoning elements) is placed in a position to know the functional path (not psychological) cognitive and evaluative of the author of the act. It will also be said that reasoning can be express or consist in a mere statement of agreement with prior opinion, information or proposal, which, in this case, constitutes an integral part of the respective act (this is the so-called reasoning "per relationem" - cf. Article 125 of the Administrative Court Procedure Code).

To ascertain whether an administrative-tax act is or is not reasoned, it is necessary, first of all, to make the distinction between formal and material reasoning: one thing is to know whether the Administration has made known the motives that determined it to act as it did, the reasons on which it based its actions, a question that falls within the scope of the formal validity of the act; another, quite different and already falling within the scope of substantive validity of the act, is to know whether those motives correspond to reality and if, corresponding, are sufficient to legitimize the concrete administrative action (cf. judgment Supreme Administrative Court-2nd Section, 13/7/2011, case 656/11; judgment Central Administrative Court of the South-2nd Section, 19/6/2012, case 3096/09).

If formal reasoning does not specifically clarify the motivation of the act, by obscurity, contradiction or insufficiency, the act is considered not reasoned (cf. Article 125, paragraph 2, of the Administrative Court Procedure Code). There will be obscurity when the statements made by the author of the decision do not make it possible to perceive what the reasons were that determined him to decide as he did. In other words, the grounds of the act must be clear, so as to perfectly grasp the sense of the reasons that determined the practice of the act, thus not being permissible the use of dubious, vague and generic expressions. Contradiction of reasoning will occur when the reasons invoked to decide justify not the decision made, but a decision of opposite sense (contradiction between grounds and decision), and when grounds are invoked that are in opposition to others. In other words, the grounds of the decision must be congruent, that is, they must be premises that inevitably lead to the decision that functions as the logical and necessary conclusion of the motivation put forward. Finally, reasoning is insufficient if its content is not sufficient to explain the reasons why the decision was made. In other words, the reasoning must be sufficient, in the sense that reasons explaining the final decision appropriately are not left unsaid (cf. Marcello Caetano, Manual of Administrative Law, vol. I, Almedina, 1991, page 477 et seq.; Diogo Freitas do Amaral, Course on Administrative Law, vol. II, Almedina, 2001, page 352 et seq.; Diogo Leite de Campos and others, General Tax Law Commented and Annotated, Vislis, 2003, page 381 et seq.; judgment Central Administrative Court of the South-2nd Section, 2/12/2008, case 2606/08; judgment Central Administrative Court of the South-2nd Section, 10/11/2009, case 3510/09; judgment Central Administrative Court of the South-2nd Section, 19/6/2012, case 3096/09)."

On the other hand, regarding legal reasoning, the Supreme Administrative Court "has decided that, for it to be considered sufficient, it is not always necessary to indicate the applicable legal provisions, reference to relevant principles, the legal regime or a well-determined legal framework being sufficient, and the act should be considered reasoned in law when it fits into a perfectly cognizable legal-normative framework – among many others, the judgments delivered by the 1st Section of the Supreme Administrative Court on 27/02/1997, on 17/05/1998, and on 28/02/2002, in cases No. 36.197, 32.694 and 48071, respectively.

As noted in the judgment of the Contentious Administrative Section delivered on 27/05/2003, in case No. 1835/02, "it has been the understanding of this Supreme Administrative Court that, in the legal reasoning of administrative acts, express reference to legal provisions is not required, reference to relevant legal principles, the applicable legal regime or a determined normative framework being sufficient – cf., for example, the judgments of 28.02.02, case 48.071, of 28.10.99, case 44.051 (respective appendix to the Official Journal, page 6103), of 8.6.98, case 42.212 (Appendix, page 4263), of 7.5.98, case 32.694 (Appendix, page 3223) and the plenary of 27.11.96, case 30.218 (Appendix, page 828). More than this, it has been said that in the context of legal reasoning, given the functionality of the institute of reasoning of administrative acts, that is, the merely instrumental purpose that it pursues, a minimum content is accepted translated in the adduction of grounds which, despite the lack of express reference to any legal provision or legal principle, permit the reference of the decision to a perfectly determined legal framework - cf. Judgment of plenary of 25.5.93, case 27.387 (Appendix, page 309) and judgments in subsection of 27.2.97, case 36.197 (Appendix page 1515) and supra cited judgments of 7.5.98, case 32.694 and of 28.10.99, case 44.051)".

Guidance that, moreover, was adopted by the Plenary of that Section, in the judgment of 25/03/93, in case No. 27387, in which it is affirmed that the duty of reasoning is assured whenever, despite the lack of express reference to any legal provision or legal principle, the decision is situated in a determined and unequivocal legal framework, perfectly cognizable from the point of view of a normal recipient, concluding thus that there will be legal reasoning whenever, in light of the text of the act, the legal reasons that determined it are perfectly intelligible.

Whence it results that, even facing this current case law, which we fully endorse without reservation, only in very particular cases (such as were, after all, those analyzed in the cited judgments) can one conclude that an act is legally reasoned despite no direct legal reference existing in the text of the act. And this only occurs when, as explained in that judgment of 27/05/2003, two conditions are shown to be met:

"- The first is that it can be affirmed, unequivocally, in light of the objective facts of the procedure, what was the legal framework taken into account by the act;

• The second is that it can be concluded that that legal framework was perfectly known or cognizable by the recipient, hypothesizing that it would be by a normal recipient in the concrete position in which he is found.

The second condition does not function without the first, as this integrates it. If one does not know what the legal framework actually taken into account by the act was, it can never be realized; and, for that reason, it is irrelevant whether the recipient can know, and even does know, what the legal framework should have been considered. The recipient cannot substitute himself either for the act or for the author of the act. Reasoning is a requirement of the act. And the recipient has the right to know what legal framework was taken into consideration, under what legal regime the author of the act understood to practice it."

Reverting to the case at hand, by examining the administrative proceedings, only the following justification put forward by AT for the disregard of part of the expenses presented by the Claimant is found, in Annex F to the Personal Income Tax return, model 3, for 2012, as deductible from her property income (cf. proven fact h)): "Submit a replacement declaration, correcting the values of expenses with the leased properties, since they contain expenses that are not eligible under Article 41 of the Personal Income Tax Code, namely consumables, legal support, accounting support and stamp duty."

The Respondent does not question the duty to reason the changes it introduced in the Claimant's income return. Nor could it be otherwise, as results, from the outset, from the above-stated, but also from the fact that, because administrative acts concern realities of life, the Administration is bound by law, being unable to act except in the cases where it allows it, nor in a manner different from what it imposes, so that reasoning is indispensable so that one may not grasp only the factual or legal reasons, but both. The recipient of the act must know what factual situation was considered, what law was chosen and how it was interpreted and applied.

Thus, as a rule, reasoning that limits itself to pointing out a legal norm, or a set of norms, adding that the factual situation does not fit within its provision, is incomplete, either by not identifying that factual situation, or by not disclosing the interpretation given to the law, that is, the reason why it is considered that the real situation diverges from what is provided in the norm.

Now, in the situation under examination, AT limited itself to identifying the legal norm that it understood to be useful, stating that some of the expenses presented by the Claimant did not fit within its provision, limiting itself to identifying one of the groups of expenses not accepted that it identified as "consumables", without specifying what concrete expenses it was referring to, as it should have done in light of the indeterminability and vagueness of that term, and without saying what the reasons were why it understood that the expenses it referred to were not covered by said norm. And this does not appear to be sufficient to satisfy the obligation to reason, since we are dealing with a legal norm – Article 41 of the Personal Income Tax Code – that is not absolutely straightforward and that, therefore, is susceptible of different interpretations.

Therefore, the Claimant was left without knowing how to fight the tax act that was unfavorable to her, what to say in refutation of its grounds, seeing herself compelled to rebut reasons that she did not know, but only supposed, were underlying what AT decided. Indeed, the mere mention that some expenses presented by the Claimant constitute improper deductions, even if accompanied by the invocation of the underlying legal provision, because it contains conclusive discourse, does not allow a medium taxpayer with normal understanding capacity to be made aware of the entirety of the reasons that justify a given act with a certain decision content. Nor should it be said, by the fact that the Claimant, throughout the request for arbitral determination, did not limit herself to invoking the lack of reasoning of the tax acts and expended multiple considerations regarding the expenses she presented and even regarding the interpretation she considers correct of the applicable legal norms, that thereby she demonstrated to have had perfect knowledge of the reasoning of the tax acts in question. It is that, as is easy to verify, without prejudice to arguing the defect consisting of lack of reasoning, the Claimant did nothing but make considerations about the reasons that, from her point of view, justify the correctness of the content of the income return she submitted (mainly regarding property income and respective deductions) and, as such, that justify her disagreement with the fact that AT corrected it (as, indeed, the Claimant herself admits in Articles 32 and 33 of the initial petition). And this attitude is perfectly understandable if we bear in mind that the Claimant did not know the grounds underlying the impugned tax acts.

For these reasons, it is necessary to conclude that the tax acts in question are tainted with the formal defect consisting of lack of reasoning, which implies their respective annulment (cf. Articles 133, a contrario, and 135 of the Administrative Court Procedure Code) which will be determined finally.

§2. ON THE ILLEGALITY OF THE IMPUGNED TAX ACTS, DUE TO ERROR REGARDING LEGAL ASSUMPTIONS, AS A RESULT OF THE INCORRECT INTERPRETATION OF THE PROVISIONS OF ARTICLE 41 OF THE PERSONAL INCOME TAX CODE

In light of what was decided regarding the argued formal defect of lack of reasoning of the impugned tax acts, the examination of the substantive defects that the Claimant ascribes to them is prejudiced, that is, the errors of law that are attributed to them, which will therefore not be the subject of examination and decision.

§3. ON THE RIGHT TO COMPENSATORY INTEREST

The Claimant petitions for the payment of compensatory interest, under the provisions of Articles 43 and 100 of the General Tax Law, which, according to her, is owed from the "date of the judicial impugnation decision" to the "date of issuance of the respective credit note", alleging that "the illegality – due to lack of reasoning – and the calculation error – because it did not take into account all possible and legal specific deductions – of the additional assessment act was fully demonstrated in these proceedings", so that, in her view, one should conclude that the "requirement of error of the services" is met.

The Respondent, for its part, contests that the Claimant is entitled to compensatory interest, because the Claimant alleges that the impugned tax acts are tainted with a formal defect due to lack of reasoning and Article 43 of the General Tax Law only contemplates cases in which there are errors regarding factual assumptions and/or legal assumptions, thus excluding cases of formal defect.

It is necessary to examine and decide.

Paragraphs 1, subparagraph b), and 5 of Article 24 of RJAT provide as follows:

"1 - The arbitral decision on the merits of the claim which cannot be the subject of appeal or impugnation binds the tax administration from the end of the period provided for appeal or impugnation, and the latter must, in the exact terms of the substantiation of the arbitral decision in favor of the taxpayer and up to the end of the period provided for the spontaneous execution of the decisions of judicial tax tribunals, alternatively or cumulatively, as the case may be:

(…)

b) Restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for this purpose;

5 - The payment of interest, regardless of its nature, is owed in the terms provided for in the general tax law and in the Tax Procedure and Process Code."

For its part, the norm contained in Article 100 of the General Tax Law provides as follows:

"The tax administration is obliged, in case of total or partial substantiation of complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would have existed if the illegality had not been committed, comprising the payment of compensatory interest, in the terms and conditions provided for in the law."

It is also important to invoke the norm of Article 43 of the General Tax Law, entitled "Payment of undue tax", which provides as follows:

"1 - Compensatory interest is owed when it is determined, in a gracious complaint or judicial impugnation, that there was an error attributable to the services that results in payment of the tax debt in an amount higher than legally due.

2 - An error attributable to the services is also considered to exist in cases in which, although the assessment is made on the basis of the taxpayer's return, the latter has followed, in its completion, the generic orientations of the tax administration, duly published.

3 - Compensatory interest is also owed in the following circumstances:

a) When the legal deadline for official restitution of taxes is not met;

b) In case of annulment of the tax act by the tax administration's initiative, from the 30th day following the decision, without the credit note having been processed;

c) When the review of the tax act at the taxpayer's initiative takes place more than one year after their request, unless the delay is not attributable to the tax administration.

4 - The rate of compensatory interest equals the rate of compensatory interest.

5 - In the period between the date of the end of the deadline for spontaneous execution of a judicial decision that has become final and the date of issuance of the credit note, concerning the tax that should have been refunded by final judicial decision, interest is owed at a rate equivalent to double the rate of interest on arrears defined in general law for debts to the State and other public entities."

In the concrete case, it is important to note, in particular, the provisions of paragraph 1 of the cited Article 43, which establishes that compensatory interest is owed when, there being an error attributable to the services, it results from such error "payment of the tax debt in an amount higher than legally due".

It is to be noted, from the outset, that there is reference to error and not defect, which suggests that what is sought to be highlighted are errors regarding factual assumptions or legal assumptions that led the Tax Administration to an illegal definition of the taxpayer's tax situation, not considering formal or procedural defects that, although affecting the act with illegality, do not necessarily imply an erroneous definition of that situation.

Thus, the formal defect of lack of reasoning – which, in this case, will lead to the annulment of the impugned tax acts – does not fall within the scope of the requirement of error attributable to the services that generates the right to compensatory interest, as it does not materialize in defective appreciation of relevant facts or in incorrect application of legal norms, not preventing, moreover, the Tax Administration from renewing the substance of the act.

Compensatory interest has, in effect, its justification in the need to compensate the taxpayer for the unavailability of the capital of which he was deprived due to the illegal demand for tax made by the Tax Administration, thus incurring in what is commonly understood to be extracontractual civil liability.

However, if the tax act must be annulled, because it is illegal, but that illegality does not translate into an erroneous definition of the tax situation, that is, if from the illegality of the act does not emerge, as a fatal consequence, the unjustifiability of the demanded tax assessment, then one cannot speak of either patrimonial injury, nor damage, nor liability, nor, consequently, compensation by way of indemnification.

In the concrete case, after the delivery of this arbitral decision, it will only be known that there is a formal defect of the additional Personal Income Tax assessment of the year 2012 that makes it illegal and, therefore, null

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