Process: 396/2018-T

Date: January 11, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration (Process 396/2018-T) addressed the incorrect taxation of real estate capital gains (mais-valias imobiliárias) under IRS for properties acquired in two separate transactions in 1988 and 1992. The taxpayer acquired half of several properties in February 1988 (before the IRS Code entered into force) and the remaining half in September 1992. When selling the entire properties in 2016, the taxpayer initially filed an IRS declaration without declaring capital gains, then submitted a replacement declaration (declaração de substituição) declaring only the alienation of the half acquired in 1992. The Tax Authority (AT) subsequently issued a new assessment calculating IRS on the total sale value of all properties. The taxpayer challenged this through a pedido de revisão oficiosa, which was tacitly dismissed, leading to CAAD arbitration. The transitional regime under Article 5(1) of Decreto-Lei 442-A/88 exempts from IRS taxation any capital gains on properties acquired before the IRS Code's implementation. During proceedings, AT partially revoked the contested assessment, excluding taxation on the 50% share acquired in 1988, while maintaining the assessment on the 1992 acquisition but rejecting €8,456.25 in undocumented expenses. The taxpayer then requested extinction of proceedings due to supervening futility (inutilidade superveniente da lide), seeking costs against AT and compensatory interest (juros indemnizatórios) for overpayment caused by AT's error. The case demonstrates the importance of the transitional regime protecting pre-IRS acquisitions and establishes that partial revocation by AT during arbitration can render proceedings moot.

Full Decision

ARBITRAL DECISION

REPORT

On 20 August 2018, A..., holder of Tax Number..., with tax domicile at ..., Lisbon (hereinafter referred to as the Claimant), pursuant to the provisions of Articles 2, paragraph 1, subparagraph a) and 10, paragraphs 1 and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (RJAT) and Articles 1 and 2 of Ministerial Order No. 112-A/2011, of 22 March (Binding Order), requested the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is named as respondent, informing that it does not wish to exercise the faculty to appoint an arbitrator.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and automatically notified to AT, and, pursuant to paragraph 1 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the undersigned as arbitrator of the single arbitral tribunal, a position accepted within the applicable period, without opposition from the Parties.

A. Subject Matter of the Request:

The Claimant petitions for a declaration of illegality of the decision of tacit dismissal of the request for official revision which concerned the Personal Income Tax (IRS) assessment No. 2017..., of 15/12/2017, relating to income for the year 2016, as well as the account reconciliation statement No. 2017... and the interest assessment No. 2017..., resulting in the amount payable of € 24,600.99, with payment deadline of 26/01/2018, the annulment of which the Claimant requests, based on a defect of violation of law.

The Claimant further requests the condemnation of the Respondent to pay compensatory interest, due to an error by the services that resulted in the payment of a tax obligation greater than legally due.

B. Summary of the Parties' Positions

1. Of the Claimant:

a. The Claimant acquired, in February 1988, an undivided half of an urban property and two rural properties located in the municipality of..., having acquired the other half in 1992, properties which it alienated in their entirety in 2016;

b. In the IRS model 3 declaration for 2016, it did not declare the gains from capital gains (Annex G);

c. Notified by AT, the Claimant presented a replacement declaration, in which it included an Annex G, declaring the alienation of the undivided half of the aforementioned properties, acquired in 1992, and AT issued an IRS assessment with income tax payable in the amount of € 9,382.12, paid by it within the deadline;

d. In December 2017, the impugned IRS assessment was issued by AT, in which the Respondent calculated income tax by reference to the total value of alienation of the aforementioned properties;

e. This new assessment here impugned contradicts the transitional regime for income in category G, established by Article 5, paragraph 1, of Decree-Law No. 442-A/88, of 30 November, which approved the IRS Code, an error attributable to the Respondent.

2. Of the Respondent:

Notified in the terms and for the purposes provided in Article 17 of the RJAT, the Respondent submitted a Response and attached the administrative file (PA), stating, in summary, that:

On 3 October 2018, by an order of the Deputy Director-General for Income, the impugned act was partially revoked, considering: (i) the exclusion of taxation of the undivided half of 50% relating to the acquisition of the properties identified in the request for arbitral pronouncement; (ii) the maintenance of the acquisition values that the Claimant entered in Annex G of the IRS income declaration for the year 2016, as they were proven by deed; (iii) non-acceptance of the value of expenses and charges of € 8,456.25 that the Claimant entered, as they were not proven; and (iv) that no right to compensatory interest should be recognised, as the official assessment respected the legal provisions and the Claimant did not prove that 50% of the properties were acquired before 1989, nor the expenses and charges incurred with the alienation and acquisition of the aforementioned properties;

Regarding expenses and charges connected with the acquisition and alienation of the properties, although the Claimant entered in item 4 of Annex G to the income declaration for the year 2016 the sum of € 8,456.25, the Claimant did not submit any document in order to prove the amounts declared under expenses and charges, as was incumbent upon it pursuant to paragraph 1 of Article 74 of the General Tax Law;

As to the right to compensatory interest provided in paragraph 1 of Article 43 of the LGT, arising from judicial annulment of an assessment act, it depends on it being proven in the proceedings that there was error regarding the factual or legal premises attributable to the tax authority;

Since, at the time of the facts, the tax authority applied the law in the terms to which it is constitutionally bound, one cannot speak of error by the services within the terms of Article 43 of the LGT.

The AT concludes by requesting exemption from the meeting referred to in Article 18 of the RJAT, given the documentary evidence produced by both Parties, as well as the inadmissibility of the request for arbitral pronouncement.

* * *

Notified of the Response of the Respondent, the Claimant remitted to the proceedings, on 28 November 2018, a request in which it asks for extinction of the instance, due to subsequent futility of the dispute, with costs against the Tax and Customs Authority.

By arbitral order of the same previous date, the AT was notified to, within 10 days, submit its position, if it so wished, on the content of the request presented by the Claimant, and the date of 11 January 2019 was set for pronouncement of the final decision and the Claimant was warned that, by that date, it must proceed to payment of the remaining arbitral fee.

The AT did not submit its position on the content of the Claimant's request.

II. CLARIFICATION OF ISSUES

The Arbitral Tribunal is competent and was regularly constituted on 29 October 2018, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ministerial Order No. 112-A/2011, of 22 March.

The proceedings are not subject to defects that would invalidate them.

III. REASONING

III.1 MATTERS OF FACT

In the award, the arbitrator shall distinguish the proven facts from the unproven facts, substantiating its decisions (Article 123, paragraph 2, of the Code of Tax Procedure and Process [CPPT], subsidiarily applicable to tax arbitral proceedings, pursuant to Article 29, paragraph 1, subparagraph a) of the RJAT), under penalty of nullity, imposed by paragraph 1 of Article 125 of the same CPPT.

Proven Facts:

The Claimant presented the IRS model 3 declaration concerning income for the year 2016, on 30 May 2017 (declaration No...), consisting of the cover sheet and Annex A, income in categories A and H), according to copy attached to the PA;

Notified by AT (Official Letter... from the Lisbon Finance Service..., of 14/08/2017 – Doc. 5 attached to the PI), the Claimant presented, on 31/08/2017, a replacement declaration (declaration No..., with copy attached to the PA), consisting of the cover sheet, Annex A, Annex G and Annex G1;

In item 4 of Annex G, the Claimant declared the alienation, in November 2016, for the values of € 48,750.00, € 7,500.00 and € 12,500.00, respectively, of 100% of three properties located in the parish with code..., with articles..., Section G and..., Section G, acquired in September 1992, for the value of € 3,740.98 each, as well as expenses and charges in the total value of € 8,456.25 (copy attached to the PA);

In Annex G1, item 5, the Claimant declared the alienation, for identical values, of the properties identified in the preceding paragraph, acquired in February 1988 for the values of € 4,987.97, € 3,740.98 and € 3,740.98, respectively (copy attached to the PA);

Following the submission of the replacement declaration, AT issued on 08/09/2017, in the name of the Claimant, the IRS assessment No. 2017..., relating to the year 2016, for the amount of € 9,382.12, paid within the deadline (copies attached to the PA);

By Official Letter No. GI-..., of 10/11/2017, the Lisbon Finance Service... notified the Claimant to, within 15 days, "present the documents that served as the basis for completing Annex G (deeds of purchase and sale as well as expenses and charges), under penalty of only the values known to AT being considered (without any value for expenses being considered)", relating to the IRS model 3 declaration with the identification... (Copy attached to the PA);

The Claimant presented copies of the public deed executed on 11/02/1988 at the Notarial Office of..., concerning the acquisition of an undivided half of the properties identified in item 3, above, and of the public deed executed on 30/09/1992 at the... Notarial Office of Lisbon, relating to the acquisition of the other half of the same properties (copies attached to the PI and to the PA);

Through Official Letter No. GI-..., of 11/12/2017, the Lisbon Finance Service... notified the Claimant that, after analysis of the documents presented regarding the discrepancy identified in the IRS model 3 declaration, it was determined that an official correction declaration be drawn up to correct the elements entered in Annex G and elimination of Annex G1, "since it did not present proof of acquisition before 1989, as per the notification for prior hearing" (copy attached to the PA);

The Correction Document No..., drawn up on the basis of OS2017..., from the Lisbon Finance Service..., gave rise to the IRS assessment and account reconciliation statement which is the subject of these proceedings, resulting in the amount payable of € 24,600.99, paid by the Claimant on 24/01/2018 (information on page 47 of the PA);

On 30/01/2018, the Claimant filed a gracious objection to the 2016 IRS assessment which, instituted under No...2018..., would come to be filed away on 30/10/2018, as a new correction document had been drawn up within the scope of the arbitral proceedings, for partial annulment of the impugned assessment (information on page 47 of the PA);

The correction document mentioned in the preceding paragraph is DC No..., from the Finance Directorate of Lisbon, issued on the basis of Service Order OS2018..., which was, on 03/11/2018, in the "declared assessment" phase (computer extract on page 46 of the PA).

Unproven Facts:

It was not proven in the proceedings the amount for which the partial revocation of the impugned tax act occurred.

C. Reasoning of the Proven and Unproven Matters of Fact:

Regarding matters of fact, the Tribunal does not have to rule on everything that was alleged by the parties; rather, it is incumbent on it to select the facts that matter for the decision and to distinguish the proven facts from the unproven facts.

Thus, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (cf. former Article 511, paragraph 1, of the CPC, corresponding to the current Article 596, applicable ex vi Article 29, paragraph 1, subparagraph e) of the RJAT).

Thus, taking into account the documents attached to the pleadings, not contested by the Parties, the following facts are considered proven and unproven, respectively.

III.2 OF LAW

The question to be decided. Subsequent futility of the dispute. Partial revocation of the impugned act.

On Extinction of the Instance

The Claimant having invoked the subsequent futility of the dispute as a cause for extinction of the present arbitral instance, the only question to be decided is whether the aforesaid exception occurs.

Subsequent futility of the dispute arises from the occurrence of a fact, pending the judicial or arbitral instance, whereby the solution of the dispute ceases to have interest and utility, namely because the claim made by the claimant has been satisfied by extrajudicial means.

The mediate object of the request for arbitral pronouncement at the origin of the present proceedings consisted in the declaration of illegality of the additional IRS assessment No. 2017..., relating to income for the year 2016, as well as the account reconciliation statement No. 2017... and the interest assessment No. 2017..., resulting in the amount payable of € 24,600.99, based on a defect of violation of law (undue taxation of capital gains realized with the alienation of immovable property acquired on a date prior to the entry into force of the IRS Code, excluded therefrom by virtue of paragraph 1 of Article 5 of Decree-Law No. 442-A/88, of 30 November), following the tacit dismissal of the gracious objection presented against that tax assessment.

Both in the course of the judicial impugnation process and in that of the tax arbitral instance, the Tax and Customs Authority may proceed to the annulling revocation, total or partial, of the impugned tax act.

In case of partial revocation of the impugned act, AT shall notify the taxpayer to, within 10 days, submit its position, the instance proceeding in the silence of the taxpayer or if the latter comes to declare that it wishes to maintain it (Articles 112, paragraph 3 of the CPPT and 13, paragraph 2, of the RJAT).

The tax arbitral instance begins with the submission of the request for constitution of the arbitral tribunal (Article 10 of the RJAT), the legislator having established in Article 13, paragraph 1, of the RJAT, a period of 30 days for the "withdrawal"[1] of AT, still in the phase of the arbitral procedure, that is, before the constitution of the arbitral tribunal (Articles 11, paragraph 8 and 15, of the RJAT), leaving AT prevented from, after the end of that period, "practicing a new tax act in relation to the same taxpayer or taxable obligated, tax and taxation period, except on the basis of new facts," as provided in paragraph 3 of Article 13 of the RJAT.

However, it should be understood that when partial revocation of the impugned act occurs, the 30-day period referred to in paragraph 1 of Article 13 of the RJAT having elapsed, already after constitution of the arbitral tribunal, the same legal effect provided for in its paragraph 2 shall be produced, by subsidiary application of paragraph 3 of Article 112 of the CPPT, ex vi subparagraph a) of paragraph 1 of Article 29 of the RJAT.

In the case of the present proceedings, the arbitral tribunal only became aware of the partial revocation of the additional IRS assessment relating to income for the year 2016, with the notification of the Response of AT, in which it is stated that "On 03-10-2018, by order of the Deputy Director-General for Income, the impugned act was partially revoked and it was considered: 1. the exclusion of taxation of the undivided half of 50% relating to the acquisition of the properties; 2. the maintenance of the acquisition values that the Claimant entered in Annex G of the IRS income declaration for the year 2016, as they were proven by deed; 3. non-acceptance of the value of expenses and charges of € 8,456.25 that the Claimant entered, as they were not proven; 4. not to recognize the right to compensatory interest given that the official assessment respected the legal provisions and the Claimant did not prove that 50% of the properties were acquired before 1989 nor the expenses and charges incurred with the alienation and acquisition of the aforementioned properties," the Claimant, also notified, having likewise produced an express declaration in which, in conformity with the administrative decision, it came to "request the subsequent futility of the dispute, with costs against the Respondent who gave rise to the action."

Now, since the impugned IRS assessment was partially revoked, one cannot, strictly speaking, refer to subsequent futility of the dispute, since, with the assessment being partially maintained in the legal order, the Claimant did not obtain the full satisfaction of its claim by the administrative route.

Thus, although the Respondent did not inform the arbitral tribunal of the extent of the revocation of the impugned act and it does not behoove this tribunal to substitute itself for the tax administration in the calculations of the new assessment, the subsequent futility of the dispute cannot be said to have occurred, with the consequent extinction of the instance, pursuant to Article 277, subparagraph e), of the CPC, of subsidiary application to tax arbitral proceedings, ex vi Article 29, paragraph 1, subparagraph e) of the RJAT.

With a specific provision of tax law existing, the instance should instead be considered extinct pursuant to paragraph 3 of Article 112 of the CPPT, interpreted a contrario, in view of the express declaration of the Claimant in the sense of non-continuation of the action, thus prejudicing the knowledge of the remaining issues raised by the Parties.

On Responsibility for Costs

Article 537 of the CPC, applicable ex vi Article 29, paragraph 1, subparagraph e) of the RJAT, establishes the following:

Article 537 – Costs in case of confession, withdrawal or settlement

1 – When the case ends by withdrawal or confession, the costs are paid by the party that withdraws or confesses; and, if the withdrawal or confession is partial, responsibility for the costs is proportional to the part of which one withdrew or which one confessed.

2 – In case of settlement, the costs are paid half and half, except by agreement to the contrary, but when the settlement is made between a party exempt or dispensed from payment of costs and another not exempt or dispensed, the court, having heard the Public Prosecutor's Office, shall determine the proportion in which the costs shall be paid.

In the situation in question, it is verified that (i) the request for constitution of the arbitral tribunal was presented on 20 August 2018; (ii) the arbitral tribunal was regularly constituted on 29 October 2018; (iii) although the impugned IRS assessment was partially revoked by order of the Deputy Director-General for Income, of 3 October 2018, such fact was only communicated to the arbitral tribunal within the framework of the Response of AT; (iv) the claim of the Claimant was partially satisfied by the Respondent by extrajudicial means; (v) AT did not inform the arbitral tribunal of the extent of the revocation of the impugned act, it not being incumbent on this arbitral tribunal to substitute itself for the tax administration and determine the amount of income tax due after the partial revocation of the IRS assessment under analysis.

Furthermore, notified of the request in which the Claimant requested extinction of the instance, due to subsequent futility of the dispute, with condemnation of AT in the costs of the proceedings, the Respondent said nothing.

Article 342, paragraph 2, of the Civil Code provides that "The burden of proving facts that prevent, modify or extinguish the right invoked is on the person against whom the invocation is made."

Having AT failed to produce proof of the amount for which the impugned assessment remains in the legal order, as was incumbent on it, this arbitral tribunal cannot determine the part of the costs which, proportionally, would be the responsibility of the Claimant.

Thus, the Respondent is condemned in the entirety of the procedural costs.

DECISION

Based on the grounds set forth above, it is decided:

To declare the present arbitral instance extinct, pursuant to paragraph 3 of Article 112 of the CPPT, interpreted a contrario, by referral from Article 29, paragraph 1, subparagraph a) of the RJAT;

To condemn the Tax and Customs Authority to payment of the arbitral fee.

VALUE OF THE PROCEEDINGS: In accordance with Article 306, paragraphs 1 and 2, of the CPC, 97-A, paragraph 1, subparagraph a) of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 24,600.99 (twenty-four thousand six hundred euros and ninety-nine cents).

COSTS: Calculated in accordance with Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and the Table I attached thereto, in the amount of € 1,530.00 (one thousand five hundred thirty euros), payable by the Respondent.

Notify the parties.

Lisbon, 11 January 2019.

The Arbitrator,

Mariana Vargas

Text prepared by computer, pursuant to paragraph 5 of Article 131 of the CPC, applicable by referral from subparagraph e) of paragraph 1 of Article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the 1990 orthographic agreement.

[1] Cf. Carla Castelo Trindade, "Legal Regime for Arbitration in Tax Matters", annotated, Almedina, 2016, pages 327 et seq.

Frequently Asked Questions

Automatically Created

How does the transitional regime under Article 5(1) of Decreto-Lei 442-A/88 affect IRS taxation of real estate capital gains on properties acquired before the IRS Code?
The transitional regime under Article 5(1) of Decreto-Lei 442-A/88 exempts from IRS taxation any capital gains (mais-valias) arising from the sale of real estate acquired before the IRS Code entered into force on January 1, 1989. This means properties or property shares acquired before this date are not subject to IRS capital gains taxation upon alienation, regardless of when the sale occurs. In this case, the 50% share acquired in February 1988 was properly excluded from taxation under this transitional provision, while the half acquired in September 1992 remained subject to normal IRS capital gains rules under Category G income.
Can the Portuguese Tax Authority (AT) issue a new IRS assessment covering the full sale value when only half of a property was acquired after the IRS Code entered into force?
No, the Portuguese Tax Authority cannot lawfully issue an IRS assessment covering the full sale value when only a portion of the property was acquired after the IRS Code implementation. The transitional regime protects pre-1989 acquisitions from capital gains taxation. When a taxpayer acquires property in stages—part before and part after January 1, 1989—only the portion acquired after the IRS Code's effective date is subject to capital gains taxation. In this case, AT's initial assessment on 100% of the sale value violated the transitional regime and was subsequently partially revoked to tax only the 50% share acquired in 1992, demonstrating AT's recognition of its error.
What is the procedure for filing a pedido de revisão oficiosa to challenge an IRS capital gains assessment in Portugal?
To file a pedido de revisão oficiosa challenging an IRS assessment in Portugal, the taxpayer must submit a formal request to the Tax Authority under Article 78 of the Lei Geral Tributária (LGT), identifying the contested assessment and grounds for revision, typically based on manifest error of law or fact. The request must be filed within the applicable time limits and should include supporting documentation proving the alleged error. If AT does not respond within the statutory period, tacit dismissal (indeferimento tácito) occurs, which can then be challenged through administrative litigation or CAAD tax arbitration. In this case, the taxpayer followed this procedure after receiving the erroneous December 2017 assessment, and when the revision request was tacitly dismissed, initiated arbitration proceedings.
When does partial revocation of a contested tax assessment apply in IRS real estate capital gains cases at CAAD?
Partial revocation of a contested tax assessment (revogação parcial) in IRS capital gains cases at CAAD occurs when the Tax Authority recognizes during arbitration proceedings that the original assessment contained errors but maintains that portions of the assessment remain legally valid. Under Article 43 of the LGT and general administrative law principles, AT can unilaterally correct its errors through partial revocation, adjusting the assessment to reflect correct legal application. In this case, AT's Deputy Director-General for Income issued a partial revocation order on October 3, 2018, excluding taxation on the 50% acquired in 1988 (recognizing the transitional regime), maintaining taxation on the 1992 acquisition with documented acquisition values, but rejecting unproven expenses of €8,456.25. This partial revocation may render the arbitration proceedings superfluous, potentially leading to extinction for supervening futility.
Are taxpayers entitled to indemnity interest (juros indemnizatórios) when the Tax Authority issues an IRS assessment based on an error attributable to its services?
Taxpayers are entitled to compensatory interest (juros indemnizatórios) under Article 43(1) of the Lei Geral Tributária when a tax assessment is annulled due to an error attributable to the Tax Authority's services, and this error resulted in payment of tax exceeding the legally due amount. However, entitlement requires proving that AT committed an identifiable error in applying factual or legal premises. In this case, AT argued against awarding compensatory interest, claiming it applied the law as constitutionally required at the time and that the taxpayer failed to adequately prove the 1988 acquisition date and claimed expenses. The burden of proof rests on the taxpayer to demonstrate both the AT's attributable error and the resulting overpayment. Simple correction through partial revocation does not automatically trigger compensatory interest unless the original error is clearly attributable to AT's services rather than incomplete taxpayer documentation.