Process: 406/2017-T

Date: March 12, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

In Process 406/2017-T, non-resident taxpayers A and B challenged IRS assessments for 2012-2014 totaling €9,092.94 related to rental income (Category F) from two properties. The Tax Authority partially deferred their gracious claim but rejected certain maintenance and conservation expense deductions under Article 41 of the IRS Code. The main dispute centered on expenses for a property where the claimants held usufruct rights but invoices were issued in the property owner's name, not the usufructuaries. The AT argued these could not be deducted since the invoices did not reflect the taxpayers' names. Additionally, the AT reclassified certain expenses as non-deductible operating expenses rather than maintenance costs and applied a proportionality coefficient based on rental days. The claimants argued that Article 41 requires only that expenses be actually incurred by the taxpayer receiving rental income and be properly documented, without imposing formal requirements on invoice addressees. They provided supporting documentation including declarations from the property administrator proving they incurred and paid the disputed expenses. CAAD admitted the cumulation of claims for multiple tax years (2012-2014) since they involved identical factual circumstances and interpretation of the same legal provisions. The arbitral tribunal was constituted on September 12, 2017, with both parties waiving the oral hearing. The case illustrates critical issues regarding expense deductibility for non-resident landlords, the formal requirements for documentary proof under Article 41, and the treatment of expenses incurred by usufructuaries versus property owners in Portuguese rental income taxation.

Full Decision

ARBITRAL DECISION

1. Report

On 03-07-2017, A…, taxpayer no.…, and B…, taxpayer no.…, with tax address at Rua do …, …, …-… …, hereinafter referred to as Claimants, submitted to the Administrative Arbitration Centre (CAAD) a request for constitution of an arbitral tribunal with a view to, immediately, the declaration of illegality of the act of partial deferral of the gracious claim no.…2016…, and mediately, the declaration of illegality of the acts of assessment of Personal Income Tax (IRS) for the years 2012, 2013 and 2014, in the total amount of €9,092.94.

The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 04-07-2017 and notified to the Respondent on the same date.

The Claimant did not proceed with the appointment of an arbitrator, whereby, pursuant to the provisions of article 6º no. 2 letter a) of RJAT, Ms. Doctor Suzana Fernandes da Costa was designated as arbitrator by the President of the Deontological Council of CAAD, on 28-08-2017, the appointment having been accepted within the legal timeframe and terms.

On the same date the parties were duly notified of that designation, having not manifested the will to refuse the arbitrator's designation, in accordance with the provisions of article 11º, no. 1, letters a) and b) of RJAT, in conjunction with articles 6º and 7º of the Deontological Code.

Thus, in accordance with the provisions of letter c), no. 1, of article 11º of RJAT, the Arbitral Tribunal was constituted on 12-09-2017.

On the same date, an order was issued ordering the notification of the Respondent to, within 30 days, present a reply and, if it wished, request the production of additional evidence and send to the arbitral tribunal a copy of the administrative file within the timeframe for presentation of the reply.

On 16-10-2017, the Respondent presented its reply and attached the administrative file to the case.

On 20-10-2017, an order was issued to notify the parties that, within 10 days, they would comment on the waiver of the hearing provided for in article 18º of RJAT and on the waiver of arguments. The Claimant attached to the case the proof of payment of the subsequent arbitral fee on 10-11-2017.

On 22-11-2017, an order was issued deciding on the waiver of the hearing provided for in article 18º of RJAT, taking into account the position of the parties, and pursuant to the provisions of articles 16º letter c) and 19º of RJAT, also taking into account the principles of procedural economy and the prohibition of performing useless acts. In the same order, 08-03-2018 was set as the date for the issuance of the arbitral decision. And the Claimant was warned to, by that date, attach to the file proof of payment of the subsequent arbitral fee.

On 08-03-2018, an order was issued extending to 12-03-2018 the deadline for the decision, given the complexity of the matter to be decided.

The parties have legal personality and capacity and are legitimate (articles 4º and 10º no. 1 and 2 of RJAT and article 1º of Order no. 112-A/2011 of 22 March).

The arbitral request is timely, in accordance with article 10º no. 1 letter a) of Decree-Law no. 10/2011 of 20 January and article 102º no. 1 letter a) of the Code of Procedure and Tax Process.

The case does not suffer from nullities and no preliminary questions were raised, except for the cumulation of claims, which will be decided below.

The Claimants request the cumulation of claims relating to different acts of tax assessment of IRS for the years 2012, 2013 and 2014, since in all years the same circumstances of fact and the same interpretation and application of the same principles or rules of law are involved.

In this case the cumulation of claims is admissible, in accordance with articles 104º of CPPT and 3º of RJAT, whereby it is admitted.

2. Cause of Action

The Claimants begin by stating that, not agreeing with the additional assessments of IRS for the years 2012, 2013 and 2014, they presented a gracious claim of the said assessments to the Finance Service of … … . Said claim was subject to a decision of partial deferral, with the Claimants being reimbursed for the tax paid in excess for the year 2014.

The Claimants state that they were subject to an internal inspection action, for the years 2012, 2013 and 2014, of partial scope (IRS). As a result of said inspection action, the Claimants were notified of the tax inspection report, which contained purely arithmetic corrections of €13,988.83 for the year 2012, €12,647.01 for 2013 and €13,375.76 for 2014. From these corrections would result IRS to be paid of €2,308.16 in 2012, €3,541.16 in 2013 and €3,745.20 in 2014. The Claimants state that they proceeded with payment of the IRS assessments for the three years referred to.

The Claimants argue that they are non-residents and that they obtained income related to the rental of two of their properties: fraction A of the urban property inscribed in the real estate registry of the parish of … under the article … and fraction D of the urban property inscribed in the real estate registry of the parish of … under the article ….

As regards the gracious claim that was partially deferred, the Claimants state that the AT partially accepted the tax deductibility of the expenses that the Claimants claimed in the years 2012, 2013 and 2014, except for the expenses relating to the property inscribed in the real estate registry of the parish of … under the article … fraction A, of which the Claimants are usufructuaries, and regarding water expenses and an invoice issued in the name of A… relating to the property inscribed in the real estate registry of the parish of … under the article … fraction D, of which the Claimants are owners.

According to the Claimants, the AT did not accept the said expenses because it considered them to be operating expenses and not maintenance and conservation expenses, and also because some of the expenses were related to the article … fraction A, of which the Claimants are usufructuaries.

The Claimants further state that the AT maintained the application of a proportionality coefficient of expenses based on the number of days of rental of the property.

The Claimants argue that they cannot agree with the fact that the AT did not accept for tax purposes the expenses incurred and paid by the Claimants regarding the maintenance and conservation of the property of which they are usufructuaries, on the argument that the invoices are not in the name of the Claimants, but in the name of the owner of the property.

On this point, the Claimants further state that for practical reasons, many of the conservation and maintenance expenses were issued in the name of the owner of the property and not of the usufructuary of the property. However, the Claimants state that such expenses were incurred and paid by them, as stated in the declaration of the property administrator that they attached.

The Claimants state that, in the order of partial deferral of the gracious claim, the AT states that "the only requirement that the law makes is that maintenance and conservation expenses are actually incurred by the taxpayer, that is, by the one who receives the rent, and are documented proof". For the Claimants, the AT recognized that for expenses to be deductible, the rent relating to the property must be received by the taxpayer, which is what happens in this case.

For the Claimants, article 41º of the IRS Code only requires that expenses be incurred by the taxpayer and be found in documentary form, with no formal requirements regarding the name that should appear on the invoices.

In the view of the Claimants, it should have been sufficient that all the invoices submitted by the Claimant and the supporting documents attached to them related to the property of which the Claimants are usufructuaries and that it was they who incurred such expenses. And for this, the AT should have taken into account what is described in article 11º no. 3 of the General Tax Law (LGT), which states that "if doubt persists about the meaning of the rules of incidence to be applied, attention must be paid to the economic substance of the tax facts". For the Claimants, this principle of substance over form is peacefully accepted by doctrine and case law.

For these reasons, the Claimants state that they cannot agree with the position of the AT in not accepting the expenses for not being properly framed in article 41º of the IRS Code, for not meeting the required form.

The Claimants allude to the fact that the AT did not analyze the arguments presented by the Claimants in the gracious claim regarding the property of which they are usufructuaries, in violation of the duty of reasoning provided for in article 77º of the LGT and article 268º no. 3 of the Constitution of the Portuguese Republic (CRP). On this duty, the Claimants also refer to judgments of the Central Administrative Court and South and the Supreme Administrative Court.

The Claimants also argue that the inspection report does not indicate which specific expenses are not deductible because the description does not allow the goods/service provided to be framed, or because they are operating expenses or other non-deductible expenses, in violation of the said duty of reasoning.

Additionally, the Claimants state that the AT bases itself on an alleged proportionality between the expenses incurred and the periods in which the Claimants' properties generate real estate income.

On this subject, the Claimant attaches the proof of registration of local accommodation no. …/09 of 19-06-2009, made with the Municipal Council of … . And states that imposing on them the burden of renting the properties in all days of the year so that maintenance and conservation expenses can be deductible in accordance with article 41º of the IRS Code is a reality not controllable by the Claimants and is a superfluous and inappropriate interference in the daily management of the same.

Regarding this aspect, the Claimants state that some of the maintenance and conservation expenses can only be carried out when the property is not occupied/rented. As for water expenses, the Claimants understand that it makes no sense to make a proportionality of such an expense, in which the Claimants are obliged to incur, given that at any time they may need to rent their properties.

The Claimants understand that there is no reason for the AT to presume that, by failing to rent the properties, the maintenance and conservation expenses underlying them are not deductible for tax purposes.

In conclusion, the Claimants argue that the AT did not comply with the duty of reasoning that fell upon it regarding the non-acceptance of the expenses, referring to the arbitral decision of case no. 394/2014-T. They further state that the IRS assessments in question should be considered unfounded, under no. 2 of article 153º of the Administrative Procedure Code (CPA), applicable by virtue of letter d) of article 2º of CPPT.

On the other hand, the Claimants state that the assessments in question suffer from error in the factual and legal assumptions, and should therefore be annulled for being illegal.

As regards said error, the Claimants argue that the AT did not accept the expenses relating to the property of which the Claimants are usufructuaries for not being in their name. They further state that the AT did not accept as deductible the expenses related to water and the invoice in the amount of €88.56 issued in the name of A….

The Claimants mention that it appears from the inspection report that certain expenses were not considered deductible to real estate income because the description did not allow the goods/service provided to be framed.

As regards the requirement of form, the Claimants refer to the judgment of the Supreme Administrative Court of case no. 028/15, and state that they justified in a concrete manner and in accordance with the legal requirements that have come to be understood by doctrine and case law, all the expenses that were disregarded by the AT in the years 2012, 2013 and 2014.

The Claimants make, in the arbitral opinion request, reference to the concept of maintenance and conservation expenses. They begin by stating that the legislator never defined what is understood by maintenance and conservation expenses. The Claimants transcribe the wording of article 4º of the IRS Code, in effect in the years 2012, 2013 and 2014, according to which "from the gross income referred to in article 8º, maintenance and conservation expenses are deducted (…)".

The Claimants understand that the interpretation of the concept of maintenance and conservation expenses should be carried out in light of the provisions of article 11º of the LGT, and refer to the former Urban Leasing Regime and to the current Civil Code.

According to the Claimants, in accordance with article 9º no. 3 of the Civil Code, the fact that the IRS Code does not distinguish the type of conservation expenses that should be considered for the purposes of the specific deduction covered by article 41º, allows that all types of conservation expenses provided for in the various branches of law, such as ordinary and extraordinary conservation expenses, be deductible for tax purposes. To support this position, the Claimants mention the arbitral decision of case no. 435/2014-T.

As for maintenance expenses, the Claimants argue that the interpretation of that concept should be carried out in accordance with article 9º of the Civil Code, and again refer to the arbitral decision of case no. 435/2014-T. For the Claimants, maintenance expenses are all those necessary to maintain the properties and their economic activity.

Thus, for the Claimants, all expenses that, having sufficient proof, have a direct causal relationship with the property, in the economic sense of the same, that is, to produce income, should be framed in the concept of maintenance expenses, on pain of being faced with a violation of the principle of tax capacity. On this principle, the Claimants refer to articles 4º no. 1 of the LGT and 104º no. 1 of the CRP.

In the view of the Claimants, the expenses that were not accepted by the AT fall within the concept of maintenance and conservation expenses and are indispensable for obtaining income subject to tax, in accordance with article 41º of the IRS Code.

In relation to the question of proportionality of expenses based on the number of days of rental of the property, the Claimants state that the AT understands that a proportionality coefficient should have been applied to the deductible expenses based on the number of days of rental. The days in question by the AT are 45 and 60 in 2012, 67 and 104 in 2013 and 51 and 83 in 2014, in the two properties of the Claimants.

The Claimants argue that this understanding of the AT incurs a violation of the principle of legality provided for in article 103º no. 2 of the CRP. And as for the question of the proportionality coefficient, the Claimants mention the arbitral decisions of cases no. 201/2015-T and no. 294/2015-T.

For the Claimants, the application of a proportionality coefficient has no legal support, violating the said principle of legality.

The Claimants finally ask for the annulment of the IRS assessments as well as the annulment of the compensatory interest assessments. As for the latter, the Claimants base the request with judgments of the Supreme Administrative Court.

The Claimants further request the condemnation of the AT in the reimbursement of the tax paid unduly and in the payment of indemnity interest, in accordance with articles 43º and 100º of the LGT.

3. Reply of the Respondent

The Tax and Customs Authority presented a reply alleging that the legal compliance of the tax act subject of the arbitral request is evident.

The AT begins by stating that the thesis of the Claimants regarding the lack of reasoning of the tax act has no support.

For the AT, the act is duly reasoned when, by the motivation provided, it is apt to reveal to a normal recipient the factual and legal reasons that determine the decision, enabling it to react effectively through legal means against the respective harm. And it bases its position with case law and doctrine.

As regards deductible expenses, the AT states that real estate income is deductible documented expenses, necessary and directly linked to obtaining such income, provided they are incurred by the taxpayer itself.

The AT argues that, for taxation purposes in category F, the net income obtained is considered, that is, the rents received minus the expenses incurred to produce the real estate income and to maintain in full the respective productive source (the properties subject to lease). And, therefore, the conservation and maintenance expenses and the IMI paid regarding a property rented during some months should be proportionally considered as deductible based on the number of months of rental.

The AT states that, in accordance with no. 1 and no. 2 of article º of the IRS Code, the expenses that can be deducted are the following:

  • maintenance and conservation expenses that are incumbent on the taxpayer, incurred by him and documented proof, as well as IMI that affects the value of the properties or part of properties whose income has been aggregated;

  • and, in the case of autonomous fraction of property in horizontal property regime, conservation, enjoyment and other charges that, in accordance with civil law, the owner must necessarily incur, incurred by him, and documented proof.

The AT also refers to Law no. 66-B/2012 of 31-12, which came to include in no. 1 of article 41º of the IRS Code the Stamp Duty affecting the value of properties or part of properties whose income was subject to taxation in the fiscal year.

For the AT, maintenance expenses are considered, namely, those incurred with energy and maintenance of elevators, escalators and hoists, porters, cleaning, energy for lighting, heating or central air conditioning and building insurance premiums. And conservation expenses will be those not framed in the previous ones and carried out with works intended to maintain a building in the conditions existing at the date of its construction, reconstruction, enlargement or alteration, namely restoration, repair and cleaning works. According to the AT, these are the expenses necessary to produce the real estate income subject to taxation.

The AT argues that when there is no gross income, no expense incurred can be considered, and when there is partial rental, that is, only during part of the year, only the expenses that are proportionally attributable to the number of months of rental can be considered as eligible for the purposes of article 41º of the IRS Code.

Thus, for the AT, any other interpretation that does not support the position set out in the inspection report frontally violates constitutional precepts, namely the principle of equality and the principle of tax capacity, by discriminating against those who rent a property for few days, deducting all and any expenses provided for in article 41º of the IRS Code without any limit, from those who, constantly using and throughout the fiscal year the property for rental, find themselves in the contingency of being placed on the same level of tax capacity (which is not at all equal) as those others.

The Respondent concludes by stating that it should not be condemned to pay indemnity interest, since there was no error attributable to the services.

4. Matter of Fact

4.1. Proven Facts

Having examined the documentary evidence produced and the position of the parties contained in the procedural documents, the following facts are considered proven and with interest for the decision of the case:

  • The Claimants are non-residents in Portugal.

  • The Claimants in 2012-2014 were owners of fraction D of the urban property inscribed in the real estate registry of the parish of …, municipality of …, under the article ….

  • The Claimants from 2012 to 2014 were usufructuaries of fraction A of the urban property inscribed in the real estate registry of the parish of …, municipality of …, under the article….

  • The Claimants were subject to an internal tax inspection action, relating to the years 2012, 2013 and 2014, of partial scope, regarding the procedures adopted for the purposes of determining IRS.

  • The Claimants were notified, on 22-01-2016, of the draft inspection report.

  • The Claimants were notified, on 24-02-2016, of the inspection report.

  • Pursuant to said report, the AT did not accept the following expenses relating to the following properties:

    • expenses related to fraction A of the article …, in the total amount of €33,626.31, because the invoices are not issued in the name of the Claimants;

    • expenses related to fraction D of the article …, in the total amount of €15,300.44, on the ground that the description does not allow the goods/service provided to be framed or because they are operating expenses and not maintenance and conservation expenses;

    • as for deductible expenses, the AT understood that they should be considered proportionally based on the number of days of rental, that is, it accepted only as deductible the amounts of €178.52 in 2012, €266.47 in 2013 and €213.40 in 2014, regarding fraction A of the article …, and €128.92 in 2012, €147.80 in 2013 and €231.44 in 2014, regarding fraction D of the article ….

  • The Claimants were notified of the following documents:

    • additional IRS assessment no. 2017 … for the year 2012;

    • statement of compensatory interest assessment no. 2017 … for the year 2012;

    • additional IRS assessment no. 2017 … for the year 2013;

    • statement of compensatory interest assessment no. 2017 … for the year 2013;

    • additional IRS assessment no. 2016 … for the year 2014;

    • statement of compensatory interest assessment no. 2017 … for the year 2014;

    • statement of account settlement no. 2017 … for the year 2014.

  • The Claimants presented, on 29-07-2016, a gracious claim of the additional IRS assessments referred to above, as per document 1 attached to the arbitral request.

  • The Claimants were notified, on 03-04-2017, of the decision of partial deferral of the gracious claim presented, as per document 2 attached to the arbitral request.

  • The Claimants proceeded with payment of the aforementioned assessments.

  • The Claimants presented the present arbitral opinion request on 03-07-2017.

No other facts with relevance to the decision of the case were proven.

4.2. Unproven Facts

It is not considered proven that the Claimants incurred the expenses issued in the name of A….

4.3. Reasoning of the Proven Matter of Fact

The conviction of the arbitrator was based on the documents attached to the case by the Claimant, namely the assessments, the property register and proof of payment.

5. Matter of Law

5.1. Object and Scope of the Present Case

The essential questions of law that arise in this case are:

  • Whether or not the inspection report suffers from the defect of lack of reasoning;

  • To conclude whether the expenses incurred by the Claimants are not subject to deduction because, in the view of the AT, the description does not allow the goods/service provided to be framed;

  • To question whether such expenses can be disregarded because, in the view of the AT, operating expenses are at stake and not maintenance and conservation expenses;

  • To know whether some of the expenses cannot be accepted, according to the position of the AT, because they are related to the article … fraction A of which the Claimants are usufructuaries;

  • To conclude whether a proportionality coefficient of expenses should be applied based on the number of days of rental of the property, as the Respondent argues;

  • And to determine whether compensatory interest is or is not illegal.

On these questions have already ruled, the decisions of CAAD issued in cases number 103/2017-T, 42/2017-T, 434/2016-T, 338/2016-T, 294/2015-T, 201/2015-T and 435/2014-T.

Having established the matter of fact, as mentioned above, it is important to address the legal questions raised by the parties, beginning with the formal defects invoked by the Claimant.

5.2. The Alleged Lack of Reasoning

The Claimant argues that there is the defect of lack of reasoning, since the inspection report refrains from indicating which specific expenses are not deductible when the description does not allow the goods/service provided to be framed, and those that are not deductible because they are operating expenses.

For the Claimant, the reasoning is obscure and insufficient, because its content is not sufficient to explain the true reasons why the aforementioned acts were performed.

The AT states that the thesis of the Claimants regarding the lack of reasoning of the tax act has no support. For the AT, the act is duly reasoned when, by the motivation provided, it is apt to reveal to a normal recipient the factual and legal reasons that determine the decision, enabling it to react effectively through legal means against the respective harm. And it bases its position with case law and doctrine.

Article 286º no. 3 of the CRP imposes that "administrative acts are subject to notification to the interested parties, in the form provided by law, and require express and accessible reasoning when they affect rights or legally protected interests".

The same duty of reasoning is provided for in articles 152º and 153º of the Administrative Procedure Code for administrative acts in general, and in article 77º of the General Tax Law for tax administrative acts.

In that sense, see what Diogo Freitas do Amaral states, in Course of Administrative Law, Volume II; Almedina, pages 352 onwards: "the reasoning of an administrative act consists in the explicit statement of the reasons that led its author to perform that act or to give it certain content".

As for no. 2 of article 77º of the LGT, the same imposes that "the reasoning of tax acts can be carried out in a summary manner, and should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax".

On the other hand, and as a corollary of the obligation to reason administrative acts, the exercise of the right to be heard will arise which, in the final analysis, will have the virtue that the administrated person can confront the arguments produced against him.

According to doctrine and case law, the legally required reasoning must have the following characteristics:

  • ex officio: it must always come from the initiative of the administration, with no admissible reasoning on request,

  • contemporaneity; it must be contemporaneous with the performance of the act, and there can be no deferred reasoning or on request,

  • clarity: it must be comprehensible to an average recipient, avoiding polysemic or deeply technical concepts,

  • completeness: it must contain all essential elements that were determinative of the decision taken, and this characteristic unfolds in the duty of justification (legal norms and factuality – domain of legality) and in the duty of motivation (domain of discretion or opportunity, when an assessment is required)

The Supreme Administrative Court has come to understand that the reasoning of an administrative or tax act is a relative concept that varies depending on the type of act and the circumstances of the concrete case, but that the reasoning is sufficient when it allows a normal recipient to realize the cognitive and evaluative path followed by the author of the act to issue the decision, that is, when he can know the reasons why the author of the act decided as he did and not differently so that he can trigger the administrative or contentious mechanisms of challenge.

In that sense, see the Judgment of the Supreme Administrative Court of 10/09/2014, of case 01226/13, which states that: "I- The Tax Administration has the duty to reason the acts of official assessment of taxes in accordance with the principle embodied in art. 268º of the CRP and adopted in arts. 152º of the Administrative Procedure Code, and 77 of the General Tax Law. II. The act will be sufficiently reasoned when the administrated person, placed in the position of a normal recipient – the bonus pater familiae of which art. 487º, no. 2 of the Civil Code speaks – can come to know the factual and legal reasons that are at its genesis, so as to choose, in an informed manner, whether or not to accept the act."

In relation to the tax inspection procedure, it follows from article 63º no. 1 of RCPIT that tax acts or matters relating to taxation can base their conclusions "through adhesion or agreement with these, and in all cases the entity competent for their performance must reason the divergence from the conclusions of the report".

In the present case, the Claimants had knowledge of the draft tax inspection report and were notified of the tax inspection report.

The reasoning for the corrections contained in the tax inspection report support the tax assessments in question.

Thus, we understand that the Claimants became aware of the cognitive path that led to the issuance of the assessments in question in the present case.

Indeed, considering the concrete context in which the assessment acts here under review were produced, the grounds contained in the final tax inspection report that preceded them will be perceptible to an average recipient placed in the position of the actual recipient.

Thus, the reasoning in question allowed the Claimants to act through gracious claim and arbitral opinion request, and it is not evident that their defense rights were compromised or that the same did not allow them to understand the reasoning adopted by the AT that led to the additional assessments of the years 2012, 2013 and 2014.

Therefore, we understand that the duty of reasoning of the tax assessment acts subject to the present arbitral process is complied with.

5.3. Maintenance and Conservation Expenses Subject to Deduction from Real Estate Income

As for the expenses, the AT argues that, regarding fraction A of the article … in which the Claimants are usufructuaries, only the expenses that are issued in their name are accepted. And as for the remaining expenses, the AT states, in the inspection report, that they are not deductible, either because the description does not allow the goods/service provided to be framed, or because it is a matter of operating expenses and not maintenance expenses.

In the gracious claim, the Respondent accepted as deductible, all expenses from 2012, 2013 and 2014, regarding fraction D of the article…, with the exception of water expenses, on the ground that it is an operating expense, and the expense in invoice no. 6594 of 30-11-2014, in the amount of €88.56, for not being in the name of the Claimants.

As for the question regarding the descriptions of services rendered and goods sold to the Claimants, it was resolved with the acceptance of expenses in the gracious claim.

Therefore, regarding this fraction, it is only necessary to assess the legality of the non-acceptance of water expenses in the amount of €1,563.84.

Before deciding, it is important to examine what is understood by real estate income and the deductions allowed by article 41º of the IRS Code.

Article 8º no. 1 of the IRS Code tells us that:

"1. Real estate income is considered to be the rents of rural, urban and mixed properties paid or made available to their respective holders (…)".

And no. 2 letter a) of the same article states:

"2. The following are considered rents:

  • The amounts relating to the cession of the use of a property or part thereof and the services related to that cession".

As for article 41º of the IRS Code, which stipulates which expenses are deductible in category F, it had the following wording in the year 2012:

"1 - From the gross income referred to in article 8º maintenance and conservation expenses that are incumbent on the taxpayer, incurred by him and documented proof are deducted, as well as the municipal property tax that affects the value of properties or part of properties whose income has been aggregated.

2 - In the case of autonomous fraction of property in a horizontal property regime, the conservation, enjoyment and other charges that, in accordance with civil law, the owner must necessarily incur, incurred by him, and documented proof are also deducted.

3 - In subletting, the difference between the rent received by the subletter and the rent paid by him does not benefit from any deduction."

Law no. 66-B/2012 of 31-12 came to give new wording to no. 1 of article 41º of the IRS Code, with that number coming to have the following wording, in the years 2013 and 2014:

"1 - From the gross income referred to in article 8º maintenance and conservation expenses that are incumbent on the taxpayer, incurred by him and documented proof are deducted, as well as the municipal property tax and stamp duty that affect the value of properties or part of properties whose income is subject to taxation in the fiscal year."

Thus from this no. 1 two categories of deductible expenses result: the first refers to maintenance and conservation expenses and the second refers to municipal property tax and stamp duty supported.

As stated in AAVV: IRS – annotated and commented codes, Lexit, October 2013 edition, page 134, "this article deals with the specific deductions relating to category F (real estate income), that is, the set of expenses and charges objectively connected with obtaining that income and, in that measure, whose deduction from the gross income of this category appears as appropriate, given the principle of tax capacity, with a view to determining the corresponding net income".

Let us see which expenses can be included conservation expenses and which can be integrated in maintenance expenses.

It should be said from the outset that the legislator never defined what is understood by maintenance and conservation expenses. Thus, the interpretation of that concept should be carried out with reference to the provisions of article 11º of the LGT. And in accordance with no. 2 of article 11º of the LGT "whenever, in tax rules, terms specific to other branches of law are used, they must be interpreted in the same sense as that which they have there, unless otherwise resulting directly from the law".

To interpret that concept, we should also refer to the former Urban Leasing Regime and the Civil Code.

Article 9º no. 3 of the Civil Code states that "in determining the meaning and scope of the law, the interpreter will presume that the legislator adopted the most correct solutions and knew how to express his thought in adequate terms".

Having this provision in mind, the fact that the IRS Code does not distinguish the type of conservation expenses that should be deductible, allows that all types of conservation expenses provided for in the various branches of law, such as ordinary and extraordinary conservation expenses, be deductible for tax purposes.

As for the Urban Leasing Regime, its article 11º provided that "in urban properties and, for the purposes of this diploma, ordinary conservation works, extraordinary conservation works (…) may take place; (ii) ordinary conservation works are: a) the general repair and cleaning of the property and its dependencies; b) the works imposed by the Public Administration, in accordance with the applicable general or local law, and which aim to give the property the characteristics presented at the time of the granting of the license of use; c) in general the works intended to maintain the property in the conditions required by the purpose of the contract and existing at the time of its conclusion. (iii) are extraordinary conservation works caused by a defect in the construction of the property or by force majeure or act of God and, in general, those which, not being imputable to unlawful actions or omissions perpetrated by the lessor, exceed, in the year they become necessary, two-thirds of the net income of that same year (…)".

In AAVV: IRS – annotated and commented codes, Lexit, October 2013 edition, page 135, it is stated that "this code does not provide any definition of conservation expenses, so it is important to pay attention, among other things, to what is provided for in art. 11.º of the urban leasing regime (RAU), even though it has been repealed in the meantime. In that sense, conservation expenses are considered:

  • The general repair and cleaning of the property and its dependencies;

  • The works imposed by the Public Administration, in accordance with the applicable general or local law, and which aim to give the property the characteristics presented at the time of the granting of the license of use;

  • In general, the interventions intended to maintain or restore the property in good preservation condition and in the habitability conditions required by the purpose of the lease contract and identical to those existing at the time of its conclusion; and

d) The works caused by a construction defect of the property or by force majeure (unforeseeable) or act of God (unavoidable) and, in general, those which, not being imputable to unlawful actions or omissions perpetrated by the lessor, exceed 2/3 of the net income of the year in which they become necessary".

The arbitral decision of case no. 435/2014-T concluded that conservation expenses "are those that concern the state and functioning of the building itself, and which are not included in the concept of maintenance expenses, such as repair works, general, periodic, and, including those that maintain or increase the value of the building, and add new added values, such as swimming pools, gymnasiums, elevators, among others, and especially those that give a level of habitability identical to the existing one at the time of conclusion of the lease contract".

The arbitral decision referred to of case no. 435/2014-T defended that "maintenance expenses are those that concern the day-to-day of the building, such as, by way of example, those of energy, water, elevator maintenance, cleaning, porters, and all current administration expenses".

Having reached this point, it should be said that the only expenses that are not accepted by the AT as deductible from the income of category F, in the years 2012, 2013 and 2014, regarding fraction D of the article … are the water expenses and an expense that is not titled in the name of any of the Claimants.

With regard to this latter, we will assess its deductibility in the next chapter.

As for water expenses, and as stated above, namely the arbitral decision of case no. 435/2014-T, there is no doubt that these expenses must be considered as maintenance expenses, since we are faced with expenses that concern the day-to-day functioning of the building. It is easy to understand that water is essential for properties to be in full operation, and to be able to provide real estate income subject to taxation.

Thus, the expenses incurred with water by the Claimants in the amount of €781.92 in 2013 and €781.92 in 2014, were necessary for obtaining real estate income, being maintenance expenses that are documented proof and that, as such, are subject to deduction in light of the provisions of article 41º of the IRS Code.

5.4. Expenses Not Titled in the Name of the Claimants

The AT does not accept as deductible the expense relating to invoice no. 6594 of 30-11-2014, in the amount of €88.56, regarding fraction D of the article …, because it is not issued in the name of the Claimants.

As for fraction A of the urban article …, the AT did not accept any expense related to this property, on the ground that the Claimants are not owners of the root of the property, but usufructuaries, and that the expenses presented are issued in the name of the owners of the root.

Let us recall the legal provision contained in article 41º no. 1 of the IRS Code:

"1 - From the gross income referred to in article 8º maintenance and conservation expenses that are incumbent on the taxpayer, incurred by him and documented proof are deducted, as well as the municipal property tax and stamp duty that affect the value of properties or part of properties whose income is subject to taxation in the fiscal year."

Indeed, the article requires, in the part that concerns us, that the deductible expenses are incumbent on the taxpayer and are incurred by him.

Now, in the present case, we have invoices for expenses for insurance, maintenance of planters and pots, replacement of fire extinguishers, water, painting, among others, that are issued in the name of A…, and not in the name of any of the Claimants.

The judgment of the Supreme Administrative Court of 09-09-2015, of case no. 028/15 states that "it has been the majority case law of the Superior Courts, as well as the doctrine that deals with these matters, that the mere internal document unaccompanied by additional proof that would allow concluding to its veracity, is not suitable for the proof of costs on the part of the taxpayer who intends to avail himself of them".

TOMÁS CASTRO TAVARES, On the Relation of Partial Dependence between Accounting and Tax Law In the Determination of Taxable Income of Legal Entities: Some Reflections at the Level of Costs, Science and Tax Technique no. 396, page 167, further states that "indeed, in costs documented the veracity of the expense is presumed. On the other hand, in expenses without a document it is incumbent on the taxpayer, by any means at his disposal, the allegation and proof that such an expense occurred, notwithstanding the omission or formal insufficiency".

Now, if it is true that the Claimants proved, with the invoices and statements attached, the type of service/good acquired, it is also true that the Claimants did not prove that the expenses in question were incumbent on them and that they were incurred by them, as required by article 41º no. 1 of the IRS Code. In the first place, it cannot be extracted from the documents attached that the invoices issued in the name of A… were paid by the Claimants.

On the one hand, the VAT Code (articles 29º and 36º) already at the time of the facts imposed that invoices, or receipts and invoice-receipts be issued to the "customers" or to the "purchasers". And the entities that billed A… are commercial companies, obliged, therefore, to proceed with the issuance of an invoice for each transaction/service provision.

In the case of the purchaser/customer not being the recipient of the goods/services, it would always be possible to issue an invoice from that person to the final recipient so that he would have a valid document that would allow him to deduct the expenses incurred by him.

The Claimants, for proof of expenses incurred by them, should have required from the third party, A…, an invoice relating to the expenses they incurred. And the third party could have issued that invoice, which could have been an isolated act if the same was not taxed for IRS purposes. Alternatively they should have requested invoices with their identification data.

See that article 115º no. 1 of the IRS Code imposes that the holders of income from category B are obliged to issue an invoice, receipt or invoice-receipt, in official form, of all amounts received from their customers. And no. 5 states that the holders of category F income are obliged to issue a receipt of discharge, in official form, of all amounts received from their tenants, for the payment of the rents referred to in letters a) to e) of no. 2 of article 8º, even if by way of security, advance or reimbursement of expenses.

Thus, we understand that the AT was correct in not considering as deductible the expenses related to invoice no. 6594 of 30-11-2014, in the amount of €88.56, regarding fraction D of the article…, as well as the expenses relating to fraction A of the urban article … in the amount of €33,626.31, all issued in the name of third parties, for not meeting the legal requirements contained in article 41º no. 1 of the IRS Code.

5.5. Proportionality of Expenses Based on the Number of Days of Rental of the Properties, Regarding the Expenses Accepted as Deductible

The Respondent understands that a proportionality coefficient should have been applied to the deductible expenses (of fraction D of the article …), based on the number of days of rental.

Thus, taking into account the days in which the property in question was occupied/rented, the AT applied to the total expenses accepted the percentage of 16.39% in 2012, 18.36% in 2013 and 22.74% in 2014, to obtain the value of the expenses accepted as deductible to real estate income.

The Respondent accepted the nature of the expenses with the said property. But understands that only are deductible in the proportion of the occupation/rental of the property.

Now, this occupation coefficient cannot be accepted, beginning by the fact that it has no legal support in the IRS Code.

Such procedure also cannot be accepted, because all expenses performed will always have to be incurred, regardless of the occupancy rate.

IRS is levied on the annual value of income from certain categories, after the corresponding deductions and reliefs are made (article 1º no. 1 of the IRS Code). Thus, taxation for IRS purposes is levied on the annual value of income and this is determined for each fiscal year, which coincides with the calendar year (articles 1 no. 1, 22 no. 1 and 143 of the IRS Code).

Since the elementary operation of tax calculation consists of determining taxable income, through deductions and reliefs to gross income, there is no reason why these negative components should not have in fact the same reference period that gross income has.

Also the rule of declarative obligations is disciplined in the sense that a single statement must be submitted for the entire annual period (article 57 no. 1 of the IRS Code). However, these rules of the annuality of IRS have specialties, such as, for example, in the limitation to the four-year period of the imputation of income from categories A and H (article 74 no. 1 of the IRS Code), in the imputation to the year of the final judgment of the action on disputed income, even if they relate to several previous years (article 62 of the IRS Code) or in the possibility of deduction of losses from previous years (article 55 no. 2 and 3 of the IRS Code).

However, article 41º of the IRS Code, or any other, does not contemplate any exception regarding the said general rule of the annuality of IRS. Indeed, this provision does nothing more than state the general rule: from gross income expenses are deducted. The article says nothing about the period to be considered, since it already consists of what is contained in article 1º of the IRS Code: annual period.

So we must conclude that there is no need to make any other temporal correspondence between gross income and the expenses to be deducted. There is only the need to ensure that the deductions relate to the calendar year in which the real estate income was paid or made available.

These same conclusions appear in the case law already cited, namely in the arbitral decisions of cases no. 201/2015-T, 294/2015-T and no. 434/2016-T.

In conclusion, the expenses related to fraction D of the urban article … should be fully accepted as deductible to real estate income, and the IRS assessments of 2012, 2013 and 2014 respectively should be partially annulled, as well as the statements of compensatory interest assessment and the statements of account settlement in the proportional part.

6. Indemnity Interest

The Claimants further request that the Respondent be condemned in the reimbursement of the tax unduly paid, plus indemnity interest, in accordance with article 43º, no. 1, of the LGT.

In accordance with the provisions of letter b) of article 24º of the Legal Regime of Tax Arbitration the arbitral decision on the merits of the claim that cannot be subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and the latter, in the exact terms of the procedence of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of the sentences of the tax judicial courts, "restore the situation that would have existed if the tax act subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose", which is in line with the provisions of article 100º of the LGT, applicable by virtue of the provisions of letter a) of no. 1 of article 29º of the Legal Regime of Tax Arbitration.

Now in accordance with no. 5 of article 24º of the Legal Regime of Tax Arbitration in saying that "the payment of interest, regardless of its nature, is due, in accordance with the terms provided for in the General Tax Law and in the Code of Procedure and Tax Process" is nothing more than the recognition of the right to indemnity interest in the arbitral process.

Article 43º no. 1 of the LGT establishes that «indemnity interest is owed when it is determined, in gracious claim or judicial challenge, that there was error attributable to the services which resulted in the payment of the tax debt in an amount higher than legally due».

In the case in question, the error that affects the IRS assessments, in the part that results from the disregard as deductible to the income of category F of the expenses related to fraction D of the urban article …, with the exception of the expense relating to invoice no. 6594 of 30-11-2014, in the amount of €88.56, is attributable to the AT that performed the assessment acts by its own initiative, so the Claimants have the right to receive indemnity interest from the date of payment of each of the amounts until reimbursement, at the legal default rate, in accordance with articles 43º, nos. 1 and 4, and 35º, no. 10, of the LGT, article 559º of the Civil Code and Order no. 291/2003, of 8 April.

7. Decision

Based on the foregoing, it is determined:

a) To partially uphold the claim filed by the Claimants, determining the partial annulment of the IRS assessments for the years 2012, 2013 and 2014, which should be reformulated, in the following terms:

  • acceptance as deductible of the expenses with water in the total amount of €1,563.84, relating to fraction D of the urban article …;

  • non-acceptance as deductible of the expense relating to invoice no. 6594 of 30-11-2014, in the amount of €88.56, issued in the name of a third party and referring to fraction D of the urban article …;

  • acceptance as deductible of all expenses declared regarding fraction D of the urban article …, in the amount of €17,803.20;

  • non-acceptance as deductible of the expenses relating to fraction A of the urban article … in the amount of €33,626.31, issued in the name of third parties.

b) To condemn the Respondent to reimburse the Claimants for the amount of tax unduly paid, plus the payment of indemnity interest to be calculated on the IRS unduly paid, in accordance with article 43º of the LGT in the proportion of the annulled tax and from the date on which that tax was unduly paid, until the date on which the taxpayer is reimbursed that tax, at the legally due rate.

c) To condemn the Claimants and the Respondent in the payment of the costs of the present case, in the proportion of their respective default.

8. Value of the Case

In accordance with the provisions of article 306º, no. 2, of the Code of Civil Procedure and article 97º-A, no. 1, letter a) of the Code of Procedure and Tax Process and article 3º, no. 2 of the Regulation of Costs in Tax Arbitration Cases the value of the action is fixed at €9,712.58.

9. Costs

In accordance with article 22º, no. 4, of RJAT, and Table I attached to the Regulation of Costs in Tax Arbitration Cases, the amount of costs is fixed at €918.00, to be borne by the Claimant (63.08%) and the Respondent (36.92%), in accordance with article 22º no. 4 of RJAT.

Notify.

Lisbon, 12 March 2018.

Text prepared by computer, in accordance with article 138º, no. 5 of the Code of Civil Procedure, applicable by referral of article 29º, no. 1, letter e) of the Legal Regime of Tax Arbitration, reviewed by me.

The sole arbitrator

Suzana Fernandes da Costa

Frequently Asked Questions

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What expenses can be deducted from Category F rental income under Article 41 of the Portuguese IRS Code?
Under Article 41 of the Portuguese IRS Code, taxpayers with Category F rental income can deduct maintenance and conservation expenses from their gross rental income. The law requires two essential conditions: (1) the expenses must be actually incurred by the taxpayer who receives the rental income, and (2) the expenses must be supported by proper documentation. According to the text of the law, there are no explicit formal requirements regarding whose name must appear on invoices. Deductible expenses typically include property repairs, conservation work, and maintenance costs necessary to preserve the property's condition. However, operating expenses are generally not deductible. The Tax Authority may apply a proportionality coefficient based on the number of days the property was actually rented during the tax year.
How did CAAD rule on the partial deferral of the tax complaint in process 406/2017-T?
CAAD partially deferred the tax complaint in Process 406/2017-T. The Tax Authority accepted some of the maintenance and conservation expense deductions claimed by the taxpayers for the years 2012, 2013, and 2014, resulting in a reimbursement for the year 2014. However, the AT rejected expenses related to a property where the claimants held usufruct rights (article ... fraction A) because the invoices were issued in the property owner's name rather than the usufructuaries' names. The AT also rejected water expenses and certain invoices for the property the claimants owned (article ... fraction D), arguing some expenses were operating expenses rather than maintenance and conservation expenses. The partial deferral maintained the Tax Authority's position on applying a proportionality coefficient based on rental days.
What is the procedure for filing an arbitration claim against IRS assessments at CAAD?
The procedure for filing an arbitration claim against IRS assessments at CAAD begins with submitting a request for constitution of an arbitral tribunal to the Administrative Arbitration Centre. The request must be timely filed in accordance with Article 10(1)(a) of Decree-Law 10/2011 and Article 102(1)(a) of the Code of Procedure and Tax Process. The President of CAAD accepts the request and notifies the Tax Authority (Respondent). If the claimant does not appoint an arbitrator, one is designated by the President of CAAD's Deontological Council. Once parties are notified and do not refuse the designation, the arbitral tribunal is constituted. The Respondent is then ordered to present a reply within 30 days and submit the administrative file. Parties may waive the oral hearing. The claimant must pay the initial and subsequent arbitral fees. The tribunal issues its decision within the established deadline.
Can taxpayers challenge IRS tax assessments for multiple years in a single arbitration process?
Yes, taxpayers can challenge IRS tax assessments for multiple years in a single arbitration process at CAAD through cumulation of claims. This is permitted under Articles 104 of the CPPT (Code of Procedure and Tax Process) and Article 3 of RJAT (Legal Regime of Tax Arbitration) when the claims relate to different tax assessment acts that involve the same factual circumstances and require interpretation and application of the same legal principles or rules. In Process 406/2017-T, the arbitral tribunal admitted the cumulation of claims for IRS assessments for the years 2012, 2013, and 2014 because all three years involved identical factual situations regarding rental income deductions and required interpretation of the same provisions of Article 41 of the IRS Code. This procedural efficiency benefits taxpayers by consolidating related disputes.
What are the legal grounds for declaring the illegality of IRS tax assessments on rental income in Portugal?
The legal grounds for declaring the illegality of IRS tax assessments on rental income include violations of Article 41 of the IRS Code regarding deductible expenses from Category F income. Taxpayers can challenge assessments when the Tax Authority incorrectly refuses to accept legitimately incurred and documented maintenance and conservation expenses. Grounds include: (1) improper interpretation of documentary requirements, such as demanding invoices be in the taxpayer's name when the law only requires expenses be actually incurred and documented; (2) incorrect classification of expenses as non-deductible operating costs when they are actually maintenance and conservation expenses; (3) improper application of proportionality coefficients; and (4) failure to recognize the taxpayer's right to deduct expenses when they are the usufructuary receiving rental income, even if invoices are in the property owner's name. The illegality can be challenged through gracious claims and subsequently through CAAD arbitration.