IRS Capital Gains on Real Estate and Reinvestment Exclusion – CAAD Case 407/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 407/2014 – T

Subject Matter: Personal Income Tax – taxation of real estate capital gains; reinvestment; defectiveness of initial petition

I. REPORT

"A", taxpayer number ... and spouse, "B", taxpayer number ..., resident at Street ..., no. ..., ..., Lisbon, hereinafter referred to as the Claimants, filed a request for constitution of an arbitral tribunal in tax matters and request for arbitral determination, pursuant to Articles 2 and 10, both of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, abbreviated as RJAT), petitioning:

(i) the declaration of illegality of the Personal Income Tax assessment acts number 2013 ... and of compensatory interest number 2013 ...;

(ii) the condemnation of the Tax Authority (AT) to refund the amount of € 50,000.00, already paid, plus indemnificatory interest; and

(iii) the recognition of the right to indemnification for guarantee improperly provided, pursuant to Articles 53 of the General Tax Law and 171, paragraphs 1 and 2 of the Code of Tax Procedure and Process.

To support their request, they allege, in summary:

a) By public deed executed on 22.06.2006, the Claimants purchased, for the amount of € 200,000.00, a plot of land for construction, with an area of 1,184 m², located in ..., ..., parish of ..., municipality of Sintra, registered in the urban property register under article ...;

b) On the aforementioned land, the Claimants constructed a residential property, having for this purpose obtained a bank loan from Bank "C", S.A., in the total amount of € 505,818.69;

c) The constructed residential property was assigned a Taxable Patrimonial Value of € 342,650.00;

d) The residential property referred to in c) above was sold on 12 January 2011, for the amount of € 800,000.00, part of which (€ 508,757.51) was used to pay the loan obtained from Bank "B", S.A., referred to in b) above;

e) On 27 December 2011, the Claimants acquired, for the amount of € 375,000.00, the autonomous unit designated by letter "A" of the urban property located at Street ..., nos. ... to ..., parish of ..., municipality of Lisbon, registered in the urban property register under article ..., having for this purpose obtained a loan from Bank "D", in the amount of € 320,000.00;

f) The previous owner of this unit – "E" – Real Estate Operations Company, S.A. - filed, on 13 May 2011, a Form 1 declaration of Property Tax with grounds in "Improved/Modified/Reconstructed Property";

g) The aforementioned Form 1 Property Tax declaration was accompanied by the Project for remodeling/expansion of the Lapa property, approved by Order of the Alderman of the Territorial Coordination Unit of the Lisbon Municipal Council No. .../...2011, of 21 July 2011;

h) Having thus been filed well before the completion of the remodeling works of the property, which allowed the aforementioned "E" – Real Estate Operations Company, S.A. to establish the property in horizontal property ownership and, in this manner, sell the autonomous units thus constituted;

i) Under the terms of the contract entered into between the Claimants and the selling company of the unit, the remodeling works to be carried out inside the unit to be acquired by the Claimants would be executed by them, at their own expense, which indeed took place;

j) The works executed by the Claimants amounted to payment of the sum of € 296,800.00, which was paid in 3 annual installments: one, in 2011, in the amount of € 74,200.00; another, in 2012, in the amount of € 95,400.00; and a final one in 2013, in the amount of € 127,200.00;

k) The Claimants declared the reinvestment made, having proceeded to record the capital gain obtained from the sale of the residential property referred to in b) above in section 4 of Annex G of the Personal Income Tax Form 3 declaration and invoked the reinvestment regime of section 5 of the same declaration, by reference to the amount reinvested in the year 2011 (€ 74,200.00);

l) A procedure which they repeated when filling out the declarations for the following years (2012 and 2013);

m) The AT disregarded the declared reinvestment, holding that proof of tax residence had not been provided, in accordance with Article 19 of the General Tax Law, read together with Article 10, paragraph 5 of the Personal Income Tax Code, nor of the charges with appreciation of the asset and the necessary and actually incurred expenses inherent to the acquisition and disposal, in accordance with Article 51 of the Personal Income Tax Code;

n) Thus, the Claimants were notified of Personal Income Tax assessment acts for the fiscal year 2011, in the total amount of € 112,852.80, of which € 108,615.32 as tax and € 4,237.48 as compensatory interest, as well as the assessment for fiscal year 2012, which resulted in a total amount payable of € 11,191.25;

o) The Claimants partially settled the Personal Income Tax assessment referred to in n) above, paying the amount of € 50,000.00;

p) On 30 July 2013, the Claimants filed a gracious complaint against the aforementioned assessment acts relating to fiscal year 2011;

q) The Claimants were notified of the draft partial approval of the gracious complaint, in accordance with which the AT proposed to accept partial reinvestment of € 85,000.00, relating to the difference between the acquisition value of the unit (€ 375,000.00) and the value of the bank loan obtained for its acquisition (€ 290,000.00), and reject reinvestment of the amount of € 294,180.30, relating to the remodeling works carried out, arguing that, having the selling company filed a Form 1 Property Tax declaration on a date prior to the acquisition of the unit by the Claimants, the works were not carried out by the Claimants but by that company;

r) The Claimants exercised their right to be heard, arguing that the property had been purchased "off-plan" and that the remodeling/rehabilitation works were executed by them on a date subsequent to its acquisition;

s) By official notice notified to the Claimants, dated 12/03/2014, the AT converted the draft decision into final, thus rejecting reinvestment relating to the works carried out by the Claimants, which it contends are remodeling works and not improvement works, and therefore the amount incurred with such works is not considered for reinvestment purposes;

t) Following the decision rendered in the context of the gracious complaint filed by the Claimants, they were notified of the corrective Personal Income Tax assessment acts and compensatory interest, from which a total amount payable of € 78,880.80 results;

u) With a view to suspending the enforcement tax proceeding instituted to collect the amounts relating to assessments 2013…, 2013… and 2013…, the Claimants constituted a voluntary mortgage on the property referred to in e) above.

In addition to the error regarding the presuppositions, which the Claimants contend vices the assessments in question, the Claimants further impute to both the assessment acts in question and to Official Notice No. ..., dated 22/05/2013, by which the AT notifies the Claimants of the corrections made to the Personal Income Tax Form 3 declaration for the year 2011, the defect of lack of reasoning, further invoking, as to these acts, breach of essential legal formality, by virtue of the fact that the AT did not grant the Claimants the right to be heard prior to their elaboration.

As for the decision on the gracious complaint filed, the Claimants impute to it the defect of omission to pronounce, by virtue of the fact that it did not pronounce on the new elements brought by the Claimants to the record upon exercise of the prior right to be heard.

The Claimants attached 37 documents and did not call any witnesses.

The Claimants opted not to designate an arbitrator, so the Deontological Council of CAAD proceeded to designate the following arbitrators: His Excellency Councillor Jorge Lino Ribeiro Alves de Sousa, Dr. Alberto Amorim Pereira and Dr. Marcolino Pisão Pedreiro, who were accepted by the parties.

The collective arbitral tribunal was constituted on 06 August 2014.

Notified in accordance with the terms and for the purposes of Article 17 of the RJAT, the Respondent filed its reply, defending itself by exception and by impugn.

In its defense by exception, it argued in summary that the Personal Income Tax assessment acts and compensatory interest impugned were annulled, following the gracious complaint filed by the Claimants, having consequently ceased to exist in the legal order.

In its defense by impugn, it sustains, in summary, that none of the imputed defects of lack of reasoning, breach of essential legal formality, omission to pronounce, or error regarding the presuppositions upon which the application of the reinvestment regime provided for in Article 10, paragraph 5, a) of the Personal Income Tax Code depends, occur.

It concludes, petitioning for the merits of the exception raised and, consequently, the absolution of the Respondent from the instance, or, should that not be the case, the dismissal of the request with the consequent absolution of the Respondent from the request.

The Respondent attached the administrative file and did not call any witnesses.

The meeting referred to in Article 18 of the RJAT was waived, without opposition from the parties, and the Claimants were ordered to be notified to, if they so wished, state in writing, within a period of 10 days, what they had to offer regarding the matter of exception raised by the Respondent.

In response to the matter of exception, the Claimants argue for the dismissal of the dilatory exception raised by the Respondent.

No written allegations were presented by any of the parties.

II. EXAMINATION OF PROCEDURE:

The Arbitral Tribunal was regularly constituted and is materially competent.

The parties have legal personality and capacity and are legitimate, with no defects of representation.

III. QUESTIONS TO BE DECIDED:

The questions to be decided are as follows:

(i) to rule on the dilatory exception of unchallengeable assessments in question, raised by the Respondent;

(ii) to determine whether the tax acts performed suffer from the defect of lack of reasoning;

(iii) to determine whether there was a breach of the essential formality of hearing the Claimants prior to the performance of the tax acts;

(iv) to determine whether the decision on the gracious complaint filed suffers from the defect of omission to pronounce;

(v) to determine whether error occurred in the verification of the presuppositions upon which the application of the reinvestment regime provided for in Article 10, paragraph 5, a) of the Personal Income Tax Code depends.

IV. MATTER OF FACT:

a. PROVEN FACTS:

With relevance to the decision, the following facts are considered proven:

a) By public deed executed on 22.06.2006, the Claimants purchased, for the amount of € 200,000.00, a plot of land for construction, with an area of 1,184 m², located at ..., ..., parish of ..., municipality of Sintra, registered in the urban property register under article ...;

b) On the aforementioned land, the Claimants constructed a residential property, having for this purpose obtained a bank loan from Bank "C", S.A., in the total amount of € 505,818.69;

c) The constructed residential property was assigned a Taxable Patrimonial Value of € 342,650.00;

d) The residential property referred to in c) above was sold on 12 January 2011, for the amount of € 800,000.00, part of which (€ 508,757.51) was used to pay the loan obtained from "C", S.A., referred to in b) above;

e) On 27 December 2011, the Claimants acquired, for the amount of € 375,000.00, the autonomous unit designated by letter "A" of the urban property located at Street ..., nos. ... to ..., parish of ..., municipality of Lisbon, registered in the urban property register under article ..., having for this purpose obtained a loan from Bank "D", in the amount of € 320,000.00;

f) On 13 May 2011, a Form 1 declaration of Property Tax was filed by the then owner of the unit referred to in e) above with grounds in "Improved/Modified/Reconstructed Property";

g) The aforementioned Form 1 Property Tax declaration was accompanied by the Project for remodeling/expansion of the Lapa property, approved by Order of the Alderman of the Territorial Coordination Unit of the Lisbon Municipal Council No. .../...2011, of 21 July 2011;

h) At the date of acquisition of the unit by the Claimants, the remodeling works planned for this unit, approved by Order of the Alderman of the Territorial Coordination Unit of the Lisbon Municipal Council No. .../...2011, of 21 July 2011, had not yet been carried out;

i) The remodeling works referred to in h) above were executed by the company "F – Constructions, Ltd.", at the request of the Claimants, and amounted to payment of the total amount of € 296,800.00, which the Claimants paid in three annual installments: one, in 2011, in the amount of € 74,200.00; another, in 2012, in the amount of € 95,400.00; and a final one in 2013, in the amount of € 127,200.00;

j) The Claimants declared the reinvestment made, having proceeded to record the capital gain obtained from the sale of the residential property referred to in b) above in section 4 of Annex G of the Personal Income Tax Form 3 declaration and invoked the reinvestment regime of section 5 of the same declaration, by reference to the amount reinvested in the year 2011 (€ 74,200.00);

k) A procedure which they repeated when filling out the declaration for the year 2012;

l) By official notice No. GI…, dated 13/12/2012, the male Claimant was notified that, regarding the Personal Income Tax Form 3 declaration, fiscal year 2011, the following inaccuracy was found:

"You must prove all amounts declared in Annex G and insert in section 8 of the same Annex the disposal of shares in entity "C", S.A. (Tax ID …), in the amount of 37.58";

m) In the official notice referred to in l) above, the Respondent also notified the male Claimant to, if he so wished, exercise his right to prior hearing, fixing for this purpose a period of 10 days;

n) On 15/01/2013, the Claimants filed a replacement income tax declaration, inserting in section 8 of Annex G the disposal of shares of "C", S.A.;

o) By official notice No. GI…, dated 04/03/2013, the male Claimant was notified that, regarding the aforementioned income tax declaration, the following inaccuracy was found:

"residence of the taxpayer different from the property subject to reinvestment and/or proof of loan amounts or declared reinvestment values";

p) In the official notice referred to in o) above, the male Claimant was notified to, within a period of 15 days, present a duplicate of the income tax declaration in question and all supporting documents of his personal and family situation, as well as of the quantitative elements associated with the marked situations, and to, if he so wished, exercise his right to prior hearing, fixing for this purpose a period of 15 days;

q) Following the notification referred to in o) above, the Claimants presented a copy of the Personal Income Tax Form 3 declaration and other documents;

r) By official notice No. GI…, dated 15/04/2013, the male Claimant was notified that, from the analysis made of the presented documents, the following inaccuracy was found:

"Prove expenses/charges acquisition/disposal of the transferred asset. Supporting documents of the acquisition of the residential property in the parish of Sintra, article ..., as well as bank discharge statement with the amount owed at the date of disposal. Deed of the property subject to reinvestment";

s) In the official notice referred to in r) above, the Respondent also notified the male Claimant to, if he so wished, exercise his right to prior hearing, fixing for this purpose a period of 15 days;

t) By request dated 08/05/2013, the male Claimant provided clarifications and attached copies of the following documents: loan amortization; copy of the deed of purchase of the plot of land for construction, referred to in a) above; and copy of the deed of purchase of the unit referred to in e) above;

u) Following the clarifications and documents presented by the male Claimant, the Respondent notified the male Claimant, by official notice No. …, dated 22/05/2013, that proof of tax residence had not been provided, in accordance with Article 19 of the General Tax Law, read together with Article 10, paragraph 5 of the Personal Income Tax Code, nor of the charges with appreciation of the asset and the necessary and actually incurred expenses inherent to the acquisition and disposal, in accordance with Article 51 of the Personal Income Tax Code, and therefore the declared reinvestment was disregarded, a correction document being prepared through official declaration of income;

v) Following the correction made, the Claimants were notified of Personal Income Tax assessment acts for fiscal year 2011, in the total amount of € 112,852.80, of which € 108,615.32 as tax and € 4,237.48 as compensatory interest, as well as the assessment for fiscal year 2012, which resulted in a total amount payable of € 11,191.25;

w) On 30 July 2013, the Claimants made partial payment of the assessments referred to in v) above, paying the amount of € 50,000.00;

x) Having on the same date filed a gracious complaint against the aforementioned assessment acts relating to fiscal year 2011;

y) By official notice No. …, dated 07/02/2014, the Claimants were notified of the draft partial approval of the gracious complaint, in accordance with which the Respondent proposed to accept partial reinvestment of € 85,000.00, relating to the difference between the acquisition value of the unit referred to in e) above (€ 375,000.00) and the value of the bank loan obtained for its acquisition (€ 290,000.00), and reject reinvestment of the amount of € 294,180.30, relating to the remodeling works carried out, arguing that, having the selling company filed a Form 1 Property Tax declaration on a date prior to the acquisition of the unit by the Claimants, the works were not carried out by the Claimants but by that company;

z) The Claimants exercised their right to be heard, in accordance with the terms contained in the document attached with the initial petition under number 34;

aa) By official notice No. …, dated 12/03/2014, the Claimants were notified of the partial approval of the gracious complaint filed by them, with the grounds contained in the draft decision previously notified, having consequently been prepared the respective correction document;

bb) Which gave rise to the annulment of the Personal Income Tax assessment acts and compensatory interest subject to complaint and their replacement by official Personal Income Tax assessment No. 2014…, from which tax and compensatory interest payable in the total amount of € 78,880.80 resulted;

cc) With a view to suspending the enforcement tax proceeding No. …, the Claimants constituted a voluntary mortgage on the property referred to in e) above.

UNPROVEN FACTS:

There are no unproven facts with interest for the decision of the case.

REASONING OF THE MATTER OF FACT:

The conviction regarding the proven facts was based on the positions taken by the parties, on the documentary evidence attached by the Claimants, and on the administrative file attached to the record.

V. LAW:

(i) On the exception of unchallengeable assessments in question:

As a preliminary issue to the merits of the request formulated by the Claimants, the AT questions the challengeability of the assessments in question in the present proceedings, that is, the Personal Income Tax assessment acts number 2013… and compensatory interest number 2013….

Let us examine this.

As results from the proven facts – cf. point bb) -, the Personal Income Tax assessment acts No. 2013 … and compensatory interest No. 2013… were annulled and replaced by the Personal Income Tax assessment and compensatory interest act No. 2014 ….

Such annulment occurred precisely following the partial approval of the gracious complaint duly filed by the herein Claimants against the Personal Income Tax and compensatory interest assessments referred to above.

Having annulled the said assessments, these ceased to exist in the legal order. And if they ceased to be legally existent, it seems manifest that they cannot be challenged, due to evident lack of subject matter.

And if such is the case, a fortiori, this arbitral tribunal is prevented from ruling on their legality.

Therefore, the Respondent is correct on this point.

However, without prejudice to what has been stated, we understand that, more than the mere unchallengeable nature of the assessments, we are dealing here with a true defectiveness of the initial petition, due to an insanabale contradiction between the cause of action and the request.

Let us see:

In Article 6 of the initial petition, the Claimants delimit the object of the request for arbitral determination, which, according to their allegations, is based on the following tax acts:

a) Corrective Personal Income Tax assessment act No.…; and

b) Decision of (non-)approval in part of the gracious complaint filed by the Claimants.

Upon analysis of the entire content of the request for arbitral determination, it is verified that, indeed, and contrary to what the Claimants ultimately petition, the acts on which they intend the arbitral tribunal to pronounce are the acts of (non-)approval in part of the gracious complaint and the subsequent assessment act (Personal Income Tax and compensatory interest assessment No. 2014…) and not the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013….

And that this is so results, without any margin for doubt, from the very allegations of the Claimants, especially those contained in Articles 48, 50 and 51 of the request for arbitral determination, in which it is further alleged:

a) that the gracious complaint filed by them was judged partially well-founded;

b) that, following the partial approval of the gracious complaint, the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013… were annulled;

c) that, having annulled the indicated Personal Income Tax assessment acts and compensatory interest, a new Personal Income Tax and compensatory interest assessment, with No. 2014…, was issued; and

d) that, not accepting the decision of (non-)approval in part of the gracious complaint filed, the Claimants hereby present the request for constitution of an arbitral tribunal.

Moreover,

Also by the value attributed to the case by the Claimants - € 78,880.80 – it is concluded that the assessment on whose legality these intended the arbitral tribunal to pronounce was precisely the assessment issued following the annulment of the assessments impugned, that is, assessment No. 2014…, from which an amount payable in the sum of € 78,880.80 resulted.

It results, therefore, without any margin for doubt, from all the facts alleged by the Claimants and from the value attributed to the case by them, that the object of the requested request for arbitral determination is the decision rendered on the gracious complaint filed by them and the assessment issued in that sequence and not the previously issued assessments which were subject to annulment by the Respondent, following the partial approval of the gracious complaint filed by the Claimants.

It happens, however, that,

Notwithstanding the above, the Claimants conclude the request for arbitral determination in the following terms:

"Accordingly, the illegality of the Personal Income Tax assessment acts No. 2013 … and, likewise, of the compensatory interest assessment act No. 2013 …, issued by His Excellency the Director-General of Taxes, must be declared, because performed in violation of the applicable legal norms and principles with the necessary legal consequences, namely (i) the refund of the amount of € 50,000 already paid, plus indemnificatory interest, as well as (ii) the recognition of the right to indemnification for guarantee improperly provided, pursuant to Articles 53 of the General Tax Law and 171, paragraphs 1 and 2 of the Code of Tax Procedure and Process, which are also hereby petitioned".

It is concluded, therefore, that, notwithstanding the fact that it results from the request presented by the Claimants that the tax acts they intended to challenge were the acts of (non-)approval in part of the gracious complaint filed by them and the Personal Income Tax and compensatory interest assessment act No. 2014 …, the truth is that what was actually petitioned by the Claimants was the declaration of illegality of the Personal Income Tax assessment acts No. 2013 … and compensatory interest No. 2013 ….

Thus is verified the existence of an insanable contradiction between the cause of action and the request.

In truth,

As is known, the cause of action is the concrete fact that serves as the legal basis for the legal effect sought[1]. In the words of ANSELMO DE CASTRO, it is the legal fact that underlies the claim[2].

In the present case, the cause of action is the decision of (non-)approval in part of the gracious complaint filed by the Claimants and the consequent annulment of the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013… and issuance of the new Personal Income Tax and compensatory interest assessment No. 2014 ….

For its part, the request is the means of judicial protection sought by the claimant[3].

In the case at hand, the request is the declaration of illegality of the Personal Income Tax assessment acts No. 2013 … and compensatory interest No. 2013…, with the legal consequences, that is, the refund of the amount improperly paid, plus indemnificatory interest, and the recognition of the right to indemnification for guarantee improperly provided.

Manifest, therefore, is the contradiction between the request and the cause of action, which determines the defectiveness of the initial petition – cf. Article 186 of the Code of Civil Procedure.

Note that it is to the request, necessarily based on the cause of action invoked, that the court responds when it issues the judgment on the merits. It (the request) thus constitutes the object of the proceedings[4].

As ALBERTO DOS REIS explained[5], the nullity provided for the defectiveness of the initial petition resulting from the contradiction between the request and the cause of action has its parallel in the (then) Article 668, paragraph 3 (current 615, paragraph 1, c)): the judgment is null when the grounds are in opposition with the decision.

This author continues explaining that "the cause of action must bear to the request the same logical relationship as, in the judgment, the grounds must bear to the decision. The request has, like the decision, the value and significance of a conclusion; the cause of action, like the factual grounds of the judgment, is the basis, the point of support, one of the premises on which the conclusion rests. This is sufficient to show that there must be the same logical nexus between the cause of action and the request as between the premises of a syllogism and its conclusion.

The initial petition, to be a well-drafted and constructed document, must have the logical structure of a syllogism, must be reducible, in outline, to a reasoning, with its major premise (reasons of law), its minor premise (factual grounds), and its conclusion (request)."

In this order of ideas, the same author concludes: "it is of the essence of the syllogism that the conclusion is contained in the premises, in the sense of being the natural corollary and logical emanation of them. If the conclusion, instead of being the logical consequence of the premises, is in opposition with them, we have, not a rigorously logical syllogism, but flawed reasoning, and therefore an erroneous conclusion.

It is understood, therefore, that the law declares the petition whose conclusion or request conflicts with the cause of action to be defective. (…) If the plaintiff formulates a request that, far from having its justification in the cause of action, is in flagrant opposition with it, the defectiveness is manifest."

Applied to the present case the teachings of ALBERTO DOS REIS, it seems manifest that we are not dealing with any syllogism, since the conclusion (the request) is not, by any measure, the logical corollary of the premises (the reasons of fact and of law, that is, the cause of action).

On the contrary, in the present case, the request is in evident contradiction with the cause of action, and is not its logical consequence. In the words of ALBERTO DOS REIS, in the present case, the request "conflicts" with the cause of action.

Now,

The evident contradiction between the request formulated in the present case and the cause of action can have no other effect than the defectiveness of the initial petition.

And this, however much it may be argued that, from the cause of action, one can infer with sufficient clarity what the request is.

In the present case, from the cause of action one can infer without any margin for doubt what the request is.

But the truth is that this request was never formulated, and the arbitral tribunal cannot substitute itself for the parties to convert the request formulated by them into the request which, in its judgment, they intended to formulate.

This is because the request is precisely the circle within which the tribunal must move to provide a solution to the conflict of interests which it is called upon to decide[6].

The conversion of the request formulated by that which results, as a logical corollary, from the cause of action would ultimately result in a condemnation on a different matter from the request, which is absolutely forbidden to any tribunal, even to arbitral tribunals which, despite the greater procedural flexibility they may admit, are always and only bound by the law as it stands, with no recourse to equity (cf. Article 2, paragraph 2 of the RJAT).

It must also be mentioned here that the Claimants, notified to pronounce on the exception raised by the Respondent, discourse on the immediate and mediate object of the request formulated, arguing that, contrary to what was argued by the Respondent, the immediate object of the request formulated is not the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013…, but rather the decision of (non-)approval in part of the gracious complaint filed.

According to their argument, this same results from the content of Article 6 of the initial request, already referred to above.

The Claimants are correct when they argue that from Article 6 of the initial request it results, without any margin for doubt, that they intended to challenge the decision of (non-)approval in part of the gracious complaint.

But the fact is that, although such results directly from the indicated Article 6 and, moreover, from the entire content of the request for determination, the truth is that the Claimants conclude their request petitioning not for an appreciation of the legality of the decision rendered in the context of the gracious complaint filed, but only and solely for an appreciation of the legality of the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013….

This, however many justifications and theories are presented, is an inescapable fact which the tribunal cannot, in any way, ignore.

Further in the aforementioned request for determination on the exception raised by the Respondent, the Claimants show themselves "available" to expand the request should the tribunal invite them to do so, in accordance with the terms and for the purposes of Article 18, paragraph 1, c) of the RJAT.

"Suggesting," moreover, a new wording for the request, in which they come to include the declaration of illegality of the decision of (non-)approval in part of the gracious complaint filed.

But without, however, including this "new wording," which would constitute, after all, a true expansion of the initial request, in the operative part of the written reply to the exception, in which they merely petition the dismissal of the exception raised and the continuation of the proceedings to final judgment, with ruling on the merits.

Now, manifestly the Claimants cannot, as they have done, ask the tribunal to invite them to expand the request so that they do so.

The notification made to respond, if they so wished, to the exception will necessarily have to have that meaning, there being no logic in the fact that, in the reply to the exception, in which the Claimants perceive the possibility of the exception prevailing, they merely allege that they may come to expand the request, should the tribunal so invite them.

What the Claimants should, in this context, have done was to have requested, even if merely subsidiarily, the expansion of the initial request, as this is legally admissible – cf. Articles 264 and 265 of the Code of Civil Procedure.

Not having done so, no practical effect can follow from this manifestation of availability to expand the request and still less from the suggestion made of a new wording of the initial request.

This, it is repeated, without the Claimants being able to rely on the command of Article 18, paragraph 1, c) of the RJAT, in accordance with the terms and for the reasons already set forth.

From all that has been set forth, the existence of an insanable contradiction between the request and the cause of action is verified, and by reason thereof, the initial petition is defective, which determines the nullity of the proceedings – Article 186 of the Code of Civil Procedure.

The defectiveness of the initial petition is a dilatory exception of which the tribunal has ex officio knowledge and determines the absolution of the Respondent from the instance – cf. Articles 577, 578 and 576, all of the Code of Civil Procedure.

Therefore, even though the Respondent has not raised the exception of defectiveness of the initial petition, being this of ex officio knowledge, the arbitral tribunal must rule on it.

In light of the above, the nullity of the entire proceedings is declared, due to defectiveness of the initial petition.

Ruling on the merits of the case is precluded by the verified nullity of the entire proceedings, therefore the arbitral tribunal refrains from pronouncing on it.

VI. OPERATIVE PART:

In light of the above, it is decided:

a) Declare the initial petition defective, due to contradiction between the request and the cause of action;

b) Declare, in consequence, the nullity of the entire proceedings;

c) Absolve the Respondent from the instance.

The value of the proceedings is fixed at € 112,852.80, in accordance with Article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings, as this is the value of the impugned acts.

In accordance with the terms of paragraph 2 of Article 12 and paragraph 4 of Article 22 of the RJAT and Article 4 of the RCPAT, the amount of costs is fixed at € 3,060.00 in accordance with Table I appended to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Claimants, as the unsuccessful party.

Register and notify.

Lisbon, 14 January 2015,

The Arbitrators,

Jorge Lino Ribeiro Alves de Sousa

Alberto Amorim Pereira

Marcolino Pisão Pedreiro, with dissenting vote.

Dissenting Opinion of Arbitrator Marcolino Pisão Pedreiro

I dissent from the present decision, for the reasons, of fact and of law, which I now set forth.

MATTER OF FACT

1. I consider item bb) of the matter of fact incorrectly given as proven, for the reasons that follow.

Item aa), which precedes the item in question, reads as follows:

"By official notice No. …, dated 12/03/2014, the Claimants were notified of the partial approval of the gracious complaint filed, with the grounds contained in the draft decision previously notified, having consequently been prepared the respective correction document;"

Following this, item bb), which contains the fact subject to my disagreement, has the following content:

"Which gave rise to the annulment of the Personal Income Tax assessment acts and compensatory interest subject to complaint and their replacement by official Personal Income Tax assessment No. 2014 …, from which tax and compensatory interest payable in the total amount of € 78,880.80 resulted;"

However, it results from the documents contained in pages 305 and 306 of the administrative file, documents proving that the assessments subject to the gracious complaint procedure were not annulled, but only partially annulled.[7]

In truth, from the document designated "Collection Notes – Compensation Demonstration," regarding these assessments, states "Partially annulled."

And there further appear:

Amount issued: € 112,852.80

Amount annulled: € 33,972.00

Amount settled: € 50,000

Amount owed: € 28,880.80

On the other hand, from the document of page 306, entitled "Consult Debt Certificate – Detail," the following data appear regarding the debt certificate and the enforcement proceedings relating to the Personal Income Tax of the Claimants for 2011 and respective compensatory interest and penalties:

Enforcement tax proceeding number: …2013…

Debt Certificate: 2013…

Date of institution: 22.08.2013

Total Debt Amount: € 62,852.80

Amount annulled: € 33,972.00

The enforcement tax proceeding thus reflects this partial annulment and it is the assessments subject to complaint, partially annulled, that continue to constitute an executory title and that remain in force in the legal order.

In truth, if the assessments subject to complaint had not remained in the legal order, the enforcement proceeding instituted in 2013 which had them as its executory title could not fail to be declared extinct by virtue of the annulment of that title.

Viewed from the perspective of the so-called Personal Income Tax and compensatory interest assessments, Nos. 2014… and 2014…", issued on 21.04.2014, these could not constitute an executory title of an enforcement proceeding instituted on an earlier date (22.08.2013), prior to their existence.

From the documents indicated, contained in the administrative file itself, it results that the assessment act No. 2013… and the compensatory interest assessment act No. 2013…, of 15.06.2013, were not annulled, but partially annulled, with no document existing from which it appears that they were totally annulled.

Moreover, it could not fail to be thus, under penalty of violation of the decision that ruled on the gracious complaint and that was of partial approval, as results from the legal reasons that follow.

MATTER OF LAW

1. It follows from Article 68, paragraph 1, of the Code of Tax Procedure and Process that "the gracious complaint procedure aims at the annulment in whole or in part of tax acts."

This means, in my view, that in case of total approval of the complaint the consequence is the annulment and consequently disappearance of the tax act from the legal order, and that in case of partial annulment, the tax act is annulled in the part affected by the illegality and only in that part.

It follows, therefore, from this provision that, in case of partial approval of the complaint, the annulment of the act is not total, but partial. In the remaining part, the act remains in the legal order.

Which implies that the assessments Nos. 2013… and the compensatory interest assessment act No. 2013…, of 15.06.2013 remained in the legal order, to the extent of the partial rejection.

This measure of the partial rejection corresponds also to the so-called Personal Income Tax and compensatory interest assessments, Nos. 2014… and 2014…, of 21.04.2014, which are exactly the assessment numbers 2013… and 2013…, of 15.06.2013, purged of the partial annulment decided in the gracious complaint proceeding.[8]

1. On the other hand, the corrective assessments have no decision-making/innovative content, (which emerged, rather, from the assessments of 15.06.2013 and the decision that partially annulled them), and do not aim to produce legal effects in an individual and concrete situation, not falling within the concept of administrative act in which the administrative assessment act consists.

These corrective assessments are nothing more than the quantitative expression of the decision of partial annulment rendered in the gracious complaint proceeding in conjunction with the assessment subject to it and which the Tax Authority identified with specific numbering, and not, as would appear more correct and in accordance with the legal reality in question, as "assessment No. 2013… altered in accordance with the decision of partial annulment in the gracious complaint proceeding No. (…)" or equivalent expression.

However, the designation or numbering given to this quantitative expression of the decision of partial annulment does not preclude the reality that we continue to be dealing with the assessments subject to the gracious complaint, less the part annulled therein (as results from the documents contained in the administrative file).

1. The understanding that the assessments of 15.06.2013, whose request for annulment was subject to partial approval in the gracious complaint proceeding, were (entirely) annulled does not find acceptance in Article 68, paragraph 1 of the CPPT, nor in the decision rendered in the gracious complaint, nor as we have seen in the administrative file itself. On the contrary.

On the other hand, even if one were to understand that the corrective assessments would be administrative acts, the same would be merely confirmatory, so that the impugnable acts would always be the decision that partially rejected the gracious complaint as well as the assessments of 15.06.2013, to the extent they were not annulled.

1. Moreover, the understanding that the corrective assessments would be administrative acts of assessment impugnable as such (that is, as autonomous acts disconnected from the partially annulled assessments and from the decision that determined their partial annulment) would lead to results not desired by the legal system, clearly contrary to the principle of efficiency in tax proceedings[9] and, in general, to the principle of rationalization of public administration[10], as it would lead to permitting a new gracious complaint[11] on the same question and identical grounds on which the previous complaint had already ruled.

Effectively, if it were a matter of true administrative assessment acts with innovative character, producing legal effects, nothing would permit limiting the guarantees of defense of the taxpayer, namely the possibility of filing a new gracious complaint. This would, however, result in a duplication of administrative activity, unacceptable in light of the mentioned principles and which would also imply new procedural steps on the part of the taxpayer, which in essence would be repetition of those previously undertaken, which would also constitute an undue supplementary burden on the taxpayer.

1. On the other hand, should the corrective assessments be impugnable and not the partially annulled assessments, this would translate into the impossibility of judicially reviewing the illegalities imputed to the very decision that ruled on the gracious complaint insofar as the same is concerned, and in the present case, in the request for arbitral determination, the defect of omission to pronounce was imputed to this decision, which would thus cease to have any relevance, ceasing to be subject to judicial review, by mere decision of the Respondent, which does not appear acceptable in light of Article 268, paragraph 4, of the Constitution of the Portuguese Republic and of the guarantees of taxpayers legally enshrined.

2. Moreover, it follows from Article 56, paragraph 2, a) of the General Tax Law that there is no duty to decide when the tax authority has already ruled, in less than two years, on an identical request from the same party with identical subject matter and grounds, a situation that would apply in the present case and that, consequently, would make impossible the filing of a gracious complaint against the corrective assessments.

Likewise, as acts merely confirmatory of the decision that ruled on the gracious complaint, the corrective assessments could not be subject to challenge.

Indeed, as Mário Esteves de Oliveira, Pedro Costa Gonçalves and J. Pacheco de Amorim write, "As to confirmatory acts of previous administrative acts already executive or vested with executory force, the absence of their "executory force" is evident: it is due to the fact that it is the "confirmed" act that must be executed, not the act which merely confirms it, which has no autonomous legal, procedural, and procedural relevance.

The interest of the category of confirmatory act (beyond didactic) is limited practically to its contentious relevance – to reject appeals therefrom – some authoritative writers denying that such acts may be considered administrative acts, because they do not have innovative legal effect (creating, modifying, or extinguishing) of relations or legal-administrative situations." (Code of Administrative Procedure Commented, 2nd Updated, Revised and Expanded Edition, Almedina, 1997, page 715).

Viewed in light of Article 95, paragraph 1 of the General Tax Law, the acts harmful to the Claimants do not consist of the corrective assessments but rather of the partially annulled assessments and of the partial rejection of the gracious complaint, which defined legally the position of the Tax Authority.[12]

1. In identifying the object of the request for arbitral determination, the Claimants indicate:

• The assessment act No. 2013…of 15.06.2013, in the amount of € 112,852.68.

• The compensatory interest assessment act No. 2013…, in the amount of € 4,237.60.

• The decision of partial rejection of the gracious complaint notified to the taxpayer on 12.03.2014.

In the request, they manifest the pretension that these administrative assessment acts be annulled.

It is true that, in Article 50 of the request for arbitral determination, the Claimants refer to the fact that "Following the decision of the Administrative Justice Division of the Finance Directorate of Lisbon, they were notified of the corresponding corrective Personal Income Tax assessment acts and compensatory interest Nos. 2014… and 2014 …".

But if there were any doubt about the acts subject to the request for arbitral determination, Article 51 clarifies it immediately thereafter, stating that "Not accepting the decision of (partial) rejection of the gracious complaint filed against the aforementioned assessment acts (…) the Claimants hereby present the Request for Constitution of the Arbitral Tribunal".

In the arbitral decision it is stated that:

"(….) it results, without any margin for doubt, from the very allegations of the Claimants, especially those contained in Articles 48, 50, and 51 of the request for arbitral determination, in which it is further alleged:

a) that the gracious complaint filed by them was judged partially well-founded;

b) that, following the partial approval of the gracious complaint, the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013… were annulled;

c) that, having annulled the indicated Personal Income Tax assessment acts and compensatory interest, a new Personal Income Tax and compensatory interest assessment, with No. 2014…, was issued; and

d) that, not accepting the decision of (partial) rejection of the gracious complaint filed, the Claimants hereby present the request for constitution of an arbitral tribunal."

Let us examine if such is the case.

From Articles 48, 50, and 51 of the request for arbitral determination, the following appear:

Article 48

"Despite the clarifications provided, by Official Notice No. …of 12.03.2014 the Administrative Justice Division of the Finance Directorate of Lisbon converted into final the draft (partial) rejection of the Gracious Complaint (See cited Document No. 1), insisting on the (unfounded) understanding that the expenses incurred in the execution of works on the Lapa property do not have the nature of improvement works, but rather the nature of remodeling works"

Article 50

"Following the decision of the Administrative Justice Division of the Finance Directorate of Lisbon, they were notified of the corresponding corrective Personal Income Tax assessment acts and compensatory interest Nos. 2014... and 2014…, both referring to the year 2011, to which corresponds the account statement act No. 2014…, from which results that the amount (allegedly) owed was officially reduced by the tax authority from the previous € 124,743.13 to the current € 78,880.80 (cf. Documents No. 35)."

Article 51

"Not accepting the decision of (partial) rejection of the gracious complaint filed against the aforementioned Personal Income Tax and Compensatory Interest assessment acts, which – as demonstrated here – is in manifest discord with the generality of the applicable principles and norms and, likewise, with the reality of the facts, the Claimants hereby present the Request for Constitution of the Arbitral Tribunal, which they do based on the following legal arguments:"

In my view, it does not result from this that the Claimants have stated that following the partial approval of the gracious complaint, the Personal Income Tax assessment acts No. 2013 … and compensatory interest No. 2013 … were annulled. On the contrary, they are identified as the object of the request for arbitral determination and the Claimants expressly petition their annulment and designate by the acts in question as "corrective Personal Income Tax and compensatory interest assessment acts, Nos. 2014… and 2014…". Strictly speaking, to correct does not mean to annul but rather to amend or modify.

There is, therefore, in my view, no contradiction between the request and the cause of action[13].

If there were any doubt about the hypothetical existence of such a contradiction, it results, above all, from the fact that in the correction of the assessments subject to complaint in compliance with the decision rendered in the gracious complaint proceeding, this fact was not mentioned, but new numbers were conferred on these apparently new assessments, which do not, in my opinion, have the nature of tax acts of assessment, as I mentioned above, and are merely the quantitative expression of the decision rendered in the gracious complaint proceeding on the assessments of 15.06.2013, partially annulled by it.

1. Even if one can detect some lapses in the request for arbitral determination (e.g., the correct identification of the assessments, but with the indication of the initial amount and not the amount resulting from the partial annulments) it clearly results from it that what the Claimants desire to see removed from the legal order are the decision that ruled on the gracious complaint and the assessments that were subject to it, in the part in which they were not annulled, which results clear both from the identification of the decision that ruled on the gracious complaint, and from the Personal Income Tax assessment acts No. 2013… and compensatory interest No. 2013…, and further from the corrective Personal Income Tax and compensatory interest assessment acts, Nos. 2014…and 2014 … and, further, from the very value of the request indicated, which consists effectively of the value of the assessment subject to complaint less the part annulled by the decision rendered in the gracious complaint proceeding. These latter "assessments" are, in substance, the initial ones, less the part annulled.

2. I further understand that from the circumstance that the Claimants did not expressly formulate in the conclusion of the petition the request for annulment of the decision that partially rejected the gracious complaint[14] does not result the defectiveness of the petition to the extent that such decision is identified as the object of the request for arbitral determination (Article 6 of the request for arbitral determination), and is further imputed a defect proper to lead to its annulment, and therefore must be considered made, at least implicitly, the request for its annulment.

The legislator himself, in enumerating the competencies of arbitral tribunals, makes explicit the declaration of illegality of acts assessing taxes, but not the decisions rejecting gracious complaints against such acts. Such competence, not express, is deduced from the conjugated provisions of paragraph 1 of Article 10 of the RJAT and Article 102 of the CPPT (See Jorge Lopes de Sousa, in "GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, Almedina, 2013, page 121).

It does not appear to me, therefore, that having the Claimants petitioned the declaration of illegality of the assessment and having clearly identified in the petition as the object of the request for arbitral determination also the decision of rejection of the gracious complaint, there are doubts about the request or about the cause of action or, further, any contradiction between them.

1. Moreover, the principle "pro actione," corollary of the constitutional principle of effective judicial protection, requires that "procedural norms be interpreted in the sense of promoting the issuance of pronouncements on the merits of the formulated claims" (Article 7 of the Code of Procedure in Administrative Courts), and it appears to me that, also in light of this principle, the Tribunal has the duty to interpret procedural norms in a sense that favors the issuance of a pronouncement on the merits of the formulated claims, especially in cases such as the present where there are no doubts about the real and substantive claim of the Claimants and the factual and legal reasons that underlie it.

2. Finally, for the reasons set forth, I understand that the value of the proceedings should have been that indicated by the Claimants - € 78,880.80 -, which corresponds to the value of the assessment acts Nos. 2013… and 2013…, as results from their partial annulment, reflected in the corrective assessment acts, and not the value of € 112,852.80, which corresponds to the value of the assessments sub judice before their partial annulment.

3. In summary and in essence, I understand that the Claimants correctly challenged the tax acts in force in the legal order (assessments and decision that partially rejected the gracious complaint filed against them), that the invoked exception of unchallengeable nature of the acts subject to the request for arbitral determination does not apply, and further that there is no contradiction between the request and the cause of action.

In my view, there is no obstacle to ruling on the request.

Lisbon, 19.01.2014

The Arbitrator

Marcolino Pisão Pedreiro

Text drawn up by computer, in accordance with paragraph 5 of Article 131 of the CPC, applicable by virtue of paragraph e) of paragraph 1 of Article 29 of Decree-Law No. 10/2011, of 20/01.

The writing of this decision follows the old spelling.

[1] ANTUNES VARELA, MIGUEL BEZESSA AND SAMPAIO AND NORA, in "Manual of Civil Procedure," 2nd Revised and Updated Edition, Coimbra Publishing, page 245.

[2] ARTUR ANSELMO DE CASTRO, "Civil Declaratory Procedure Law," Volume I, Almedina, 1981, page 204.

[3] ANTUNES VARELA, MIGUEL BEZESSA AND SAMPAIO AND NORA, op. and loc. cit.

[4] In this sense, JOSÉ LEBRE DE FREITAS, JOÃO REDINHA AND RUI PINTO, in "Civil Procedure Code Annotated," Volume 1, Coimbra Publishing, 1999, page 322.

[5] "Commentary on the Civil Procedure Code," Volume 2, Coimbra Publishing, 1945, page 381.

[6] ARTUR ANSELMO DE CASTRO, op. cit., page 201.

[7] Which is in accordance with Article 68, paragraph 1, of the Code of Tax Procedure and Process and also with the decision rendered in the gracious complaint proceeding.

[8] Hereinafter, for simplicity, I shall often refer to the assessments numbered 2013… and 2013…, of 15.06.2013, as "partially annulled assessments" and to the assessments Nos. 2014… and 2014 …", of 21.04.2014, as "corrective assessments".

[9] Cf. Article 46 of the Code of Tax Procedure and Process.

[10] Article 267, paragraph 5 of the Constitution of the Portuguese Republic (See J.J. Gomes Canotilho-Vital Moreira, CONSTITUTION OF THE PORTUGUESE REPUBLIC ANNOTATED, Vol. II, pages 813-814.

[11] And indeed, it is indicated in the notification made to the claimants, as results from document No. 35, attached with the initial petition.

[12] As also written by Marcelo Caetano, "the confirmatory act does not have its own executory force: it does not take from, nor does it add to the situations created by the confirmed act. All obligatoriness and coercive force result from the executed or executory confirmed act" (MANUAL OF ADMINISTRATIVE LAW, Vol. I, Almedina, 10th Edition, Revised and Updated by Prof. Doutor Freitas do Amaral, page 452). This is what happens with the corrective assessments which, as mentioned, embody only the partially annulled assessments, expressing only the conjunction of the original assessments with the decision rejecting the gracious complaint, without any innovative content.

[13] To note that, in my view and contrary to what is sustained in the decision, the cause of action in the present case is not the "decision of partial rejection of the gracious complaint filed by the Claimants and the consequent annulment of the Personal Income Tax assessment acts No. 2013 … and compensatory interest No. 2013 … and issuance of the new Personal Income Tax and compensatory interest assessment No. 2014 …" for as ARTUR ANSELMO DE CASTRO states, "In annulment actions, the cause of action is the specific nullity invoked to obtain the desired effect (Article 498, paragraph 4)" (Civil Declaratory Procedure Law," Volume I, Almedina, 1981, page 208).

In truth, pursuant to Article 581, paragraph 4, of the CPC (formerly Article 498, paragraph 4), "(…) the cause of action (…) in (…) annulment actions (…) is the specific nullity invoked to obtain the desired effect".

[14] Being that, with caution, in the reply to the complaint filed by the Respondent, the Appellants requested the tribunal that in the eventuality of considering the request to be incorrect, notify them under Article 18, paragraph 1, al. c) of the RJAT, for the perfecting of their procedural document with a view to expanding the request, proposing from then on the following new wording for the request:

"Accordingly, the legality (i) of the Decision of (partial) rejection of the Gracious Complaint filed by the Claimants, rendered by the Administrative Justice Division of the Finance Directorate of Lisbon and notified to the Claimants by Official Notice No. …, of 12 March 2014, and, likewise, (ii) of the assessment acts Nos. 2013… and 2013…, as amended by the corrective assessment acts Nos. 2014… and 2014… issued following that decision, must be declared, all with the legal consequences".

Also for this reason I understand that, if there were any defect in the petition, the same should not have failed to be considered cured, particularly under the provisions contained in Articles 16, al. f) and 18, paragraph 1, al. c), interpreted in light of the principle "pro actione".