Process: 434/2016-T

Date: December 15, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 434/2016-T addresses the deductibility of property maintenance expenses under Portuguese Corporate Income Tax (IRC) law. A foreign company with Portuguese tax representation challenged additional IRC assessments totaling €7,928.38 for tax years 2012-2014. The Tax Authority (AT) disallowed various expenses on two primary grounds: insufficient invoice descriptions preventing proper classification, and characterization of costs as non-deductible 'ordinary expenses' rather than qualifying maintenance and conservation expenses. The claimant contested expenses including condominium fees, resort club services, and property maintenance costs for a rental property. Key arguments centered on whether Portuguese tax law recognizes 'ordinary expenses' as a distinct category, the adequacy of standard invoice descriptions, and the Tax Authority's application of an occupancy coefficient to prorate deductions based on rental vacancy periods. The taxpayer argued that maintenance expenses constitute fixed costs regardless of property occupation, that invoice descriptions using common terminology sufficiently identify services rendered, and that no legal basis exists for proportional disallowance. The case raises fundamental questions about burden of proof for expense deductibility, the interpretation of maintenance versus current expenses under IRC Article 56, and the legality of compensatory interest assessments. The arbitral tribunal was constituted under RJAT (Decree-Law 10/2011), with the Tax Authority defending its assessment methodology while the claimant invoked principles of tax legality, equality, and taxation by real profit.

Full Decision

Arbitral Award

I – Report

1.1. A…, legal entity no.…, with registered address in …, …, …, …, …, with appointed tax representative, with domicile at …, …, no.…, in ... (hereinafter referred to as "Claimant"), having been notified of the acts of additional assessment of Corporate Income Tax and compensatory interest, relating to the tax years 2012, 2013 and 2014, in the total amount of €7,928.38, and not accepting the same, filed, on 25/7/2016, a request for constitution of an arbitral tribunal and for an arbitral award, in accordance with the provisions of article 10 of Decree-Law no. 10/2011, of 20/1 (Legal Framework for Tax Arbitration, hereinafter referred to as "RJAT") and in articles 99 et seq. of the Code of Tax Procedural Law, in which the Tax Authority is required, with which it requests that "the illegality of the acts of additional Corporate Income Tax assessment and respective Compensatory Interest, relating to the tax years 2012, 2013 and 2014" be declared.

1.2. On 19/10/2016 the present Sole Arbitral Tribunal was constituted.

1.3. In accordance with article 17, no. 1, of the RJAT, the Tax Authority was summoned, as the respondent party, to submit its reply. The Tax Authority submitted its reply on 24/11/2016, arguing for the total dismissal of the Claimant's claim.

1.4. By order of 9/12/2016, the Tribunal considered, in accordance with article 16, letter c), of the RJAT, that the hearing provided for in article 18 of the RJAT was unnecessary and that the case was ready for decision. The date of 15/12/2016 was also set for the pronouncement of the arbitral award.

1.5. The Arbitral Tribunal was duly constituted, is materially competent, the case does not suffer from vices that would render it invalid and the Parties have legal standing and capacity, being legitimately positioned.

II – Parties' Allegations

2.1. The Claimant now alleges, in its initial petition, that: a) "as results from the Inspection Report Project, the expenses incurred by the Claimant were disregarded, not being "deductible, either when the description does not allow for the classification of the asset/service provision incurred, or when these are ordinary expenses and not maintenance and conservation expenses"; b) "thus, from the "justification" of the disregard of the costs/expenses of the activity, it results that the same would be based on (i) insufficient description of the services in the invoice that bears them, (ii) and, likewise, that the expenses are "ordinary expenses"; c) "the descriptions of the services provided and of the assets sold to the Claimant are of common use, sufficiently indicating the type of service or asset acquired, the Claimant being unable to understand the "doubts" that the same suggest to the Inspection Services"; d) "all the charges deducted by the Claimant can be classified in the category of maintenance expenses, not least due to the description of their respective invoices"; e) "however, neither the Corporate Income Tax Code, nor the Income Tax Code, present a legal definition of what should be understood by maintenance or conservation expenses. The law also does not define what should be understood by this third concept now brought to these proceedings by the Inspection Services of ordinary expense"; f) "the Claimant believes it should be dismissed forthwith from this latter concept, because (i) the law never refers to it for the assessment of deductible expenses, (ii) because this same concept often coincides (in its proper place, which is that of Economics), with the concept of maintenance expenses"; g) "the Claimant cannot follow the reasoning of the Inspection Services, nor can it understand it, since not even the expenses disregarded on this ground are specified. Thus, since this ground cannot serve as the basis for the disregard of the expenses declared by the Claimant, the assessments that are the subject of this claim should be annulled, because they are illegal"; h) "on the other hand, the Services of the Tax Authority deny the deductibility of the expenses incurred and declared, because these cannot be considered maintenance expenses"; i) "all expenses incurred by the Claimant must be considered deductible, as they fall within the legally provided concepts. [...]. Thus, it is evident that the expenses relating to condominium fees and Resort Services and other exclusive services for the tenants of the property arising from the Claimant's Association in the Club… of the real estate development in question, incurred by the Claimant, must be accepted"; j) "from the aforementioned expenses result not only benefits for the tenants of the property, but are in fact essential for its maintenance, insofar as they involve the existence of additional maintenance and protection services thereof. Now, as for all the other expenses that the Tax Authority intends to disregard, as it did, it is all too evident their consideration as maintenance expenses, so that their non-deductibility, besides being illegal, is illogical and materially unjust"; l) "it is [...] evident that [...] it would be excessive and unnecessary and [...] the law does not require more than what is described in all the invoices in question"; m) "in summary, the disregarded expenses are evidently maintenance expenses, essential for preserving the property in a state of fitness to provide accommodation services, by force of the lease contracts entered into and legal requirements, and must, as such, be accepted"; n) "notwithstanding the Claimant's availability to lease the property throughout the year, it happened that the same was not, in the tax years covered by this Claim, occupied on all days of the year. [...]. It is evident that the periods of non-occupation of the property are due to reasons that are beyond the Claimant's control, such as the seasonality of the demand for rental properties in an area of the country predominantly coastal. Not putting into question what is contained in Annex 1 of the Inspection Report, relating to the dates when the property was actually occupied, it would immediately be said that maintenance expenses, as well as the Municipal Property Tax, are fixed costs inherent to the property, whether the property is occupied or vacant, so it would never make any sense to apply any "occupancy coefficient"; o) "the expenses do not vary according to the actual occupation of the property, since the property must be prepared and in conditions to be leased, that is, to serve the purpose to which the owner has dedicated it"; p) "the law provides for the deduction of maintenance and conservation expenses, and also the Municipal Property Tax, making no reference to proportions or pro rata occupation. There being no legal basis for the disregard of the aforementioned expenses, the Respondent frontally violated the command contained in article 41 of the Income Tax Code, in the principles of Tax Legality, Equality and Taxation by Real Profit, and can only conclude that the assessments of Corporate Income Tax and Compensatory Interest relating to the tax years 2012, 2013 and 2014, subject of this Arbitral Award Claim, are illegal"; q) "the compensatory interest assessments under analysis are illegal, due to manifest absence of fault of the taxpayer or, at least, of its weighting, proof and substantiation of the conclusion reached by the Tax Administration, and for breach of an essential legal formality, so that, in accordance with the provisions of article 163 of the Code of Administrative Procedure, should also be annulled, which is hereby requested."

2.2. The Claimant requests, with the above stated grounds, that "this arbitral award claim should [...] be judged as well-founded, as proven and, in consequence: a. The acts of assessment of Corporate Income Tax and compensatory interest, relating to the tax years 2012, 2013 and 2014, contained in the Account Adjustment Statements nos…, … and …, all for violation of articles 56 of the Corporate Income Tax Code, 8 and 41 of the Income Tax Code and 103 and 104 of the Constitutional Law; b. In any case, the acts of assessment of the compensatory interest referred to in a. be annulled, for failure to meet the prerequisites for their assessment".

2.3. For its part, the Tax Authority alleges, in its reply, that: a) "the issue that is the subject of these proceedings has [...] to do with the application of the provisions of article 41 of the Income Tax Code"; b) "what is at issue here is a cost relation that is indispensable for obtaining income, when documentary proof exists and is actually borne by the asset holder"; c) "in annex 2 of the Inspection Report, column "Expenses that can be framed in article 41 of the Income Tax Code", the Tax Inspection Services identify the expenses that may be deductible from real estate income. The other expenses mentioned in the invoices are not deductible, either because the description does not allow for the classification of the asset and or the service provision incurred, or when these are ordinary expenses and not maintenance and conservation expenses"; d) "from the analysis of the invoices it is thus verified that various expenses incurred were included from which it is not possible to establish an unequivocal relationship/correspondence between them and the obtaining of income"; e) "on the one hand, copies of expenses incurred were submitted whose description is so generic that it does not allow for assessing the eligibility of the expenses in question"; f) "effectively, the insufficiency of data regarding the assets sold/services provided, does not allow one to know, for example, in what service labor was applied, what purpose the trips served [...], electrical material for which equipment, what types of products would be included in hygiene material... that is, all types of products and services could be included here, never knowing their specification or in what service they were used"; g) "on the other hand, we have expenses that were not considered, because it was not understood that they would correspond to maintenance and conservation expenses, but rather ordinary expenses, such as cleaning services and social security, surveillance/security services, insurance, fire extinguisher renewal, water, pest control service provision, air conditioning maintenance, sewage cleaning and unclogging, lamp replacement, deck chair repair and checking problem with the water heater. We also have expenses presented relating to resort member service fee, association with the Club… and resort membership (probably identical to the first), whose relationship with the income obtained was not possible to ascertain"; h) "on the other hand, the correction of the deductible amounts with reference to the expenses that truly fall within the deductible charges for this type of income, took into account that the property was only occupied for part of the years in question. In this way, since it is a property leased during some periods, the deductible expenses should be considered proportionally on the basis of the number of days of lease, that is, 44 days in 2012, 67 in 2013 and 61 in the year 2014"; i) "as stated above, the interpretation and application of article 41 of the Income Tax Code, contained in the Inspection Report, does not suffer from any illegality. In the version then in force of article 41 of the Income Tax Code, no. 1, it provides that the deductible expenses from the gross income referred to in article 8 are maintenance and conservation expenses that are incumbent on the taxpayer, incurred by it and documentary proven, as well as the Municipal Property Tax that is levied on the value of the properties or parts of properties, whose income has been included"; j) "the maintenance, conservation and tax paid expenses should be proportionally considered on the basis of the periods in which the property was occupied and to that extent generated real estate income"; l) "in view of the above, the act in question does not suffer from any illegality as alleged, so it is impugned, as unfounded, all the allegations in the Arbitral Award Claim that contradict the above stated, and the Claimant's claim should be considered as unfounded and the Respondent absolved from all claims".

2.4. Concludes finally, the Tax Authority that "this arbitral award claim should be judged as unfounded, maintaining in the legal order the tax assessment acts contested and accordingly absolving the respondent entity from the claim, all with the due and legal consequences."

III – Proven Facts, Unproven Facts and Respective Justification

3.1. The following facts are considered proven:

i) The Claimant is a non-resident entity, taxed for the activity corresponding to Economic Activity Code…, "Real Estate Leasing", being classified in the exemption regime provided for in article 9 of the VAT Code and in the general regime for determining taxable profit in relation to Corporate Income Tax.

ii) The Claimant has been the owner, since 1998, of a villa intended for residential use, located in the village of…, plot…, registered in the urban property register of the parish of …, municipality of …, under article....

iii) In compliance with Service Orders no. OI2015…/…/…, an inspection action was conducted on the Claimant, of partial scope and covering the tax years 2012, 2013 and 2014. On 17/2/2016, the Claimant was notified, by Official Notice no.…, of the Inspection Report Correction Project, carried out under the aforementioned Service Orders.

iv) As a result of the aforementioned inspection action, corrections were made in terms of Corporate Income Tax in the amount of €12,400.91, for the tax year 2012, of €11,307.31, for the tax year 2013, and of €12,031.72, for the tax year 2014. Following the Tax Inspection and the conclusions set out in the Project and in the Final Report, the Claimant was notified of the acts of additional Corporate Income Tax assessment and compensatory interest, now in question, and from which results the total amount contested of €7,928.38 (see Docs. 1 to 5 attached to these proceedings).

v) Considering the data contained in Annex 2 that appears in the Correction Project attached to the proceedings, it is verified that the invoices submitted are properly substantiated, containing, in particular, a description that allows identifying the purpose of the expenses incurred and their connection, with a character of indispensability, to the activity carried out by the Claimant. The Respondent did not challenge the authenticity of the invoices submitted by the Claimant.

vi) Disagreeing with the aforementioned additional Corporate Income Tax assessments, the Claimant filed this arbitral award claim on 25/7/2016.

3.2. There are no facts not proven relevant to the decision of the case.

3.3. The facts considered pertinent and proven (see 3.1) are justified on the basis of the analysis of the positions set out by the parties and the documentary evidence attached to the proceedings.

IV – On the Law

In the case now under analysis, the two essential legal questions that arise are: i) whether the expenses incurred and declared by the Claimant are not subject to deduction because, in the opinion of the Tax Authority, "the description does not allow for the classification of the asset/service provision incurred"; ii) whether such expenses can be disregarded because, in the opinion of the Tax Authority, these are "ordinary expenses" and not "maintenance and conservation expenses". Finally, there will be the question relating to the alleged illegality of compensatory interest [iii)].

Let us proceed, then.

i) As to the question concerning the descriptions of the services provided and assets sold to the Claimant (and their adequacy to the activity), it is found that reason is with the Claimant, given that these are sufficiently complete and clear so that the proper framing of the same can be made (as, in the present case, it was made).

The descriptions (which are not "generic", as the Respondent said, but rather have a level of detail that is common, adequate and necessary for the understanding of the objective/purpose aimed at with the assets and services in question) are, in particular, the following: "garden maintenance", "maintenance services", "cleaning and social security services", "cleaning and hygiene material", "pest control service provision", "labor, travel and materials", "resort member service fee", "association with the property owners' club", "batteries", "surveillance/security services", "fire extinguisher renewal", "insurance", "kitchen sliding door repair", "deck chair repair", "toilet repair", "light bulb", "light bulb replacement", "materials: switch", "sewage cleaning and unclogging", "water", "kitchen door-window adjustment" and "checking problem with the water heater".

The list is sufficiently enlightening on the connection of the expenses (underlying the invoices in question) to the activity carried out by the Claimant. In other words, the expenses incurred by the Claimant, identified above, were necessary for the obtaining of real estate income, being maintenance expenses that are documentary proven and which, as such, are subject to deduction in light of the provisions of article 41 of the Income Tax Code (both in the version before and after Law no. 66-B/2012, of 31/12).

ii) However, the Respondent, without challenging the authenticity of the invoices in question and the expenses underlying them, states that the disregard of those expenses results from the fact that "it is not understood that they would correspond to maintenance and conservation expenses, but rather ordinary expenses, such as cleaning and social security services, surveillance/security services, insurance, fire extinguisher renewal, water, pest control service provision, air conditioning maintenance, sewage cleaning and unclogging, lamp replacement, deck chair repair and checking problem with the water heater. We also have expenses presented relating to resort member service fee, association with the Club… and resort membership (probably identical to the first), whose relationship with the income obtained was not possible to ascertain".

No reason is found in the argument presented by the Respondent. Not only because there is no legal (or economic) reason to state that the so-called "ordinary expenses" are not "maintenance and conservation expenses", but also because such expenses – as is easily perceived from the description and list given by the Respondent itself, aim to preserve the state (and the regular functioning) of the property, ensuring that it fulfills its purposes, allowing tenants to enjoy all the services that have been and are made available to them under the lease contract, and for which they pay rent.

In this regard and in the same sense, there are already several arbitral awards from the Administrative Arbitration Centre, of which the following are examples, reproduced here in the parts considered most relevant: "All services that are made available to the tenant, and that are paid by the tenant, constitute rent, so obviously, all maintenance and conservation expenses of these services must be accepted. Services that must be connected with the building itself, from the most common and basic cleaning services, to the maintenance of elevators and concierge services. [...]. Also included in this concept of services are other luxury amenities, such as Wi-Fi, gyms, swimming pools and SPAS, although considered luxuries, as they are services made available to the tenant related to the leasing of the use of the property, and assigned to it, so all maintenance and conservation expenses must be accepted." (Arbitral Award rendered in proc. no. 435/2014-T, of 10/11/2014); "the deductibility rule for Category F costs has always been associated with the costs of maintenance necessary for the obtaining of taxable real estate income, which the legislator never, even by way of example, typified. [...]. [It is incumbent on the claimant property owner] to carry out all expenses inherent to the maintenance and conservation of the property, keeping it in normal rental conditions" (Arbitral Award rendered in proc. no. 294/2015-T, of 21/1/2016).

With regard to the deductibility of the aforementioned expenses as a function of an "occupancy coefficient" (in particular, the proportional reduction of those based on the number of days of lease), it is found that nothing exists in the law that would allow concluding that such reduction can occur; quite the contrary: knowing, as has been stated, that these are (necessary) expenses of a fixed character (i.e., expenses whose implementation and corresponding amount do not depend on actual occupation of the property) – and that, if not carried out, would entail inevitable loss of income for its owner –, it is concluded that, also here, the Respondent is not justified.

In the same sense, see, e.g.: "With regard to the reduction of expenses and charges through the application of an "occupancy coefficient", such a procedure cannot be accepted, since all expenses incurred, such as cleaning of the residences and the swimming pool, and their respective health treatment, water, electricity, insurance, Municipal Property Tax and others, will always have to be borne, regardless of the occupancy rate. Such "occupancy coefficient", as has been mentioned, [constitutes] a "sui generis" ground that apparently had not previously been used by the Inspection, [and] has, in the opinion of this tribunal, no legal basis." (Arbitral Award rendered in proc. no. 294/2015-T, of 21/1/2016).

iii) Taking into account that, as is referred to, e.g., in the following judgment (Supreme Administrative Court Decision of 6/5/2015, proc. 196/15), "the consolidated case law of the Supreme Court, see Plenary decisions no. 0632/14, of 21.01.2015, and no. 01490/13, of 22.01.2014, goes in the direction that "responsibility for compensatory interest has the nature of a civil remedy and, therefore, depends on the adequate nexus of causality between the delay in assessment and the actions of the taxpayer, as well as the possibility of formulating a judgment of censure of its actions (by way of intent or negligence)", and that – as the judgment also points out – "the imputability required for holding liable for the payment of this type of interest depends on the existence of fault on the part of the taxpayer", it is therefore necessary to assess whether, in the present case, there was culpable conduct by the Claimant.

Now, not finding, in the assessment documents, an express and substantiated justification by the Tax Authority (nor did the Respondent present one in these proceedings) that would allow – beyond the mere objective connection of facts to the taxpayer – to impute the failure to comply in a timely manner to a will susceptible to censure by way of intent or negligence, it is concluded that the claim for illegality of the compensatory interest assessments in question is well-founded.

V – DECISION

In view of the above stated, it is decided:

  • To judge the arbitral award claim as well-founded, with the consequent annulment, with all legal effects, of the additional Corporate Income Tax assessments and compensatory interest assessments.

The value of the case is fixed at €7,928.38 (seven thousand nine hundred twenty-eight euros and thirty-eight cents), in accordance with the provisions of article 32 of the Code of Tax and Administrative Procedure and article 97-A of the Code of Tax Procedural Law, applicable by force of the provisions of article 29, no. 1, letters a) and b), of the RJAT, and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings.

Costs to be borne by the respondent, in the amount of €612.00 (six hundred twelve euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in compliance with the provisions of articles 12, no. 2, and 22, no. 4, both of the RJAT, and the provisions of article 4, no. 4, of the aforementioned Regulation.

Notify.

Lisbon, 15 December 2016.

The Arbitrator

(Miguel Patrício)

Text prepared by computer, in accordance with the provisions of article 131, no. 5, of the Code of Civil Procedure, applicable by referral of article 29, no. 1, letter e), of the RJAT.

The drafting of this decision is governed by the orthography prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

What types of business expenses were disallowed by the Portuguese Tax Authority (AT) in this IRC case?
The Portuguese Tax Authority disallowed condominium fees, resort club services (Club membership services for property tenants), and various property maintenance expenses. The disallowances were based on two grounds: (1) insufficient description in invoices that prevented proper classification of the asset or service acquired, and (2) characterization of the expenses as 'ordinary expenses' rather than deductible 'maintenance and conservation expenses' under IRC law. The taxpayer argued these were essential fixed costs for maintaining rental property fitness.
How does Portuguese tax law distinguish between current expenses and maintenance and conservation costs for IRC deduction purposes?
Portuguese tax law does not provide explicit statutory definitions distinguishing 'ordinary expenses' from 'maintenance and conservation expenses' in either the CIRC (Corporate Income Tax Code) or IRS Code. The claimant argued that 'ordinary expenses' is not a recognized legal tax category and that this concept from economics often overlaps with maintenance expenses. Maintenance and conservation expenses are understood as costs necessary to preserve property in a state of fitness for its intended use (rental accommodation), representing fixed costs regardless of actual property occupation, whereas the Tax Authority appears to distinguish routine operational costs from capital-preserving maintenance.
What are the invoice description requirements for deducting costs under the Portuguese Corporate Income Tax Code (CIRC)?
Under Portuguese Corporate Income Tax law, invoice descriptions must sufficiently identify the type of service or asset acquired to allow proper expense classification. The CIRC does not specify detailed formatting requirements, but the Tax Authority requires descriptions enabling classification of costs as deductible business expenses. The claimant argued that 'common use' terminology adequately describes services rendered and that requiring excessive detail beyond standard commercial practice is not legally mandated. The case illustrates tension between Tax Authority scrutiny of expense documentation and taxpayer reliance on standard business invoice practices.
Can a taxpayer challenge additional IRC assessments and compensatory interest through CAAD tax arbitration?
Yes, taxpayers can challenge additional IRC assessments and compensatory interest determinations through CAAD (Centro de Arbitragem Administrativa) tax arbitration. This case was filed under the RJAT (Legal Framework for Tax Arbitration, Decree-Law 10/2011) and Articles 99 et seq. of the Tax Procedural Code (CPPT). The arbitral tribunal has jurisdiction to review both the substantive legality of IRC assessments and procedural issues including compensatory interest. CAAD arbitration provides an alternative dispute resolution mechanism for contesting Portuguese tax authority decisions without requiring prior payment of contested amounts.
What was the outcome of CAAD arbitral process 434/2016-T regarding the deductibility of business costs for the 2012-2014 tax years?
The excerpt provided contains only the initial Report section (factual background and party allegations) of Process 434/2016-T, not the final arbitral award decision. The document shows the arbitral tribunal was constituted on October 19, 2016, with a decision date scheduled for December 15, 2016. The case involved €7,928.38 in disputed IRC and compensatory interest for 2012-2014. While the taxpayer's arguments and Tax Authority's defense are detailed, the actual ruling on whether the expenses were properly deductible and whether the assessments should be annulled is not included in the provided text.