Process: 437/2014-T

Date: January 26, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (437/2014-T) concerns a dispute over IRS capital gains taxation from the 2011 sale of two real estate properties in Lisbon. The taxpayer challenged an assessment of €83,906.93, arguing that the Tax Authority failed to consider €45,513.74 in property appreciation expenses for one of the properties when calculating taxable capital gains. The dispute arose when the taxpayer initially filed their 2011 IRS declaration declaring expenses and charges of €53,441.09 for a property acquired in May 2007 for €300,000 and sold in September 2011 for €430,000. After the Tax Authority requested documentary proof of these expenses, the taxpayer failed to respond within the 10-day deadline. Consequently, the Tax Authority issued a correction removing all declared expenses and charges, significantly increasing the tax liability. The taxpayer argued these appreciation expenses should be deductible under Article 51(a) of the IRS Code, which allows expenses incurred with property valorization to be added to the acquisition value when calculating capital gains. The taxpayer also claimed the decision dismissing the gracious complaint lacked proper reasoning and sought compensation for the undue guarantee provided to suspend enforcement. The Tax Authority defended its position by arguing the taxpayer failed to prove the expenses with consistent documentation and only submitted supporting documents during the complaint procedure, after the legal deadline had expired. The Authority also contested that any error was attributable to its actions, as it made the assessment based on available information. The complaint was partially granted by the Tax Authority before reaching full arbitration.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 437/2014–T

Subject Matter: PIT - Real estate capital gains; appreciation expenses.

I – Report

  1. On 20.06.2014, A, divorced, taxpayer identification number …, resident in …, in Lisbon, filed a request with CAAD for the constitution of an Arbitral Tribunal, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to as "RJAT"), in which the Tax and Customs Authority is the respondent, with a view to the partial annulment of the assessment act no. 2013…, relating to the year 2011, dated 18.05.2013, in the amount of 83,906.93 € and an amount payable after settlement of accounts in the amount of 57,319.82 €, with the claimant and B as taxpayers, and from which the claimant filed a gracious complaint and against the partial dismissal thereof, a hierarchical appeal.

The claimant further claims entitlement to compensation for undue guarantee, provided to obtain suspension of enforcement of the amount allegedly owed, as a result of the assessment.

  1. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and notified to the Tax and Customs Authority.

Pursuant to and for the purposes of the provision of no. 1 of article 6 of RJAT, by decision of the President of the Deontological Council, duly communicated to the parties, within the legally applicable periods, Dr. Marcolino Pisão Pedreiro was appointed as arbitrator, who communicated to the Deontological Council and to the Administrative Arbitration Center his acceptance of the office within the regularly applicable period.

The Arbitral Tribunal was constituted on 22.08.2014

  1. By order of 15.10.2014, the meeting provided for in article 18 of RJAT was dispensed with, on the grounds of its lack of necessity.

  2. On 24.11.2014, at 15:30 hours, the arbitral hearing took place at the Administrative Arbitration Center – CAAD - at Avenida Duque de Loulé, no. 72-A, in Lisbon, for the examination of the witnesses cited by the claimant.

  3. The grounds presented by the claimant, in support of his claim, were, in summary, as follows:

  • Neither in the assessment in question, nor in the decision which partially granted the complaint filed against it, were expenses incurred with the appreciation of the property corresponding to unit C, of the urban property registered under article … of the parish of … – Lisbon, in the amount of 45,513.74 €, from the sale of which capital gains resulted that were considered for the determination of taxable income.

  • Such expenses should have been considered pursuant to article 51, subsection a) of the Personal Income Tax Code, and should have been added to the acquisition value, in accordance with the aforementioned provision.

  • Failing this, the decision dismissing the gracious complaint should be annulled for lack of reasoned grounds, since the decision in question did not address the arguments raised by the claimant in the exercise of the right to be heard, exercised in that procedure.

  • From article 53 of the General Tax Law (hereinafter "GTL") the claimant claims entitlement to compensation for undue guarantee.

  1. The ATA – Tax and Customs Administration, when called upon to submit its response, contested the claimant's claim, defending itself by objection, in summary, with the following grounds:

  • The claimant failed to prove the expenses he alleges, since the documents he presented suffer from inconsistencies.

  • The alleged defect of lack of reasoned grounds for the decision dismissing the gracious complaint is unfounded, since the decision clearly shows appreciation of the elements brought to the proceedings by the claimant in the exercise of the right to be heard, and the draft decision was even modified in the direction of partial granting of the complaint.

  • The request for compensation for undue guarantee is unfounded since, even if the claimant's request for annulment were to be granted, there would be no occurrence of "error attributable to the administration" since the respondent, in making the assessment in question, did so with the information available to it, and only in the gracious complaint proceedings did the claimant submit documents related to the expenses, having failed to do so previously within the period granted to him for this purpose.

  1. The parties submitted written pleadings in which they maintained their positions.

  2. The tribunal is materially competent and is regularly constituted pursuant to RJAT.

The parties have legal personality, legal capacity, have standing and are legally represented.

The proceedings do not suffer from defects that would invalidate them.

II – The Relevant Facts

  1. The tribunal finds the following facts proven:

  2. On 4.07.2012, the claimant and taxpayer B of the declaration, B, filed their Personal Income Tax declaration, no. …, relating to the year 2011, which gave rise to assessment no. 2012 …, in the amount payable of € 26,587.11.

  3. In that declaration, the onerous disposals of two properties were entered in table 4, of annex G:

  • The property corresponding to unit C, of the urban property registered under article … of the parish of …;

  • The property corresponding to unit C, of the urban property registered under article … of the parish of … – Lisbon.

  1. It being declared that:

  • Article … was acquired in May 2007 at the price of 300,000.00 € and disposed of in September 2011 at the price of € 430,000.00, with expenses and charges totaling € 53,441.09.

  • Article … was acquired in July 1993 at the price of 75,000.00 € and disposed of in April 2011 at the price of 185,000.00 €, with expenses and charges totaling € 12,050.14.

  1. On 8.07.2012 the respondent initiated proceedings for irregular situation and notified the claimant.

  2. Subsequently, on 18.04.2013, the claimant was notified for the purpose of being heard and to, within 10 days, submit a substitute declaration to correct annex G (corresponding to capital gains), entering in table 8, fields 801, 802, the securities issued by banking entities and to provide documentary proof of acquisition/disposal and respective expenses incurred.

  3. After the period elapsed, the claimant said nothing, did not submit the substitute declaration nor provided documentary proof of acquisitions and disposals, nor the expenses incurred.

  4. In consequence, the respondent prepared a correction document on 9.05.2013, having removed the expenses and charges relating to the properties declared in annex G, Q4, and added the securities existing in the system, which gave rise to the assessment that is the subject matter of the present proceedings.

  5. On 14.05.2013, the claimant submitted a substitute declaration, which was considered by the respondent as not assessable, on the grounds that it was presented out of time.

  6. On 18.05.2013, the respondent made the assessment no. 2013…, in the amount of 83,906.93 € and an amount payable after settlement of accounts in the amount of 57,319.82 €, with the claimant and B as taxpayers.

  7. The assessment pending judgment was subject to a gracious complaint procedure initiated by the claimant, which was processed under no. ….

  8. The claimant's disagreement, set out in the gracious complaint, was based, with respect to the property corresponding to unit C, of the urban property registered under article … of the parish of … Lisbon, on the failure to consider expenses for property appreciation and expenses inherent in the disposal.

  9. In the exercise of the right to be heard, the claimant changed the value of expenses and charges for this unit from 53,441.09 € to 54,671.09 €.

  10. This complaint was partially granted, and the respondent, with respect to the determination of capital gains from the property to which the claimant's disagreement in the present proceedings relates – unit C, of the urban property registered under article … of the parish of … Lisbon – accepted expenses inherent in the disposal in the amount of 9,120.00 € but not expenses for property appreciation in the amount of 45,513.74 €, nor an expense in the amount of 55.35 €, relating to the cost of an energy certification which was found not to relate to this property but rather to the property located on the street ….

  11. According to the decision, the non-acceptance of expenses for property appreciation was based on the following grounds:

"- A budget dated 10 August 2007 was submitted for improvement works on the 1st floor on … street in Lisbon.

  • In the said budget, exterior works are mentioned, which includes works on an outbuilding, walls, landscaped area, with execution of various possible works in the courtyard area. The total amount of exterior works was budgeted at € 6,385.74.

  • The invoices attached to the file corresponding to works carried out on this property were issued from 9 July 2007 to 17 January 2008, for works carried out on … street with regard to invoice … and ..., and for … with regard to invoices ..., ..., ..., ... and ....

  • Considering the possibility of error in the address description on invoices ..., ..., ..., ..., and ..., it is found that the sum of the percentage of payment for the work on the invoices corresponding to … street exceeds 100%, since the sum of the said percentages indicated on the invoices amounts to 127.93%.

  • Consulting the property register for said property, it is found that the building consists of a shop, 2 floors, attic space and courtyard. It is made up of independent units sufficiently distinct and isolated from each other with separate exits to a common part of the building and from there to the public road. The unit in question here is C which is located on the 1st floor with 4 rooms, and it is not possible to verify whether the courtyard is a common part of the building or belongs to the unit.

(...)

In view of the inconsistencies found regarding the budget and invoices for works carried out on this property, it is not clarified nor properly proven which works were actually carried out on this unit and their amount. Nor is it clear whether the exterior works correspond to works carried out on this unit or on the common exterior of the building."

  1. Disagreeing with the partial dismissal of the request, the claimant filed, on 24 January 2014, a hierarchical appeal of the decision rendered in the gracious complaint procedure, arguing that the expenses in question should have been accepted.

  2. The hierarchical appeal was tacitly dismissed, as it was not decided within the period provided by law.

  3. The claimant incurred, in 2007 and 2008, expenses for appreciation works on unit C, of the urban property registered under article … of the parish of … Lisbon, corresponding to invoices nos. ..., ..., ..., ..., ..., of the year 2007 and ..., ..., and ... of the year 2008, issued by company C, a construction and civil engineering company, Ltd., in the total amount of 45,513.74 € (including VAT) and in 2011 expenses for real estate mediation services inherent in the sale in the amount of 9,102.00 €, which totals € 54,615.74.

  4. The works mentioned in the previous point consisted of works on floors, walls, ceilings, electrical systems, water and sewage networks, outbuilding, walls and courtyard.

  5. In the taxable income that was the basis for the assessment that is the subject matter of the present proceedings, no expenses were considered for property appreciation, nor for the expenses incurred in connection with the disposal.

  6. Following the gracious complaint filed by the claimant against the assessment, expenses relating to real estate mediation services inherent in the transfer were accepted in the amount of 9,120.00 €.

  7. Expenses corresponding to invoices nos. ..., ..., ..., ..., ..., of the year 2007 and ..., ..., and ... of the year 2008, mentioned above, were not considered.

  8. These invoices correspond to work and materials actually carried out and supplied by company C, a construction and civil engineering company, Ltd., on the property in question.

  9. In order to suspend enforcement of the assessment that is the subject matter of the present proceedings, the claimant presented the autonomous bank guarantee no. …, dated 28.08.2013, constituted at his request by D, C.R.L., up to the maximum amount of 72,891.28 €, in favor of the Tax and Customs Authority – Financial Services of Lisbon ….

  10. Until 7.11.2014, the claimant incurred costs related to said guarantee in the amount of 2,425.55€.

  11. The documentary evidence of expenses for property appreciation and expenses inherent in the disposal were only submitted by the claimant to the respondent within the scope of the gracious complaint procedure.

  12. The tribunal's conviction regarding the decision on the facts was based on the documents in the file, as well as on the testimony of witnesses E and F who demonstrated direct knowledge of the facts, testified in a calm, convinced and unequivocal manner so as to leave no doubt in the tribunal's mind about the completion of the works listed in the invoices on the unit in question and its appurtenance, which is part of the unit as confirmed by public deed found in pages 134 to 136 of the administrative proceedings.

Despite the existence of various inaccuracies in various documents issued by company C, a construction and civil engineering company, Ltd., this was not capable of objectively calling into question the actual performance of the services and supplies listed in the invoices, and the witness testimony confirmed the effectiveness of the works listed in the invoices on the property in question.

-III- The Applicable Law

  1. Since the defect of violation of law in the assessment and the defect of lack of reasoned grounds in the decision dismissing the gracious complaint have been raised, it is necessary to determine the order of examination of the same, which should be observed as established in article 124 of the Code of Tax Procedure and Process, applicable pursuant to article 29, no. 1, subsection a) of RJAT (cf. Jorge Lopes de Sousa, Commentary on the Legal Framework for Tax Arbitration, in GUIDE TO TAX ARBITRATION, coord. by Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, page 202).

The substantiation of any of the defects invoked by the claimant will lead to annulment of the tax act. However, the defect of violation of law is the one that will lead to the "most stable or effective protection of the injured interests" insofar as its eventual substantiation will prevent the renewal of the act, which does not occur with annulment resulting from the defect of lack of reasoned grounds in the decision dismissing the gracious complaint.

In accordance, the tribunal will first examine the defect of violation of law.

  1. Pursuant to article 51 of the Personal Income Tax Code (hereinafter "PITC"): For the determination of capital gains subject to tax, the acquisition value is increased by:

a) The expenses for property appreciation, demonstrably incurred in the last five years (…)"

From the proven facts, it results that appreciation works occurred on unit C of the urban property registered under article … of the parish of … Lisbon, in the total amount of 45,513.74 € (including VAT), carried out in the five years prior to the tax period in question, and that these expenses were not considered in determining the capital gains realized with the property in question. Therefore, it cannot but be concluded that the aforementioned defect of violation of law of the assessment under judgment occurs, due to error in the factual premises, and therefore, to this extent, it cannot but be determined that its partial annulment be ordered.

  1. The claimant further requested compensation for provision of undue guarantee in the amount of 2,915.65 €.

Pursuant to article 53, no. 1, of the General Tax Law:

"1- The debtor who, in order to suspend enforcement, offers bank guarantee or equivalent shall be indemnized in whole or in part for the losses resulting from its provision, if he maintained it for a period exceeding three years in proportion to the time of decision in administrative appeal, objection or opposition which have as their subject matter the guaranteed debt.

2- The period referred to in the preceding number does not apply when it is verified, in gracious complaint or judicial objection, that there was error attributable to the administration in the assessment of the tax".

Clearly, the requirement of maintaining the guarantee for a period exceeding three years, provided for in no. 1, is not met, since the guarantee in question was constituted on 28.08.2013. It remains to be determined whether there is "error attributable to the administration" in the assessment in question.

Pursuant to article 128, no. 1 of PITC: "Persons subject to Personal Income Tax must present, within the time fixed for them, the documentary proof of income earned, deductions and exemptions and other facts or situations mentioned in their respective declaration, when the Tax Authority requests them."

Now, the respondent notified the claimant to present the documentary proof of the expenses in question, which was not done, only submitting them in the gracious complaint procedure. Furthermore, both the first declaration submitted by the taxpayers and the second were presented outside the legal period for this purpose, and therefore were not presented "in accordance with the law," and accordingly do not enjoy a presumption of truth, pursuant to articles 75, no. 1, of GTL and article 59, no. 2, of the Code of Tax Procedure and Process.[1]

Under these circumstances, it is manifest that "error attributable to the administration" did not occur in the assessment in question, the error being attributable instead to the violation of duties of cooperation by the taxpayers.

Accordingly, the claimant's claim for compensation for undue guarantee cannot but be dismissed.

  1. The claimant indicated the value of the case as 15,765.76 €. In article 45 of the request for arbitral award, the respondent carried out a simulation of the tax portion payable based on capital gains obtained from unit C of the urban property registered under article … of the parish of … Lisbon, concluding it to be 15,765.76 €.[2]

However, article 97-A of the Code of Tax Procedure and Process provides that:

"1. The amounts to be considered, for the purposes of costs or other matters provided by law, for actions that take place in tax courts, are as follows:

a) When the assessment is contested, the amount of which annulment is sought;"

It is thus manifest that the value of the case is not that indicated by the claimant, but rather the amount for which annulment is sought. That amount in the specific case will be found by the influence that the consideration of expenses in the amount of 45,513.74 €, to be added to the acquisition value of unit C of the urban property registered under article … of the parish of … Lisbon, will have on the assessment. And that value will be 9,899.24 € (45,513.74:2[3]x0.435).

The value of the action is thus set at 9,899.24 €.

-IV- Decision

Therefore, the arbitral tribunal decides:

a) To declare the partial annulment of the assessment that is the subject of the present proceedings, to the extent of the non-consideration, for the purposes of income of category G, of the expenses for appreciation of unit C of the urban property registered under article … of the parish of … Lisbon, in the total amount of 45,513.74 €.

b) To find unfounded the request for compensation for provision of undue guarantee.

Value of the case: 9,899.24 € (nine thousand eight hundred and ninety-nine euros and twenty-four cents) pursuant to the provisions of article 315, no. 2, of the CPC and 97-A, no. 1, subsection a), of the CPPT and 3, no. 2, of the Regulation on Costs in Arbitration Proceedings.

Costs payable by the respondent, in the amount of 918.00 €, pursuant to no. 4 of article 22 of RJAT.

Lisbon, CAAD, 26 January 2015

The Arbitrator

(Marcolino Pisão Pedreiro)

[1] Cf. Award rendered by the Arbitral Tribunal in proceedings 10/2013-T of 5.07.2013 (which may be consulted at www.caad.org.pt) and Award of the Central Administrative Court of the North, of 30.03.2006, rendered in proceedings 00272/04, 2nd Section which may be consulted at www.dgsi.pt).

[2] But omitting from the calculations the expense of 9,120.00€ for the commission to the real estate mediation company inherent in the disposal of the property recognized by the respondent in the gracious complaint procedure.

[3] Taking into account that pursuant to article 43, no. 2, of PITC the balance of capital gains is considered at only half, the value of income considered in excess was 22,756.87 €.

Frequently Asked Questions

Automatically Created

What qualifies as deductible valorization costs for capital gains tax on real estate under Portuguese IRS?
Under Portuguese IRS law, deductible valorization costs for capital gains on real estate include expenses incurred with property improvements, renovations, and appreciation works that increase the property's value. According to Article 51(a) of the IRS Code, these expenses can be added to the acquisition value when calculating taxable capital gains from the property's sale. However, taxpayers must provide proper documentary evidence of these expenses, including invoices, receipts, and proof of payment. The expenses must be demonstrably linked to the property's valorization and must be supported by consistent, verifiable documentation. In this case, the dispute centered on €45,513.74 in claimed appreciation expenses that the Tax Authority initially rejected due to lack of timely proof.
How does Article 51(a) of the Portuguese IRS Code apply to property improvement expenses in capital gains calculations?
Article 51(a) of the Portuguese IRS Code allows property improvement and valorization expenses to be added to the acquisition value of real estate when calculating capital gains for tax purposes. This provision reduces the taxable gain by increasing the cost basis of the property. The article requires that these expenses be directly related to the property's appreciation or improvement and must be properly documented. In capital gains calculations, the taxable amount is determined by subtracting the acquisition value (plus deductible expenses under Article 51(a)) from the sale price. However, taxpayers must submit supporting documentation within the deadlines established by the Tax Authority. In this arbitration case, the claimant argued that appreciation expenses should have been considered under Article 51(a), but had failed to provide timely proof when initially requested by the Tax Authority.
Can a taxpayer claim compensation for an undue guarantee provided during a tax dispute in Portugal?
Yes, under Article 53 of the Portuguese General Tax Law (Lei Geral Tributária), taxpayers may claim compensation for undue guarantees provided during tax disputes. This applies when a taxpayer provides a bank guarantee or other security to suspend enforcement of a contested tax assessment, and the assessment is subsequently annulled or reduced. However, compensation is only awarded when the error is attributable to the Tax Administration. In this case, the claimant sought compensation for the guarantee provided to suspend enforcement of the €57,319.82 amount payable. The Tax Authority argued against compensation, claiming no attributable error existed since it made the assessment based on available information, and the taxpayer only submitted supporting documentation during the complaint procedure, after the initial deadline had expired.
What happens when the Tax Authority fails to consider property valorization costs in an IRS capital gains assessment?
When the Tax Authority fails to consider property valorization costs in an IRS capital gains assessment, taxpayers have several remedies available. They can file a gracious complaint (reclamação graciosa) within the statutory deadline, presenting documentary evidence of the expenses that should have been considered under Article 51(a) of the IRS Code. If the complaint is denied or only partially granted, taxpayers can file a hierarchical appeal and ultimately seek arbitration through CAAD (Centro de Arbitragem Administrativa). In this case, the taxpayer's gracious complaint was partially granted by the Tax Authority, recognizing some of the claimed expenses. However, the initial failure to consider these costs occurred because the taxpayer did not provide the required documentary proof within the 10-day deadline given by the Tax Authority, leading to a correction that removed all declared expenses and significantly increased the tax liability.
How does the CAAD arbitration process work for challenging IRS capital gains tax assessments in Portugal?
The CAAD arbitration process for challenging IRS capital gains assessments begins with filing a request for constitution of an arbitral tribunal under Decree-Law 10/2011 (RJAT). The taxpayer must identify the contested assessment and grounds for challenge. Once accepted, an arbitrator is appointed by the President of the Deontological Council, and the tribunal is formally constituted. The Tax Authority is notified and submits a response contesting or accepting the claims. The process includes a preparatory meeting (which may be waived if unnecessary), an arbitral hearing where witnesses may be examined, and submission of written pleadings by both parties. The arbitrator evaluates the facts, applies relevant tax law provisions, and issues a binding decision. In this case (437/2014-T), the tribunal was constituted on August 22, 2014, following a request filed on June 20, 2014, and proceeded to hearing after the preparatory meeting was dispensed with, with the claimant seeking partial annulment of an €83,906.93 assessment plus compensation for undue guarantee.