Process: 437/2018-T

Date: April 22, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 437/2018-T) addresses the IRS taxation of real estate capital gains for a non-resident taxpayer who sold a Portuguese property at a loss. The Brazilian claimant acquired a property in Cascais for €850,000 in 2010 and sold it in 2013 for €585,000, resulting in a €265,000 loss. Despite this loss, the Portuguese Tax Authority (AT) issued an IRS assessment of €10,052.97 for tax year 2013. The claimant argued that since the sale generated a loss rather than a capital gain, no taxable income existed under Article 10 of the IRS Code (CIRS). For non-residents, IRS only applies to Portuguese-sourced income, with capital gains taxed at an autonomous 28% rate under Article 72(1)(a) CIRS. The capital gain calculation requires a positive difference between the realization value and acquisition value. Where no gain exists, there is no tax liability and no filing obligation. The claimant paid the assessment under protest and filed an administrative review request in February 2018. After initiating CAAD arbitration in September 2018, the Tax Authority favorably resolved the administrative review, annulling the contested assessment. This led to 'inutilidade superveniente da lide' (supervening futility of proceedings) under Article 277(e) of the Civil Procedure Code, resulting in case termination. The decision confirms that actual economic losses on property sales cannot generate IRS capital gains liability, regardless of the relationship between sale price and taxable property value (VPT). This ruling reinforces taxpayer protections for non-residents and clarifies that capital gains taxation requires demonstrable economic profit.

Full Decision

ARBITRAL DECISION

Report

A – General

A..., taxpayer number..., resident at Rua..., no....–..., ... São Paulo, Brazil, whose tax representative in Portugal is the company B..., S.A., with tax identification number..., with registered office at..., no....–..., ...-... Lisbon (hereinafter referred to as "Claimant"), submitted, on 04.09.2018, a request for constitution of a single arbitral tribunal in tax matters, which was accepted, aiming, in mediatory terms, at the annulment of the Personal Income Tax (hereinafter "IRS") assessment which was notified to him by the IRS assessment statement no. 2017..., relating to the year 2013, in the amount of € 10,052.97 (ten thousand and fifty-two euros and ninety-seven cents).

Pursuant to the provisions of paragraph a) of section 2 of article 6 and paragraph b) of section 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned as arbitrator, and the Parties, after being duly notified, did not raise any objection to this appointment.

By dispatch of 20.09.2018, the Tax and Customs Administration (hereinafter referred to as "Respondent") proceeded to appoint Mr. Dr. C... and Ms. Dr. D... to intervene in this arbitral proceedings, in the name and on behalf of the Respondent.

In compliance with the provisions of paragraph c) of section 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 14.11.2018.

On 19.11.2018, the senior official of the Respondent's service was notified to, if willing, present a response within 30 days, request additional evidence production, and attach to the proceedings a copy of the administrative file.

The Respondent did not submit its Response nor attached the administrative file to the proceedings.

B – Position of the Claimant

The Claimant is a natural person of Brazilian nationality who resided in Portugal until 2009, from which year onwards he was considered non-resident in Portugal.

On 17.05.2010, the Claimant acquired, for € 850,000.00 (eight hundred and fifty thousand euros) the urban property located at..., situated in..., ... Cascais, number..., registered and described in the ... land registry office of Cascais under number..., entered in the respective urban property tax matrix under article..., autonomous fraction identified by the letter "B" (the "Property").

On 11.04.2013, the Claimant sold, for € 585,000.00 (five hundred and eighty-five thousand euros) the "Property".

The price at which the Claimant sold the Property was higher than its Tax Assessed Value ("VPT") at the date of the sale, but lower than the price at which he had acquired it.

With the sale of the Property referred to in 1.9., the Claimant realized a loss of € 265,000.00 (two hundred and sixty-five thousand euros) and not a capital gain.

In 2013, the Claimant was non-resident in Portuguese territory, so IRS would be levied solely on his income obtained in Portuguese territory, pursuant to section 2 of article 15 of the IRS Code.

At the date to which the facts relate, capital gains provided for in paragraphs a) and d) of section 1 of article 10 earned by non-residents in Portuguese territory that were not attributable to a permanent establishment situated there would have been taxed at the autonomous rate of 28% [article 72, section 1 paragraph a)].

The concept of capital gain, also at the date of the facts, was contained in article 10 of the IRS Code: capital gains would be gains obtained which, not being considered as business and professional income, income from capital or real property income, resulted namely from the onerous transfer of real rights over immovable property, the gain subject to IRS being constituted by the difference between the realization value and the acquisition value, net of the part qualified as income from capital, as appropriate, in the cases provided for in paragraphs a), b) and c) of section 1.

Now, the Claimant did not realize any gain with the sale of the Property; instead, he registered a loss of € 265,000.00 (two hundred and sixty-five thousand euros), so there cannot be any tax to be assessed relating to said sale.

Having not earned any IRS income in Portuguese territory in the year 2013, the Claimant had no reporting obligation.

The Claimant was notified, on 20.11.2017, of the IRS assessment statement no. 2017..., relating to the year 2013, in the amount of € 10,052.97 (ten thousand and fifty-two euros and ninety-seven cents), the payment deadline for which ended on 20.12.2017.

Although disagreeing, the Claimant proceeded to pay the amount that was being demanded from him on 15.12.2017.

On 06.02.2018, a petition for administrative review was filed with the Respondent's services, by which the Claimant requested the annulment of the IRS assessment statement no. 2017..., relating to the year 2013, in the amount of € 10,052.97 (ten thousand and fifty-two euros and ninety-seven cents), on the grounds that the sale of the Property does not generate, as summarized above, any capital gain capable of being taxed for IRS purposes.

Until the submission of the request for constitution of a single arbitral tribunal in tax matters by the Claimant, the Respondent had not ruled on the mentioned petition for administrative review, so the same, pursuant to the terms and for the purposes of article 57 of the General Tax Law (LGT), was deemed to have been tacitly rejected on 06.06.2018.

C – Position of the Respondent

The Respondent, as already stated, did not submit its Response.

D – Conclusion of the Report and Case Management

The Claimant, by petition notified on 03.12.2018, informs the Arbitral Tribunal that the Respondent had in the meantime ruled favorably on the petition for administrative review submitted by him on 06.02.2018, so that, pursuant to the terms and for the purposes of paragraph e) of article 277 of the Code of Civil Procedure ("CPC"), applicable by virtue of paragraph e) of section 1 of article 29 of the Arbitration Regulations in Tax Matters (RJAT), there was supervening futility of the dispute resulting in the termination of the proceedings.

Invited to comment on the Claimant's petition, the Respondent came forward on 10.12.2018 to inform the Arbitral Tribunal that it would have no objection to the requested termination of the proceedings.

The Arbitral Tribunal is substantively competent, pursuant to the provisions of article 2, section 1, paragraph a) of the RJAT.

The Parties have judicial personality and capacity and have standing pursuant to article 4 and section 2 of article 10 of the RJAT, and article 1 of Regulation no. 112-A/2011, of 22 March.

The proceedings are not affected by any nullity.

Matters of Fact

2.1. Established Facts

The facts referred to in points 1.7 to 1.11 and 1.17 to 1.20 above are deemed established.

The Claimant submitted on 04.09.2018 the request for constitution of a single arbitral tribunal in tax matters, which was accepted, aiming, in mediatory terms, at the annulment of the IRS assessment which was notified to him by the IRS assessment statement no. 2017..., relating to the year 2013, in the amount of € 10,052.97 (ten thousand and fifty-two euros and ninety-seven cents).

The Respondent, after the expiration of the 30-day period referred to in section 1 of article 13 of the RJAT, ruled favorably on the petition for administrative review submitted by the Claimant on 06.02.2018.

2.2. Non-Established Facts

There are no facts relevant to the assessment of the merits of the case that have been given as not established.

2.3. Reasoning for the Establishment of Matters of Fact

The facts were established on the basis of the appraisal and evaluation of the documents attached to the proceedings by the Claimant, the positions assumed by him in the request for arbitral decision, and also the contents of the petitions submitted by the Parties.

Matters of Law

3.1. Preliminary Question to be Decided

From what has been stated above, there is a preliminary question that merits consideration and may prejudice the need to proceed with the analysis of the substantive issue raised in the present proceedings: that of supervening futility of the dispute, which will be addressed immediately below.

3.2. Supervening Futility of the Dispute

As results from the fact established as proven, the Respondent, after the request for arbitral decision had been submitted, ruled favorably on the petition for administrative review submitted by the Claimant on 06.02.2018, whose tacit rejection constituted the immediate object of the present proceedings.

Being so, both Parties are expressly in favor of the termination of the proceedings. In fact, it becomes futile to continue with the present dispute, insofar as, from the continuation thereof, no effect will result on the disputed substantive legal relationship, in which the Parties are, as stated, in agreement.

Supervening futility of the dispute occurs when, by fact occurring during the pendency of the case, the resolution of the dispute ceases to have interest and utility, which justifies the termination of the proceedings [cf. article 277, paragraph e), of the Code of Civil Procedure].

Thus, if, by virtue of new facts occurring during the pendency of the proceedings, the objective sought with the claim brought before the court has already been achieved by another means, and the merits decision that could be rendered in these proceedings has no utility, supervening futility of the present dispute cannot but be established.

It follows from the administrative action established as proven that the claim formulated by the Claimant, which had as its purpose the declaration of illegality and annulment by this Arbitral Tribunal of the act being challenged, was undermined because the suppression of that act and its effects on the legal order was achieved by another route, after the initiation of the present proceedings. In fact, the subsequent practice of the express act of revocation of the mediately challenged assessment (cf. article 79, section 1 of the LGT) implies that the proceedings relating to the assessment of the legality of that assessment are terminated by supervening futility of the dispute, given that, as its effects have been eliminated by the annulling revocation, the assessment of the alleged defects regarding its invalidity in relation to the disputed assessment loses utility, and the claim for annulment against said assessment is rendered moot.

In these terms, this Arbitral Tribunal finds that supervening futility of the dispute is present regarding the request for annulment of the tax act that is the object of the present proceedings, which implies the termination of the corresponding proceedings pursuant to the provisions of paragraph e) of article 277 of the CPC, applicable by virtue of article 29, section 1, paragraph e) of the RJAT.

Decision

Pursuant to and on the grounds set forth above, the Arbitral Tribunal decides, with all legal consequences, to declare these proceedings terminated by supervening futility of the dispute.

Value of the Proceedings

When an assessment act is challenged, the value of the case is that of the amount whose annulment is sought, which corresponds to the economic value of the claim. Thus, in accordance with the provisions of section 2 of article 306 of the CPC, article 97-A of the Tax Procedure Code (CPPT), and also section 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings, the case is valued at € 10,052.97 (ten thousand and fifty-two euros and ninety-seven cents).

Costs

For the purposes of section 2 of article 12 and section 4 of article 22 of the RJAT and section 5 of article 4 of the Regulation on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 918.00 (nine hundred and eighteen euros), pursuant to Table I attached to said Regulation.

Responsibility for the expenses of the proceedings should be borne by the party that gave rise to the dispute, being understood that the party that does so is the one that will be defeated in it. In the present case, the Respondent did not proceed with the revocation of the assessment act now being challenged within the period referred to in section 1 of article 13 of the RJAT, so this Arbitral Tribunal considers that, pursuant to section 3 of article 536 of the CPC, the Respondent should be held entirely responsible for the costs of the present proceedings.

Lisbon, 22 April 2019

The Arbitrator

(Nuno Pombo)

Text prepared by computer, pursuant to section 5 of article 131 of the CPC, applicable by referral of paragraph e) of section 1 of article 29 of the RJAT and with the spelling prior to the said Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

How are real estate capital gains (mais-valias imobiliárias) calculated for IRS purposes when the sale price is lower than the acquisition price?
Real estate capital gains for IRS purposes are calculated as the difference between the realization value (sale price) and the acquisition value, as defined in Article 10 and Article 51 of the CIRS. When the sale price is lower than the acquisition price, no capital gain exists—instead, the taxpayer realizes a loss. Under Portuguese tax law, losses on real estate sales do not generate taxable income for IRS purposes. In this case, the property sold for €585,000 against an acquisition cost of €850,000, resulting in a €265,000 loss. Since there was no positive gain, no IRS liability arose. The Tax Authority's initial assessment was subsequently annulled because the fundamental requirement for capital gains taxation—a positive economic gain—was absent. This principle applies equally to resident and non-resident taxpayers.
What qualifies as property enhancement costs (encargos com a valorização dos imóveis) under Article 51(a) of the Portuguese IRS Code (CIRS)?
Under Article 51(a) of the CIRS, property enhancement costs (encargos com a valorização dos imóveis) are expenses that can be added to the acquisition value when calculating capital gains. These include costs for improvements, renovations, expansions, or other investments that increase the property's value beyond mere maintenance. Enhancement costs must be properly documented and proven to qualify for inclusion in the adjusted acquisition value. While this case did not specifically address enhancement costs (as the sale price was below the original purchase price), the provision allows taxpayers to reduce taxable gains by demonstrating legitimate value-adding expenditures. Examples include structural improvements, additions, modernization works, and major refurbishments—but not routine repairs or maintenance. Proper documentation such as invoices, building permits, and payment receipts is essential to substantiate these costs before the Tax Authority.
How does non-resident tax status affect IRS liability on real estate capital gains in Portugal?
Non-resident tax status significantly affects IRS liability on Portuguese real estate capital gains. Under Article 15(2) of the CIRS, non-residents are only taxed on Portuguese-sourced income, not worldwide income. At the time of the facts (2013), capital gains from real estate sales by non-residents not attributable to a permanent establishment in Portugal were taxed at an autonomous rate of 28% under Article 72(1)(a) CIRS. Non-residents have simplified obligations: they only file IRS returns when taxable Portuguese income exists. In this case, since the property sale generated a loss rather than a gain, the non-resident claimant had no Portuguese-sourced taxable income and therefore no filing obligation or tax liability. The Tax Authority's initial assessment incorrectly assumed taxable income existed merely because a transaction occurred, without properly verifying whether an actual economic gain had been realized.
What is 'inutilidade superveniente da lide' (supervening uselessness of proceedings) in CAAD tax arbitration cases?
'Inutilidade superveniente da lide' (supervening uselessness/futility of proceedings) occurs when the disputed matter is resolved during arbitration, making continuation of the case pointless. Under Article 277(e) of the Civil Procedure Code (CPC), applicable to CAAD proceedings via Article 29(1)(e) of the RJAT, proceedings terminate when the dispute becomes moot. In this case, after the claimant initiated arbitration seeking annulment of the IRS assessment, the Tax Authority favorably decided the pending administrative review and cancelled the contested assessment. Since the claimant obtained the relief sought—annulment of the tax assessment—continuing the arbitration served no purpose. Both parties agreed to termination. This procedural mechanism promotes efficiency by avoiding unnecessary judicial resources on resolved disputes. The doctrine recognizes that when the substantive controversy disappears, the formal proceedings should end, regardless of which party's action resolved the underlying issue.
Can the acquisition value of a property be adjusted for IRS capital gains purposes when the sale price exceeds the taxable asset value (VPT) but is below the purchase price?
The acquisition value for IRS capital gains purposes can be adjusted under Article 51 of the CIRS to include certain costs beyond the purchase price. However, adjustment depends on demonstrable enhancement costs, not merely because the sale price exceeds the taxable property value (VPT). The VPT (valor patrimonial tributário) serves administrative purposes but does not automatically determine capital gains calculations. In this case, although the €585,000 sale price exceeded the property's VPT, it remained below the €850,000 acquisition price, resulting in an economic loss. The relationship between sale price and VPT is irrelevant to capital gains calculation—what matters is the comparison between realization value and properly documented acquisition value plus eligible enhancement costs. Article 51(a) CIRS allows adding valorization costs (improvements, expansions) to the base acquisition value, but taxpayers must prove these expenses with adequate documentation. The Tax Authority cannot presume a gain exists solely because sale price exceeds VPT; actual economic profit must be demonstrated through proper acquisition value calculation.