Process: 44/2017-T

Date: September 11, 2017

Tax Type: IRC IRS

Source: Original CAAD Decision

Summary

CAAD Process 44/2017-T addresses the proportional deduction of expenses under Article 41 of the Portuguese Personal Income Tax Code (CIRS) for a non-resident taxpayer deriving rental income from Portuguese property. The taxpayer challenged IRC assessments for 2012-2014, totaling over €16,000 in tax and compensatory interest, arguing that the Tax Authority (AT) unlawfully limited expense deductions based on property occupancy days rather than the full tax year. The claimant raised three principal grounds: procedural defects including lack of reasoning in the tax inspection report; introduction of new legal grounds (non-compliance with VAT Code invoice requirements) in the gracious complaint decision that were absent from the original inspection report; and substantive error in applying proportionality coefficients to maintenance and conservation expenses. The taxpayer maintained that all documented expenses directly linked to property maintenance should be fully deductible under Article 41 CIRS, arguing that 'maintenance and conservation expenses' should encompass all ordinary and extraordinary costs necessary to preserve the income-producing asset. The AT defended the proportionality approach, asserting that expenses must correlate with income-generating periods—only months when the property was actually rented. The Authority argued that deductible expenses under Article 41 must be documented, necessary, directly linked to income production, and borne by the taxpayer, with a proportional relationship to rental periods when the property generated taxable income. The tribunal's analysis would determine whether expense deductibility follows a strict temporal correlation with rental periods or permits full deduction of annual maintenance costs regardless of occupancy rates, establishing important precedent for non-resident property owners in Portugal.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1. A..., taxpayer no...., tax resident in ..., ... – no...., ..., hereinafter designated as the Claimant, presented on 13/01/2017 a request for establishment of tribunal and arbitral decision, in which she requests the annulment of the express rejection decision of the gracious appeal and, consequently, of the Corporate Income Tax (IRC) assessments for 2012 (2016...) in the amount of € 3,626.54 in tax and € 389.08 in compensatory interest; for 2013 (2016...) in the amount of € 5,727.44 (€ 10,288.81 - € 4,922.45) in tax and € 361.08 in compensatory interest; for 2014 (2016...) in the amount € 7,352.16 (€ 8,924.87 – € 1,768.00) in tax and € 195.29 in compensatory interest and the payment of indemnity interest.

1.2. The Honourable President of the Deontological Council of the Administrative Arbitration Centre (CAAD) designated on 06/03/2017 as arbitrator, Francisco Nicolau Domingos.

1.3. On 22/03/2017 the arbitral tribunal was constituted.

1.4. In compliance with the provision of art. 17, nos. 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Defendant was, on 22/03/2017 notified to, if she wished, present a response, request the production of additional evidence and to submit the administrative file (PA).

1.5. On 05/05/2017 the Defendant presented her response in which she defends the unfoundedness of the claims formulated and attached the PA to the proceedings.

1.6. The tribunal on 30/06/2017 decided to dispense with the holding of the meeting to which art. 18, no. 1 of RJAT refers on the basis of the principle of the arbitral tribunal's autonomy in conducting the proceedings and in determining the rules to be observed with a view to obtaining, within a reasonable timeframe, a substantive decision on the claims formulated, cf. art. 16, para. c) of RJAT, granted 8 days for the parties, if they wished, to present their written final submissions and set a deadline to render the arbitral decision.

1.7. The parties did not present written final submissions.

2. POSITIONS OF THE PARTIES

The Claimant begins by attributing the defect of lack of reasoning to the Tax Inspection Report (RIT), in so far as this, in her understanding, does not indicate which expenses are non-deductible when the description does not allow to classify the asset/service provision supported and those which are non-deductible because they are "current expenses".

She also argues that the reasoning is obscure and insufficient, because its content is not sufficient to explain the true reasons that justified the performance of the acts complained of.

She further argues that the corrections are unlawful in so far as the Tax and Customs Authority (AT), in the express rejection decision of the gracious appeal, came to provide different reasoning for the corrections and consequent assessments, as it invokes ex novo that: "...the taxable person (TP) deducted expenses incurred by invoices that do not comply with the provision of paragraph b) of no. 5 of art. 36 of the Value Added Tax Code and, as such, cannot be accepted for tax purposes, namely, cannot be accepted for the purposes of the provision of art. 41 of the Personal Income Tax Code", when in the RIT there is only reference that such corrections are made because they do not allow to classify the asset/service provision supported or when they are current expenses and not maintenance and conservation expenses.

She further attributes the defect of error in the factual and legal assumptions to the RIT and consequent assessments when it promotes the corrections on the basis of: i) deductibility of expenses under art. 41 of the Personal Income Tax Code (CIRS); ii) other non-deductible expenses and iii) proportionality of expenses based on the number of days of the property lease.

To support this claim she alleges namely that: i) she has all external and internal documents of the expenses she deducted under art. 41 of CIRS; ii) the indeterminate concepts of "maintenance and conservation expenses" should not be interpreted in the sense of being assumed as a factor of rigidity capable of putting into question the rationality that should characterize the income of category F of Personal Income Tax (IRS); iii) the rationale underlying the concept of "conservation expenses" consists in accepting, for purposes of deductibility, all conservation expenses, whether ordinary or extraordinary; iv) all expenses necessary to the maintenance of the properties and their economic activity should be considered as "maintenance expenses" – those expenses that, having sufficient proof, have a direct causal link with the property, that is, to produce income and v) the AT in defending the application of a proportionality coefficient for maintenance and conservation expenses evidences a violation of the law.

The Claimant further requests the annulment of the compensatory interest assessments and the payment of indemnity interest.

The Defendant in her response defends herself as follows:

i) Matter of lack of reasoning

The content of the request for arbitral decision demonstrates that the Claimant understood the meaning and scope of the IRC assessments and compensatory interest, as evidenced by the argumentative exercise contained in the procedural document and in which it is possible to find an extensive discussion of the criteria and methods applicable and from which resulted the corrections set out in the RIT. Or, in other words, in her judgment the acts are reasoned both in fact and in law.

But, even if this were not the case, any deficiencies in the reasoning discourse would always be degraded to mere non-essential irregularities, when it is proven that the objective was achieved, that is, the complete clarification of its addressee.

Moreover, she further alleges that if the acts suffered from deficiencies in the level of the reasoning discourse, the Claimant could always have used art. 37 of the Tax Procedure and Process Code (CPPT), not having used it, the defect was cured.

Based on the foregoing, she alleges that it can be easily inferred that there was no subsequent reasoning.

ii) Matter of the defect of violation of law – art. 41 of CIRS at the date of the tax facts

In the income in question here – property income – deductible are documented expenses, necessary and directly linked to obtaining those same income, provided they are borne by the taxable person himself. These are the expenses understood as necessary to the production of the property income included and to maintain intact the income-producing source, that is, the properties subject to lease.

Such conservation, maintenance and Municipal Real Estate Tax (IMI) expenses paid on the property leased during some months of the year should be proportionally considered based on the number of months of lease.

As maintenance and conservation expenses eligible within the framework of art. 41 of CIRS should be considered those that fall to the taxable person, that are borne by him and that are documentally proven, as well as the IMI that falls on the value of the properties or part thereof whose income has been included.

In the specific case, the correction of the deductible amounts took into account that the property was only occupied for part of the year, and not all expenses could be deducted, whereby there was a counting of the nights in which the property was occupied by customers.

In the interpretation of art. 41, no. 1 of CIRS, the expenses concerning conservation, maintenance and IMI paid on the property, provided that properly documented and that should be considered as costs, must contain a relationship and/or correspondence with obtaining the property income included for purposes of category F of CIRS.

In the periods in which the property was not occupied and, for that reason, did not produce any property income, there being no gross income to which any incurred expense could be deducted, it will not be possible to ascertain a net income subject to taxation under category F of CIRS. Thus, maintenance, conservation and tax paid expenses should be proportionally considered based on the periods in which the property was occupied and, in that measure, generated the property income.

In summary, only through the consideration of the occupancy coefficient was it possible for the tax administration to establish an adequacy and proportionality between the gross property income and the charges and deductible expenses – category F of CIRS – so as to obtain the net property income.

iii) Matter of violation of the principle of equality and tax-paying capacity

An interpretation that does not support the position set out in the RIT violates the principle of equality and tax-paying capacity, by discriminating against taxpayers who lease a property for few days, deducting all and any expenses provided for in art. 41 of CIRS without any limit, from those who, using the property for leasing throughout the entire tax year, find themselves in the contingency of being placed on the same level of tax-paying capacity as the former.

In this way, these are the matters which the tribunal should decide:

i) Whether the IRC assessments and compensatory interest assessments suffer from the defect of lack of reasoning;

ii) Whether the IRC assessments and compensatory interest assessments should be annulled due to error in the factual and legal assumptions;

iii) Whether the interpretation that expenses provided for in art. 41 of CIRS should be considered without any limit, when the property is not leased for the entire year is unconstitutional, by violation of the principle of equality and tax-paying capacity;

iv) Whether there is grounds for payment of indemnity interest.

3. MATTER OF FACT

3.1. Facts considered proven

3.1.1. The Claimant is the owner of a residential property located in the Tourist Village ..., ..., being registered in the urban property register of the parish of ... under article ... .

3.1.2. The Claimant is a non-resident company, without permanent establishment and assessed for the activity "Leasing of real estate", to which corresponds the CAE 68200 and framed in the exemption regime provided for in art. 9 of the Value Added Tax Code (CIVA).

3.1.3. By order of 18/09/2015 of the Deputy Director of Finance of Faro, the carrying out of an internal inspection action and of partial scope was determined, having as its object the years 2012, 2013 and 2014.

3.1.4. The Claimant was notified by letter dated 15/01/2016 of the Draft RIT with the following corrections in respect of IRC:

| | 2012 | 2013 | 2014 |
|---|---|---|---|
| Corrections to taxable income | € 24,638.43 | € 21,465.45 | € 28,627.51 |

3.1.5. The Claimant did not exercise the right to prior hearing in relation to the draft administrative decision.

3.1.6. By letter dated 08/02/2016 the Claimant was notified of the RIT which made the corrections to taxable income described above final.

3.1.7. The corrections resulted in the practice of the following additional IRC assessments:

i) 2012 (2016...), in the amount of € 4,015.62, which includes € 389.08 by way of compensatory interest;

ii) 2013 (2016...), in the amount of € 5,727.44 (€ 10,288.81 of IRC - € 4,922.45 of self-assessment), which includes € 361.08 by way of compensatory interest;

iii) 2014 (2016...), in the amount of € 7,352.16 (€ 8,924.87 of IRC - € 1,768.00 of self-assessment), which includes € 195.29 by way of compensatory interest.

3.1.8. The basis of the corrections to taxable income was founded on the following:

"The amounts received as rent by the TP are considered property income (Category F of Personal Income Tax, article 8).

The expenses susceptible to being deducted from property income are found in art. 41 of CIRS "From the gross income referred to in art. 8, there are deducted the maintenance and conservation expenses that fall to the taxable person, borne by him and are documentally proven, as well as the Municipal Real Estate Tax that falls on the value of the properties... whose income has been included" – version in force in 2012.

For the years 2013 and 2014, the legislation was amended to: "From the gross income referred to in art. 8, there are deducted the maintenance and conservation expenses that fall to the taxable person, borne by him and are documentally proven, as well as the Municipal Real Estate Tax and Stamp Duty that falls on the value of the properties whose income is subject to taxation in the tax year".

In annex 2, column "Expenses that fall within art. 41 of CIRS", the expenses susceptible to being deducted from property income are identified.

The remaining expenses mentioned in the invoices are not deductible, either when the description does not allow to classify the asset/service provision supported, or when they are current expenses and not maintenance and conservation expenses.

Being a property leased during some periods, deductible expenses should be proportionally considered based on the number of days of the lease, that is, 61 days in 2012, 80 in 2013 and 66 in 2014... ".

3.1.9. In annex 2 to the RIT reference is made in various columns to the following description: "Invoice does not comply with legal requirements".

3.1.10. The Claimant presented on 29/06/2016 a gracious appeal of all the assessments identified in 4.1.7 herein.

3.1.11. The gracious appeal no. ...2016... was expressly rejected by order dated 29/09/2016 of the Honourable Head of the Finance Service of ... and notified to the Claimant on 03/10/2016.

3.1.12. The Claimant proceeded on 29/03/2016 to the payment of the amounts recorded in the additional IRC assessments as follows: i) 2012 – € 4,015.62 – (€ 3,626.54 in tax and € 389.08 by way of compensatory interest; ii) 2013 – € 5,727.44 (€ 5,366.36 in tax and € 361.08 by way of compensatory interest) and iii) 2014 – € 7,352.16 (€ 7,156.87 in tax and € 195.29 by way of compensatory interest).

3.1.13. The request for establishment of tribunal and arbitral decision was presented on 13/01/2017.

3.2. Facts not considered proven

There are no other facts with relevance to the arbitral decision that have not been given as proven.

3.3. Reasoning of the matter of fact considered proven

The matter of fact given as proven has its origin in the documents used for each of the alleged facts and whose authenticity was not called into question.

4. PRELIMINARY MATTER

Art. 10, no. 1 of RJAT provides that: "The request for establishment of arbitral tribunal is presented: a) Within the period of 90 days, counted from the facts foreseen in nos. 1 and 2 of article 102 of the Tax Procedure and Process Code, as to acts susceptible of autonomous challenge and, likewise, from the notification of the decision or the expiration of the legal deadline for decision of the hierarchical appeal".

As we know, no. 2 of art. 102 of CPPT was repealed by Law no. 82-E/2014, of 31 December, putting an end to the duality of periods to challenge judicially when faced with an express rejection of a gracious appeal or in the presence of a tacit rejection. That is, 15 days and 3 months, respectively.

Therefore, the period is today 3 months for either of the aforementioned hypotheses.

And as for tax arbitral contentious?

The matter in this context did not arise, in so far as the period for requesting the establishment of tribunal and arbitral decision was already uniformized. That is, whether one was faced with an express or tacit rejection of the gracious appeal, the period for such purpose was 90 days. A legislative solution that did not undergo any amendments, whereby the period for presenting the request for establishment of tribunal, when there is express rejection of the gracious appeal is 90 days.

But could one question the nature of this period?

The period is of a substantive nature and not procedural and, thus, runs continuously without being suspended during judicial holidays.

Applying the interpretation of the aforementioned rule to the case sub judice it is imperative to conclude that the request for establishment of arbitral tribunal is untimely, in so far as on 13/01/2017 the 90-day period of expiration of the right had already fully elapsed, counted from the day following the date of notification of the express rejection decision of the gracious appeal – 04/10/2016.

In summary, there is a lapse of the right of action.

5. DECISION

In these terms there is the exception of untimeliness of the request for establishment and arbitral decision of the tribunal and, consequently, the Defendant is absolved of the instance.

6. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at € 17,095.22, in accordance with art. 97-A of CPPT, applicable by virtue of the provision of art. 29, no. 1, para. a) of RJAT and art. 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

7. COSTS

Costs to be borne by the Claimant, in the amount of € 1,224, cf. art. 22, no. 4 of RJAT and Table I attached to the RCPAT.

Notify.

Lisbon, 11 September 2017

The arbitrator,

(Francisco Nicolau Domingos)

Frequently Asked Questions

Automatically Created

What are the rules for proportional expense deduction under Article 41 of the Portuguese CIRS for non-residents?
Under Article 41 of the Portuguese CIRS, non-resident taxpayers deriving rental income from Portuguese property may deduct documented maintenance and conservation expenses, as well as Municipal Real Estate Tax (IMI), that are directly linked to income production. The critical dispute concerns proportionality: the Tax Authority interprets Article 41 to require that expenses be proportionally allocated based on actual rental periods (occupancy days), arguing that expenses only relate to income-generating periods. However, taxpayers contend that all annual maintenance and conservation expenses necessary to preserve the property as an income-producing asset should be fully deductible, regardless of occupancy rates. The expenses must be documented, borne by the taxpayer, and demonstrate a direct causal connection to the property's capacity to generate rental income. This interpretation significantly impacts non-residents with seasonal or intermittent rental activity.
How does the CAAD arbitral tribunal assess IRC and IRS liquidation disputes involving non-resident taxpayers?
The CAAD arbitral tribunal conducts a comprehensive review of both procedural and substantive aspects of IRC and IRS assessments involving non-residents. Procedurally, the tribunal examines whether the tax inspection report and subsequent administrative decisions contain adequate legal and factual reasoning, verifying compliance with Article 77 of the Tax Procedure Code. The tribunal also assesses whether the Tax Authority introduced new legal grounds in the gracious complaint decision that were absent from the original inspection report, which may constitute a procedural defect. Substantively, the tribunal analyzes the correct interpretation and application of tax law provisions—particularly Article 41 CIRS for rental income—evaluating the proportionality of expense deductions, the documentation requirements, and the nexus between claimed expenses and income production. The tribunal's analysis balances taxpayer rights with proper tax assessment methodology.
What constitutes sufficient legal grounds for challenging tax inspection corrections through gracious complaint in Portugal?
Sufficient legal grounds for challenging tax inspection corrections through gracious complaint in Portugal include: (1) formal defects such as lack of reasoning or insufficient reasoning in the tax inspection report, violating Article 77 of the Tax Procedure Code; (2) introduction of new legal grounds (reformatio in peius) in the gracious complaint decision that differ from the original inspection report's rationale; (3) substantive errors in law, including misinterpretation or misapplication of tax code provisions such as Article 41 CIRS; (4) factual errors in the assessment of documented expenses or their characterization; (5) violation of proportionality principles or other constitutional tax principles; and (6) procedural irregularities during the inspection process. Taxpayers may also invoke Article 37 of the Tax Procedure Code to request clarification of ambiguous or incomplete reasoning before filing formal challenges.
When does the limitation period (caducidade) apply to the right of action in Portuguese tax arbitration proceedings?
The limitation period (caducidade) for the right of action in Portuguese tax arbitration proceedings is governed by Article 10 of the RJAT (Regime Jurídico da Arbitragem Tributária). Taxpayers must file their arbitration request within 90 days from notification of the final administrative decision being challenged—typically the rejection of a gracious complaint or hierarchical appeal. This deadline is peremptory and cannot be extended. Failure to file within this period results in loss of the right to arbitral review. The limitation period begins running from actual notification of the decision to the taxpayer, not from the decision's issuance date. For non-resident taxpayers, proper notification according to international service rules is critical to determining when the 90-day period commences. Unlike prescription (prescrição), which affects the underlying tax debt, caducidade affects only the procedural right to challenge the assessment through arbitration.
Can the Portuguese Tax Authority (AT) introduce new legal reasoning in a gracious complaint decision that differs from the original tax inspection report?
Portuguese administrative law generally prohibits the Tax Authority from introducing fundamentally new legal reasoning in a gracious complaint decision that was entirely absent from the original tax inspection report. This constitutes a procedural defect known as deficient reasoning or reformatio in peius when it disadvantages the taxpayer. In this case, the taxpayer alleged that while the inspection report cited only lack of expense classification and characterization as current expenses, the gracious complaint decision introduced a new ground: non-compliance with Article 36(5)(b) of the VAT Code regarding invoice requirements. Such introduction of new legal grounds may violate the taxpayer's right to defense and procedural fairness, as the taxpayer had no opportunity to address these arguments during the inspection phase. However, the AT may clarify, complement, or develop reasoning already implicit in the original report without constituting a defect. The distinction lies in whether the new reasoning represents genuine amplification of existing grounds or introduces entirely new legal bases for the assessment.