CAAD Ruling on IRS Reinvestment Exclusion and Full Loan Amortization Deduction from Sale Value

ENGLISH TRANSLATION

Case No. 443/2014-T

Claimant: A…, resident at Av. … Corroios, Tax Identification Number …

Respondent: Tax and Customs Authority

ARBITRAL DECISION

I. Report

1. The Claimant requested the Constitution of an Arbitral Tribunal pursuant to paragraph 2 of article 5 of the Legal Framework for Tax Arbitration, with the TAX AND CUSTOMS AUTHORITY (AT) intervening as the opposing party, in accordance with Order 112 A/2011 of 22 March, challenging the dismissal of a hierarchical appeal that upheld the partial grant decision on gracious complaint no. …, whereby the Claimant seeks, in summary, that the total amount of the loan contracted (rather than only the portion outstanding at the time of sale) be considered in the deduction from the realization value, with the consequent refund of €1,055.55, which comprises €650.56 in respect of Personal Income Tax (IRS) unduly paid and €404.99 in respect of excess withholding tax, plus compensatory interest.

2. More specifically, the Claimant requests the full application of the taxation exclusion provided for in paragraph a) of section 5 of article 10 of the Personal Income Tax Code (CIRS), whereby the correct value of €49,879.79 would be considered as the loan amortization amount to be deducted from the realization value, so as not to be taxed on the various loan amortizations (€11,528.66) made prior to the date of the deed of sale.

3. In accordance with 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 appointed Ana Teixeira de Sousa as arbitrator, and the parties, having been duly notified, raised no objection to such appointment.

4. Accordingly, 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 27.08.2014.

5. The senior official of the Tax and Customs Authority (hereinafter referred to as the "Respondent" or AT) was notified to submit, if it so wished, within 30 days, a reply and request the production of additional evidence. A reply was submitted on 03.10.2014, signed by legal counsel Ms. Dr. … and Ms. Dr. … on behalf and in representation of the Respondent, and the administrative file (hereinafter PA) was submitted by the AT.

6. In response to the AT's Reply, the tribunal, by order of 02.02.2015, decided to dispense with the meeting referred to in article 18 of the Legal Framework for Tax Arbitration (RJAT), granting the parties the statutory period for submission of arguments.

7. The Claimant submitted arguments on 23.02.2015, and the Respondent submitted its arguments on 24.02.2015.

8. Given the complexity of the analysis of various documentation and additional elements requested, the pronouncement of the decision was postponed until 26 August.

The Arbitral Pronouncement Request

In summary, the grounds presented by the Claimant are as follows.

1. In January 2008, for the sum of €115,500.00 (one hundred and fifteen thousand five hundred euros), he sold fraction "O" of the urban property entered in the property matrix of the parish of ... under number ….

2. This property constituted his own permanent residence.

3. The property was acquired on 27/05/1998, for this purpose, for the value of €49,879.79 (forty-nine thousand eight hundred and seventy-nine euros and seventy-nine cents) and with recourse to a bank loan for the total amount of the acquisition.

4. On 11/03/2008, for the value of €117,500.00 (one hundred and seventeen thousand five hundred euros), he acquired fraction "Z" of property no. …, entered in the urban property matrix of the parish of Corroios for his own permanent residence, resorting to a loan of €50,000.00 (fifty thousand euros).

5. In July 2012, he received the IRS tax assessment notice for the year 2008, officially corrected, with the amount due of €8,234.10, including compensatory interest of €794.58.

6. Having detected that in the IRS return for 2008, submitted by him within the statutory period, through an error the value €6,750.00 was declared in field 506 of the respective Annex G – Capital Gains and Other Patrimonial Increments, instead of €67,500.00.

7. Upon further analysis of the 2008 IRS assessment mentioned above, he detected an incorrect application of the provision in paragraph a) of section 5 of article 10 of CIRS. Incorrectly, the Tax and Customs Authority (AT) deducted from the realization value only the payment of the final loan installment for acquisition of the property, as required in field 503 of table 5 of Annex G - Capital Gains and Other Patrimonial Increments of the IRS Return for the year 2008 and subsequent years.

8. The Claimant submitted a gracious complaint on 16/08/2012, requesting the correction of the error referred to in paragraph 14, of the value entered in field 506 of Annex G, to €67,500.00.

9. In the same gracious complaint, a correction was requested of the error in the 2008 IRS assessment so that the true amount of the loan amortization contracted for its acquisition, in the amount of €49,879.79, would be deducted from the realization value of the property sale, in accordance with the provision in paragraph a) of section 5 of article 10 of CIRS, instead of the €38,351.13 paid in the final loan amortization installment and considered, wrongly and illegally, by the AT.

10. The gracious complaint submitted was only partially granted, correcting the net tax collection to the value of €4,508.56, which, after subtracting withholding taxes, resulted in a tax assessment with tax payable of €650.56.

11. The request for correction of the value (€67,500.00) to be considered in field 506, table 5, of Annex G of the respective 2008 IRS return was granted. As for the part requesting the actual application of the provision in paragraph a) of section 5 of article 10 of CIRS, this was not granted by the Tax and Customs Authority (AT), which considered only the payment of the final loan amortization installment, in the amount of €38,351.13, contracted for its acquisition, on the date of the deed of sale.

12. On 26/03/2014, the Claimant received the order dated 14/02/2014, of the hierarchical appeal filed on 28/01/2013, which upheld the order being appealed from the gracious complaint regarding the 2008 IRS assessment, namely, regarding the value considered for the loan amortization contracted in the acquisition and deducted from the respective realization value, whose legal justification is limited to reference to the instructions for completing field 503 of table 5 of Annex G, in force for income in the year 2008.

13. The Claimant presents a set of simulations, carried out through the Finance Portal to demonstrate that, in situations identical to reinvestment of their 2008 IRS, in which only the amount outstanding on the loan at the time of sale of the property differs (field 503 of Annex G), with all income elements remaining constant, various amounts of tax payable result, with the final IRS value always being greater the greater the loan debt previously amortized and the lesser the debt amortized with the sale of the property that gave rise to the loan.

14. Therefore, the assessment of their 2008 IRS, under the described conditions, is attributable to an error of interpretation and incorrect application of paragraph a) of section 5 of article 10 of CIRS by the AT.

15. The Claimant understands that the payment made of the amortization of €11,528.66, burdened with the respective interest, from the acquisition to the transfer, was not achieved "without effort or by chance of fortune," but rather the contrary. And the reduction of their liability, bank debt, does not in any way result in an increase in assets (patrimonial increment) or in income.

16. In the case at hand, the loan contracted in 1998 for acquisition of the first property, transposed to 2008, would in fact, applying the respective currency devaluation coefficient, have had a value greater than the €50,000.00 loan contracted in 2008.

17. The realization value deducted from the loan for acquisition of the property is €65,620.21 (€115,500.00 - €49,879.79) and the difference between the bank credit and the value of acquisition of the new own permanent residence is €67,500.00 (€117,500.00 - €50,000.00).

18. For this reason, he contends that the minimum reinvestment value, which would exclude subjection to capital gains, considered in his 2008 IRS, would be €65,620.21, a value which would in fact have exceeded by more than €1,879.79.

19. The final part of section 3 of Article 11 of the General Tax Law mentions that attention should be paid to the economic substance of the tax facts, which in the case at hand is, solely, the value of bank loan amortization not subject to IRS, not considered as income or patrimonial increment.

20. The Tax and Customs Authority itself considers, unequivocally, that partial or total bank loan amortization is not income subject to IRS, and that this same value should be considered as a deduction from the realization value to be reinvested, as can be verified in the binding ruling issued on 27/09/2012, on request …/2012.

21. The payment of loans for acquisition of own permanent residence does not figure, in any case, as income, taxable under IRS for the year 2008.

22. The legislator, in the content of paragraph a) of section 5 of article 10 of CIRS, enshrines amortization as a unit/totality to be deducted from the realization value so as not to unlawfully and unduly tax the amortizations made prior to the date of sale, since these do not figure as income nor are they taxed under IRS. If the legislator desired the contrary, it would suffice that he referred, in the body of the aforementioned paragraph a), that the deduction of the amortization of any loan contracted for acquisition of the property would be the value paid on the date of the deed, or something similar.

23. If the Tax and Customs Authority (AT) complied with the provision in paragraph a) of section 5 of article 10 of CIRS, the value of the deduction to be declared in field 503 (amount outstanding on the loan at the time of sale of the property referred to in field 502) would be the loan amortization and not the partial amount amortized on the date of the deed of sale.

24. According to the Claimant, as a result of this anomalous interpretation, various amounts to be paid result from IRS simulations for the year 2008 identical to the one complained of, differing only in the value of loan amortization made prior to the date of the deed of sale, as per the examples presented in the draft petition.

25. The Claimant thus requests the following:

a. The full application of the taxation exclusion provided for in paragraph a) of section 5 of article 10 of CIRS, whereby the correct value of €49,879.79 would be considered as the value of loan amortization, which it was in reality, to be deducted from the realization value, so as not to be taxed on the payment of the various loan amortizations (€11,528.66) made prior to the date of the deed of sale.

b. That the value considered as loan amortization to be deducted from the realization value be the value of €49,879.79, in accordance with paragraph a) of section 5 of article 10 of CIRS, so as to reflect in the value of net tax collection, corrected to €3,453.01, which, after subtracting the respective withholding taxes, will result in the just and legal refund of €404.99.

c. Considering the absence of legal grounds for the orders of partial dismissal of the gracious complaint of 02/01/2013 and the respective hierarchical appeal of 14/02/2014, sections 2 and 3 of article 103 of the Constitution of the Portuguese Republic and the foregoing, requesting that the tribunal order the just refund of €1,055.55 (€650.56 + €404.99) of the Personal Income Tax for the year 2008, plus the respective compensatory interest, in accordance with article 94 of CIRS, section 3 of article 61 of the Code of Tax Procedure (CPPT), sections 1 of articles 43 and 30 of the General Tax Law (LGT).

Response of the Tax and Customs Authority

1. The Tax Authority is of the view that the Claimant has no merit.

2. Indeed, in accordance with article 85 of CIRS, in the wording in force at the date of the facts (prior to Law No. 66-B/2012, of 31 December), both interest and amortizations of debts (amortizations of capital) contracted with the acquisition of properties for own permanent residence were subject to deduction, declared in Annex H of Model 3 of IRS.

3. That is, annually, and during the term of the loan, capital amortizations were, at the date of the tax facts, subject to deduction from the tax collection (through Annex H).

4. The Claimant deducted annually, in addition to interest, a portion of the amortized capital.

5. On the other hand, upon sale of the property, the taxpayer, in field 503 of Annex G of the IRS Return, enters the deduction relating to the amount of the loan that is being amortized at the moment the property was sold.

6. If the interpretation sought by the claimant were to be made, we would have a double deduction of the amounts of capital amortized, both through the deduction declared in Annex H, annually during the loan, and also through Annex G, upon sale of the property.

7. And this is the understanding advocated in Doc. No. 4 attached to the file.

8. In fact, bank loan amortization is not income subject to taxation under IRS and should be considered in Annex G (excluding interest and other charges) as a deduction from the realization value to be reinvested, in accordance with the provision in section 5 of article 10 of CIRS, to be indicated in Field 503 of Table 5 of Annex G of the Model 3 return (in the aforementioned ruling, field 505 is referred to, due to a change in the Model 3 form, Annex G).

9. It being certain that what is at issue is not the entirety of the loan but its remainder, on the date of sale of the property.

10. For that reason, the instructions for completing field 503 of table 5 of Annex G provide, unequivocally, the following:

"Field 503 – the amount of capital outstanding on the loan contracted for the acquisition of the property sold (excluding interest and other charges, as well as loans for works) on the date of sale of the property (applicable only for sales made in 2002 and subsequent years)".

1. Accordingly, there is no defect attributable to the act challenged in these proceedings, which, making a correct application of the law to the facts, in particular of paragraph a) of section 5 of article 10, in the wording then in force, upheld the decision rendered on the gracious complaint no. ...2012....

2. The assessment no. … being correct and lawful, in accordance with the grounds, both factual and legal, of the appealed act, which are hereby fully reproduced.

3. And as the challenged act is not subject to any invalidating defect, there is no grounds for the payment of compensatory interest.

Arguments of the Parties

1. The Claimant submitted written arguments in which it clarified its position.

2. The Claimant further adds the following regarding the deduction from tax collection relating to interest and amortizations of housing loans.

3. The benefit referred to by AT was a deduction from the tax collection of 30% of interest and amortizations, with a limit of €586.00, existing in 2008 and regulated by paragraph a) of article 85 of the Personal Income Tax Code (CIRS).

4. These deductions only produced practical effects when the total tax collection (after the application of rates and the marital coefficient) had a value equal to or greater than €586.00. Accordingly, there would be the possibility that many taxpayers would be penalized before the Law (CIRS), because they could not deduct any value, in accordance with paragraph a) of article 85 of CIRS, and when they reinvested in a new residence they would lose the deduction, from the realization value, of the amortizations made prior to the deed of sale of the previous residence.

5. The deductions from tax collection of paragraph a) of article 85 of CIRS are optional and do not always occur in fact (as is seen in the previous point), and should not therefore justify disregarding the amortizations of loans paid prior to the date of sale of the residence in the deduction from the realization value in the case of reinvestment in a new property for this purpose.

6. In paragraph a) of article 85 of CIRS, as it stood in 2012, amortizations of loan debts contracted for own permanent residence ceased to be considered as deductions. Only 30% of the interest on these credits could be deducted from the tax collection.

7. If what was advocated by AT were real, Annex G of the IRS for 2012 and subsequent years would have had to be amended so as not to penalize taxpayers who reinvest in their own properties, because since 2011 the supposed "compensation" by AT of the amortizations deducted through paragraph a) of article 85 of CIRS, declared in Annex H, no longer exists.

8. For its part, the AT, in its arguments, likewise reiterates its position.

9. Referring to section 5 of article 10 of the Personal Income Tax Code, it clarifies that the calculation of capital gains is carried out from the perspective of determining net annual income and must therefore reflect the amortization made in the year of realization (and not in all previous years, since the acquisition of the property with recourse to bank credit).

10. As regards what is alleged by the Appellant regarding the tax benefit of deduction from tax collection of interest and housing loan amortization, the AT comes to say that, following the reasoning of the Claimant, all deductions from tax collection would constitute violations of the principle of equality since all taxpayers who did not have them would be discriminated against negatively.

11. And that the claimant would have been discriminated against positively in relation to subjects who acquired their own permanent residence without recourse to bank credit, since they would not have had any deduction of interest or capital amortization.

Subject Matter of the Request

1. The question the Claimant wishes to have decided is the legality of the 2008 IRS assessment, regarding the taxation of real estate capital gains determined in the sale of property for own permanent residence.

2. Specifically, the Claimant wishes for the 2008 IRS assessment to be declared unlawful because, in calculating the taxable real estate capital gains, the AT considers that the value of loan amortization to be deducted from the realization value should be the value made available by the Claimant as seller for final amortization of the loan on the date of that sale, while the Claimant understands that it should be the value of the loan on the date of acquisition of the property.

3. In the income return for IRS/Model 3, relating to the year 2008, filed on 20/05/2009, the Claimant entered in field 401 of table 4 of Annex G the values of realization of 115,500.00€ and acquisition of 49,879.79€ and expenses and charges of 1,101.00€. The Claimant further entered in fields 503 (amount outstanding on the loan), 504 (amount to be reinvested) and 506 (amount reinvested in the year of sale) the amounts of, respectively, 38,351.13€, 67,500.00€ and 6750.00€.

4. In accordance with the declaration, the IRS assessment no. ... dated 19/06/2009 was issued, to which corresponded tax payable of €650.56.

5. From this assessment, the Claimant filed a gracious complaint on 29/12/2009, with no. ...2009....

6. That gracious complaint was subject to a dismissal decision of 21/04/2010 from the Chief of the Seixal Finance Service ….

7. As in the IRS returns for subsequent years, the taxpayer did not enter the remaining reinvestment of the realization value, a reassessment of the return was made, which gave rise to the IRS/2008 assessment no. …, to which corresponded tax payment of €7,583.54 (assessment no. …).

8. From this last assessment, gracious complaint no. ...2012... was filed on 16/08/2012.

9. By memorandum no. ..., of 12/12/2012, the taxpayer was notified for the purpose of prior hearing on a draft decision that granted partial relief to the gracious complaint, with the tax administration recognizing a reinvestment of €67,500.00 and capital gains of €76,614.30.

10. The taxpayer came forward disagreeing with the AT's position, arguing that "The realization value deducted from the loan for acquisition of the property is €65,620.21 (€115,500.00-€49,879.79) and the difference between the bank credit and the value of acquisition of the new own permanent residence is €67,500.00 (€117,500.00-€50,000.00). For this reason, the correct and real reinvestment value to be declared in field 506 of Annex G (…) is €65,620.21 instead of €76,614.30 …".

11. The gracious complaint was partially granted, in the segment relating to the error in stating the reinvested value (€67,500.00 instead of €6,750.00), in accordance with the draft decision communicated to the Claimant.

12. Following the partial grant of the gracious complaint, an official amended return was prepared, with the values of realization of €115,500.00 and acquisition of €49,879.79 and expenses and charges of €998.29 entered in field 401 of table 4 of Annex G, and in fields 503 (amount outstanding on the loan), 504 (amount to be reinvested) and 506 (amount reinvested in the year of sale) of table 5 of the cited annex, the values of, respectively, €38,385.70, €67,500.00 and €67,500.00.

13. That return gave rise to the assessment of ..., of 18/01/2013 with tax payable of €647.50.

14. On 28/01/2013, the taxpayer filed a hierarchical appeal of the (partial) dismissal of the gracious complaint, reiterating the arguments presented in the same complaint.

15. By order of 14/02/2014 from the Director of IRS Services (in substitution) the hierarchical appeal was dismissed of the decision rendered on the gracious complaint process no. … - 2012….

16. This order dismissing the hierarchical appeal of the decision rendered on the gracious complaint process no. … - 2012… constitutes the subject matter of the present request for arbitral pronouncement.

Preliminary Matters

1. Tax laws provide for the possibility of taxpayers administratively contesting tax assessment acts through gracious complaints and contesting the dismissal decisions of gracious complaints and hierarchical appeals, in accordance with articles 66, 67 and 76 of the Code of Tax Procedure (CPPT).

2. The acts that decide gracious complaints or hierarchical appeals of dismissals of gracious complaints will be, in this context, acts of second and third degree, respectively, in which the legality of assessment acts, which are acts of first degree, may be appraised (Guide to Tax Arbitration, Comments on the Legal Framework for Tax Arbitration by Jorge Lopes de Sousa, in co-authorship with Tânia Carvalhais Pereira, p. 121, Edições Almedina 2013).

3. Section 1 of article 10 of RJAT establishes that the request for constitution of the arbitral tribunal is presented within 90 days counting from the facts provided for in sections 1 and 2 (meanwhile revoked) of article 102 of CPPT as regards facts capable of autonomous challenge as well as from notification of the decision of the hierarchical appeal.

4. It is concluded that the jurisdiction of arbitral tribunals extends to these acts of second and third degrees which appraise the legality of primary acts, namely acts of dismissal of hierarchical appeal filed against the decision of dismissal of the gracious complaint of the assessment, as is the case in the present proceedings.

5. It is concluded, therefore, by the material jurisdiction of the tribunal, in accordance with the provisions of articles 2, section 1, paragraph a) of the Legal Framework for Arbitration in Tax Matters.

6. The parties enjoy judicial personality and capacity and have standing in accordance with article 4 and section 2 of article 10 of the Legal Framework for Arbitration in Tax Matters (RJAT), and article 1 of Order No. 112-A/2011, of 22 March.

7. The proceedings do not suffer from any nullity nor have the parties raised any exceptions that would prevent the appraisal of the merits of the case, so the conditions for the pronouncement of the arbitral decision are met.

II. JUSTIFICATION

Established Facts

On the basis of the documents submitted by the Claimant (request for arbitral pronouncement, Doc. No. 1 to 6 attached to that Request; Response from A.T. and the administrative file attached – PA – as well as the facts alleged and not contested by the parties), the following facts are established:

1. On 27/05/1998, the Claimant acquired, for the price of €49,879.79 and for own permanent residence, an autonomous fraction designated by the letter "O" corresponding to the 3rd floor, door B, of the urban property called "…", Lot …, located in Urbanization …, parish of ..., municipality of Loulé, entered in the matrix under article … (copy of deed of purchase and sale and loan in PA).

2. This acquisition was supported by a bank loan in the amount of the purchase price, that is, €49,879.79.

3. On 18/01/2008, he sold the aforementioned property for the value of €115,500.00 (copy of deed of purchase and sale in PA).

4. On the date of that sale, the value of the loan was €38,351.13 (copy of the document "Statement" issued by Bank … on 07/12/2007 declaring the capital outstanding on 31/12/2007 in the amount of €38,385.70 in PA).

5. On 11/3/2008, the Claimant acquired a new property, intended for own permanent residence, corresponding to the autonomous fraction designated by the letter "Z", of the … floor B, located at Av. …, parish of Corroios, municipality of Seixal, entered in the matrix under article …, for the price of €117,500.00 (copy of deed of purchase and sale and loan in PA).

6. For this latter acquisition a loan was made with CGD, in the amount of €50,000.00.

7. In the income return for IRS/Model 3, relating to the year 2008, filed on 20/05/2009, the Claimant entered in field 401 of table 4 of Annex G the values of realization of €115,500.00 and acquisition of €49,879.79 and expenses and charges of €1,101.00 (document in PA).

8. The claimant further entered in fields 503 (amount outstanding on the loan), 504 (amount to be reinvested) and 506 (amount reinvested in the year of sale) the amounts of, respectively, €38,351.13, €67,500.00 and €6,750.00 (document in PA).

9. In accordance with the declaration, the IRS assessment no. ..., dated 19/06/2009, was issued, to which corresponded tax payable of €650.56 (Doc. 1 of PI).

10. From this assessment, the Claimant filed a gracious complaint on 29/12/2009, with no. ...2009..., on the grounds that "he had been forced to declare only €38,351.13 in field 503 of Annex G of the Model IRS for the year 2008, of the loan amortization outstanding, on the date of transfer, instead of the total loan amortization of €49,879.79".

11. That gracious complaint was subject to a dismissal decision of 21/04/2010 from the Chief of the Seixal Finance Service …, on the grounds of the understanding that field 503 should be completed with the value of the capital outstanding on the date of sale (see instructions for completing field 503).

12. In the IRS returns for subsequent years, the taxpayer did not enter the remaining reinvestment of the realization value, a reassessment of the return being made, which gave rise to the IRS/2008 assessment no. …, to which corresponded tax payment of €7,583.54 (assessment no. …, document in PA).

13. From this last assessment, gracious complaint no. ...2012... was filed on 16/08/2012 (document in PA).

14. By memorandum no. ..., of 12/12/2012, the Claimant was notified for the purpose of prior hearing on a draft decision that granted partial relief to the gracious complaint, with the tax administration recognizing a reinvestment of €67,500.00 and capital gains of €76,614.30 (document in PA).

15. The Claimant came forward disagreeing with the AT's position, arguing that "The realization value deducted from the loan for acquisition of the property is €65,620.21 (€115,500.00-€49,879.79) and the difference between the bank credit and the value of acquisition of the new own permanent residence is €67,500.00 (€117,500.00-€50,000.00). For this reason, the correct and real reinvestment value to be declared in field 506 of Annex G (…) is €65,620.21 instead of €76,614.30 …" (document in PA).

16. The gracious complaint was partially granted, in the segment relating to the error in stating the reinvested value (€67,500.00 instead of €6,750.00), in accordance with the draft decision communicated to the Claimant (document in PA).

17. An official amended return was prepared, with the values of realization of €115,500.00 and acquisition of €49,879.79 and expenses and charges of €998.29 entered in field 401 of table 4 of Annex G, and in fields 503 (amount outstanding on the loan), 504 (amount to be reinvested) and 506 (amount reinvested in the year of sale) of table 5 of the cited annex, the values of, respectively, €38,385.70, €67,500.00 and €67,500.00.

18. That return gave rise to the assessment of ..., of 18/01/2013 with tax payable of €647.50.

19. On 28/01/2013, the taxpayer filed a hierarchical appeal of that partial dismissal decision, reiterating the arguments presented in the gracious complaint (document in PI and in PA).

20. By order of 14/02/2014 from the Director of IRS Services (in substitution) the hierarchical appeal was dismissed of the decision rendered on the gracious complaint process no. … - 2012….

Unproven Facts

The unproven facts are considered irrelevant for the appraisal of the merits of the case.

Justification of the Decision – Applicable Law

1. It results from the positions of the Parties that the essential question in the present proceedings is to know how the taxation of real estate capital gains should be carried out, and in particular, the value that, for this purpose, should appear in field 503 of table 5 of Annex G of the Model 3/IRS Declaration (amount outstanding on the loan), in accordance with the form in force in 2008, with the understanding that

(i) the Claimant believes that the value to be registered there should correspond to the total amount of the loan contracted with the banking institution on the date of acquisition of the property, and

(ii) the Respondent believes that such value should be that of the remainder of the debt on the date of sale of the same property.

1. For the Claimant, the legislator, in the content of paragraph a) of section 5 of article 10 of CIRS, enshrines amortization as a unit/totality to be deducted from the realization value so as not to unlawfully and unduly tax the amortizations made prior to the date of sale, since these do not figure as income nor are they taxed under IRS.

2. If the legislator desired the contrary, it would suffice that he referred, in the body of the aforementioned paragraph a), that the deduction of the amortization of any loan contracted for acquisition of the property would be the value paid on the date of the deed, or something similar.

3. Thus, in the understanding of the Claimant, if the Tax and Customs Authority (AT) complied with the provision in paragraph a) of section 5 of article 10 of CIRS, the value of the deduction to be declared in field 503 (amount outstanding on the loan on the date of sale of the property referred to in field 502) would be the loan amortization and not the partial amount amortized on the date of the deed of sale.

4. The AT recognizes that bank loan amortization is not income subject to taxation under IRS and should be considered in Annex G (excluding interest and other charges) as a deduction from the realization value to be reinvested, in accordance with the provision in section 5 of article 10 of CIRS, to be indicated in Field 503 of Table 5 of Annex G of the Model 3 return.

5. It being certain that what is at issue is not the entirety of the loan but its remainder, on the date of sale of the property.

6. For that reason, the instructions for completing field 503 of table 5 of Annex G provide, unequivocally, the following:

"Field 503 – the amount of capital outstanding on the loan contracted for the acquisition of the property sold (excluding interest and other charges, as well as loans for works) on the date of sale of the property (applicable only for sales made in 2002 and subsequent years)".

1. Accordingly, there is no defect attributable to the act challenged in these proceedings.

2. For the AT, the assessment made was made on the basis of applicable law, to which the Administration is bound, with the Tax Administration pursuing, in accordance with article 55 of the LGT and following the principle set forth in articles 266 sections 1 and 2 of the Constitution of the Portuguese Republic, "… the pursuit of the public interest, with respect for the rights and legally protected interests of citizens" and with its "… organs and administrative agents … subordinated to the Constitution and to law …" and having to "… act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice, impartiality and good faith".

3. The Tax Administration being thus bound by the principle of legality, cannot fail to give full compliance to the normative provisions that the ordinary legislator created and that are in force in the legal order and also by virtue of the provision of article 55 of the LGT.

4. For the tribunal, the question to be decided relates to a question of law – interpretation of section 5 of article 10 of the Personal Income Tax Code – in the wording in force at the time, applicable to the taxation of real estate capital gains, resting equally on an economic concept which is the concept of "reinvestment".

5. In the case at hand, before anything else, there must be an exegesis of the norm contained in article 10, section 5, of CIRS, in the wording in force in 2008 (see article 12, section 1, of the Civil Code), a norm that had the following wording:

1 - Capital gains are gains obtained which, not being considered business and professional income, capital or real property income, result from:

a) Onerous disposal of real rights over real property and allocation of any assets of the private patrimony to a business and professional activity carried on in their own name by their owner;

………………………………..

2 -……

3 - …….

4 - The gain subject to IRS is constituted by:

a) The difference between the realization value and the acquisition value, net of the part qualified as capital income, if applicable, in the cases provided for in paragraphs a), b) and c) of section 1;

b)…………

c)

5 - The following are excluded from taxation: gains from the onerous transfer of real property intended for the own permanent residence of the taxpayer or of his family group, under the following conditions:

a) If, within 24 months counted from the date of realization, the realization value, deducted from the amortization of any loan contracted for acquisition of the property, is reinvested in the acquisition of ownership of another property, of land for construction of a property, or in the construction, extension or improvement of another property exclusively with the same purpose located in Portuguese territory or in the territory of another Member State of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information in tax matters; (Wording given by Decree-Law 361/2007, of 2 November).

b) If the realization value, deducted from the amortization of any loan contracted for acquisition of the property, is used in the payment of the acquisition referred to in the previous paragraph, provided that it is made in the twelve months preceding;

c) For the purposes of the provision in paragraph a), the taxpayer should manifest the intention to carry out the reinvestment, even if partial, mentioning, in the income return for the year of sale, the value which he intends to reinvest;

6 -

7 - In the case of partial reinvestment of the realization value and verified the conditions established in the previous section, the benefit referred to in section 5 will respect only the proportional part of the gains corresponding to the reinvested value.

………………………………..

1. On the other hand, the instructions for completing Annex G of Model 3 of IRS, in the version in force in 2008, determined the following:

TABLE 5 REINVESTMENT OF THE REALIZATION VALUE OF A PROPERTY INTENDED FOR OWN PERMANENT RESIDENCE

Capital gains from the onerous transfer of properties intended for the own permanent residence of the taxpayer or of his family group are excluded from taxation if the proceeds from the transfer (realization value) are used for the acquisition of another property, of land for construction of a property or in the construction, extension or improvement of another in sections 5 and 6 of article 10 of the Personal Income Tax Code.

Accordingly, taxpayers who wish to benefit from this exclusion should indicate:

In field 501, the year in which the transfer occurred;

In field 502, the field of table 4 corresponding to the transferred property whose realization value is intended to be reinvested;

In field 503, the amount of capital outstanding on the loan contracted for the acquisition of the transferred property (excluding interest and other charges, as well as loans for works) on the date of sale of the property (applicable only for sales made in 2002 and subsequent years);

In field 504, the realization value that the taxpayer intends to reinvest in the acquisition of own permanent residence, excluding the part of the acquisition value carried out with recourse to credit;

In fields 505 and 506, respectively, the amount that was reinvested in the 12 months preceding and that which was made in the year of transfer, excluding the part of the acquisition value carried out with recourse to credit;

In field 507 should be indicated the value reinvested in the first year following the transfer of the real property, excluding the part of the acquisition value carried out with recourse to credit;

In field 508 should be indicated the value reinvested in the second year following, but within the 24 months counted from the date of transfer, excluding the part of the acquisition value carried out with recourse to credit.

1. The treatment, under IRS, of capital gains realized with the onerous disposal of real rights over real property, has undergone successive changes since the entry into force of the respective Personal Income Tax Code.

2. In fact, in the wording given by Decree-Law No. 198/2001 of 3 July, in force until 2001, there was no provision at all, for the exclusion of the value subject to taxation, for the deduction of loan amortization contracted for acquisition of the property, from the value to be reinvested.

3. Indeed, article 10 of CIRS provided the following regarding the taxation and exclusion from taxation of real estate capital gains:

1 - Capital gains are gains obtained which, not being considered business and professional income, capital or real property income, result from:
a) Onerous disposal of real rights over real property and allocation of any assets of the private patrimony to a business and professional activity carried on in their own name by their owner;

…..

3 - The gains are considered obtained at the moment of the performance of the acts provided for in section 1, without prejudice to the provision of the following paragraphs:

a) In cases of promise of sale or exchange, it is presumed that the gain is obtained as soon as tradition or possession of the property or rights object of the contract is verified;

(…)
4- The gain subject to IRS is constituted by:

a) The difference between the realization value and the acquisition value, net of the part qualified as capital income, if applicable, in the cases provided for in paragraphs a), b) and c) of section 1;

b) …..

c)

5 - The following are excluded from taxation: gains from the onerous transfer of real property intended for the own permanent residence of the taxpayer or of his family group, under the following conditions:

a) If, within 24 months counted from the date of realization, the proceeds from the transfer are reinvested in the acquisition of ownership of another property, of land for construction of a property, or in the construction, extension or improvement of another property exclusively with the same purpose, and provided that it is located in Portuguese territory;

………………………………..

1. It is only with the publication of Law No. 109-B/2001, of 27 December, approving the State Budget for 2002, that the legislator ceases to refer to the reinvestment of the PROCEEDS OF THE TRANSFER, starting to require the reinvestment of the REALIZATION VALUE.

2. CAPITAL GAINS are calculated by the difference between the REALIZATION VALUE (sale) and the ACQUISITION VALUE (purchase) deducted from the monetary correction coefficient (purchase value x currency devaluation coefficient) (provided that 24 months have elapsed since the date of acquisition); to the previous result will also be deducted the charges with the acquisition (transfer tax and IMT subsequently, deed and registration fees), the charges with the appreciation of the property proven to be realized in the last 5 years and the expenses necessary for the disposal actually carried out and properly documented, and the amortization of any loan contracted for acquisition of the property will be deducted (in the case of reinvestment).

3. In the event of wishing to reinvest the realization value (or part thereof), the taxpayer should mention this fact in the return for the year of transfer, PROVING in that and in the returns for the following two years, THE REINVESTMENT(S) MADE (value of the new acquisition of ownership of another property).

4. This provision inserted in section 5 of article 10 of CIRS constitutes an incursion into the scope of the rules for exclusion of taxation of income.

5. Indeed, in the construction of the concept of taxable income, CIRS adopts the income-increment conception, according to which the tax base of this tax encompasses all increases in the taxpayer's purchasing power, including in it capital gains (viewed as patrimonial increments that do not derive from a productive activity, but which have some economic significance and are capable of monitoring by the Tax Authority, including real property capital gains) and, in general, irregular income and fortuitous gains, which should also be considered manifestations of tax capacity (see section 5 of the preamble to CIRS; Paulo de Pitta e Cunha, Fiscal Policy of the 90s, The New Income Taxation System, Almedina, 1996, p. 20; José Guilherme Xavier Basto, IRS: Real Incidence and Determination of Net Income, Coimbra Editora, 2007, p. 39 et seq.).

6. In turn, capital gain should be defined, in principle, by the difference between the realization value and the acquisition value, especially when the event generating the tax is described as an onerous disposal, and thus subject to the principle of realization (see article 44 of CIRS; judgment T.C.A.Sul-2nd Section, 22/1/2013, case 4771/11; judgment T.C.A.Sul-2nd Section, 12/12/2013, case 7073/13; José Guilherme Xavier Basto, op. cit., p. 443 et seq.).

7. It is reiterated, section 5 of article 10 of the Personal Income Tax Code contains an exclusion of incidence, relating to capital gains realized on real property, provided that certain conditions are verified, in accordance with the terms referred to in the article itself.

8. The presupposition of the exclusion of incidence, which is its fundamental raison d'être, is that there is verified, within the statutory periods, and financed by the realization value of the alienated property in which the capital gain was realized, an acquisition of a property intended for own permanent residence, directly or indirectly (…) and, further, that actual allocation of the acquired, constructed, extended or improved property to permanent own residence is verified (José Guilherme Xavier Basto, op. cit., p. 415 et seq.).

9. Quoting the same author, José Guilherme Xavier Basto, op. cit., p. 413 et seq., the general objective of the regime for exclusion of incidence is thus not to hamper the acquisition, immediate or mediate, of own permanent residence financed with the proceeds of the transfer of another property to which the same purpose had been given. The roll-over technique is used, which renders these capital gains non-taxable as long as the realization values are reinvested in properties also intended for residence.

10. For purposes of reinvestment, however, the amounts used in the amortization of any loan contracted for acquisition of the property do not count, as is concluded from paragraphs a) and b) of section 5, already transcribed.

11. It is taken into account that the owner may have to, before proceeding to the sale, amortize the loan which had been contracted.

12. Indeed, the reinvestment that is relevant for exclusion from taxation in category G of IRS, real estate capital gains, is that of the realization value, less that of the value of the loan amortization.

13. Taxation will be carried out in the year of realization, for the value of the capital gain determined, in accordance with the "income-increment" theory, if that realization value is not reinvested in the acquisition of a new property for the same purpose: own permanent residence.

14. If the reinvestment of the realization value is partial, the capital gain will be taxed in accordance with a proportion legally defined in section 7 of article 10 of CIRS.

15. It falls to this tribunal to determine whether it is in accordance with the law the interpretation given to the provision of section 5 of article 10 of CIRS by the Claimant, which argues that there should appear in field 503 of table 5 of Annex G of the Model 3/IRS Declaration (amount outstanding on the loan) the value corresponding to the total loan contracted with the banking institution on the date of acquisition of the property – €49,879.79 – or whether that value should be that which corresponds to the remainder of the debt on the date of sale of the same property – €38,385.70, as argued by the AT, now Respondent.

16. And, consequently, to determine the illegality of the act of IRS assessment that is the subject of challenge in the present proceedings, or to decide upon its conformity with the law.

17. It should be noted that the norms of incidence of taxes as well as those that grant exemptions or exclusions from taxation should be interpreted in their exact terms, without resorting to analogy, making prevail certainty and security in their application (see judgment T.C.A.Sul-2nd Section, 2/10/2012, case 5320/12; judgment T.C.A.Sul-2nd Section, 12/12/2013, case 7073/13).

18. Article 10, section 5, of CIRS, systematically inserted in the category of patrimonial increments (norms of real incidence), presents itself as a norm of negative delimitation of incidence.

19. The rationale for this negative delimitation of incidence has already been explained.

20. The provision enshrines an exclusion from tax incidence relating to capital gains realized with the onerous disposal of real property intended for own permanent residence of the taxpayer or of his family group, thus favoring ownership of the property intended for permanent residence of the taxpayer (or of his family group) whenever, within certain periods and conditions, the realization value is reinvested in property intended for the same purpose and located in national territory.

21. Non-compliance with all the conditions fixed in the law will result in the sale of the property, if carried out with capital gains, falling under the standard regime, which is that of taxation of capital gains income determined in accordance with articles 43 et seq. of CIRS.

22. In concrete terms, the tribunal is called upon to interpret the provision of article 10 of CIRS, namely in its section 5, regarding the "deduction of the amortization of any loan contracted for acquisition of the property", specifically, whether this amortization relates to the initial value of the loan or the final amount amortized when the property is sold.

23. The interpretation of tax norms, including norms of tax relief or deferral of taxation, is subject to legal rules, namely to article 11 of the General Tax Law (LGT) which provides:

Article 11
Interpretation

1. In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever, in tax norms, terms specific to other areas of law are used, they should be interpreted in the same sense as they have there, unless otherwise directly provided for by law.

3. If doubt persists regarding the meaning of the applicable norms of incidence, attention should be paid to the economic substance of the tax facts.

4. Gaps resulting from tax norms covered by the reserve of law of the Assembly of the Republic are not capable of integration by analogy.

5. Article 9 of the Tax Benefits Statute (EBF) also does not establish principles distinct from these, only excluding integration by analogy, but admitting extensive interpretation.

6. The Judgment of the Supreme Administrative Court in case 0250/14, of 17/09/2014, clarifies that: "In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed (see section 1 of article 11 of the LGT), so we should bring to bear article 9 of the Civil Code and conclude that 'the grammatical or philological statement of the law is assumed as the starting point of the interpreter, but also entails a limiting function, since the interpreter cannot consider the legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed (see section 2 of article 9).

7. It is further added that, "In fixing the meaning and scope of the law, the interpreter will presume that the legislator enshrined the most correct solutions and knew how to express his thought in adequate terms".

8. The norms of tax relief or of deferral of taxation, which depart from the standard regime of taxation, create equilibria and permanent tension between the objective of collection of tax revenue and the protection of distinct interests or values, supra-fiscal, which deserve protection.

9. The determination of these interests and relevant goods is realized through fiscal typicality which constitutes one of the corollaries of the constitutional principle of legality in tax law.

10. A question of interpretation of law whose elucidation should result from a combination of the concrete content of the provision in question with an appeal to the rational and historical element. In fact, as Ferrara refers, (Francesco Ferrara, Essay on the Theory of Interpretation of Laws, pp. 21 and 26; Interpretation and Application of Laws, translation by Manuel de Andrade, 3rd ed., Coimbra, 1978, pp. 127 et seq. and 138 et seq.) every norm has an objective to attain, to fulfill a certain function and purpose, for whose accomplishment it was created. The norm rests on a juridical basis, on a ratio iuris, which indicates its real understanding and it is necessary that it be understood in the sense that best responds to the achievement of the result it wants to obtain, since law behaves toward the ratio iuris as the means toward the end: whoever wants the end also wants the means.

11. And, according to the same author, to determine this practical purpose of the norm, it is necessary to attend to the relations of life, for whose regulation the norm was created. We should depart from the concept that the law wants to give satisfaction to the economic and social requirements that spring from relations (nature of things). And, therefore, it is necessary to pay attention not only to the technical mechanism of relations, but also to the requirements that derive from those situations, proceeding to the evaluation of the interests at stake. Interpretation and application of laws Author(s): Francesco Ferrara; transl. Manuel A. D. de Andrade Coimbra: Arménio Amado, 1933 work cited p. 141. and Lisbon of 10-10-2013, Case 443/09.4TTVFX.1,L1-4].

12. Returning to the case at hand, and considering the reasons underlying the deferral of taxation of real estate capital gains, set forth above, it is understood that the tax norm inserted in section 5 of article 10 of CIRS should be interpreted as referring to the amortization of the loan made in the year of transfer of the property, for the amount outstanding at that date, and not for the total amount of the loan contracted for acquisition of the property, on the date of acquisition.

13. The understanding sustained by the Claimant cannot therefore be upheld, since the admissibility of that understanding, in addition to appealing to an interpretation that would generate incongruous results, would also require that it be presumed that the legislator used inadequate terms to express a certain reality, without any justification, which would contradict the very principles and rules of interpretation, which impose that it be presumed that the legislator, in elaborating the norm, took into account the unity of the legal system and knew how to express his thought in adequate terms (article 9 of the Civil Code).

14. Indeed, the position defended by the Claimant would lead to a differentiation in the tax treatment of real estate capital gains, depending on whether the taxpayer had acquired the property with recourse to credit or with own capital, without any fiscal or extra-fiscal justification, and which would breach respect for the fundamental principles of equality and tax capacity.

15. Real estate capital gains should be taxed in accordance with the rules of article 10 and 43 et seq. of CIRS, independently of the sources of financing for acquisition of the property that will give rise to this type of income.

16. And it is thus that, in the various situations exemplified by the Claimant, in its petition, the value of the capital gain determined in accordance with the rules of CIRS is always identical, independently of the value already previously amortized of the loan to which the taxpayer resorted to acquire the property.

17. The difference in the final value of IRS assessed, in the various examples presented by the Claimant in its petition, does not correspond to a determination of differentiated capital gain income but rather to a difference in the value of capital that the taxpayer uses to acquire a new own permanent residence, operationalizing what the tax law called "reinvestment" and which, to the extent that the realization value of the property is allocated to this reinvestment, permits in total or partially to depart from the taxation of the capital gain.

18. That is, to depart from the standard regime of taxation of real estate capital gains, the legislator requires that the "realization value" (and not the capital gain) must be allocated to the acquisition of another property for permanent residence.

19. And it is the entirety of the realization value that must be reinvested; otherwise, the capital gain will be taxed, even if partial and proportionally.

20. The value that, from 2002 onward, can be excluded from this reinvestment is the value of the amortization of the loan contracted for purchase of the property, to the extent that this value, with the sale of the property, is not available to the taxpayer but must be delivered to the bank for final amortization of the loan.

21. Contrary to what the Claimant understands, the partial amortizations made on loans contracted for acquisition of the property are not subject to taxation for the fact that these values are not deducted from the value to be reinvested, at the moment of sale of the property.

22. Each amortization of the capital outstanding will imply a diminution of the taxpayer's "liability" with the bank, as well as a diminution of the "asset", by the fact that this amortization is made at the expense of own capital of the taxpayer.

23. Being that, before the sale of the property, there is no income taxed in the taxpayer's sphere, even when the loan is totally liquidated.

24. Taxation only operates in the year of sale of the property, if there is a positive difference between the realization value and the acquisition value, combined with the remaining adjustments.

25. However, each partial amortization of the loan implies that, at the moment of sale of the property, the capital of the taxpayer invested in those amortizations will be recovered by the taxpayer himself and not to be used to liquidate any loan with the bank.

26. And, thus, at the moment of the subsequent sale of the property, the entire portion of the price that corresponds to the capital invested by the taxpayer, whether initially with the deed of purchase and sale or later, during the period in which partial amortizations of borrowed capital occurred, in a loan contracted for acquisition of said property, is recovered by the taxpayer, who can decide to reinvest all or part of that price received or not to reinvest.

27. Note that, at the limit, if two taxpayers acquire simultaneously a property for the value of €100,000, the first with total recourse to credit and the second with all own capital, and the property is subsequently sold for €150,000, at the moment in which the last installment of the loan to which the first taxpayer resorted is liquidated, we would have in the interpretation of the Claimant the following result (disregarding other adjustments and expenses as well as updating of the values by application of currency coefficients): so as not to have taxation of the real estate capital gain, the first taxpayer would have to reinvest only €50,000 while the second would have to reinvest practically all of the €150,000.

28. It is further added that, if the tax legislator pursues a policy of tax benefits which involve deductions from IRS tax collection applicable to capital amortization in housing loans, the taxpayer who contracted the loan for acquisition of housing will always still be able to benefit from those same deductions from the tax collection.

29. This result is incongruous and in no way reconciles with the purpose of the norm for deferral of taxation of real estate capital gains.

30. One cannot therefore conclude for an interpretation which would, in its genesis or result, in some way benefit tax-wise the taxpayers who acquired own permanent residence with recourse to credit, to the detriment of those who do so with recourse to own capital.

31. Or of taxing more heavily these latter taxpayers, as if they revealed greater tax capacity than those who acquire property with recourse to credit.

32. This implies an unjustified violation of the principles of equality and tax capacity.

33. That the interpretation which is defended is the only one compatible with the good rules of legal hermeneutics results even evidently from the very fact that the AT proceeds with the assessment of Tax – IRS – annually and only in the year of realization of the capital gain.

34. Supporting the interpretation that the value of the loan amortized to be deducted from the value to be reinvested is the value of that loan, on the date of sale of the property, and not on the date it was acquired, note the wording of the instructions to Annex G of Model 3 of IRS, in this matter.

35. These instructions consistently make the following mention since 2002: In field 503, the amount of capital outstanding on the loan contracted for the acquisition of the property sold (excluding interest and other charges, as well as loans for works) on the date of sale of the property (applicable only for sales made in 2002 and subsequent years).

36. It is certain that it is important, before anything else, to stress that the circulars or these instructions do not constitute decision rules for the courts and that the fact that the Tax Administration is bound, in face of the provision in the current article 68-A, section 1, of the General Tax Law, to the generic orientations contained in circulars that are in force at the moment of the tax fact, does not alter this perspective, because they do not have binding force either for individuals or for the courts.

37. As explained by CASALTA NABAIS In "Tax Law", 5th edition, p. 201., the circulars constitute "internal regulations which, because they are intended only for the tax administration, only this body is bound to obey them, being, therefore, binding only for the organs situated hierarchically below the issuing organ of the same. For this reason they are not binding either for individuals or for the courts. And this is whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating methods of work or modes of operation, or whether they are interpretative regulations, which proceed to the interpretation of legal (or regulatory) provisions.

38. But it is also certain that these circulars and even the instructions densify, explicate or develop the legal provisions, previously defining the content of the acts to be performed by the tax administration when applying them.

39. Similarly, these instructions embody the duty of cooperation with taxpayers of the Tax Authority as well as summon and develop the right to information of individuals.

40. Not serving as a standard for assessing the legality of the acts of the tax administration, they nonetheless have some doctrinal value which, though not binding on the judge, may coadjuvate in the interpretation of the tax norm when it contains, itself, the essential elements of tax incidence (subjects, incidence, exemptions, rates), provided that it does not contradict it but clarifies its application in obedience to the principle of legality.

41. In this way, the reason for deciding does not reside in the tenor of these instructions but the same are considered clarifying and explanatory of the manner of applying the law.

42. Finally, the interpretation above sustained, to which the tribunal adheres, derives from the analysis of the letter of the law and its insertion in the set of other applicable tax norms, and is the most consonant with the spirit of the legislative changes introduced in 2002, when the possibility of deduction, from the value to be reinvested, of loan amortization contracted for acquisition of a property for own permanent residence was first provided for.

43. Thus, for the reasons set forth, it would seem to completely lack adherence to reality the claim that the value of the loan amortized to be deducted from the value to be reinvested is the value of the initial loan, irrespective of whether or not there have been partial amortizations of the capital outstanding until the transfer of the property.

44. Hence also the difficulty in finding doctrine or case law that addresses this matter.

45. It is therefore to be recognized that the act of IRS assessment for the year 2008, challenged in the proceedings, is in accordance with applicable law and cannot be excluded from total taxation of the gains from the onerous transfer of the property, since the appellant did not reinvest the entirety of the realization value deducted from the amortization of the loan contracted to acquire the same property.

46. It is therefore concluded that the Claimant's claim has no merit.

Regarding Compensatory Interest

1. In addition to the annulment of the assessment and refund of the amount of tax unduly paid, the Claimant also requested that compensatory interest be assessed to it, in accordance with the provision of article 43 of the LGT.

2. In the present case, and in the logical course of the dismissal of the Claimant's claim, it has no right to compensatory interest, in accordance with article 43, section 1, of the LGT and article 61 of the CPPT.

Conclusion

Thus, the present arbitral tribunal concludes by the legality and maintenance of the 2008 IRS assessment, considering that section 5 of article 10 of the Personal Income Tax Code should be interpreted in the sense that the value of the loan to be deducted from the value to be reinvested, for purposes of exclusion from taxation of real estate capital gains, should be the amount outstanding on the loan on the date of sale of the real property for whose acquisition it was contracted.

Decision

In accordance with and on the grounds set out above, the arbitral tribunal decides to judge the request for arbitral pronouncement unfounded, with the consequent maintenance of the contested assessment, with all legal consequences, absolving the AT regarding the request for arbitral pronouncement filed.

Value of the Proceedings

In accordance with the provision in section 2 of article 315 of the Code of Civil Procedure (CPC), paragraph a) of section 1 of article 97-A of the Code of Tax Procedure (CPPT) and also section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at €1,055.55 (one thousand and fifty-five euros and fifty-five cents).

Costs

For the purposes of the provision in section 2 of article 12 and section 4 of article 22 of RJAT and section 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €306.00, in accordance with Table I attached to said Regulation, to be borne entirely by the Claimant.

Notification required.

Lisbon, 25 August 2015

The Arbitrator

(Ana Teixeira de Sousa)

[Text prepared by computer, in accordance with article 131, section 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29, section 1, paragraph e) of the Legal Framework for Tax Arbitration. The wording of this decision follows the old orthography.]