IRC Deduction of Maintenance and Conservation Expenses – CAAD Arbitration 45/2017-T

ARBITRAL DECISION

The arbitrator, Dr. Henrique Nogueira Nunes, appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Arbitral Tribunal, constituted on 22 March 2017, decides as follows:

1. REPORT

1.1. A..., with tax identification number..., with tax address at..., ..., no...., ...-... Lagoa, hereinafter referred to as "Claimant", requested, on 13 January 2017, the constitution of the Arbitral Tribunal pursuant to articles 2º, no. 1, paragraph a) and 10º of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT").

1.2. The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD and automatically notified to the Tax and Customs Authority on 20 January 2017.

1.3. The request for arbitral pronouncement has as its object the declaration of illegality of the tax acts embodied in a set of additional assessments of Corporate Income Tax ("IRC") for the fiscal years 2012, 2013 and 2014, namely: (i) IRC assessment statement no. 2016..., of 20 January 2016, compensatory interest assessment statement no. 2016..., as well as the corresponding account adjustment statement no. 2016..., these two of 22 January 2016, (ii) IRC assessment statement no. 2016..., of 20 January 2016, compensatory interest assessment statement no. 2016..., as well as the corresponding account adjustment statement no. 2016..., both of 25 January 2016, (iii) IRC assessment statement no. 2016..., of 20 January 2016, compensatory interest assessment statement no. 2016..., as well as the corresponding account adjustment statement no. 2016..., both of 26 January 2016, totaling a global amount of € 9,080.81, and, likewise, by the declaration of illegality of the act dismissing the Administrative Complaint that the now Claimant submitted with a view to declaring the illegality and annulment of said additional assessments, in light of the provisions of article 99º of the Code of Tax Procedure and Process.

The arbitral tribunal was regularly constituted and is materially competent in accordance with the provisions of articles 2º, no. 1, paragraph a) and 30º, no. 1 of the RJAT.

The parties have legal personality and capacity and are legitimate (articles 4º and 10º, no. 2 of the RJAT and article 1º of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities, nor was any matter of exception raised.

1.4. To support its request, the Claimant imputes, in summary, the following defects:

(i) The corrections made by the Tax Authority services were made in the context of an inspection procedure, and the Tax Authority services ended up dismissing the Claimant's claim for, as it presumes, not agreeing with the arguments presented.

(ii) The Claimant "presumes" that this was the reason for the dismissal, since, it says, the Tax Authority services did not pronounce upon the arguments presented regarding the classification of the expenses within the concept of maintenance and conservation expenses under article 41º of the Personal Income Tax Code.

(iii) It qualifies as unacceptable the conduct of the Tax Authority services, since, it alleges, it was never called upon to pronounce on whether the invoices in question complied with the provisions of article 36º of the VAT Code, nor were requested the evidentiary elements that the Tax Authority services allege do not exist.

(iv) It alleges that the Tax Authority services did not pronounce on any of the arguments presented by it in the Administrative Complaint presented regarding the classification of the expenses within the concept of maintenance and conservation expenses, declining to assess the merits of the contested issue.

(v) In the case under analysis, it invokes that the Tax Authority not only did not pronounce on the question under discussion – as it came to radically alter its initial argumentation, invoking that the expenses are not classifiable under the VAT Code, without having requested any documents for that purpose.

(vi) It considers it unacceptable that the Tax Authority services promote a correction to the calculation of the tax to be paid based on a certain argumentation and that, after the taxpayer presents its defense based on that same argumentation, the Tax Authority services discreetly alter the support of the correction promoted, making no reference to the initial argumentation.

(vii) It understands that the Inspection Report abstains from indicating which specific expenses are not deductible when the description does not allow classification of the asset/service provided, from those that are not deductible because they are 'current expenses' or other non-deductible expenses.

(viii) Suffering from the same defect of lack of reasoning, it says.

(ix) Because, it says, the reasoning is obscure and insufficient, considering that its content is not sufficient to explain the true reasons why the acts now claimed were performed.

(x) With regard to the case sub judicio, it understands that there is no consistent and adequate element in the Inspection Report for the conclusion that the proportionality invoked by the Tax Authority is legitimated by law.

(xi) In these terms, and considering the non-compliance by the Tax Authority of the special duty of reasoning to which the law obliges it, it understands that all the assessment statements now claimed should be considered as non-reasoned, under no. 2 of article 153º of the Administrative Procedure Code ("CPA") – applicable by force of paragraph d) of article 2º of the CPPT – as well as of the aforementioned articles, and consequently, for defect of form, be annulled.

(xii) Additionally, it also invokes error in the factual and legal premises to support its claim to have the tax acts in question annulled.

(xiii) With respect specifically to the concept of 'maintenance expenses', it understands that the Tax Authority seeks to unjustifiably restrict the concept thereof, alleging that all those expenses that are necessary for the maintenance of the properties and its economic activity should be considered 'maintenance expenses', that is, those that, having sufficient proof, have a direct causal link with the property, in the economic sense thereof, that is, the production of income, under penalty of, if not so, being in the presence of a violation of the principle of contributive capacity.

(xv) It understands that it has been demonstrated that the expenses incurred and questioned in the tax inspection report are expenses that are documentally proven, whose invoice descriptions and respective supporting documents are clear and are effectively maintenance and/or conservation, under article 41º of the Personal Income Tax Code, for which reason they should have been considered deductible by the Tax Authority.

(xvi) On the other hand, it argues that the Tax Authority in defending the application of a proportionality coefficient of maintenance and conservation expenses, demonstrates a profound detachment from reality and from law, and that it possesses no legal basis whatsoever, being nothing more than a mere academic exercise, demonstrative of lack of knowledge of the functional reality of a property affected by exploitation, for which reason no proportionality coefficient should be applied, with respect to deductible expenses under article 41º of the Personal Income Tax Code, under penalty of incurring a violation of the principle of legality.

(xvii) For all the foregoing, it seeks the annulment of the tax acts in dispute in the proceedings with all legal consequences, and orders should be made for the restitution of what was unduly paid as a consequence, in the amount of € 9,080.81, plus the payment of compensatory interest.

1.5. The Tax and Customs Authority, hereinafter referred to as "Respondent" or "Tax Authority", responded, in summary, as follows:

(i) It comes to defend itself by challenge.

(ii) On the lack of reasoning, it alleges that the Claimant's thesis regarding the lack of reasoning of the tax act has no basis whatsoever, since, with respect to the reasoning of administrative acts, it alleges that the act is reasoned when, by the motivation adduced, it proves capable of revealing to a normal recipient the factual and legal reasons that determine the decision, enabling it to react effectively by legal means against its harmfulness.

(iii) And that it is demonstrated that the Claimant understood perfectly the meaning and scope of the assessment on which the present request for arbitral pronouncement is based, as results from the very extensive legal and argumentative exercise that it performs in its lengthy discourse.

(iv) It refers that even if the act sub judicio suffered deficiencies at the level of the reasoning discourse – which is only by mere academic hypothesis admitted – such deficiencies would degrade into mere non-essential irregularities.

(v) And that in dismissing the Administrative Complaint, the Tax Authority did nothing more, in strict compliance with its duties and legal obligations, than confirm and ratify what had already been expounded in the reasoning of the Inspection Report and that was, as has been amply demonstrated, fully understood by the Claimant, it says.

(vi) With regard to the defect of violation of law by breach of article 41º of the Personal Income Tax Code, it argues that from real property income obtained are deductible documented, necessary and directly connected expenses for obtaining such income, provided they are borne by the taxpayer itself and these are the expenses understood as necessary to produce the real property income included and to maintain intact the respective source of production, that is, the properties subject to lease.

(vii) It understands that since, for purposes of taxation under Category F of the Personal Income Tax Code, account is taken of the net income obtained, that is, the rents received minus the expenses and charges borne to produce the real property income included and to maintain intact the respective source of production, that is, the properties subject to lease, it seems that such expenses should be proportionally considered on the basis of the number of months of lease.

(viii) The correction of the deductible amounts with reference to the expenses that really fall within the deductible charges for this type of income took into account that the property was only occupied part of the year, not all expenses being deductible, so accounting was done for the nights on which the property was occupied by customers, for which, it says, the interpretation and application of article 41º of the Personal Income Tax Code, contained in the Inspection Report, does not suffer from any illegality.

(ix) For purposes of taxation under category F of the Personal Income Tax Code, it argues that account should be taken of the net income obtained, that is, the total income obtained, minus the expenses and charges borne to produce the real property income included and to maintain intact the source of income production, that is, the property in question, which implies the existence of a correspondence and proportionality of the charges and expenses borne.

(x) In that measure, it argues that it does not make sense that a property that generated income for only a few months be associated with an annual expense.

(xi) For which it seeks the total lack of grounds of the present request for arbitral pronouncement, the tax acts of assessment in dispute remaining in the legal order and absolving, accordingly, the Respondent of the claim, all with the due and legal consequences.

1.6. The Tribunal understood to dispense with the holding of the first meeting of the Arbitral Tribunal, in accordance with the provisions of article 18º of the RJAT, and likewise the presentation of pleadings in view of the well-grounded positions of both parties in the proceedings, supported through the extensive documentary evidence offered, which did not meet any opposition from the parties.

A deadline was set for the purpose of issuing the arbitral decision until 31 July 2017.

1.7. The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2º of the RJAT.

The parties have legal personality and capacity, are legitimate and are regularly represented (cf. articles 4º and 10º, no. 2 of the RJAT and article 1º of Ordinance no. 112-A/2011, of 22 March).

No nullities were identified in the proceedings.

2. QUESTIONS TO BE DECIDED

In its arbitral petition the Claimant formulates the following essential questions for which it requests the appreciation of the Tribunal:

1. It raises the question of a posteriori reasoning in the dismissal of the Administrative Complaint presented, qualifying it as illegal.

2. To determine whether, in this case, the defect of lack of reasoning occurs regarding the corrections contained in the Tax Inspection Report (RIT).

3. To determine whether, in this case, error of law occurs in the corrections made, and concomitantly in the additional assessments issued, due to error in the factual and legal premises, by defect of violation of law, namely article 41º of the Personal Income Tax Code, with the wording in force at the date of the tax events in question.

3. FACTUAL MATTER

With relevance for the appreciation and decision on the merits, the following facts are proven:

A) Within the scope of Service Orders no. OI2015…/…/…, of 17 September 2015, an internal inspection action was carried out on the Claimant concerning the fiscal years 2012, 2013 and 2014, of partial scope, concerning the procedures adopted in the context of IRC calculation (see Administrative File filed by the Respondent).

B) As a result of said inspection action, the Claimant was notified, on 21 December 2015, of the Draft Conclusions of Tax Inspection ("Draft Conclusions") – see Document no. 1 filed by the Claimant, by means of which the Respondent proposed the following corrections in the context of IRC:

C) The Claimant did not exercise the right of prior hearing on the Draft Conclusions.

D) The Claimant was notified of the Inspection Report through Office Letter no. ... of 14 January 2016 ("Inspection Report") – see Document no. 2 filed by the Claimant, notifying it of the following corrections, as illustrated in the table below:

E) On 20 January 2016, the Claimant was notified of the IRC assessment statements, and subsequently notified of the compensatory interest assessment statements and the corresponding account adjustment statements, concerning the fiscal years 2012, 2013 and 2014 – see Documents no. 3, 4 and 5, respectively, filed by the Claimant.

F) The Claimant proceeded to pay the tax and respective compensatory interest on 2 March 2016 (see Document no. 6 filed by the Claimant).

G) The Claimant filed an Administrative Complaint, which was processed under the no. ...2016..., against said tax acts, seeking their illegality (see Administrative File filed by the Respondent).

H) The Claimant was notified of the draft of dismissal of Administrative Complaint by letter ..., of 06/09/2016, notifying it to, if it wishes, exercise the right of prior hearing (see Document no. 36 filed by the Claimant) which it did not do.

I) The Claimant was notified on 17 October 2016 of the final decision to dismiss the Administrative Complaint, by letter..., of 29/09/2016.

J) Considering the data contained in Annex 2 which appears in the Draft Corrections attached to the proceedings, it is found that the invoices presented are duly reasoned, containing, namely, a description that allows the identification of the purpose of the expenses incurred and their connection to the activity exercised by the now Claimant.

K) The Respondent did not question the veracity of the invoices presented by the Claimant.

L) On 13-01-2017 the Claimant submitted a request for constitution of the Arbitral Tribunal with CAAD – see electronic request in the CAAD system.

4. FACTS NOT PROVEN

There are no facts with relevance to the decision of the case that have not been proven.

5. REASONING OF THE DECISION ON FACTUAL MATTER

As to the essential facts, the settled matter is conformably shaped in an identical manner by both parties and the conviction of the Tribunal was formed on the basis of the documentary (official) elements attached to the proceedings and discriminated above, whose authenticity and veracity was not questioned by either party.

6. LAW

In accordance with the questions set out, which are stated in point no. 2 of this Decision, and having regard to the factual matter established in point no. 3, it is now important to determine the applicable law.

Regarding the alleged a posteriori reasoning of the tax acts:

The Claimant alleges that the Tax Authority services came to argue, in response to the Administrative Complaint presented, that "the taxpayer (TP) deducted expenses supported by invoices that do not comply with the provisions of paragraph b) of no. 5 to article 36º VAT Code and, as such, cannot be accepted for tax purposes, namely, cannot be accepted for the purposes of article 41º PIRC".

That such fact had never been questioned within the scope of the inspection procedure, nor was it referenced in the Final Tax Inspection Report that gave rise to the tax acts now in dispute.

And that within the scope of the tax inspection, what was questioned was only the classification of certain expenses within the concept of maintenance and conservation expenses under article 41º of the Personal Income Tax Code and the proportionality of expenses.

Since no doubts whatsoever were raised regarding the requirement that invoices must comply with the VAT Code, nor were any additional elements requested from the Respondent for that purpose.

Let us see.

After analyzing the Tax Inspection Report, it is indeed established that the Respondent imputes to the Claimant breach of the provisions of article 41º of the Personal Income Tax Code, by reference to article 56º of the same code. This can easily be ascertained from the description in section VII – Infractions Verified, contained on page 8 of the Inspection Report.

Making no reference whatsoever to the VAT Code, or to the alleged non-compliance of the invoices with the VAT Code.

And only and for the first time doing so in the context of considering the Administrative Complaint presented by the Claimant.

That is, on this specific point, the Claimant is correct in invoking that, in this case, a posteriori reasoning of the tax acts occurred, that reasoning being ex novo, with respect to this part of the Tax Authority's decision-making segment.

Now, it is well known that a posteriori reasoning constitutes flagrant illegality, by virtue of the fact that in the context of mere legality litigation, where we find ourselves, the tribunal must limit itself to judging the legality of the act under scrutiny in the strict terms in which it occurred, that is, assessing its legal conformity in light of the contextual, contemporaneous reasoning that is part of the act itself.

Given that the right to reasoning of administrative acts, specifically tax acts, implies attributing to the party the faculty to defend itself from the premises stated therein and from which the harmful effects of its claim resulted, it is not possible to uphold any act when for that it would be necessary to assess facts and/or legal reasons that are not part of the initial reasoning, forming part of it, that were not invoked to lead to the impugned act.

In this same sense, see the Decision of the Central Administrative Court South, rendered in proceeding no. 03716/10, 2nd Court, dated 10/05/2011 and accessible at www.dgsi.pt

In truth, as was well decided in the Decision of the Supreme Administrative Court rendered in proceeding no. 01436/15, 2nd Section, dated 06-07-2016 and likewise accessible at www.dgsi.pt, the Tax Authority cannot add a posteriori reasoning with respect to the assessments it made, nor can it legally appeal to grounds that had not previously been invoked.

And if only that reasoning were in question in the dismissal of the Administrative Complaint, that would be sufficient ground to immediately grant the Claimant's claim.

However, it happens that it is not, because the Tax Authority understood to dismiss the Administrative Complaint presented by the Respondent by basing its dismissal, equally, with recourse to argumentation contained in the Tax Inspection Report and contemporaneous with the additional tax assessment acts in dispute in the present proceedings, namely the failure to classify certain expenses within the concept of maintenance and conservation expenses under article 41º of the Personal Income Tax Code and the proportionality of expenses.

For which it is important to assess whether it is correct or not.

It results, therefore, from the above, that with respect to the question of the alleged failure to comply of the invoices filed by the Claimant with the VAT Code, this specific reasoning has no legal validity whatsoever for this Arbitral Tribunal.

Regarding the alleged lack of reasoning of the tax acts:

The Claimant alleges that the assessments are not duly reasoned, since, in its judgment, they are obscure and insufficient, because their content is not sufficient to explain the true reasons why the acts in dispute in the proceedings were performed, suffering from the lack of adequate factual and legal motivation.

Which was promptly contradicted by the Respondent.

Jurisprudence sustains that regarding the reasoning of the assessment act: "The act will be sufficiently reasoned when the administered party, placed in the position of a normal recipient – the bonus pater familiae of which article 487º, no. 2 of the Civil Code speaks – can come to know the factual and legal reasons that are at its origin, in a manner that allows it to choose, in an informed manner, between acceptance of the act or the triggering of legal means of impugnation, and in such a manner that, in the latter circumstance, the tribunal can also exercise effective control of the legality of the act, assessing its legal accuracy in light of its contextual reasoning".

Or, stated differently, the reasoning must incorporate elements of fact and law that allow the recipient of the act to perceive the Tax Authority's decision-making process.

In the case sub judicio, it is possible to perceive in the inspection report, in section III, facts and legal norms that frame the corrections that were made to taxable profit, although it may be granted that they do not excel by the clearest wording at the level of its reasoning discourse, as indeed the Tax Authority itself seems to admit in its Response, but not of sufficient intensity to advocate for the invalidity – in totum – of the tax acts in dispute in the proceedings.

For which reason the tribunal understands that the act is sufficiently reasoned, since it contains the minimum references to the factual and legal matter used by the Tax Authority to justify the performance of the tax acts in question in the proceedings.

All the more so because the lack of reasoning imputed to it did not constitute any obstacle for the Claimant to sustain and advocate its illegality and consequent annulment in a pleading in which it imputes to the assessments a diverse set of defects, revealing perfect knowledge of the factual and legal framework on which the Tax Authority based itself.

In sum, the tribunal understands that the tax acts in question in the proceedings do not suffer from the defect of lack of reasoning that the Claimant attributes to them.

Regarding the alleged error of law in the corrections made, and concomitantly in the additional assessments issued, due to error in the factual and legal premises, by defect of violation of law, namely article 41º of the Personal Income Tax Code, with the wording at the date of the tax events in question.

The Tax Authority came to consider in the Tax Inspection Report, with reference to annex 2 thereof, that certain expenses could not be deductible from the real property income obtained by the Claimant because only maintenance and conservation expenses can be and those that presented a clear description as to the asset acquired or service rendered.

And that on these only a proportional part can be deductible taking into account the number of days of lease with respect to the years in which it made the corrections.

Let us see.

Regarding the question respecting the descriptions of services rendered and assets sold to the Claimant, it is found that the Claimant is correct, given that those are sufficiently complete and clear to allow (as, in the present case, was done) the proper classification thereof.

The descriptions presented and the explanation given by the Claimant in the context of the Administrative Complaint and seconded by the present arbitral request, contain a level of detail that is common, appropriate and necessary for understanding the objective/purpose sought with the assets and services acquired and rendered, which are contained in documents no. 13 to 33 filed by the Claimant, with detailed explanations on the same, never, it is said, contradicted by the Tax Authority.

The list is sufficiently enlightening regarding the connection of the expenses (underlying the invoices in question) to the activity exercised by the now Claimant.

Thus, the tribunal understands that the expenses incurred by the Claimant, and identified in the documents filed by the Claimant in the present arbitral proceedings, were necessary for obtaining the real property income, being maintenance and conservation expenses that are documentally proven and that, as such, are liable to deduction in light of the provisions of article 41º of the Personal Income Tax Code (both in the wording prior and subsequent to Law no. 66-B/2012, of 31/12).

However, the Respondent, without questioning the veracity of the invoices in question and of the expenses underlying them, asserts that the disregard of those expenses results from the fact that, in general terms, "only maintenance and conservation expenses are deductible" and, as well, that "the amount presented includes several invoices with the same description, issued by the identified supplier (...)" with reference to the fiscal years 2012, 2013 and 2014, without further considerations of a specific nature as to the list of expenses presented by the Claimant.

There is no merit in the argument presented by the Respondent, not only because there is no legal (or economic) reason to state that so-called "current expenses" are not "maintenance and conservation expenses", but also because such expenses – as is easily understood from the description and detailed classification provided by the Claimant, aim to preserve the state (and the regular functioning) of the property, ensuring that it fulfills its purpose, allowing tenants to enjoy all the services that have been and are made available to them and for which they pay a certain amount.

In this regard, and in this same sense, there are already several arbitral decisions rendered by CAAD, of which the following is a mere example, reproduced here in the parts considered most relevant:

"the rule of deductibility of costs of category F has always been associated with maintenance costs necessary for obtaining taxable real property income, which the legislator never, not even by way of example, typified. [...]. [It is to the respondent owner that] it falls, contractually, to perform all expenses inherent to the maintenance and conservation of the property, keeping it in normal rental conditions" (Arbitral Decision rendered in proceeding no. 294/2015-T, of 21/01/2016).

In fact, Manuel Faustino, in the Journal of Public Finance and Tax Law, Year 1, Number 3, pages 100 and 101, already argued that maintenance expenses should have a much broader and more comprehensive sense than that which was habitually given to them by the Tax Authority, arguing, with which it is in agreement, that the interpretation of this concept should also adhere to the perspective on the economic substance of the tax facts, seeking to "No longer is it a matter of viewing the property only from the legal point of view as a 'thing', but looking at it, from the legal-economic point of view, as a 'thing capable of producing income'."

With respect to the deductibility of said expenses based on the number of days of actual lease of a property, it is found that there is no type of criterion in the law that allows concluding that such reduction can occur; quite the opposite: knowing that maintenance and conservation expenses are (necessary) expenses of a fixed nature (i.e., expenses whose performance and corresponding amount do not depend on actual occupation of the property) – and that, if not carried out, would imply inevitable loss of income for its owner – it is concluded that, also here, the Respondent has no basis whatsoever.

In the same sense, see the Arbitral Decision rendered in proceeding no. 294/2015-T, of 21/01/2016:

"With respect to the reduction of expenses and charges through the application of an 'occupancy coefficient', such procedure cannot be accepted, because all expenses incurred, such as cleaning of dwellings and the swimming pool, and respective sanitation treatment, water, electricity, insurance, IMI and others, will always have to be borne, regardless of the occupancy rate. Such 'occupancy coefficient', as was mentioned, [constitutes] a foundation 'sui generis' that apparently had not until now been used by Inspection, [and] has, in this tribunal's view, no legal basis whatsoever."

Regarding the alleged violation of the principle of equality and the principle of contributive capacity, argued by the Respondent in its Response, by allegedly discriminating those taxpayers who lease a property for scarce days, deducting the entirety of expenses incurred during the year, from those who lease a property throughout the year, it does not hold, because, as mentioned above, the expenses incurred stem from the permanent availability of the asset to generate income, since whoever engages in this activity, that of leasing, logically intends their properties to be leased throughout the year, thus implementing their activity.

The (gross) income obtained in each year constitutes the positive elements that contribute to calculating the annual taxable income, and one must also consider the negative elements of the same period, which are the deductions and abatements. The general rule provided for in the Personal Income Tax Code states that the tax is annual in nature and it is with respect to each calendar year that the elements that allow determining the incidence should be considered, namely gross income, deductions and abatements, and it is not possible to discern in article 41º of the Personal Income Tax Code, or any other, for this purpose, that could lead to an exception regime with respect to the aforementioned general rule of the annuity of the Personal Income Tax.

On the contrary, if the thesis defended by the Respondent were to prevail, it would be in the presence of a flagrant violation of the principles of equality and contributive capacity, since it would be treating unequally what is equal, considering that the temporal correspondence that must be made between gross income and the expenses to be deducted is by reference to the calendar year in which the real property income was received or made available to the taxpayer, a sole and equal criterion for all taxpayers.

With respect to the right to compensatory interest, requested by the Claimant, it should be noted that paragraph b), of no. 1, of article 24º of the RJAT provides that the Arbitral Decision on the merits of the claim from which no appeal or challenge may lie binds the Tax Administration from the end of the deadline provided for appeal or challenge, and this – in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for voluntary execution of sentences of the tax courts – must restore the situation that would exist if the tax act subject to the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose.

Such provision is in harmony with the provisions of article 100º of the General Tax Code, applicable to the case by force of the provisions of paragraph a), of no. 1, of article 29º of the RJAT, in which it is established that "The tax administration is obligated, in case of total or partial success of complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would exist if the illegality had not been committed, including the payment of compensatory interest, under the terms and conditions provided for in the law."

Article 43º, no. 1, of the General Tax Code provides, in turn, that "compensatory interest is due when it is determined, in an administrative complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due."

From the analysis of the evidentiary elements contained in the present proceedings it is possible to conclude that the Respondent had total and complete knowledge of the factual elements relevant to proceed to the correct assessment of the tax, and did not do so, choosing instead to maintain the assessments tainted by error in the premises, and for that reason illegal, being thus obligated to indemnify.

Thus, in light of the provisions of article 61º of the CPPT and considering that the requirements of the right to compensatory interest are met, that is, verified the existence of error attributable to the services from which results payment of the tax debt in an amount superior to that legally due, as provided in no. 1 of article 43º of the General Tax Code, the Claimant is entitled to compensatory interest, at the legal rate, calculated on the amounts already paid in the amount of € 9,080.81, from the date on which payment was made until its full reimbursement.

7. DECISION

In view of the foregoing, this Singular Arbitral Tribunal decides:

• To judge the request for arbitral pronouncement to be well-grounded and to declare the consequent annulment, for defect of violation of law due to error in the legal premises, of the IRC assessment acts in dispute in the present proceedings, in the global amount of € 9,080.81, and likewise to declare the annulment of the dispatch dismissing the Administrative Complaint, determining the reimbursement of the tax unduly paid and compensatory interest by the Claimant, plus the payment of compensatory interest due from the date of payment of the tax and compensatory interest until the full reimbursement of the amount paid.

The value of the proceedings is fixed at Euro 9,080.81, in accordance with the provisions of articles 3º, no. 2 of the Regulations of Costs in Tax Arbitration Proceedings (RCPAT), 97º-A, no. 1, paragraph a) of the CPPT and 297º of the CPC.

The amount of costs is fixed at Euro 918.00, under article 22º, no. 4 of the RJAT and the Table I annexed to the RCPAT, to be borne by the Respondent, in accordance with the provisions of articles 12º, no. 2 of the RJAT and 4º, no. 4 of the RCPAT.

Notify.

Lisbon, 25 July 2017.

The Arbitrator,

Dr. Henrique Nogueira Nunes

Document prepared by computer, in accordance with article 131º, no. 5 of the Code of Civil Procedure, applicable by reference to article 29º, no. 1, paragraph e) of the RJAT.

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