Process: 452/2017-T

Date: February 9, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 452/2017-T) addresses the deductibility of expenses for IRS capital gains purposes under Article 51 of the Portuguese Personal Income Tax Code. Taxpayers challenged an additional IRS assessment of €143,315.04 plus €3,803.73 in compensatory interest for 2013, resulting from the Tax Authority's rejection of declared expenses totaling over €120,000. The dispute centers on two categories of expenses: (1) legal fees of €104,550 paid to a lawyer representing the taxpayer in judicial inventory proceedings that partitioned inherited property, and (2) €16,265.89 in mortgage discharge costs required to sell the property free of encumbrances. The taxpayers argued these expenses were 'necessary' and 'inherent' to acquisition and alienation under Article 51(1)(a), as the legal representation was indispensable for acquiring the property through the inheritance partition, and the mortgage discharge was essential to complete the sale. The Tax Authority maintained a restrictive interpretation, accepting only real estate agent commissions, notarial fees, and registration charges as deductible expenses. AT argued that legal fees from inheritance proceedings and mortgage discharge costs, while connected to the transaction, do not qualify as expenses 'inherent to acquisition and alienation' within the meaning of Article 51. The case highlights the interpretative challenges surrounding indeterminate legal concepts in tax law, particularly the scope of deductible expenses when calculating net capital gains from inherited property sales, and raises important questions about whether the principle of taxation based on ability to pay supports a broader interpretation of allowable deductions.

Full Decision

ARBITRAL DECISION

REPORT

On 28 July 2017, A…, with NIF … and spouse, B…, with NIF …, resident at Rua …, no. …, …, in Aveiro, (hereinafter referred to as Applicants or, individually, as Applicant), came, under the combined provisions of articles 99 of the Code of Tax Procedure and Process, 2, no. 1, paragraph a) and 10, nos. 1, paragraph a) and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT), to request the constitution of a Singular Arbitral Tribunal in which the Tax and Customs Authority is the Respondent (hereinafter AT or Respondent), with a view to declaring the illegality and consequent annulment of the additional Personal Income Tax assessment no. 2017…, of 21-03-2017, in the amount of € 143,315.04, relating to income for 2013, and of the compensatory interest assessment no. 2017…, relating to the same year, in the amount of € 3,803.73, from which resulted a balance payable of € 36,300.69, a monetary value which they attribute to the claim.

Further, the Applicants request the condemnation of the Respondent to repay the amount paid, increased by indemnificatory interest from the date of payment until the issuance of the credit note.

Summary of the Parties' Positions

Of the Applicants:

As grounds for the request for annulment of the Personal Income Tax assessments for 2013 and compensatory interest, the Applicants invoke, in summary, the following:

The Personal Income Tax assessments and compensatory interest which are being challenged result from the non-acceptance by AT of the expenses declared for the purposes of article 51 of the Personal Income Tax Code, which renders them illegal, by virtue of violation of law.

In the absence of agreement on the division of property left by the death of the Applicant's Father, his Mother, as head of the estate, would come to request judicial inventory proceedings that would put an end to the hereditary community.

In the inventory proceedings, the Applicant was represented by a Lawyer, within the scope of whose mandate he bore attorney's fees in the amount of € 85,000.00, to which was added VAT at the rate of 23%, totalling € 104,550.00.

As a result of the division, the Applicant and his sister were adjudicated, in equal shares, a company quota with a nominal value of € 15,000.00, various real property situated in the municipality of Alijó and 1/3 undivided right in an urban property situated in the parish of …, municipality of Porto and, to the Applicant, his sister and the head of estate, in equal shares, items 148 and 149 of the property list, with all interested parties waiving the adjustments that were owed to them.

The Applicant and his sister assumed the liabilities that formed item 207 of the property list, consisting of a debt to C…, CRL, in the amount of € 35,851.59, guaranteed by mortgage on the property that formed item no. 166 of that property list.

By preliminary contract for sale and purchase executed on 30-09-2013, the Applicant and his sister promised to sell, free of any liens or encumbrances, the mortgaged real property, for which they proceeded to discharge the voluntary mortgage that encumbered the same properties, the Applicant bearing charges in the amount of € 16,265.89.

The final contract was executed by public deed on 02-12-2013, with the promised real property being transferred free of liens or encumbrances.

In Annex G to the Model 3 Personal Income Tax return for the year 2013, submitted on 27-06-2014, the Applicants declared, for the purposes of article 51, no. 1, paragraph a), of the Personal Income Tax Code, the expenses incurred with the Attorney's fees, as well as the amount spent on the discharge of the mortgage on the alienated property, expenses inherent to its acquisition and alienation.

The taxpayers' capacity to pay should be assessed by reference to their net income; hence the regime for determining capital gains provides that expenses and charges effectively incurred and proven should be added to the acquisition value, as only in this way will it be possible to determine net income for Personal Income Tax purposes.

The legal concept of "necessary expenses and actually incurred, inherent to acquisition and alienation" contained in article 51, no. 1, paragraph a), of the Personal Income Tax Code, is manifestly indeterminate, requiring the interpretation that "necessary" are all indispensable expenses, and "inherent" are those that are inseparable from the obtaining of income.

It can thus be concluded that expenses have framing in article 51, no. 1, paragraph a), of the Personal Income Tax Code, the expenses necessarily incurred with the obtaining of income, provided that they are connected with acquisition or with alienation, in order to determine net income, corresponding to the capacity to pay of the taxpayer.

The expenses incurred by the taxpayer with the fees of his Judicial Representative are inseparable from the acquisition of the alienated property, resulting from the transaction executed between the heirs in the judicial inventory proceedings.

The same applies to the discharge of the mortgage that was registered on the property in question, upon which the execution of the final transaction depended and without which the taxpayer would not have obtained capital gains income.

For these reasons, the Applicants conclude that the Personal Income Tax assessments and compensatory interest which are the subject of the request for arbitral pronouncement suffer from illegality and should be annulled.

Of the Respondent:

Notified in accordance with the terms and for the purposes provided for in article 17 of RJAT, AT submitted a response and attached the administrative process, defending the legality of the assessment acts which are the subject of the request for arbitral pronouncement, with the following grounds:

The challenged assessment was made on the basis of the documents presented by the Applicant and on the re-analysis of the Model 3 return, relating to Personal Income Tax for 2013, in which errors were detected in the expenses, among others, those relating to legal services and to the payment and discharge of the voluntary mortgage that affected the alienated property, not capable of being framed within article 51 of the Personal Income Tax Code.

The Applicants argue that expenses with the fees of the Representative within the scope of judicial proceedings and in the Inventory Proceeding that put an end to the hereditary community resulting from the death of D… and those relating to the discharge of the mortgage that burdened the alienated property are inseparable from the obtaining of income that resulted from the alienation that occurred on 02-12-2013.

However, the Applicants are not correct in the arguments they put forward.

We are dealing with capital gains income referred to in article 10, no. 1, paragraph a), of the Personal Income Tax Code, constituted by the difference between the realization value and the acquisition value, as provided for in no. 4 of the same article.

For the purposes of determining capital gains resulting from the alienation of property acquired for free, article 45 of the Personal Income Tax Code establishes that the acquisition value to be considered corresponds to the value considered for the purposes of stamp tax assessment, or if there was no assessment of that tax, what would serve as its basis if it were to occur.

In the challenged assessment, AT considered that the necessary expenses actually incurred, inherent to acquisition and alienation, were those incurred with the company intermediating the sale, notarial charges and property registration charges; not those incurred with the Representative as a result of the judicial proceedings that preceded the sale, even though connected with the alienation and acquisition of the property, or those relating to the payment and discharge of the mortgage that affected the alienated property.

The expenses capable of being framed within article 51 of CIRS must be legally imposed and be necessary and inherent, that is, without which acquisition or alienation are not possible.

Contrary to what is argued by the Applicants, the assessment aimed at in the present case does not suffer from the illegalities invoked, nor from any others, as AT made a correct interpretation and application of article 51, no. 1, paragraph a), of CIRS, having in consequence made corrections to the value of expenses declared in table 4 of annex G of the Model 3 Personal Income Tax return for 2013.

Since there is no error on the part of the services in the application of the law to the facts in question, there is no place for the payment of indemnificatory interest.

AT challenges, as unfounded, all that is alleged in the Request for Arbitral Pronouncement that contradicts what has been set out, and the Applicants' claim should be considered as unmeritorious and the Respondent absolved from all claims.

*

No exceptions having been invoked nor additional evidence requested and, since only matters of law are at issue, it was, by the arbitral order of 27 November 2017, dispensed with the holding of the meeting referred to in article 18 of RJAT, the Parties being invited to submit successive written pleadings and the date of 9 February 2018 being set for pronouncement of the final decision.

In their written pleadings, the Parties came to reiterate the positions taken in the initial procedural documents.

II. PRELIMINARY EXAMINATION

The singular arbitral tribunal is competent and was regularly constituted on 19 October 2017, in accordance with articles 2, no. 1, paragraph a), 5 and 6, all of RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

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

No exceptions were invoked which the tribunal should assess and decide.

III. REASONS

III.1 FACTUAL MATTERS

A – Proven Facts

With respect to the factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather it is its duty to select the facts that matter for the decision and to distinguish the proven from the unproven factual matters (cfr. art. 123, no. 2, of the Code of Tax Procedure and Process and article 607, no. 3 of the Code of Civil Procedure, applicable ex vi of article 29, no. 1, paragraphs a) and e), of RJAT).

The factual matters relevant to the understanding and decision of the case, after critical examination of the documentary evidence and the administrative process (PA) attached to the proceedings, are as follows:

The Applicants presented, on 27-06-2014, Model 3 Personal Income Tax return no. …-… -…, for income of the year 2013, listing as passive subject A the Applicant and, as passive subject B, his wife (Doc. 15, attached to Initial Petition and PA);

In Annex G to the said return, table 4, the alienation was declared, for the value of € 650,000.00, of the right of ownership over various urban and rural properties, situated in the Parish of … (…) and in the Union of Parishes of …, … and … (…), municipality of Alijó, as well as expenses and charges, in the amount of € 168,015.88;

The said properties, which as a whole comprise the mixed property denominated "…", were acquired by the Applicant, by inheritance from his Father, opened on 10-06-2000, adjudicated in common and equal shares with his sister, within the scope of inventory proceedings (inheritance), which took place under no. …/2002, initially in the … Court, 3rd Section, of the Civil Courts of the Judicial District of Porto, having subsequently proceeded in the 1st Civil Court of the Civil Courts of Porto under no. …/11… TJPRT (Doc. 5, attached to Initial Petition);

By agreement between the interested parties, of 21-05-2012, the composition of the hereditary shares was decided, with all heirs waiving adjustments and the Applicant and his sister assuming the liability consisting of item 207 of the property list, constituted by a debt to C…, CRL – branch of …, in the amount of 35,851.59 (Doc. 5, attached to Initial Petition and PA);

In the expenses and charges entered in table 4 of the Model 3 Personal Income Tax return for 2013, totalling € 168,015.88, are included the amount of the fees of the G… Representative of the Applicant in the inventory proceedings and related ancillary proceedings identified, in the amount of € 104,550.00 (Docs. 11 to 14, attached to Initial Petition and PA) and € 16,265.89 corresponding to the amount paid to "C…, CRL", for the purposes of the discharge of the mortgage that encumbered the alienated properties (Doc. 18, attached to Initial Petition and PA);

On 30-06-2014, notice GIC2/… was issued to the Applicant, from the Personal Income Tax Services Directorate, so that within 15 days of notification, he would present at the Financial Services of the area of his tax residence the duplicate of the J…/9 income return and all supporting documents of his personal and family situation, as well as the elements relating to the verification of the values entered in Annex G (Doc. 16, attached to Initial Petition and PA);

On 22-07-2014, at the Financial Services of Aveiro…, "The Chartered Accountant of the Subjects was present, to document the expenses relating to the Code of analysis, having presented various documents (…) and, on 23-07-2014, the proceeding was given as "Completed without Corrections" – Page 1 of PA;

On 26-06-2014, the Personal Income Tax assessment no. 2014… was issued, in the total amount of € 107,014.35, paid by the Applicants on 27-08-2014 (Doc. 23, attached to Initial Petition);

By notice of the Financial Services of Aveiro…, of 21-10-2016, the Applicant was notified to appear there "in order to exhibit all the documents that served as support for the completion of the Personal Income Tax return for the fiscal year 2013" (Doc. 24, attached to Initial Petition);

The Applicant proceeded to the Financial Services of Aveiro…, where he delivered all requested documents: detailed map of capital gains calculation; copy of the deed of sale of the properties that had been executed on 02/12/2013; certificate extracted from the proceedings of inventory case no. …/11… TJPRT (which had previously been conducted in the … Court, 3rd Section, of the Civil Courts of the Judicial District of Porto, under no. …/2002); certificate issued by the … Financial Services on 14/11/2002; and statements subscribed by the Applicant husband relating to expenses inherent to the acquisition and alienation of the properties and respective supporting documents (article 28 of Initial Petition, not contested, and Docs. 17 to 22, attached thereto);

By notice no. … of the Financial Services of Aveiro …, of 25/01/2017 (Doc. 25. Attached to Initial Petition), the Applicant was notified for the exercise of the right to prior hearing regarding the draft correction to the value of expenses declared in annex 4 of annex G of the Model 3 Personal Income Tax return for 2013, in the sense that its total value should pass to € 46,487.50, given the existence of the following errors:

"The expenses relating to legal services and the payment to E… are not capable of being framed within article 51 of the Personal Income Tax Code (CIRS)";

"No invoice was submitted relating to expenses identified as being relating to payment of 'property certificates and rights of preference to the General Directorate of Culture of the North' - IGESPAR";

"The invoice relating to expenses at the Property Registry of Ílhavo was considered in full, when it should be considered at 50%, as there are two sellers."

Following the corrections made to the Model 3 Personal Income Tax return presented by the Applicants, there were issued, on 21-03-2017, the additional Personal Income Tax assessment no. 2017…, in the amount of € 143,315.04, the statement of assessment, in the amount of € 3,803.73, and the statement of account adjustment, from which resulted the balance payable of the amount of € 36,300.69, with voluntary payment deadline of 02-05-2017 (Docs. 1 to 3, attached to Initial Petition);

The Applicants proceeded to payment of the balance found in the additional Personal Income Tax assessment for 2013, on 05-04-2017 (Doc. 26, attached to Initial Petition).

B) Unproven Facts

There are no facts with relevance to the decision of the case that should be considered unproven.

C) Reasons for the Determination of Factual Matters

The determination of the factual matters was based on the critical analysis of the documentary evidence attached to the proceedings and the facts alleged and not contested by the Parties.

III.2 MATTERS OF LAW

The Issue to be Decided

The issue which it falls to the arbitral tribunal to decide concerns the admissibility, for the purposes of determining the capital gains income from real property obtained by the Applicants in the year 2013, of the expenses incurred by them with the fees of the G… Representative in the scope of the judicial inventory (inheritance) proceedings and respective ancillary proceedings, within the scope of which the Applicant's hereditary share in the inheritance of his Father was fixed, comprised of the properties alienated in that fiscal year, as well as with the discharge of a voluntary mortgage that encumbered the same, so that they could be sold free of liens or encumbrances.

In sum, the issue to be decided is concerned with the interpretation of the final segment of article 51, paragraph a), of the Personal Income Tax Code, in the wording prior to that given to it by Law no. 82-E/2014, of 31 December, that is, with the determination of the meaning and scope of the expression "necessary expenses and actually incurred, inherent to acquisition and alienation, in the situations foreseen in paragraph a) of no. 1 of article 10".

The Taxation of Capital Gains from Real Property

It constitutes capital gains income the positive difference between two values, that of acquisition and that of alienation of a property, that is, the gain which, not arising from a business or professional activity and which should not be had as capital or real property income, represents the patrimonial increase in the sphere of the taxpayer, arising, in particular, from the onerous alienation of real rights over real property (article 10, no. 1, paragraph a), of the Personal Income Tax Code).

The taxation of capital gains from real property (with the exception of those concerning building land) was introduced by the 1989 tax reform, with the legislator recognizing that "Since these are exceptional income, the appropriate tax regime was considered in view of the excessive burden that aggregated taxation could generate, providing, for this category, a specific taxation regime, involving a substantial deduction from taxable income". (Cfr. paragraph 12 of the preamble to the Personal Income Tax Code).

To that extent, the gain to be taxed corresponds to "the difference between the realization value and the acquisition value, net of the part qualified as capital income, where applicable, in the cases provided for in paragraphs a), b) and c) of no. 1" (no. 4 of article 10 of the Personal Income Tax Code), considered in only 50% of the value of the respective annual balance (article 43, no. 2, of the Personal Income Tax Code), to be determined in accordance with articles 44 et seq. of the same Code.

Thus, the realization value corresponds, as a rule, to the consideration received for the alienation, prevailing, if higher and when it is a question of real rights over real property, "the values at which the properties have been considered for the purposes of assessment of municipal tax on onerous transfers of real property or, where there is no place for such assessment, those that should have been, if it were due." (article 44, no. 1, paragraph f) and no. 2).

The value of free acquisition, as is the case here, corresponds to what was considered for the purposes of stamp tax assessment in free transfers, which succeeded the extinct tax on successions and donations, or what would serve as its basis, if the same were due (article 45, no. 1, paragraphs a) and b), of the Personal Income Tax Code).

In determining capital gains income, with a view to the taxation of actual and not merely nominal income, there is also to be considered the correction of the acquisition value by application of the money devaluation coefficient, referred to in article 50 of the Personal Income Tax Code, and, on the basis of the principle of net income taxation, the expenses and charges referred to, as regards capital gains from real property, in paragraph a) of article 51 of the cited Code (in the wording in effect at the time of the facts), that is, "Charges for improvement of the properties, duly realized in the last five years, and necessary expenses and actually practiced, inherent to acquisition and alienation (…)"

The filling of the concept of "necessary expenses and actually practiced, inherent to acquisition and alienation" of real property, because it is relatively open and indeterminate, has raised doubts that have gradually become subject to interpretation by case law and legal scholarship.

At the level of case law, we cite, by way of example, the Decision of the Central Administrative Court of the South, rendered in case 06824/13, on 14-04-2015, regarding the discharge of a mortgage that affected the property alienated, acquired within the scope of division by divorce, in which it was decided that "In the legal criterion, only inherent expenses are necessary, so only they are relevant. This criterion contains an idea of inseparability, an intrinsic relationship – that is not merely extrinsic – with alienation: to be considered relevant, the expense must be so by its position relative to alienation, it must, in sum, be inseparable from it. The expense must be integral to the alienation itself. It is not clear what other meaning can be attributed to the expression 'inherent to alienation'; It is therefore not enough that expenses be connected to the obtaining of income, it is necessary that they be inseparable from it".

In legal scholarship, Rui Duarte Morais considers as expenses inherent to alienation the case "of the commission paid to the real estate agent who intermediated the sale" and as necessary expenses actually incurred inherent to acquisition, those relating to registrations[1].

And let it not be said that this interpretation which has been explained and which is adopted here is a restrictive interpretation, which does not take into account the taxation of net income, a corollary of the principle of capacity to pay.

Indeed, this question was already subject to analysis by the Supreme Administrative Court in the Decision rendered on 18-11-2009, in case 0585/09, in a situation where the expenses related to the amortization of accounts guaranteed by the company shares alienated (article 51, paragraph b), of the Personal Income Tax Code), but whose case law is suited to the situations provided for in paragraph a) of the same article, as regards deductible expenses in the alienation of real property).

In the mentioned decision, the Supreme Administrative Court decided in the sense that,

"I - In accordance with the terms provided for in article 51, par. b) of CIRS, for the purposes of taxation of the respective capital gain, only inherent expenses are necessary, so only they are relevant.

II - The qualifier "inherent", already etymologically – in re – contains, in itself, an idea of inseparability, an intrinsic relationship – that is not merely extrinsic – with alienation: to be considered relevant, the expense must be so by its position relative to alienation, it must, in sum, be inseparable from it.

III - Thus it cannot be considered as a "necessary expense inherent to alienation" the amortization of debts contracted for purposes of guarantee of shares ceded to a third party by their holder.

IV - Article 51, par. b) of CIRS is not materially and organically unconstitutional.".

In a subsequent appeal to the Constitutional Court (Decision no. 451/2010, of 24-11-2010), this Venerable Court came to consider that the said rule did not collide with the principle of capacity to pay, with the following reasoning:

"5. The appellants also argue, in the sense of the material unconstitutionality of article 51, paragraph b), of CIRS, by violation of the principle of capacity to pay, to the extent that the norm excludes the "deductions/actual and proven charges that are considered necessary to obtain the income subject to tax, in its concrete quantitative expression". In the case at hand, therefore, not included are "the charges borne by the taxpayer which are translated into the improvement of the property" (the value of the amortization of the secured accounts guaranteed by the shares that were subject to alienation), charges that "correspond to the realization of an expense that must be considered materially necessary to the concrete alienation at the stipulated value, inherent as such to the realization of the very capital gain".

Indeed, for the determination of capital gains subject to tax, the legislator specifies only necessary expenses and actually incurred, inherent to alienation, as expenses that increase the acquisition value of company shares (and other securities).

6. It is read in the Decision of the Constitutional Court no. 84/2003 (available at www.tribunalconstitucional.pt) that the principle of capacity to pay "expresses and concretizes the principle of fiscal or tax equality in its aspect of 'uniformity' – the duty of all to pay taxes according to the same criterion – with capacity to pay filling the unitary criterion of taxation". A criterion in which the incidence and distribution of taxes – of 'tax levies' more precisely – should be made according to the economic capacity or 'capacity to spend' (…) of each and not according to what each might eventually receive in goods or public services (benefit criterion)". (…)

7. Regarding the norm which is the subject of this appeal, it is not seen how it can be considered constitutionally inadmissible.

Starting from the concept of capital gains legally established, according to which capital gains constitute the gains obtained that result from alienation or onerous cession of certain rights, values or property (article 10, no. 1, of CIRS), article 51, paragraph b), of CIRS provides for the deduction of necessary expenses and actually incurred, inherent to alienation, in fulfillment of "a general principle of income taxation, which requires that only net income should be subject to tax" (XAVIER DE BASTO, PIT. Real incidence and determination of net income, Coimbra Editora, 2007, p. 460).

That is, gains obtained (net gains) from the onerous alienation of rights, values or property previously acquired are subject to tax. It is not constitutionally required a normative criterion that allows the deduction of an expense that is to be "considered materially necessary to the concrete alienation at the stipulated value". For example, the value of the amortization of a secured account guaranteed by company shares which were subject to alienation.

It is even to be concluded, as the Administrative and Tax Court of Coimbra rightly concludes (f. 39 of the present proceedings) that "the legislator was here particularly restrictive because the admissibility of deduction of expenses whose obligations result from bilateral negotiations more or less complex would be of difficult control, being income of this category [category G], and would open the door to collusion that would favor tax evasion. Collusion that could pass, for example, by the issuance of statements that would elect a particular expense as necessary for strictly fiscal reasons". Reiterating what has already been said in the Decision of this Court no. 162/2004, it should be noted that "a system that does not allow control of income and tax evasion, to the extent close to the reality existing, leads in a straight line to the distortion, in practice, of the principle of capacity to pay and of taxation according to actual income".

Concluding, paragraph b) of article 51 of CIRS is not materially unconstitutional.".

Regarding the Challenged Assessment

As appears from the request for arbitral pronouncement, the Applicants deem illegal the Personal Income Tax assessment for 2013, because in the determination of capital gains income AT did not consider as capable of being framed within paragraph a) of article 51 of the Personal Income Tax Code, the expenses relating to the fees of the G… Representative in the scope of inventory proceedings in which the Applicant's hereditary share in the inheritance of his Father, comprised of the properties alienated in that fiscal year, was fixed (acquisition expenses), as well as those relating to the discharge of a voluntary mortgage that encumbered the same, so that they could be sold free of liens or encumbrances (alienation expenses).

Specifically, regarding expenses for attorney's fees, the Applicants cite, in support of their thesis, the binding opinion of the former Directorate-General of Taxes, in case no. 12/2008, with concordant rulings of the Legal Substitute of the Director-General of Taxes, of 14-07-2008 and of 12-08-2008, as well as the position taken by the Representative of the Public Treasury in Appeal no. 01031/10 of the Supreme Administrative Court, with Decision rendered on 22-03-2011.

With respect to the binding opinion cited by the Applicants, it is concluded that it pertains to the acceptance by the tax administration of expenses with real estate brokerage, which were considered in the challenged assessment; as for the cited Decision of the Supreme Administrative Court, it does not allow concluding the reason why the Public Treasury Appellant did not challenge the appealed decision, in the part in which it decided to consider deductible the expenses with Lawyer, for non-resident taxpayers, a question which is not addressed there.

Now, in the case at hand, it is, as results from the proven facts, the alienation of real property acquired by legitimate succession, free by nature, to which do not correspond other expenses or charges beyond those legally established (the payment of tax on successions and donations, in effect at the time the succession was opened, and the property registration charges, or, if adjustments had occurred, the payment of the corresponding Municipal Tax on Transfers of Real Property).

It not appearing that the expenses with the G… Representative appointed are intrinsic to the acquisition itself, rather they relate to the agreement that put an end to the hereditary community, allowing the composition of the Applicant's share, comprised of the alienated properties, with the assumption of a debt of the estate, guaranteed by mortgage on those real properties and in which all heirs waived adjustments.

It should, for the reasons pointed out, be concluded that neither those expenses, of a contractual nature, nor those incurred with the discharge of the said mortgage, are inherent to acquisition or to alienation, not being therefore capable of being framed within the provision of article 51, paragraph a), of the Personal Income Tax Code.

It is on these terms that it is considered that the challenged assessments do not suffer from the defect of violation of law that is attributed to them by the Applicants.

Since the Personal Income Tax and compensatory interest assessments for 2013 being challenged in the present case are not capable of censure which would permit the declaration of their illegality, the assessment of the question relating to indemnificatory interest requested is without further action.

DECISION

On the basis of the facts and reasons set out above and, in accordance with article 2 of RJAT, judgment is rendered finding the present request for arbitral pronouncement unmeritorious, by the maintenance of the Personal Income Tax assessments and compensatory interest for 2013, absconding the AT from all claims.

VALUE OF THE CASE: In accordance with the provisions of article 306, nos. 1 and 2, of the Code of Civil Procedure, 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Process and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 36,300.69 (thirty-six thousand, three hundred euros and sixty-nine cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I annexed thereto, in the amount of € 1,836.00 (one thousand, eight hundred and thirty-six euros), to be borne by the Applicants.

Lisbon, 9 February 2018.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, in accordance with no. 5 of article 131 of the Code of Civil Procedure, applicable by referral of paragraph e) of no. 1 of article 29 of Decree-Law 10/2011, of 20 January.

The text of this decision is governed by the 1990 spelling agreement.

[1] Rui Duarte Morais, "On Personal Income Tax", 3rd Edition, Almedina, 2014, pp. 135 and 136.

Frequently Asked Questions

Automatically Created

What expenses and charges are deductible from capital gains (mais-valias) under Article 51 of the Portuguese IRS Code?
Under Article 51(1)(a) of the Portuguese IRS Code, deductible expenses from capital gains (mais-valias) include necessary expenses actually incurred and inherent to the acquisition and alienation of assets. The Tax Authority typically accepts real estate agent commissions, notarial fees, property registration charges, and IMT (property transfer tax) as clearly deductible. The legal dispute arises with expenses indirectly connected to transactions, such as legal fees for inheritance proceedings or debt discharge costs. The interpretation of 'necessary' (indispensable) and 'inherent' (inseparable from income generation) remains contested, with taxpayers advocating for broader inclusion of all expenses essential to completing acquisitions and sales, while AT maintains a restrictive approach limiting deductions to direct transaction costs.
Can legal fees and lawyer honoraria from judicial inventory proceedings be deducted as charges for IRS capital gains purposes?
The deductibility of legal fees and lawyer honoraria from judicial inventory proceedings for IRS capital gains purposes is disputed. Taxpayers argue these fees are inherent to acquisition when property is obtained through inheritance partition, as legal representation is indispensable for resolving hereditary communities and acquiring title. They contend that without the inventory proceedings and legal services, the property acquisition enabling subsequent capital gains would not occur. However, the Portuguese Tax Authority typically rejects such expenses, distinguishing between costs directly related to the alienation transaction itself (such as notarial fees for the sale deed) and prior legal costs related to establishing ownership. AT's position is that inheritance-related legal fees, even if necessary to acquire property, are not expenses 'inherent to acquisition and alienation' within Article 51's meaning, as they relate to inheritance resolution rather than the taxable transaction.
How does the Portuguese Tax Authority (AT) treat encargos declared in inheritance property sales for IRS purposes?
The Portuguese Tax Authority (AT) applies a restrictive interpretation to encargos (charges/expenses) declared in inheritance property sales for IRS capital gains purposes. AT typically accepts only direct transaction costs: real estate agent fees, notarial charges for sale deeds, and property registration fees. Expenses related to the inheritance process itself—such as legal fees for judicial inventory proceedings, partition costs, or inheritance tax—are generally rejected as not qualifying under Article 51 of the IRS Code. Similarly, AT excludes debt discharge costs, even when mortgage release is contractually required to complete a sale. This conservative approach contrasts with taxpayers' arguments that all expenses essential to acquiring inherited property and completing its sale should be deductible to properly calculate net income and respect the constitutional principle of taxation according to ability to pay. The divergence frequently leads to arbitration disputes at CAAD.
What is the CAAD arbitral tribunal's position on deductible expenses in capital gains from inherited property partitions?
CAAD arbitral tribunals face the interpretative challenge of balancing literal legal interpretation with the principle of net taxation. While this specific case's final decision is not provided in the excerpt, CAAD jurisprudence generally examines whether expenses are truly 'inherent' to the acquisition and alienation transactions under Article 51. Tribunals must interpret indeterminate legal concepts like 'necessary' and 'inherent' in light of constitutional principles requiring taxation based on real economic capacity. The central issue is whether 'inherent to acquisition' encompasses all expenses without which the taxpayer could not have obtained the property (including inheritance legal fees), or only direct acquisition costs. Similarly, for alienation, whether 'inherent' includes prerequisite expenses like mortgage discharge that enable sale completion. CAAD decisions vary, but increasingly recognize that expenses essential to completing transactions may qualify even if not strictly part of the sale deed itself.
Are compensatory interest charges (juros compensatórios) applicable when the Tax Authority rejects declared deductible expenses on IRS capital gains?
Yes, compensatory interest charges (juros compensatórios) are applicable under Article 35 of the Portuguese Tax General Law (LGT) when the Tax Authority rejects declared deductible expenses on IRS capital gains, resulting in additional tax assessments. In this case, when AT rejected €120,815.89 in declared expenses and issued an additional IRS assessment of €143,315.04, compensatory interest of €3,803.73 was automatically calculated from the legal payment deadline until actual collection. Compensatory interest compensates the State for delayed tax receipt when taxpayers underpay, regardless of good faith. If taxpayers successfully challenge the underlying assessment in arbitration or court, they become entitled to indemnificatory interest (juros indemnizatórios) on amounts already paid, calculated from payment date until the credit note issuance. The applicability of compensatory interest is automatic and independent of the substantive legality of the expense rejection—it depends solely on whether additional tax is due.