Process: 460/2014-T

Date: February 9, 2015

Tax Type: IRS

Source: Original CAAD Decision

Summary

This tax arbitration case (Process 460/2014-T) addresses the proper determination of realization value for IRS Category G capital gains when real estate is sold. The claimants sold an urban property in 2009 for €1,000,000, but the taxable property value (VPT) was registered at €1,465,000 due to a transcription error in the IMI Model 1 declaration that overstated the private area by 300m². Under Article 44(2) of the IRS Code, the realization value must be the higher of the actual sale price or the VPT. The Portuguese Tax Authority (AT) discovered the error and corrected the VPT ex officio to €985,440 in 2010, also retroactively correcting the 2009 IMI assessment. However, when claimants requested official review of their 2009 IRS assessment to reflect this correction, the AT denied the request, arguing that Article 130 of the IMI Code limits VPT corrections to prospective application only. The claimants challenged this denial, contending that since the corrected VPT (€985,440) is lower than the actual sale price (€1,000,000), the realization value should be €1,000,000, not the erroneous €1,465,000 they had declared. They argued the AT incorrectly applied IMI Code provisions to an IRS assessment, and that this error violated constitutional principles of justice, equality, and good faith under Articles 103, 104, and 266 of the Portuguese Constitution. The claimants sought annulment of both the denial decision and the IRS assessment, plus refund of overpaid tax with compensatory interest calculated from payment date to credit note issuance under Article 43 of the General Tax Law.

Full Decision

ARBITRAL DECISION

The arbitrators Jorge Lopes de Sousa (arbitrator president), Ricardo Rodrigues Pereira and Diogo Feio, appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. REPORT

  1. On July 2, 2014, A, NIF …, and B, NIF …, both with tax domicile at … Porto, (hereinafter, Claimants), filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of January 20, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, abbreviated as RJAT), seeking the declaration of illegality and annulment of the act of denial of the request for ex officio review which concerned the assessment of personal income tax (IRS) for the year 2009 and, consequently, the declaration of illegality and partial annulment of the act of assessment of personal income tax (IRS) for the year 2009 (assessment no. 2010 …) and respective compensatory interest, being the Respondent the Tax and Customs Authority (hereinafter, Respondent or AT). The Claimants attached 2 (two) documents, having not listed witnesses, nor requested the production of any other evidence.

In essence and in brief summary, the Claimants alleged the following:

In the year 2009, the Claimants sold the urban property registered in the property matrix under article … – …, municipality of …, for the price of € 1,000,000.00.

In that same year, the tax property value (VPT) of that property was € 1,465,000.00.

However, this VPT was vitiated by the fact that the private area of the property was inflated by 300 m², since the declaration model 1 of Municipal Tax on Real Property (IMI), filled in and submitted by the first Claimant (to which was assigned no. …), concerning that property, contained a writing error resulting from the fact that that Claimant had incorrectly transcribed the data concerning the areas of the property in question. The areas were correctly defined, both in the plans that accompanied that declaration model 1 of IMI and in the notes that served as the basis for filling in the declaration, but by manifest oversight the aforementioned Claimant incorrectly entered the data in the respective fields of that declaration.

The AT services, by simple analysis of that declaration model 1 of IMI, found that it was incorrectly filled in, as the said Claimant replicated the value of the gross construction area in the field of the gross private area, which led to no value appearing in the dependent area field because it would exceed, when added to the private area, the gross area, which is not possible. By analysis of the respective plans, the AT verified that the private area had 300 m² less than what was declared, which were registered in the dependent area.

Subsequently, the AT proceeded ex officio to correct the VPT of the property in question in the year 2010, to € 985,440.00. The AT, on 24.08.2010, also carried out the ex officio review of the IMI assessment for 2009, following the correction of the VPT of 2009 to the amount of € 985,440.00.

In this context, the VPT of € 985,440.00 will be the value to consider to determine, in the context of IRS, the realization value in the aforementioned sale of said property in 2009, as it is the correct VPT.

It happens that the Claimants declared in field 2 of annex G of the declaration model 3 of IRS that they submitted on 14.12.2010 (replacement declaration), the amount of € 1,465,000.00, as being the realization value for IRS purposes, when they should have declared the amount of € 1,000,000.00 – as they had previously done in the declaration model 3 of IRS initially submitted on 29.05.2010 – because, comparing the correct VPT (€ 985,440.00) with the declared value, it is concluded that the declared value is the greater, so it should be this that should be entered in field 2 of the mentioned annex G, given the provisions of article 44, no. 2, of the IRS Code.

The Claimants then presented a grace period complaint against the act of assessment of personal income tax for 2009, which was converted into a request for ex officio review of the same assessment act. This request for ex officio review came to be denied by the AT with the following grounds: while it is true that the VPT was corrected to € 985,440.00, this change can only have repercussions in 2010, since the evaluation of the property only occurred on 26.05.2010; and the issuance of the collection notice concerning the IMI due on the date of 31.12.2009, dated 24.08.2010, was processed with errors by the services, since the new VPT should only apply to the IMI to be calculated on 31.12.2010.

In the Claimants' view, the assessment of IRS in question is burdened with illegality, suffering from a vice of error in the legal assumptions, since the rule invoked – article 130 of the IMI Code – is not applicable when what is at issue is an IRS assessment. Now, having the AT incurred in an error that is attributable to it, compensatory interest is owed to the Claimants, calculated from the day following the payment made in error until the date of the issuance of the respective credit note.

Moreover, the maintenance of the aforementioned IRS assessment in the legal order violates the principles of justice, equality, good faith and proportionality provided for in article 266 of the CRP and in article 55 of the LGT.

Even if this were not the case, there would always be gross and notorious injustice, with manifest violation of constitutionally enshrined precepts (articles 103, no. 1, 104, no. 2 and 266 of the CRP), with the request for ex officio review proceeding, under article 78, no. 4 of the LGT.

The Claimants conclude their request for arbitral pronouncement by formulating the following claims:

"a) The claim formulated in this arbitral tax procedure be judged as well-founded and proven;

b) The act of denial of the request for review of the tax assessment act 2010 … of 2010-12-20 of IRS for the year 2009 be annulled, as it is burdened with the vice of violation of law, under no. 1 and 2 of art. 78 of the LGT,

Otherwise being understood and subsidiarily, the act of denial of the request for review of the tax assessment act 2010 … of 2010-12-20 of IRS for the year 2009 should be annulled, as it constitutes gross and notorious injustice, with manifest violation of constitutionally enshrined precepts (art. 103, no. 1 and art. 104, no. 2 and art. 266, all of the CRP), under art. 78, no. 4 of the LGT;

c) The tax assessment act 2010 … of 2010-12-20 of IRS for the year 2009 should be partially annulled, as a consequence of the correction of Declaration Model 3 of 2009 of the claimants so as to be considered the correct realization value (€ 1,000,000.00) in field 2 of annex G;

d) To condemn the Respondent to return to the Claimant the tax improperly paid, plus compensatory interest to be calculated between the date of payment of the aforementioned amount and the issuance of the corresponding credit note in favor of the Claimant, as provided in article 43 of the General Tax Law."

  1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on July 7, 2014.

  2. The Claimants did not proceed with the appointment of an arbitrator, so, under the provision of article 6, no. 2, subparagraph a) and article 11, no. 1, subparagraph a) of the RJAT, the President of the Ethics Council of the CAAD appointed as arbitrators of the collective Arbitral Tribunal Counselor Jorge Lino Ribeiro Alves de Sousa (arbitrator president), Dr. Ricardo Rodrigues Pereira and Dr. Diogo Feio (arbitrators members), who communicated their acceptance of the appointment within the applicable period.

  3. On August 20, 2014, the parties were duly notified of that appointment, having not manifested the will to refuse the appointment of the arbitrators, under the combined provision of art. 11, no. 1, subparagraphs b) and c) of the RJAT and of arts. 6 and 7 of the CAAD Ethics Code.

  4. Thus, in accordance with what is provided in subparagraph c) of no. 1 of art. 11 of the RJAT, the collective Arbitral Tribunal was constituted on September 4, 2014.

  5. On October 7, 2014, the Respondent, duly notified for that purpose, presented its Answer in which, in addition to having raised the exception of material incompetence of the Arbitral Tribunal, with its consequent absolution from the instance, specifically disputed the arguments put forward by the Claimants and concluded for the dismissal of the present action, with its consequent absolution of the claim. The Respondent attached a document, having not listed witnesses, nor requested the production of any other evidence. On the same occasion, the Respondent attached to the proceedings the respective administrative file (hereinafter, abbreviated as PA).

In essence and also in brief form, it is important to glean the most relevant arguments on which the Respondent based its defense:

The Respondent begins by invoking the exception of material incompetence of the Arbitral Tribunal because the Claimants failed to present the grace period complaint provided for in article 131 of the CPPT, which should have been filed within two years of the submission of the declaration model 3 of IRS. Indeed, although they attempted to, they did so in untimely manner, which is why they subsequently requested the conversion into a request for ex officio review. Thus, the only administrative remedy to which they resorted prior to arbitration was the request for ex officio review of the tax act.

By force of the referral made by no. 1 of article 4 of the RJAT, the binding of the AT to the jurisdiction of the arbitral tribunals functioning in the CAAD depends on what is provided in Administrative Order no. 112-A/2011, of March 22, namely as to the type and maximum amount of disputes covered. As it follows from article 2, subparagraph a), of the aforementioned Administrative Order no. 112-A/2011, the binding of the AT to that arbitral jurisdiction has as its object the appreciation of claims relating to taxes whose administration is incumbent upon it, referred to in no. 1 of article 2 of the RJAT, excepting claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to administrative remedy under articles 131 to 133 of the CPPT.

In this way, in the concrete case, it was imperative to have grace period complaint as a precedent, under the provision of article 131, no. 1, of the CPPT, so that the Claimants could resort to arbitral jurisdiction, because, as the Claimants acknowledge in article 5 of the request for arbitral pronouncement and expressly accepted, what is at issue is an act of self-assessment. Because the legislator did not provide for, in article 2 of that Administrative Order no. 112-A/2011, the ex officio review procedure as equivalent to recourse to administrative remedy, namely the grace period complaint, for purposes of access to arbitral jurisdiction.

Being certain that the understanding that disputes having as their object the declaration of illegality of acts of self-assessment, as occurs in the case sub judice, are excluded from the material competence of the arbitral tribunals functioning in the CAAD, unless they are preceded by grace period complaint under article 131 of the CPPT, is imposed by force of the constitutional principles of the rule of law and separation of powers (articles 2 and 111 of the CRP), as well as of legality (articles 3, no. 2, and 266, no. 2, of the CRP), as a corollary of the principle of unavailability of tax credits inherent in article 30, no. 2, of the LGT, which bind the legislator and all activity of the AT.

By way of defense, the AT came to say that the theory of the Appellants, based on the invocation of error and its rectification, is ineffectual, since the AT conducted its action according to strict compliance with legality and the duties to which it is bound both legally and constitutionally.

Moreover, contrary to what is alleged by the Claimants, it is not a matter of denying, or not, that the VPT of the property is, at the time of evaluation, € 985,440.00, but merely of, in compliance with the legal determinations, considering that value only for the fiscal year in which the evaluation occurs and subsequent years.

On the other hand, there is no legal foundation for asserting, as the Claimants do, that no. 8 of article 130 of the IMI Code does not apply to an IRS assessment, being certain that, for purposes of calculating real property capital gain in the context of IRS, it is the legislator itself who refers to the IMI assessment, an assessment that can only be the valid and effective one in relation to the fiscal year in question.

It further adds that the IMI collection note, dated 24.08.2010, concerning the tax due on the date of 31.12.2009, suffered from a violation of no. 8 of article 130 of the IMI Code, having that illegality been corrected as soon as it was detected.

In this way, the VPT of € 1,465,000.00, in force in the year 2009, cannot be altered by virtue of subsequent evaluations of the property in question or updates.

For this order of reasons, the AT did not incur in any error, so the petitioned compensatory interest is not owed.

Finally, the AT states that the invocation made by the Claimants of no. 4 of article 78 of the LGT should be completely disregarded, as the legal application conditions of that provision are not met.

  1. On October 7, 2014, an order was issued determining the waiver of the meeting provided for in article 18 of the RJAT, if the parties did not object to it, and notifying the Claimants to present their views within 10 (ten) days regarding the matter of exception alleged by the Respondent.

The Claimants, duly notified, presented their views to the effect that the exception invoked by the Respondent is without merit.

Neither of the parties objected to the non-holding of the meeting provided for in article 18 of the RJAT and, to that extent, no arguments were made.

  1. By order of the President of the Ethics Council of the CAAD, issued on February 4, 2015, the mandate of the arbitrator president of this collective Arbitral Tribunal, Counselor Jorge Lino Ribeiro Alves de Sousa, was declared ended, by virtue of him being incapacitated, due to illness, from performing the respective functions, having been appointed, in his replacement, Counselor Jorge Lopes de Sousa.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly constituted.

The proceedings do not suffer from nullities.

The parties enjoy legal standing and capacity, are duly represented and are legitimate.

II.1. On the exception of material incompetence of the Arbitral Tribunal

The Respondent, in its answer, raises the issue of material incompetence of the Arbitral Tribunal for understanding that, given the provision of article 2, subparagraph a), of Administrative Order no. 112-A/2011, of March 22, in the list of competencies of the arbitral tribunals functioning in the CAAD there is not contemplated the possibility of appreciation of claims relating to the declaration of illegality of acts of self-assessment that have not been preceded by grace period complaint, under article 131, no. 1, of the CPPT, but only, as occurs in the situation sub judice, of request for ex officio review, under article 78 of the LGT.

Consequently, the Respondent advocates that "the Arbitral Tribunal constituted is materially incompetent to appreciate and decide the claim that is the object of the dispute sub judice, under articles 2, no. 1, subparagraph a) and 4, no. 1, both of the RJAT and of articles 1 and 2, subparagraph a), both of Administrative Order no. 112-A/2011, which constitutes a dilatory exception preventing the examination of the merits of the case, under the provision of article 576, nos 1 and 2, of the CPC as per article 2, subparagraph e), of the CPPT and article 29, no. 1, subparagraphs a) and e), of the RJAT and prevents the examination of the claim and the absolution from the instance of the AT, under articles 576, no. 2 and 577, subparagraph a), of the CPC, as per article 29, no. 1, subparagraphs a) and e), of the RJAT. Under penalty of, if this is not understood, such interpretation being not only illegal, but manifestly unconstitutional, by violation of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111 of the CRP), as well as of legality (cf. articles 3, no. 2, and 266, no. 2, both of the CRP), as a corollary of the principle of unavailability of tax credits inherent in article 30, no. 2, of the LGT, which bind the legislator and all activity of the AT."

The scope of material competence of tribunals constitutes a matter of public order and its examination precedes that of any other matter, so it is proper, before all else, to proceed with its appreciation (cf. articles 16 of the CPPT, 13 of the CPTA and 96 and 98 of the CPC, subsidiarily applicable by referral, respectively, of subparagraphs a), c) and e) of no. 1 of article 29 of the RJAT).

It is certain that the Claimants, in the scope of the request for arbitral pronouncement, namely in the respective article 5, allude to self-assessment. It is further certain that the Claimants did not attach the alleged self-assessment, but only a copy of their declaration of income model 3 of IRS.

The Claimants did not attach the said self-assessment of IRS, nor could they do so, given that, under the provision of article 75 of the IRS Code, "the assessment of IRS is the responsibility of the Directorate-General of Taxes [currently, Tax and Customs Authority]".

Indeed, unlike what happens in other taxes – for example, in IRC (cf. art. 89, subparagraph a), of the IRC Code) and in VAT – in the context of IRS there is no place for self-assessment.

And, there being no place for self-assessment, there could not have been error in the same, so there is no reason to bring article 131 of the CPPT into question and invoke the regime resulting from it, as this legal norm only applies "in case of error in self-assessment" (cf. no. 1).

Consequently, it appears to be absolutely irrelevant, as being outside the scope of the legal regime applicable to the situation sub judice, everything that the AT refers to both regarding the necessity of prior grace period complaint and regarding the application of Administrative Order no. 112-A/2011, of March 22. Not having, thus, any basis to invoke, with this legal support, the material incompetence of this Arbitral Tribunal to examine and decide this case.

In these terms, without need for further considerations, the exception of material incompetence of the Arbitral Tribunal to appreciate and decide the present case is judged as without merit.

There are no other exceptions or prior issues that prevent the examination of the merits and of which it is proper to examine.

III. REASONING

III.1. ON THE FACTS

§1. FACTS PROVEN

With respect to the factual matters, it is important, first and foremost, to point out that the Tribunal does not have to pronounce on everything that was alleged by the parties, as it falls to it the duty to select the facts that matter for the decision and discriminate between what is proven and what is not proven (cf. art. 123, no. 2, of the CPPT and art. 607, nos 3 and 4, of the CPC, applicable as per article 29, no. 1, subparagraphs a) and e), of the RJAT). In this way, the facts relevant to the judgment of the case are chosen and defined based on their legal relevance, which is established having regard to the various plausible solutions of the legal question(s).

In this context, taking into account, in particular, the positions assumed by the parties, the documentary evidence produced and the administrative file attached to the proceedings, the following facts with relevance to the decision are considered proven:

  1. In the year 2009, the Claimants sold the urban property registered in the property matrix under article … – …, municipality of …, for the price of € 1,000,000.00 – cf. article 8 of the initial petition.

  2. On 29.05.2010, the Claimants submitted the declaration model 3 of IRS for the fiscal year 2009, composed of annexes A, C, F, G and H – cf. PA attached to the proceedings.

  3. In field 4 of annex G to that declaration model 3, the Claimants entered the following information concerning the aforementioned property (cf. PA attached to the proceedings):

Realization | Acquisition
Year | Month | Value | Year | Month | Value
2009 | 07 | 1,000,000.00 | 2009 | 01 | 975,000.00

  1. On 25.06.2010, assessment no. 2010 … was issued, concerning IRS for 2009, with global income in the amount of € 296,531.23 and calculating tax payable in the amount of € 90,317.65 – cf. PA attached to the proceedings.

  2. On 14.12.2010, the Claimants submitted a replacement declaration, correcting field 4 of the cited annex G, regarding the aforementioned property, to the following amounts (cf. document no. 4 attached to the initial petition and PA attached to the proceedings):

Realization | Acquisition
Year | Month | Value | Year | Month | Value
2009 | 07 | 1,465,000.00 | 2009 | 01 | 975,000.00

  1. Subsequently, assessment no. 2010 … was issued, concerning IRS for 2009, with global income in the amount of € 529,031.23 and calculating tax payable in the amount of € 190,117.80, which is at issue in the present proceedings – cf. document no. 2 attached to the initial petition and PA attached to the proceedings.

  2. In the year 2009, the tax property value (VPT) of the aforementioned property was € 1,465,000.00 – cf. article 10 of the initial petition.

  3. Claimant A, when he filled in and submitted the declaration model 1 of IMI concerning said property – which originated the evaluation sheet no. …, of 30.01.2007 – incorrectly transcribed the data concerning the respective areas, which resulted in an inflation of the private area of the property by 300 m² at the expense of the respective dependent gross area, whereas the areas were correctly defined, both in the plans that accompanied that declaration model 1 of IMI and in the notes that served as the basis for filling in the declaration – cf. articles 11 to 14 of the initial petition and 77 of the answer and document attached to the answer.

  4. On 26.05.2010, the entity that acquired the aforementioned property ("C – Real Estate Enterprises, Ltd.", NIPC …) decided to request its evaluation – which originated the evaluation sheet no. …, of 24.06.2010 – under the provision of article 130, no. 3, subparagraph a), of the IMI Code, having the respective VPT been corrected by the AT services to € 985,440.00 – cf. article 77 of the answer, document no. 1 attached to the initial petition, document attached to the answer and PA attached to the proceedings.

  5. On 24.08.2010, assessment no. 2009 … was issued, concerning IMI accruing to the cited property in the year 2009, in the name of the company "C – Real Estate Enterprises, Ltd.", NIPC …, in which the VPT of that property is € 985,440.00 – cf. document no. 5 attached to the initial petition and PA attached to the proceedings.

  6. On the understanding that the new VPT of the property that was determined in 2010, in the amount of € 985,440.00, should only apply to the IMI to be calculated on 31.12.2010, reflected in the assessment issued during the year 2011, the AT, on 16.10.2010, proceeded with the issuance of the collection note no. 2010 … of IMI, correcting the VPT of the property to the amount in force during the fiscal year 2009, namely € 1,465,000.00 – cf. PA attached to the proceedings.

  7. On 30.05.2012, the Claimants presented at the Tax Office of Porto … a grace period complaint, requesting that in annex G to the declaration model 3 of IRS, presented on 14.12.2010, the realization value entered in field 4, in the amount of € 1,465,000.00 (VPT), be changed to € 1,000,000.00 (deed value), since the AT had ex officio proceeded with the correction of the VPT of said property to € 985,440.00 in the year 2010, but with effects to the assessment concerning IMI for 2009 – cf. article 1 of the initial petition, document no. 3 attached to the initial petition and PA attached to the proceedings.

  8. In the draft decision of that grace period complaint, the AT services proposed its dismissal due to untimeliness, having the Claimants, when exercising the right to be heard, requested the conversion of the grace period complaint into a request for review, a request that was denied on the grounds that the review request was untimely, which would render the performance of the act futile – cf. PA attached to the proceedings.

  9. The aforementioned dismissal decision was notified to the Claimants via letter no. …, of 31.08.2012, of the Tax Office of Porto (postal registration … signed on 05.09.2012) – cf. PA attached to the proceedings.

  10. For disagreeing with the order denying the conversion of the grace period complaint into a request for review, due to untimeliness, on 27.09.2012, by mail (postal registration …), the Claimants filed a hierarchical appeal to the Tax Office of Porto – cf. PA attached to the proceedings.

  11. That hierarchical appeal was granted and, consequently, the order appealed was annulled and a new order was made accepting the conversion of the grace period complaint into a request for review – cf. PA attached to the proceedings.

  12. The aforementioned request for review was denied on 21.03.2014, by decision made by the Director of Services acting in lieu of the DSIRS, which was notified to the Claimants' representative via letter no. …, dated 04.04.2014 (postal registration …) – cf. article 2 of the initial petition, document no. 1 attached to the initial petition and PA attached to the proceedings.

  13. On July 2, 2014, the Claimants presented the request for constitution of an arbitral tribunal that gave rise to the present proceedings – cf. case management information system of the CAAD.

§2. FACTS NOT PROVEN

With relevance to the appreciation and decision of the case, there are no facts that have not been proven.

§3. MOTIVATION REGARDING FACTUAL MATTERS

As regards the factual matters proven, the Tribunal's conviction was based on the administrative file, on the statements made in the pleadings, on the points indicated, in which the adherence to reality was not put in question, and on the documents attached to the proceedings, referenced in relation to each of the points, whose correspondence to reality was not questioned.

III.2. ON THE LAW

The issues to be decided that need to be appreciated concern the following:

a) whether the tax property value fixed in 2010, based on a property matrix complaint presented in that year under article 130 of the IMI Code, can be considered for purposes of a capital gain assessed in the context of IRS for the year 2009;

b) whether in the assessment of the taxable matter underlying the disputed act there was demonstrated gross and notorious injustice determining its annulment.

The Claimants base their claim on the understanding that the tax property value to be considered for determining the realization value of the sale in 2009, in the context of IRS, is the tax property value fixed in 2010.

The Claimants sustain this claim on the alleged circumstance that the Tax Administration proceeded with the correction of Mod. 1 of IMI no. …, with reference to the property registered in the matrix under art. … - … and, moreover, for having allegedly proceeded ex officio with the correction of the tax property value in the year 2010 to € 985,440 and with the ex officio review of the IMI assessment for 2009, based on the new tax property value of € 985,440.

We do not find it appropriate to follow the understanding upheld by the Claimants, as follows.

In the case at hand is the assessment of a capital gain in the context of IRS, by virtue of the fact that in the fiscal year 2009 a transmission of an urban property took place for the amount of € 1,000,000, whose tax property value amounted to € 1,465,000.

In accordance with article 44, nos 1, subparagraph f) and 2, of the IRS Code, in its version in force in 2009, as regards the realization value for the purpose of calculating capital gains, "in the case of real rights over immovable property, the values at which the property has been regarded for the purposes of transfer tax settlement shall prevail, if they are higher, or, if there is no such settlement, the values that would prevail if such settlement were due." (the reference to transfer tax is to be considered as made to property transfer tax, by force of the provision of article 28, no. 2, of Decree-Law no. 287/2003, of November 12).

It is thus considered, for IRS purposes, that, in the case of onerous transmission of real rights over immovable property, the realization value is that which serves as the basis for property transfer tax settlement or, if there is no such settlement, those that would prevail if such settlement were due.

Now, for its part, property transfer tax is levied on the tax property value of the property, with article 16 of the Property Transfer Tax Code specifying that "The tax property value for purposes of this tax is the value of immovable property registered in the matrices on the date of settlement" (cf. also no. 1, of article 12, of the Property Transfer Tax Code).

This rule corresponds to paragraph 1 of article 30 of the Code of Municipal Tax on Real Property and Tax on Inheritances and Donations, repealed by Decree-Law no. 287/2003, of November 12, whose provision, on the date of repeal, was as follows: "Article 30 – For purposes of transfer tax and tax on inheritances and donations, the value of immovable property shall be the tax property value contained in the matrices. Paragraph 1 – In the case of transfers for consideration, the tax property value entered in the matrix on the date of settlement shall be considered."

Under this provision, which establishes that the value to be considered in determining the taxable matter is that entered in the matrix on the date of settlement, legal doctrine understood that "It is the same to say that if the matrix is not updated on that date, even though the Tax Office has elements that imply its update, it is not possible, in the face of a subsequent change to the matrix, to proceed later with the correction of the settlement", adding that "The provision of article 30 of the Code is to be observed at the time of the first settlement. But in the additional settlements that, under the terms the Code permits, are later made to correct prior ones, the tax property values in force on the date of the initial settlement cannot be used or serve as a pretext to, in the shadow of article 30, update the tax property values in force on the date of the initial settlement (FERNANDES F. Pinto and FERNANDES Nuno Pinto - Code of Municipal Tax on Real Property and Tax on Inheritances and Donations – Annotated and Commented, 4th edition, 1997, p. 409).

Now, the settlement of property transfer tax precedes the act or legal fact transferring the property (cf. no. 1, of article 22 of the Property Transfer Tax Code), which means that, in the case at hand – in accordance with the rules of property transfer tax to which IRS refers – the tax property value shall be the value of the property entered in the matrix on the date of settlement, namely in the year 2009, since the transmission occurred in that year.

It further adds that, in accordance with the facts given as proven, the change of the tax property value of the property in question in 2010 is a consequence of a property matrix complaint presented by the new owner of the property – the company C – Real Estate Enterprises, Ltd – under the provision of subparagraph a), of no. 3 of article 130 of the IMI Code.

The change of the tax property value of the property in question in 2010 was thus the result of a complaint based on the undervaluation of the tax property value and, not based on error of transcription or in the determination of areas, nor on the ex officio correction promoted by the Tax Administration.

The regime of property matrix complaints provided for in article 130 of the IMI Code provided specifically in its no. 7, in the version then in force (corresponding essentially to the current no. 8) that "The effects of complaints filed on any of the grounds provided for in this article shall only occur in the settlement concerning the year in which the request is submitted."

Thus there is expressly excluded the existence of retroactive effects in the changes made to the tax property value resulting from property matrix complaints filed under the aforementioned article 130 of the IMI Code.

Note that in its current version no. 8 of article 130 of the IMI Code does not permit retroactive effects - when what is involved is any of the grounds provided therein - whether when the changes result from a complaint (as in the previous no. 7) or when they result from corrections promoted by the chief of the tax office himself. And among the grounds provided for in the aforementioned legal provision, in addition to the undervaluation of the tax property value, are in particular the "error of transcription of cadastral elements or of entries contained in any official documents" and the "error in the determination of areas of rustic or urban properties, provided that the differences between the areas determined by the expert appraiser and the contested ones exceed 10% and 5%, respectively".

As indicated in the arbitral decision made in Case no. 13/2011-T – CAAD, "The legislator intends to prevent that, at any time, changes to the matrices resulting from complaints, have retroactive effects with respect to IMI and property transfer tax settlements already made for that property. Otherwise, the IMI and property transfer tax settlements would never be consolidated and it would suffice a change in the VPT resulting from a matrix complaint, which, in some situations, can be filed at any time, for the earlier settlements of those taxes to be amended. Such a problem cannot, however, be disassociated from the respect for the principle of legal certainty, inherent in the idea of a Democratic Rule of Law, where situations cannot remain eternally non-consolidable."

In summary, there is an express legislative intention that the correction of property matrix inaccuracies identified in article 130 of the IMI Code not have retroactive effects.

In accordance with what has been set out, the property matrix complaint presented by the company C – Real Estate Enterprises, Ltd, on May 26, 2010, only produces effects "in the settlement concerning the year in which the request is submitted" (cf. no. 7 of article 130 of the IMI Code then in force). That is, from the cited legal provision it results that the correction or corrections to the matrix resulting from the complaint, namely the change of the respective tax property value, only produce effects with reference to the year 2010.

The Claimants contend that no. 7 of article 130 (or no 8 in the current version) of the IMI Code is not applicable to the case at hand, an understanding that is not followed, as already mentioned, because for calculating the capital gain, for IRS purposes, one attends to the definitive value that serves as the basis for property transfer tax settlement. And for purposes of property transfer tax settlement, any correction to the matrix under the aforementioned article 130 of the IMI Code does not have retroactive effects.

As a consequence of the Claimants' inaction, the tax property value resulting from the evaluation made in 2007 became consolidated in the legal order regardless of any possible error that affected the evaluation act.

The non-use of the means of defense provided for in article 76 and in article 130 of the IMI Code by the Claimants led to the formation of a res judicata or settled matter regarding the tax property value contained in the matrix.

Thus, the disputed assessment is based on a tax property value that was consolidated in the legal order, due to the absence of reaction by the taxpayers, and the Claimants cannot base their claim, as has already been developed above, on an update of the tax property value promoted by the new owners in the year following the transmission.

The act of fixing the tax property value must be challenged autonomously, and the correction thereof cannot be made when challenging subsequent assessment acts.

Indeed, "In our legal order the rule of autonomous challengeability of acts fixing tax property values on the grounds of any illegality applies, such as property evaluations (cf. art. 86, no. 1, of the Tax General Law; art. 134 of the Tax Procedure Code). (…) Inasmuch as these are separable acts and there being no such restriction relating to the illegalities that can be the object of contentious challenge, the vices affecting the said evaluation act can only be argued when challenging the evaluation act and not when challenging the assessment act made based on it, since the assignment of the nature of separable act has as its purpose, precisely, to make the vices of this act autonomous for purposes of contentious challenge. Being so, there will be no possibility of appreciation of the correctness of the same act when challenging the assessment act, and there one must presume the value fixed in the evaluation (cf. Decision of the Central Administrative Court of the South, made in Case no. 07047/13, of 28-11-2013, at www.dgsi.pt).

This means that it does not fall within these proceedings to appreciate the correctness of the tax property value fixed in the matrix before the request for update filed in 2010, and consequently it does not fall within these proceedings to appreciate whether the same was inflated. That discussion could only take place when requesting a second evaluation, a property matrix complaint, or a subsequent challenge of the tax property value.

On the other hand, the Claimants, despite not having challenged the fixing of the tax property value, could have made proof that the price actually practiced in the transmission was lower than the tax property value that was in the matrix, as it has come to be understood by the Constitutional Court that the presumptions inherent in norms determining taxable matter are rebuttable (decisions of the CC no. 348/97 (BMJ no. 466, page 140), no. 211/03, of 28-4-2003 (Official Journal, II Series, of 21-6-2003), but they did not make that proof in the IRS assessment procedure, nor in its subsequent administrative challenge, nor in the present proceedings.

Moreover, the lack of proof that the price actually practiced in the transmission was lower than the tax property value that was in the matrix prevents the conclusion that the principles of material truth, justice, equality, good faith and proportionality were violated.

In light of what has been set out, it is concluded that the disputed assessment does not suffer from error of fact or law leading to its annulment.

Finally, the Claimants contend that absent the grounds advanced, there will always be gross and notorious injustice, and the present request should proceed under no. 4 of article 78 of the General Tax Law.

The aforementioned rule provides in its number 4 that it can be authorized, exceptionally, in the three years following that of the tax act, the review of the taxable matter assessed on the grounds of gross or notorious injustice, provided that the error is not attributable to negligent conduct of the taxpayer. Adding in number 5 that injustice is considered notorious when it is obvious and unequivocal and is considered grave in particular when it is the injustice resulting from taxation that is manifestly excessive and disproportionate to reality.

This term established in no. 4 of article 78 of the General Tax Law "is, as the provision itself indicates, an exceptional term that can only be used in cases in which its strict requirements are met, because it is understood that this specially extended term (applicable in a situation in which there is no error on the part of the administration, as in this case the term would be longer) conflicts with the legal value of the stability of the tax act and the principle of legal certainty. Only when there exists gross or notorious injustice, which is different from an illegality, is the possibility of review of a tax act admitted within the three-year term." (Decision made in Case no. 187/2013-T – CAAD, on March 3, 2014).

Note further that the gross and notorious injustice to be alleged and demonstrated must be directly directed at the taxable matter assessed (as occurs in the exceptional review of taxable income provided for in article 62 of the IRC Code).

The gross or notorious injustice in the taxable matter in the context of IRS to exist will result from the fixing, in 2007, of a tax property value that is disproportionate, by virtue of an alleged error in the declared areas, or from the circumstance that the sale value was manifestly lower than its respective tax property value, both situations capable of having led to the assessment of an excessive capital gain in the year 2009.

"It is the taxpayer who must prove the gravity or notoriety of the injustice, under penalty of summary dismissal of the request for review of the taxable matter" (GUERREIRO, António Lima Guerreiro - General Tax Law Annotated, Lisbon, 2001, p. 347). That is, for it to be possible to grant the request made by the Claimants, it would be necessary that there be duly alleged and demonstrated the occurrence, in the concrete case, of gross and notorious injustice with reference to the taxable matter assessed, which does not verify since the Claimants at no moment specify what constitutes the alleged gross and notorious injustice.

It is not demonstrated in the proceedings that the tax property value fixed in 2007 was a disproportionate value. The Claimants always take as their reference the tax property value fixed in 2010 (which did not form the basis of the disputed tax act) never advancing what value would have been fixed in 2007, if the alleged error in the areas indicated had not occurred. It is not enough to invoke the error in the declaration of Model 1 of IMI as they had to demonstrate that that error resulted in an injustice that is either unequivocal or manifestly disproportionate.

On the other hand, neither was proof made by the Claimants of the actual price of the transmission of the property so that it could be concluded that an excessive capital gain was actually assessed. It being certain that the value declared in the deed is not sufficient for such proof, as this will always, necessarily, be the value declared by the taxpayers as the realization value, which leads to the presume that in cases in which the sale value is lower than the tax property value fixed, additional documentary evidence is required of the taxpayers, which was not presented.

In light of what has been set out, it is concluded that it has not been demonstrated in the proceedings the existence of gross and notorious injustice leading to the annulment of the disputed assessment.

It not being determined that the disputed assessment is to be annulled, the right of the Claimants to compensatory interest is consequently not recognized.

IV. DECISION

In the terms set out, this Arbitral Tribunal decides:

a) To judge the exception of material incompetence of the Arbitral Tribunal as without merit;

b) To judge the request for arbitral pronouncement as wholly without merit and, in consequence, not to declare illegal the personal income tax assessment disputed and not to recognize the right of the Claimants to compensatory interest;

c) To absolve the Respondent from the claim; and

d) To condemn the Claimants for the costs of the proceedings.

VALUE OF THE CASE:

In accordance with the provision of articles 306, no. 2, of the CPC, 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 99,800.15 (ninety-nine thousand eight hundred euros and fifteen cents).

COSTS:

In accordance with article 22, no. 4, of the RJAT, the amount of costs is fixed at € 2,754.00 (two thousand seven hundred and fifty-four euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimants.

Lisbon, February 9, 2015.

The Arbitrators,

(Jorge Lopes de Sousa)

(Ricardo Rodrigues Pereira)

(Diogo Feio)

Frequently Asked Questions

Automatically Created

What happens when the taxable asset value (VPT) of a property exceeds the actual sale price for IRS Category G capital gains purposes?
Under Article 44(2) of the IRS Code, when the taxable property value (VPT) exceeds the actual sale price, the VPT becomes the mandatory realization value for calculating Category G capital gains. This anti-avoidance rule requires taxpayers to use the higher of the two values—either the declared sale price or the VPT in effect at the transaction date. In Process 460/2014-T, the claimants faced this situation when their property's VPT of €1,465,000 exceeded the actual sale price of €1,000,000, requiring use of the higher VPT as the realization value. However, this VPT was later discovered to contain a 300m² area calculation error, creating a dispute over whether the corrected VPT could retroactively reduce the taxable realization value to the actual sale price.
Can a taxpayer correct an error in the IMI Model 1 declaration that inflated the property's gross private area and taxable asset value?
Yes, errors in the IMI Model 1 declaration can be corrected by the Portuguese Tax Authority. In Process 460/2014-T, the claimant made a transcription error, incorrectly replicating the gross construction area into the gross private area field, inflating the property dimensions by 300m². The AT identified this error through analysis of the declaration—noting that no dependent area value appeared because it would exceed the total gross area when combined with the overstated private area, which is logically impossible. By examining the architectural plans attached to the declaration, the AT verified the actual private area was 300m² smaller. The AT then corrected the VPT ex officio from €1,465,000 to €985,440 in 2010 and retroactively corrected the 2009 IMI assessment on August 24, 2010.
How does the Portuguese Tax Authority (AT) handle the realization value in onerous alienation of real estate rights under IRS?
The Portuguese Tax Authority applies Article 44(2) of the IRS Code to determine realization value in onerous alienation of real estate rights. This provision mandates using the higher of either the declared consideration (actual sale price) or the taxable property value (VPT) at the transaction date. In Process 460/2014-T, a dispute arose when the VPT was corrected after the sale occurred. The AT took the position that VPT corrections apply only prospectively from the correction year, citing Article 130 of the IMI Code governing temporal application of property value changes. The claimants challenged this approach, arguing that IMI Code provisions should not control IRS assessments and that the corrected VPT should retroactively determine the proper realization value for their 2009 property sale.
What is the procedure for requesting an official review (revisão oficiosa) of an IRS assessment related to property capital gains?
The official review (revisão oficiosa) procedure under Article 78 of the General Tax Law (LGT) allows correction of tax assessments containing errors attributable to the tax authority. In Process 460/2014-T, claimants initially filed a grace period complaint (reclamação graciosa) against the 2009 IRS assessment, which the AT converted into an official review request. Under Article 78(1)-(2) of the LGT, official review is warranted when AT errors result in excessive taxation. The claimants argued the AT's acceptance of the incorrect VPT and subsequent correction demonstrated such an error. Alternatively, Article 78(4) permits official review for gross and notorious injustice violating constitutional principles. When the AT denied the review request, claimants challenged this denial through tax arbitration, seeking annulment of both the denial decision and the underlying IRS assessment, plus refund with compensatory interest.
Does a corrected taxable asset value (VPT) retroactively affect the IRS capital gains calculation on the sale of real estate?
Whether a corrected VPT retroactively affects IRS capital gains calculations was the central dispute in Process 460/2014-T. The claimants argued the corrected VPT of €985,440 should retroactively apply to their 2009 sale, recalculating the realization value as €1,000,000 (the higher of actual sale price versus corrected VPT). They noted the AT had already applied the VPT correction retroactively for IMI purposes, correcting the 2009 IMI assessment in August 2010. However, the AT denied retroactive application for IRS purposes, invoking Article 130 of the IMI Code, which limits VPT changes to prospective application from the year following evaluation. Since the property evaluation occurred May 26, 2010, the AT argued the corrected VPT could only apply from 2010 forward. The claimants contended Article 130 of the IMI Code should not govern IRS realization value determinations and that the AT's position violated constitutional principles of justice and equality.