Process: 481/2017-T

Date: May 15, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 481/2017-T) addresses whether Portuguese taxpayers can carry forward Category F (rental income) losses from prior years without opting for income aggregation (englobamento). The claimants earned €58,704.50 in rental income in 2015, with deductible expenses of €18,518.11, resulting in net income of €40,186.39 taxed autonomously at 28%. However, they had incurred losses of €16,512.10 in 2014 that they sought to deduct. The Tax Authority denied this carryforward under Article 55 of CIRS, arguing that taxpayers who choose autonomous taxation at 28% rather than consolidation cannot benefit from loss carryforward provisions. The Authority claimed taxpayers cannot 'have the best of both worlds.' The claimants challenged this interpretation, arguing that Article 55 of CIRS permits loss carryforward regardless of the taxation method chosen. The tribunal examined whether the legal framework requires englobamento as a prerequisite for deducting prior-year Category F negative results. This case is significant for property investors and tax practitioners navigating the interplay between autonomous taxation regimes and loss relief provisions in Portuguese IRS law, particularly regarding rental property income taxation strategies and the scope of Article 55 CIRS application.

Full Decision

ARBITRAL DECISION

I – REPORT

The Parties and Constitution of the Arbitral Tribunal

A…, taxpayer no. … and B…, taxpayer no. …, married to each other, resident at Rua …, no. …, …, …, no. …, …-… in Lisbon, (hereinafter referred to as "Claimants"), filed a request for constitution of a single Arbitral Tribunal in tax matters, pursuant to the provisions of article 2, no. 1, paragraph a) and 10, nos. 1 and 2 of Decree-Law no. 10/2011, of January 20, hereinafter referred to as "RJAT" and of Ordinance no. 112 – A/2011, of March 22, for impugnation of the dispatch denying the administrative appeal and partial annulment of the IRS assessment relating to the year 2015 on the grounds of disregard of the negative net result of category F, determined in the previous year (2014). In the present arbitral request, the IRS assessment for the year 2015 is at issue.

The request for constitution of the Arbitral Tribunal was presented by the Claimant on 25-08-2017, was accepted by the Honorable President of CAAD and notified to the Tax and Customs Authority on 15-09-2017. The Claimant opted not to designate an arbitrator, wherefore, pursuant to the provisions of no. 1 of article 6 of RJAT, the undersigned was designated by the Deontological Council of the Center for Administrative Arbitration on 31-12-2017 as arbitrator to constitute the single Arbitral Tribunal.

Thus, in conformity with the provision in paragraph c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012 of December 31, the Arbitral Tribunal was constituted on 21-11-2017.

On 22-11-2017 an arbitral dispatch was issued, for the Tax and Customs Authority (AT) to present its response within the legal period, in accordance with the provisions of nos. 1 and 2 of article 17 of RJAT.

On 22-12-2017 the Respondent attached to the case file its Response and the respective Administrative Process (PA), which are deemed to be entirely reproduced. In its response the Respondent holds that the issues under discussion in the case are merely matters of law and that therefore the meeting referred to in article 18 of RJAT may be dispensed with. On 03-01-2018 the Claimants attached to the case file an arbitral sentence handed down in process no. 314/2017-T, on an identical issue, relating to their IRS declaration for 2014.

On 01-02-2018 an arbitral dispatch was issued for the parties to pronounce themselves on the possible waiver of the meeting. Both pronounced themselves favorably, although without dispensing with the submission of written pleadings. Accordingly, an arbitral dispatch was issued on 14-02-2018 waiving the holding of the meeting provided for in article 18 of RJAT, in which a deadline for the parties' pleadings was set. Following the deadline set for the submission of written pleadings, which the parties submitted and attached to the case file, an arbitral dispatch was issued on 24-05-2018 setting May 15, 2018 as the probable date for the pronouncement of the arbitral decision.

B) THE POSITION OF THE CLAIMANTS:

The Claimants formulate the present request for arbitral pronouncement, arguing for the illegality of the IRS assessment relating to the year 2015, as well as the denial of the respective administrative appeal, alleging that in the year in question they opted for joint taxation of their income, which includes rental income; having declared in annex F of the IRS Return Model 3, the Claimants declared gross rental income in the amount of €58,704.50 (fifty-eight thousand, seven hundred and four euros and fifty cents). However, the Claimants also declared having incurred expenses in the amount of €18,518.11 for obtaining the rental income, which resulted in a net rental income of €40,186.39. The Claimants were taxed autonomously on this amount at the rate of 28%.

It happens that in the previous year, having also opted for the filing of a joint declaration, the Claimants determined a loss, which should be carried forward to future years as provided in article 55 of CIRS.

The Respondent does not admit such carryforward since the Claimants did not opt for consolidation. The Claimants do not accept the Respondent's position, which is reflected in the assessment subject to administrative appeal and impugned here.

C – THE POSITION OF THE RESPONDENT

The position of Respondent AT, well evidenced in the tax acts impugned, as well as in the response attached to the case file, is based on the understanding that the failure to opt for consolidation under article 72, no. 8 of CIRS, prevents the Claimants from being able to benefit from the reflection of the negative net result, since they cannot "have the best of both worlds."

In its response it further alleges that the Claimants petition for the complete annulment of the IRS assessment, which is not acceptable.

In these terms, it concludes arguing for the legality of the tax acts impugned and for the dismissal of the arbitral request.

D - THE DISPUTED ISSUE:

Thus, as the facts described in the case file, accepted by the parties, are not in question, what is truly being discussed is the question of whether, not having the Claimants opted for consolidation, they may or may not benefit from the carryforward of losses carried forward from the previous year, as provided in article 55 of CIRS.

II - PROCEDURAL REQUIREMENTS

The Arbitral Tribunal is regularly constituted and is materially competent, pursuant to article 2, no. 1, paragraph a) of RJAT.

The Parties have legal personality and capacity, are legitimate and are legally represented (cf. articles 4 and 10 no. 2 of RJAT and article 1 of Ordinance no. 112/2011 of March 22).

The process does not suffer from defects that would invalidate it.

Having regard to the administrative tax process, the documentary evidence attached to the case file, it is appropriate to set out the relevant factual matter for the understanding of the decision, which is set out as follows.

III – FACTUAL MATTER

Proven Facts

As relevant factual matter, this tribunal finds as established the following facts:

  • Regarding the year 2015, the Claimants opted for joint taxation of their income, which includes rental income.

  • The Claimants earned gross rental income in the amount of €58,704.50;

  • The Claimants incurred deductible expenses imputed to said rental income in the amount of €18,518.11, which resulted from the sum of the following expenses incurred with leased properties:

    • €1,852.56 in maintenance and conservation expenses;
    • €13,915.53 in condominium expenses for the leased properties;
    • €2,470.16 in Municipal Property Tax ("IMI"), and
    • €279.86 in municipal fees.

  • The household earned net rental income in the amount of €40,186.39 (€58,704.50 - €18,518.11), of which €39,087.31 are imputable to taxpayer A and €1,099.08 are imputable to taxpayer B.

  • The Claimants are resident in Portuguese territory and expressly declared that they do not opt for consolidation of the rental income earned;

  • The Claimants incurred the amount of €11,252.19 as tax relating to autonomous taxation of category F income, which resulted from the application of the 28% rate to the positive net income (i.e., €40,186.39 X 28%);

  • The Claimants paid the amount of the assessed tax;

  • In the year 2014 the Claimants also opted for joint taxation of 2014 rental income, with the expenses accepted by AT as deductible amounting to €64,058.75, resulting in a loss determined in the amount of €16,512.10;

  • The Claimants filed an administrative appeal which was denied with the following reasoning: "as the Appellants opted for non-consolidation of rental income, and therefore the same are taxed at the special rate of 28%, pursuant to paragraph e) of no. 1 of article 72 of CIRS, with Category F income not being included in the calculation of total income subject to taxation, the deduction of losses, pursuant to article 55 of CIRS, is prejudiced."

  • The Claimants filed an Administrative Appeal, which was denied by means of Official Letter attached to the case file dated 25-05-2018, notified to the Claimants on 30-05-2017.

  • The arbitral request was presented on 28-08-2017.

Facts Not Proven

With relevance to the decision, there are no facts that should be considered as unproven.

REASONING FOR THE PROVEN FACTS

The facts described were proven on the basis of the documentary evidence that the parties attached to the present process, the Claimant with its arbitral request and AT in the Administrative Process attached to the case file, regarding which no divergence was found.

It should be noted that, with respect to factual matter, the Tribunal does not have to pronounce on everything alleged by the parties, but rather it is its duty to select the facts that matter for the decision and discriminate between proven and unproven matter [cf. article 123, no. 2 of CPPT and article 607, no. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, no. 1, paragraphs a) and e) of RJAT]. In this manner, the facts relevant to the judgment of the case are selected and defined according to their legal relevance, which is established in light of the various plausible solutions of the question(s) of Law [cf. former article 511, no. 1 of CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e) of RJAT].

IV – AS TO THE LAW: REASONING FOR THE MERIT DECISION

As a preliminary matter, it should be stated that there is no doubt as to the nature of the request formulated by the Claimants, which appears to be a request for partial annulment, as is clear from all that is set out in their arbitral request. If there were any doubts, in the pleadings the Claimants came to clarify this matter fully, which is therefore considered resolved.

Having said that:

Having fixed, in the terms stated above, the factual matter, it is important to address the question of law raised by the Claimants, which consists in knowing whether or not, in the circumstances determined in the case file, the carryforward of losses determined in the previous year(s) within category F (rental income) can be admitted in the case where the holders of such income have opted for autonomous taxation, that is, did not opt for consolidation.

The legal regime for taxation of rental income under IRS provides for carryforward of losses within category F. However, will this possibility be dependent on the requirement to opt for consolidation of rental income?

Let us see what the law provides on this matter.

Article 41, no. 1 of CIRS provides as follows:

"Article 41
Deductions

1 - From the gross income referred to in article 8 shall be deducted the maintenance and conservation expenses that are incumbent on the taxpayer, borne by the taxpayer and documented, as well as the municipal property tax and the tax stamp that applies to the value of the properties or part of properties whose income is subject to taxation in the fiscal year."

For its part, nos. 1 and 2 of article 55 of CIRS establish the regime for deductibility of the negative net result determined in category F, in the following terms:

"1 - Without prejudice to the provisions of the following numbers, the negative net result determined in any category of income is deductible from the aggregate of net income subject to taxation.

2 - The negative net result determined in category F may only be carried forward to the five following years to which it pertains, deducting from the positive net results of the same category."

It is worth noting that the transcribed version of the provision in article 55 of CIRC is the one that was in force on the date of determination of said loss (year 2014). The wording of this article was amended upon the entry into force of Law no. 82-E/2014 of December 31. However, under the heading "Production of Effects," it was provided in article 17, no. 6 of said Law no. 82-E/2014 that "Article 55 of the IRS Code, as amended by the present law, is only applicable to losses occurring after January 1, 2015."

Therefore, for what is relevant here, we must apply the loss deduction regime provided for in the tax year in which such loss occurred, as the Claimants and the Respondent have properly recognized, the latter expressly referring to it in the reasoning for denial of the Administrative Appeal attached to the case file.

Finally, article 72, nos. 7 and 8 of CIRS provides as follows:

"Article 72
(...)

7 - Rental income is taxed autonomously at the rate of 28%.

8 - Income provided for in nos. 4 to 7 may be consolidated by option of their respective holders resident in Portuguese territory."

Thus, it follows from the joint interpretation of the regulations described above that the possibility of loss deduction provided in article 41, as well as the carryforward of losses in following years provided in article 55, both of CIRS, precedes the option provided in article 72 of the same Code. In this matter, we fully agree with the arbitral case law mentioned below, as well as with the dominant Doctrine on this issue, referenced in the arbitral request, emphasizing the thinking of Prof. Dr. Paula Rosado Pereira, whom the Claimants cite in their pleadings, when she states that "the right to deduction of maintenance and conservation expenses related to the property subject to lease does not depend on the exercise by the taxpayer of the option to consolidate rental income and subjection thereof to general progressive IRS rates." All the more so because we are dealing with a rule that allows "deduction of expenses "from gross income" and not from consolidated income."

Thus, following the letter of the law, it clearly results that rental income, after deduction of expenses that may be deducted under the terms of the law, is taxed autonomously at the rate of 28%, without prejudice to the right of their respective holders resident in Portuguese territory to opt for consolidation of such income.

The Respondent holds that from these provisions the conclusion can be drawn that the carryforward of losses in category F requires, on the part of their respective holders, prior option for consolidation of rental income. However, such conclusion is based on a presumption that does not follow from the letter, nor from the ratio legis, of the regulation in question, as neither one nor the other permit supporting such conclusion.

Supporting this understanding is the clear difference in wording between no. 2 and no. 6 of this same article. Here, contrary to what occurs in no. 2, the carryforward can only take place "when the taxpayer opts for consolidation." However, no. 2 does not contain an identical requirement, so it appears clear that the difference in wording corresponds to a likewise different legislative choice.

Thus, pursuant to the law, the carryforward of losses determined in category F does not depend on prior option for consolidation of rental income. Thus, the unjustified disregard of losses determined within category F, contrary to the expressly provided in article 55, no. 2 of CIRS, constitutes violation of law by error as to the factual and legal assumptions underlying the assessment impugned.

Fully agreeing with what is stated in the arbitral decision handed down in process 338/2016-T: "There is no evidence in the text of the law of the existence of any conditioning of the carryforward of losses in Category F of IRS income on the option to consolidate such income and consequent waiver of its autonomous taxation. Nor that this autonomous taxation could apply to gross income, to the detriment of the principle of taxation of net income increase which constitutes a structuring principle of said tax. (...) the Arbitral Tribunal thus holds that the carryforward of losses to subsequent years, within Category F, does not depend on option for consolidation, such carryforward being admitted in the case where such option is not manifested as there is no legal provision that would preclude such possibility, on the one hand, and, on the other, in accordance with the structuring principle of taxation of net income earned by the respective taxpayers."

Indeed, apart from the temporal limitation on the deduction of losses determined within Category F, article 55 of the IRS Code does not establish any other requirement for this deductibility.

Furthermore, as is clear from the provision in article 9 of the Civil Code, applicable by virtue of article 11, no. 1 of LGT, the interpreter is required, in reading the norms, not to invent legislative thinking that has no minimum verbal correspondence in the letter of the law, always presuming that the legislator knew how to express its thinking in adequate terms. Therefore, if the legislator wanted, in fact, to accept the deduction of losses within Category F only in the hypothesis exclusive of the household having opted for consolidation, it would have provided for this expressly, as it did with respect to the deduction of losses within Category G, regarding the operations provided in article 55, no. 6 of the IRS Code. It is, therefore, a legislative choice: in some cases it requires consolidation for loss deduction, in others it does not.

Thus, it is concluded that the interpretation made by AT finds no foundation from the point of view of the literal, systematic or rational elements. Also in processes 96/2015-T and 338/2016-T which proceeded before CAAD the same conclusion was reached, with grounds that are accepted and to which reference is made. With particular interest, it is important to refer to the arbitral decision handed down in arbitral process no. 481/2017 – T, in which an identical issue, posed by the herein Claimants, was decided, and their request was deemed entirely well-founded.

Without further consideration, full agreement is expressed with the mentioned arbitral case law.

Returning to the specific case, and in conformity with what has been set out, it is found that the impugned IRS assessment, as it suffers from a defect of violation of law by error as to the legal assumptions underlying it, should be partially annulled insofar as it disregards the possibility of carryforward of losses from previous years within category F, which resulted in the payment of excessive tax in the amount of €4,623.39.

In fact, considering the net income determined in the year in question, and the amount to be deducted as carryforward of losses arising from the previous year in the amount of €16,512.10, which translates into a reduction of the positive net income to be taxed in the year 2015, we have that the correct result would be to deduct from the category's net income the loss carried forward from the previous year, that is, €40,186.39 - €16,512.10 = €23,674.29.

Consequently, this results in a reduction in the tax to be borne by the Claimants, which should correspond to the value of €23,674.29, taxed at the rate of 28%, that is, €6,628.80 and not the €11,252.19 actually paid. All considered, it is concluded that the impugned assessment resulted in illegal taxation in the amount of €4,623.39 paid in excess. Therefore, it is concluded that the Claimants' request should succeed, with the consequent partial annulment of the impugned assessment and reimbursement to the Claimants of the amount paid in excess.

From all that has been set out above, the knowledge of the subsidiary request formulated by the Claimants is rendered moot.

V - AS TO THE CLAIMANTS' RIGHT TO INDEMNITY INTEREST

As to the request for indemnity interest, the Claimants allege that despite not accepting the legality of the assessment in question, they proceeded with its full payment in order to avoid the commencement of tax enforcement proceedings and to avoid the bureaucracies and formalities associated with installment payment or establishment of guarantee, requesting that the amount of the excess be restored plus indemnity interest.

Article 43, no. 1 of LGT establishes that indemnity interest is owed when it is determined that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed.

In this case, the error in the application of law to the facts proven in the case file is attributable to AT and affected the amount of tax assessed, resulting in the payment in excess in the terms set out above. Thus, as the assessment was the result of the error with the consequent violation of law, committed at the initiative of AT, it is concluded that such error is entirely attributable to it.

The Claimants therefore have the right to be reimbursed of the amount they paid in excess (pursuant to the provisions of articles 100 of LGT and no. 1 of article 24 of RJAT) and, further, to be indemnified for the undue payment through the payment of indemnity interest by the Respondent from the date of payment of the amount until reimbursement at the legal supplementary rate, pursuant to nos. 1 and 4 of article 43 and no. 10 of article 35 of LGT, article 559 of the Civil Code and Ordinance no. 291/2003 of April 8.

VI - DECISION

In the terms and with the grounds set out, the arbitral tribunal decides:

  • To judge the request for arbitral pronouncement as well-founded with the consequent partial annulment of the impugned assessment, in the terms requested, insofar as it ignores the possibility of the loss determined in category F being carried forward to subsequent years; with the consequent reimbursement of the amount paid in excess in the amount of €4,623.39, plus indemnity interest to be calculated in accordance with the terms set out in the present arbitral decision;

  • To order AT to pay the costs of the process.

VALUE OF THE PROCESS

The value of the process is set at €4,623.39 pursuant to article 97-A, no. 1, a) of CPPT, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Processes.

COSTS

The value of the arbitration fee is set at €612.00 pursuant to Table I of the Regulation of Costs in Tax Arbitration Processes, to be paid by the Respondent, since the request was entirely well-founded, pursuant to articles 12, no. 2 and 22, no. 4 both of RJAT and article 4, no. 4 of the cited Regulation.

Notify.

Lisbon, 15-05-2018

The Arbitral Tribunal,

(Maria do Rosário Anjos)

Frequently Asked Questions

Automatically Created

Can taxpayers carry forward negative property income (Category F) losses to the following year under Portuguese IRS rules?
Yes, taxpayers can carry forward negative property income (Category F) losses to subsequent years under Article 55 of the Portuguese IRS Code (CIRS). This provision allows losses determined in any tax year to be deducted from positive income of the same category in the following twelve years. However, the Tax Authority has contested whether this carryforward applies when taxpayers choose autonomous taxation at 28% rather than opting for income aggregation (englobamento), creating a disputed interpretation requiring clarification through arbitration proceedings.
Is opting for income aggregation (englobamento) required to deduct prior-year property rental losses in IRS declarations?
This is the central legal dispute in CAAD Process 481/2017-T. The Tax Authority argues that opting for income aggregation (englobamento) is required to benefit from prior-year Category F loss carryforward under Article 55 CIRS, reasoning that taxpayers choosing autonomous taxation at 28% cannot simultaneously claim loss relief. However, taxpayers contend that Article 55 CIRS does not explicitly impose this requirement, and the loss carryforward mechanism should apply regardless of the taxation method selected. The tribunal's interpretation determines whether taxpayers must sacrifice beneficial tax rates to access loss relief provisions.
What happens if the Portuguese Tax Authority disallows the deduction of prior-year Category F negative results in an IRS assessment?
When the Portuguese Tax Authority disallows the deduction of prior-year Category F negative results in an IRS assessment, taxpayers face higher tax liability as losses cannot offset current-year positive rental income. Taxpayers can challenge this through administrative appeal (reclamação graciosa) to the Tax Authority. If denied, they may pursue arbitration through CAAD (Centro de Arbitragem Administrativa) under Decree-Law 10/2011 or judicial appeal through tax courts. The arbitration process examines whether the Tax Authority correctly interpreted Article 55 CIRS and Article 72(8) CIRS regarding loss carryforward eligibility, potentially resulting in annulment of the assessment and tax refund if the taxpayer prevails.
How can taxpayers challenge an IRS tax assessment that ignores property income loss carryforward through CAAD arbitration?
Taxpayers can challenge an IRS assessment that ignores property income loss carryforward through CAAD arbitration by filing a request for constitution of an arbitral tribunal under Article 2(1)(a) and Article 10 of the RJAT (Decree-Law 10/2011). The request must identify the contested tax assessment and administrative appeal denial, specify the legal grounds (typically Articles 55 and 72 CIRS regarding loss carryforward), and demonstrate the factual basis including prior-year losses and current-year income. The process involves designation of an arbitrator, filing of the Tax Authority's response with the administrative file, optional hearings, and written pleadings before the tribunal issues a binding decision on the legality of the assessment.
What are the legal requirements for reporting rental property losses across tax years under Portuguese IRS legislation?
The legal requirements for reporting rental property losses across tax years under Portuguese IRS legislation include: (1) accurately declaring all gross rental income (Category F) and deductible expenses in Annex F of the IRS Model 3 declaration; (2) properly calculating net rental income or losses according to Article 41 CIRS; (3) documenting losses in the year they occur; (4) applying Article 55 CIRS to carry forward losses to the following twelve years, deducting them from positive Category F income; and (5) potentially opting for income aggregation (englobamento) under Article 72(8) CIRS, though whether this is mandatory for loss carryforward remains contested. Taxpayers must maintain supporting documentation for expenses including maintenance costs, condominium fees, IMI property tax, and municipal charges to substantiate deductions.