Capital Gains Tax (IRS): Property Improvement Costs Deductible Under Article 51(a) of the IRS Code – CAAD 527/2016-T

ARBITRAL DECISION

Parties

Claimant: A…, NF…, resident in…, …, …, United Kingdom of Great Britain and Northern Ireland.

Respondent: TAX AND CUSTOMS AUTHORITY (AT)

I. REPORT

a) On 26 August 2016 the Claimant filed with CAAD a request for the establishment of a singular arbitral tribunal (TAS), pursuant to the Legal Regime of Arbitration in Tax Matters (RJAT).

THE REQUEST

b) Since the case concerns the determination of capital gains resulting from the sale of real property, the Claimant requests, in immediate terms, the declaration of illegality of the order dated 26.04.2016 from the Administrative Justice Division of the Finance Directorate of Lisbon, which partially denied his gracious review claim no. …2015…, filed against the tax assessment no. 2015 … (IRS for 2014), specifically requesting that it be considered that he incurred expenses for the appreciation of the alienated property in the total amount of € 72,398.53 and not merely € 37,346.11.

c) Consequently, he requested the annulment of the IRS tax assessment no. 2015…, considering that this IRS assessment should be reduced by € 9,982.99, as a result of the eligibility of other expenses, in addition to those considered by AT in the assessment, in the amount of € 35,653.53 (IRS assessment and compensatory interest in the amount of € 49,389.40).

d) While the present request for arbitral pronouncement (PPA) was pending, the Claimant, on 05.12.2016, attached the statement of IRS assessment no. 2016…, relating to the account settlement no. 2016…, "resulting from the execution of the decision rendered in the Gracious Review process with the no. …2015…", with the following reasoning: "The assessment made corresponds to the execution of the decision rendered in the contentious process identified, within the scope of which the respective reasoning was sent to Your Excellency", requesting the expansion of the above-mentioned request, since this assessment resulted from the partial approval of the gracious review claim referred to in b) of this Report.

e) Therefore, the request for annulment came to be directed against the (corrective) assessment no. 2016…, of 22/08/2016, with tax to be paid in the amount of € 38,296.69 and compensatory interest in the amount of € 499.43, totaling € 38,796.12 and no longer against the one mentioned in c) of this Report.

f) He further requests that his right to compensatory interest be recognized, to be determined in execution of the decision.

THE CAUSE OF ACTION

g) The Claimant invokes the illegality of the disputed assessment, ascribing to it the defect of violation of law due to error of law by AT (non-conformity with the rule contained in paragraph a) of article 51 of the IRS Code).

h) Since he considers that all expenses he incurred on the alienated property and for which he attaches documents valued it and should therefore be accepted by AT to increase the acquisition value, namely expenses for micro-generation, swimming pool, heat recovery system, air conditioning installation and energy certification.

i) The Claimant argues for an interpretation of the concept of "expenses for the appreciation of property" as referred to in paragraph a) of article 51 of the IRS Code, with the scope resulting from what is referred to for example in the judgment of the STA case 0587/11 of 21.03.2012: "Paragraph a) of article 51 of CIRS does not restrict expenses for the appreciation of property, demonstrably incurred in the last five years, to material or physical appreciations thereof, but rather encompasses expenses actually incurred that economically appreciate them".

OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)

j) The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to AT on 19-09-2016.

k) By the Deontological Council of CAAD, the undersigned decision maker was appointed as arbitrator, with the parties being notified thereof on 07-11-2016. The parties did not manifest the intention to refuse the appointment, in accordance with article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

l) The Singular Arbitral Tribunal (TAS) has been, since 22-11-2016, regularly constituted to appreciate and decide on the subject matter of this dispute (articles 2, no. 1, paragraph a) and 30, no. 1, of RJAT).

m) All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 22-11-2016 which is hereby reproduced.

n) On 22-11-2016 AT was notified pursuant to article 17-1 of RJAT. It responded on 09.01.2017, attaching the PA constituted by 9 computerized and numbered files, with a total of 141 pages.

o) AT was further notified to pronounce on the expansion of the request, made by the Claimant on 05.12.2016, having by petition of 10.01.2017 expressed its agreement with the same since the new IRS assessment resulted from a corrective assessment of the previous one, which became without effect.

p) In accordance with the concordant position of the parties, the meeting of parties under article 18 of RJAT was not held, which the parties did not waive written submissions. It was by order of the TAS of 27.01.2017 that a deadline of 10 days was set for the presentation of written and successive submissions.

q) Since by 01.03.2017 neither the Claimant presented submissions nor the Respondent presented counter-submissions, the TAS presumed that the parties implicitly waived presenting them and scheduled 13.03.2017 as the date for adoption of the final decision. Order which was notified to the parties on that day and did not obtain any reaction of disagreement from the parties up to the date of issuance of this decision.

PROCEDURAL REQUIREMENTS

r) Legitimacy, capacity and representation – The parties are legitimate parties, possess legal personality and judicial capacity and are represented (articles 4 and 10, no. 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

s) Principle of contradiction – AT was notified pursuant to items n) and o) of this Report. All procedural documents and all documents attached to the process were made available to the respective counterpart in the CAAD Case Management System. The parties were always notified of their attachment. Equally, with respect to the subsequent procedural handling, the TAS followed what results from the expressed or implicit position of the parties as written in paragraphs p) and q) above.

t) Dilatory exceptions – The arbitral procedure does not suffer from nullities and the request for arbitral pronouncement is timely since it was presented within the prescribed period in paragraph a) of no. 1 of article 10 of RJAT, as results from the fact that the Claimant presented the request for arbitral pronouncement on 26.08.2016 and the decision denying the gracious review is dated 27.04.2016, with no determination of its notification date. Because AT does not question the implicit reading of the counting of challenge periods, the TAS considers the request timely, especially since what is truly at issue here is the challenge of the (corrective) IRS assessment for 2014 referred to in e) of this Report, which dates from 22.08.2016 (four days before the PPA was presented to the TAS), so the timeliness of the presentation of the PPA would always be verified.

SUMMARY OF THE CLAIMANT'S POSITION

u) He acquired, on 4 December 2003, the urban property located on Rua…, …e…, in…, parish and municipality of…, described in the First Land Registry Office of…, under no.…, of the said parish, registered in the respective land registry under article…, of the same parish, for the price of € 540,000.00.

v) On 27 June 2014 he sold it, currently registered in the urban land registry under article … of the Union of parishes of … and …, for the price of € 822,120.00.

w) Between the date of purchase and the date of sale, the Claimant incurred expenses which he considers as "appreciation of the property", namely: 1) Installation of air conditioning system; 2) Reconditioning of the swimming pool; 3) Installation of heat recovery system; 4) Installation of solar thermal equipment for the residence, for the swimming pool and photovoltaic. He also paid "necessary expenses and inherent to the acquisition and alienation" and relating to obtaining the energy certificate.

x) He filed the 2014 tax return on 27.08.2015, but by oversight did not indicate any amount for expenses and charges, resulting in the IRS assessment having been made without consideration of these amounts.

y) He filed a gracious review of this assessment on 06.11.2015, presenting at the time copies of the documents proving the expenses incurred, but only obtained partial approval, since only the amounts paid relating to stamp duty and seal tax at the time of acquisition and as regards the energy certificate were considered (in the total amount of 36,745.00 euros).

z) The Claimant argues for a more comprehensive interpretation of paragraph a) of article 51 of the IRS Code than the one AT applied in the IRS assessment, namely he argues for the interpretation of this rule with the scope as referred to, by way of example, in the judgment of 14.04.2015 of the TCA South, case 06824/13 CT 2nd Court, Rapporteur Bárbara Tavares Teles, whose content he attached in the gracious proceeding (and judgment of the TCA South of 03.03.2016, case 05182/1).

SUMMARY OF THE RESPONDENT'S POSITION

aa) The Respondent argues for another reading of the facts and the law. It maintains that "by expenses for the appreciation of property is meant works carried out, which by their nature are indissociable from the alienated property". And adds: "here are understood the improvements made to the property that integrate it increasing its value, for which reason the expenses now at issue were not considered".

bb) It further states: "Even if this is not understood and a broader concept of expenses for property appreciation is adopted, it is still necessary to characterize the nature of the intervention or work whose expense is proven by the invoice, for which the analysis of the documents presented cannot be dispensed with…".

cc) And concludes: "In any event, even a broader concept than that adopted by AT should be based on an interpretation of the law that does not empty it of its useful meaning, which in the case of these proceedings means that although an expense of repair or maintenance is susceptible of contributing to improved use of the property, still there must be a nexus that makes it indissociable or an integral part of the immovable property subject to taxation in such a manner as to justify that the expense with it be added to the acquisition value for determination of the gain". And exemplifies as expenses that cannot be eligible: "They are unequivocal examples, among others, the cleaning of the swimming pool or the acquisition of the heat recovery system".

dd) The position of the Respondent, adopted in the order denying the gracious review claim, is that only improvements can integrate the concept of "expenses for property appreciation", eligible to be added to the acquisition value of the property (as per page 4/5 of document no. 1 attached with the PA – decision denying the gracious review claim).

ee) It considers, in the development of this reasoning, that the following are not property appreciation expenses: a) - the supply and installation of "solar project" kit as well as maintenance expenses – because it is not possible to conclude that the equipment became an integral part of the property and the maintenance expenses (invoices …/2013 and …/2014) only prove provision of equipment maintenance services; b) – micro-generation registration - is intended to certify the installed system for purposes of electricity commercialization through the conclusion of an electricity purchase and sale contract and because it is the possibility of obtaining income through the exploitation of renewable energies that does not constitute an intrinsic reality to the property; c) – expenses with the swimming pool - from the description of the invoices presented (e.g. cleaning products, filter with purge valve, water softener) it is unequivocal that these constitute maintenance expenses resulting from normal use of the swimming pool, more precisely service provisions intended to maintain the quality of the pool water, which in no way is confused with works of repair or improvement of the property for purposes of the rule now in discussion. These expenses imply the discrimination of the amounts incurred and their individual framing, being unequivocal that each of them concerns simple maintenance interventions of the pool equipment and water cleaning; air conditioning - in light of the evidence produced, it is not possible to conclude that the installed equipment became an integral part of the property and, consequently, its acquisition and installation does not constitute a property appreciation situation for the purposes now in discussion; heat recovery system – the same applies to the heat recovery system, which according to the invoice was also not subject to any installation, since it is a model that, certainly, requires no installation and, like other heating equipment, can be moved from location not forming an integral part of the property, so it is not possible to conclude that the installed equipment became an integral part of the property and, consequently, that its acquisition constitutes a property appreciation situation for the purposes now in discussion.

ff) With regard to the request for compensatory interest, it states that "in the case of these proceedings … the omission of the expenses now at issue is only imputable to the Claimant, who omitted them when proceeding with the filling and delivery of annex G of the income statement form 3 relating to IRS for 2014" so that "if the Claimant's claim regarding eligible expenses is judged to be founded, the situation of these proceedings has rather its framing in paragraph c) of no. 3 of article 43 of the LGT due to the delay of AT in appreciating the gracious review claim presented to it by the Claimant, being compensatory interest due from one year counting from the presentation of the respective request".

gg) It concludes arguing for the dismissal of the claims with acquittal of AT.

II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

First, it will be necessary to resolve which is the most assertive interpretation of the rule that is here the subject of disagreement: paragraph a) of article 51 of CIRS, that is, what should be understood as "expenses for property appreciation".

Does this expression encompass only material or physical appreciations of immovable property (improvements as AT contends) or does it also include expenses actually incurred that economically appreciate them – a position already supported by the STA and the TCA South (in the decisions referred to in i) and z) of the Report)?

In this case, the TAS, by legal obligation, is obliged to decide according to the "constituted law" so it cannot ignore the interpretation of law already adopted by two superior courts, under penalty of subjecting the decision to appeal.

Second, it will be necessary to ascertain, one by one, the expenses presented by the Claimant, in order to verify if in terms of common sense, they integrate or should integrate, the concept of expenses actually incurred that economically valued the alienated property.

Finally, if the PPA proceeds with respect to the annulment of the assessment, it is necessary to appreciate the Claimant's invoked right to compensatory interest.

The question also arises, at the official level, of verification and determination of the value of the case.

III. ESTABLISHED AND UNESTABLISHED FACTS
REASONING

With respect to the facts, the Tribunal need not pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between established and unestablished facts (in accordance with article 123, no. 2, of CPPT and article 607, no. 3 of CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of RJAT).

In this manner, the relevant facts for judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of law (in accordance with former article 511, no. 1, of CPC, corresponding to the current article 596, applicable ex vi article 29, no. 1, paragraph e), of RJAT).

Thus, taking into account the positions assumed by the parties and the documentary evidence attached, the facts listed below are considered established, with relevance for the decision, indicating the respective documents (proof by documents), as reasoning.

Established Facts

1. The Claimant acquired on 04 December 2003 the urban property located on Rua…, … and …, in …, parish and municipality of…, described in the First Land Registry Office of …, under no.…, of the said parish, registered in the respective land registry under article …º, of the same parish, for the price of € 540,000.00 (five hundred and forty thousand euros) - in accordance with Document no. 2 attached with the PA and articles 4 and 5 of the PA.

2. On 27 June 2014, the Claimant sold the aforementioned urban property, currently registered in the urban land registry under article … of the Union of parishes of … and …, for the price of € 822,120.00 (eight hundred and twenty-two thousand one hundred and twenty euros) - in accordance with Document no. 3 attached with the PA and articles 6 and 7 of the PA.

3. On 27 August 2015 the Claimant proceeded with the delivery of Form 3 of IRS for the year 2014, indicating as the value of realization the sum of € 822,120.00 (eight hundred and twenty-two thousand one hundred and twenty euros) and as the value of acquisition the sum of € 540,000.00 (five hundred and forty thousand euros), not indicating any amount for expenses and charges – in accordance with document no. 36 already attached with the PA, articles 30 to 32 of the PA and point 5.1 of AT's response.

4. The Claimant was notified of the IRS assessment no. 2015..., to proceed with the payment of the amount of € 49,389.40 (forty-nine thousand three hundred and eighty-nine euros and forty cents), of which 48,753.60 euros as IRS due and 635.80 euros as compensatory interest since the tax return was filed out of time - in accordance with Document no. 37 attached with the petition of 05.12.2016, article 33 of the PA and point 5.2 of AT's response.

5. On 9 November 2015 the Claimant filed a gracious review against the IRS assessment referred to in the preceding point, attaching the proof of the realization of expenses with the acquisition of the property referred to in 1. with respect to the payment of stamp duty and seal tax and 15 invoices relating to expenses with the maintenance of the property, dated from 2012 to 2014 - in accordance with Document no. 38 attached with the PA, article 34 of the PA and point 5.3 of AT's response.

6. The Claimant was notified of the draft decision of partial denial of the gracious review, on 11 March 2016, in prior hearing, where only expenses relating to stamp duty and seal tax (in the amount of 36,745.00 euros) were considered eligible, with AT coming to accept, in the final decision (notified to the Claimant on 02 May 2016) and in light of the participation in the decision of the interested party by petition of 04 April 2016, the amount of 601.11 euros, relating to fees and issuance of energy certificate, all in a total of 37,346.11 euros – Document no. 43 annexed to the PA, articles 40 to 45 of the PA and points 5.4 and 5.5 of AT's response.

7. Following the decision referred to in the preceding point, AT proceeded with the (corrective) assessment no. 2016…, of 22/08/2016, resulting in tax to be paid in the amount of € 38,296.69 and compensatory interest in the amount of € 499.43, all in a total of € 38,796.12, in substitution of the one referred to in 4. – in accordance with document no. 45 attached by the Claimant with the petition of 05.12.2016; nos. 2 to 4 of the Claimant's petition of 05.12.2016; and point 5.3 of AT's response.

8. The Claimant paid to AT, with respect to the assessment here in question, on 06.01.2016, the amount of 28,571.29 euros – fourth page of document no. 41 attached with the PA; 7th page of Document no. 45 attached with the Claimant's petition of 05.12.2016 and article 37 of the PA.

9. The Claimant, during the years 2012 to 2014, incurred the following expenses:

Total………………………………………………………………35,653.43 euros

In accordance with articles 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23 and 24 of the PA; Documents nos. 6 to 30 attached with the PA and point 8 of AT's response.

1. On 26 August 2016 the Claimant delivered to CAAD the present request for arbitral pronouncement (PPA) – entry record in the SGP of the request for pronouncement.

Unestablished Facts

There is no other alleged factuality that has not been considered established and that is relevant for the composition of the procedural dispute.

IV. APPRECIATION OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE

Paragraph a) of Article 51 of the IRS Code

The body of article 51 of the IRS Code and its paragraph a) provide as follows:

"For the determination of capital gains subject to tax, the acquisition value is increased by:

a) Expenses for the appreciation of property, demonstrably incurred in the last five years, and necessary expenses actually incurred, inherent to the acquisition and alienation, in the situations provided for in paragraph a) of no. 1 of article 10"

It is the first segment of the rule contained in paragraph a) of article 51 of the IRS Code that is here in discussion.

The Respondent understands that the concept of "expenses for property appreciation" should be equivalent, "roughly speaking", to improvements that are integrated into the property and increase its economic value.

In reading the position of the Respondent when using the expression "improvements that are integrated" and "integral part", we proceed from the principle that it is referring to "integral parts" of urban properties, in the definition of no. 3 of article 203 of the Civil Code.

However, by reading the summaries of the judgments of the STA and the TCA South, cited in paragraphs i) and z) of the Report, this is not the scope that the Superior Courts understand to be contained in the provision of the rule in question. It is understood that the rule encompasses expenses actually incurred that economically appreciate urban properties (incurred in the last 5 years).

Resorting to this concept of civil law to integrate a (broad) rule of tax law would not resolve, for example, the case of an expense with the painting of an urban property, which constitutes, in terms of common sense, an expense that appreciates the property, but can hardly be considered the paint applied to the property as being an "integral part" thereof such as is for example the electrical installation and a lightning rod after their installation.

The same can be said with respect to the association that the Respondent makes between what should be understood as "expenses for property appreciation" and the concept of improvements.

It is certainly referring to necessary and useful improvements, in the definition of article 216 of the Civil Code, excluding, implicitly, voluptuary improvements.

And if we interpret correctly the position of the Respondent when it uses the following expressions: "by their nature are indissociable from the alienated property", "nexus that makes it indissociable or integral part of the immovable property", this interpretation of the law seeks to safeguard that the expenses incurred with improvements refer to physical works or equipment that, once associated with the immovable property, cannot be removed from it or only at costs that do not justify their removal (e.g. elevators).

The regime of improvements makes sense for example in terms of the synallagmatic logic of lease contracts, but not in terms of improvements made by owners to the urban properties in which they live.

Moreover, already the very regime of useful improvements (which, as to their removal, is identical to that of voluptuary improvements) is that of their removal (article 1273 no. 1 of CC). That is, useful improvements are constituted, which by law definition increase the value of the thing, permanent improvements that can be removed.

As mentioned, the recourse to this institute of civil law will only make sense when there is a legal nexus between the thing and the author of the works: possession, leasing, commodity loan, usufruct, etc.

It remains, therefore, to analyze the documents and the expenses made by the Claimant in the 5 years prior to the date of sale of the property (those in point 9 of the established facts) just as AT refers in the passage of the response expressed in cc) of the Report of this decision: "Even if this is not understood and a broader concept of expenses for property appreciation is adopted, it is still necessary to characterize the nature of the intervention or work whose expense is proven by the invoice, for which the analysis of the documents presented cannot be dispensed with".

There are four groups of expenses discussed here whether or not they should integrate the concept of "expenses for property appreciation, demonstrably incurred in the last five years":

1. Those relating to the solar thermal system and photovoltaic solar system;
2. Those relating to the swimming pool;
3. Those relating to the pellet heat recovery system;
4. And those relating to the air conditioning system.

First, it will be common sense to note that a dwelling that has any of these equipment and installations (operational) has more economic value, has a market price higher than it would have if it did not possess them. It has a sales argument superior to that which dwellings that do not possess them have.

Second, to argue that maintenance or repair expenses of these equipment or installations (that is, the cost of labor, the services provided) should not integrate the concept of "expenses for property appreciation" because they are expenses in which there is no nexus that makes them indissociable or an integral part of the immovable property, does not seem to resist comparison with other real-life situations where the cost of services provided, the cost of labor, is implicitly reflected in the value of real property. These are the cases of labor in the construction, maintenance and repair of buildings.

On the other hand, these equipment or installations only increase the value of the immovable property if they are operational. Otherwise, they can even be a factor of devaluation, given the costs of their repair, being relevant the malfunctions or dysfunctions that they may have at any given time, being sometimes preferable their replacement, including due to age.

This type of expense, for maintenance and assistance to equipment and for replacement of its components, ensures or seeks to ensure that the value that they added economically to the dwelling is maintained as much as possible over time, taking into account the wear relative to their period of useful life which may depend on their proper actual use.

Expenses relating to the solar thermal system and photovoltaic solar system

In accordance with the above and in conformity with the descriptions of the invoices contained in point 9 of the established facts, the expenses contained in invoices …/2012, …/2012, …/2012, …/2013, …/2014 and …/2014 should be considered to integrate the provision of the rule contained in paragraph a) of article 51 of the IRS Code.

With respect to the cost relating to micro-generation registration, it is configured as a contribution to the increase of the economic value of the dwelling, in that it allows injecting energy into the distribution network and effectively reducing the energy bill of the consumer, user of the property.

The possible obtaining of income by the Claimant will not affect this reasoning and may even increase tax revenue through taxation of the income thus obtained.

With respect to maintenance expenses (technical assistance), displacement of personnel and labor, these are configured as being a necessary component of the cost of materials, since only through human action are the equipment assembled and maintained in proper functioning.

Expenses relating to the swimming pool

In accordance with the above and in conformity with the descriptions of the invoices contained in point 9 of the established facts, the expenses contained in invoices …/2013, …/2013, …/2013 and …/2014 should be considered to integrate the provision of the rule contained in paragraph a) of article 51 of the IRS Code, except for the following amounts from invoice …/2013:

• Cleaning products – 20.00 euros + 23% VAT = 24.60 euros;

• Service provision – 200.00 euros + 23% VAT = 246.00 euros;

since the cleaning products are not specified and the same are configured as being a consumable and not a piece of equipment or a component of the pool and, in the case of service provision, it is not specified whether they relate to pool cleaning (ineligible expense) or to the assembly of parts or components of the pool (eligible expense) to which the invoice refers (articles 341 and 342 of the Civil Code).

Expenses relating to the pellet heat recovery system

In accordance with the above and in conformity with the descriptions of the invoices contained in point 9 of the established facts, the expenses contained in invoice…should be considered to integrate the provision of the rule contained in paragraph a) of article 51 of the IRS Code, except for the following amount:

• 4 bags of pellets – 10.56 euros + 23% VAT = 12.99 euros;

since this is a consumable and not a piece of equipment or a component thereof.

With regard to the allegation that this equipment has no installation and can be moved to another location, it should be noted that it is common knowledge that there is always an exhaust gas outlet pipe that must be installed to the exterior (and the transport and installation would be included in the price of the equipment). With respect to the greater possibility of mobility of this type of equipment compared to built-in equipment, this occurs with many other alternative energy equipment of dwellings, and it is certain that when someone sells a dwelling with this type of equipment, it is not common or common sense to disassemble them and transport them to another location, given the costs involved.

Expenses relating to the air conditioning system

In accordance with the above and in conformity with the descriptions of the invoices contained in point 9 of the established facts, the expenses contained in invoice …/2014 should be considered to integrate the provision of the rule contained in paragraph a) of article 51 of the IRS Code.

Adding together all the invoices contained in point 9 of the established facts € 35,653.43 and considering that there are amounts in the invoices referred to above that should not be considered expenses for the appreciation of the alienated property, in the amount of € 283.59, VAT included, the request for pronouncement is founded, in that in the disputed IRS assessment and in the decision rendered on the gracious review claim, AT did not take into account the expenses incurred by the Claimant, in the amount of € 35,369.84, which affects the assessment act in its entirety.

On the Request for Compensatory Interest

The Claimant requests that his right to compensatory interest be recognized, to be determined in execution of the decision.

Article 43, no. 1, of the LGT establishes that "compensatory interest is due when it is determined, in gracious review or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due".

As results from the literal wording of this rule, the right to compensatory interest depends on "payment of the tax debt in an amount greater than that legally due" and the existence of "error attributable to the services".

It has been proved that the Claimant paid on 06.01.2016 the amount of 28,571.29 euros, an amount greater than that which would result if AT considered in the assessment the computation of the expenses that are here recognized as meeting the requirements of paragraph a) of article 51 of the IRS Code (point 8 of the established facts).

But it has also been proved that the Claimant, when he filed the IRS return, did not indicate any amount for expenses and charges (point 3 of the established facts).

No. 2 of article 43 of the LGT is not applicable to this case.

It was not proved that AT delayed more than one year in appreciating the gracious review claim, as per points 5 and 6 of the established facts, with the requirements of application of paragraph c) of no. 3 of article 43 of the LGT not being met.

In light of the established facts, it is not possible to impute to AT an error that would allow its condemnation to pay compensatory interest, since the original IRS assessment, as it occurred, is due to the fact that the taxpayer did not make mention of the expenses and charges eligible, according to law, to determine a lower amount of IRS to be paid.

The request for recognition of the right to compensatory interest is, therefore, dismissed.

Determination of the Value of the Case

The regime of article 97-A of CPPT is applicable to tax arbitral proceedings (article 3 no. 2 of the Regulation of Costs in Tax Arbitration Proceedings).

In the present proceeding it is not a matter of resolving questions referred to in paragraphs b) and c) of no. 1 of article 2 of the Legal Regime of Tax Arbitration, in which the value of the case is that of the assessment to which the passive subject, wholly or in part, intends to oppose.

In the case of this proceeding an IRS assessment is challenged and the annulment of the decision of partial denial of the gracious review claim is requested.

To situations such as those of this proceeding, paragraph a) of no. 1 of article 97-A of CPPT applies immediately, that is, the value of the case is that of the amount whose annulment is sought.

It is referred to in annotation to article 97-A of CPPT by Jorge Lopes de Sousa, volume II, 6th edition 2011, page 72: "In paragraph a) of no. 1 of article 97-A all situations will be included in which a "challenge to the assessment" is made in which are included not only direct challenges of assessment acts through the challenge proceeding … but also challenges of acts of denial of gracious reviews or hierarchical appeals in which the legality of the assessment is appreciated, … since in all cases an act that determined a sum of tax is challenged."

The value of the assessment that the Claimant intends to have annulled is € 38,796.12 (see point 7 of the established facts).

The Claimant indicated as the value of the case € 9,982.99, but without legal support and without having reasoned it, for which reason, in the distribution of costs by partial non-success in the PPA, the causality relative to this incident will still be taken into account.

Pursuant to the above, the value of this case is fixed at € 38,796.12.

V. RULING

Pursuant to the above and with the grounds stated above:

· The expansion of the request for arbitral pronouncement is definitively admitted (as such accepted by AT), considering that the assessment here in question is not the one in no. 4 of the established facts, but that in no. 7 of the established facts (paragraphs d) and e) of the Report of this decision);

· The request for declaration of illegality of the order dated 26.04.2016 from the Administrative Justice Division of the Finance Directorate of Lisbon, which partially denied the gracious review claim no. …2015…, filed against the assessment no. 2015 … (IRS for 2014), is judged to be founded;

· Consequently the request for annulment of the (corrective) assessment no. 2016…, of 22/08/2016, with tax to be paid in the amount of € 38,296.69 and compensatory interest in the amount of € 499.43, totaling € 38,796.12, is judged to be founded;

· The decision rendered on the gracious review claim and the subsequent assessment in its execution are annulled, for being in non-conformity with paragraph a) of article 51 of the IRS Code, being provided that in the new assessment to be made, the expenses and charges already considered eligible in the previous assessment now annulled should be considered, as well as those that AT did not take into account in the amount of € 35,369.84.

· The request for recognition of the Claimant's right to compensatory interest is judged to be dismissed as the requirements of article 43 of the LGT are not met.

· The value of the case is fixed at € 35,369.84, pursuant to paragraph a) of no. 1 of article 97-A of CPPT (by virtue of article 3 no. 2 of the Regulation of Costs in Tax Arbitration Proceedings).

Value of the proceeding: in accordance with the provision in article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of article 97-A of CPPT), the value of € 38,796.12 is fixed for the proceeding.

Costs: pursuant to the provision in article 22, no. 4, of RJAT, the amount of costs is fixed at € 1,836.00 according to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, of which 4/6 is charged to the Respondent (€ 1,224.00) and 2/6 is charged to the Claimant (€ 612.00), taking into account their respective non-success.

Notify.

Augusto Vieira

Lisbon, 13 March 2017

Singular Arbitral Tribunal (TAS)

Text prepared by computer pursuant to the provision in article 131, no. 5, of CPC, applicable by cross-reference from article 29 of RJAT.

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