Process: 534/2018-T

Date: March 1, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 534/2018-T addressed whether Category F (property income) losses from 2014 could be carried forward to subsequent tax years (2015-2017) without electing income aggregation. The taxpayer incurred a negative net result of €38,120.95 in Category F during 2014 and sought to deduct these losses from positive property income in later years. The Tax Authority (AT) rejected this, arguing that loss carryforward under Article 55(2) of the IRS Code requires taxpayers to opt for aggregation (englobamento) of property income with other income categories. The AT maintained that since the taxpayer chose separate taxation at autonomous rates under Article 72(1)(e), he forfeited the right to carry forward losses. The taxpayer contested IRS assessments totaling €6,838.16, arguing that Article 55(2) permits Category F loss carryforward for five years regardless of the aggregation election, and that no legal provision explicitly conditions loss deduction on aggregation. This case highlights a fundamental tension in Portuguese tax law between the principle of net income taxation and the distinct treatment of separately-taxed property income. The outcome determines whether taxpayers can benefit from loss carryforward mechanisms while simultaneously choosing favorable autonomous taxation rates, with significant implications for real estate investors managing rental income losses across multiple tax years.

Full Decision

ARBITRAL DECISION

REPORT

A – PARTIES

A..., with Tax Identification Number ..., resident at Rua ..., ... ...-... Coimbra, hereinafter referred to as the Claimant or taxpayer.

TAX AND CUSTOMS AUTHORITY, hereinafter referred to as the Respondent or AT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 30-10-2018, and the Arbitral Tribunal was duly constituted on 09-01-2019, to examine and decide on the subject matter of the present proceedings, and was automatically notified to the Tax and Customs Authority on 05-11-2018, as stated in the respective minutes.

The Claimant did not appoint an arbitrator, and therefore, pursuant to article 6, paragraph 1, and article 11, paragraph 1, subparagraph b) of Decree-Law no. 10/2011 of 20 January, as amended by article 228 of Law no. 66-B/2012 of 31 December, the Ethics Council appointed Arbitrator Paulo Ferreira Alves, and the appointment was accepted in accordance with the legal provisions.

On 18-12-2018 the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

In accordance with the provisions of article 11, paragraph 1, subparagraph c) of Decree-Law no. 10/2011 of 20 January, as amended by article 228 of Law no. 66-B/2012 of 31 December, the singular arbitral tribunal is duly constituted on 09-01-2018.

By order dated 2018-02-07, the meeting provided for in article 18 of the RJAT was dispensed with, and the proceedings continued with optional simultaneous written submissions for a period of 20 days.

The Claimant and the Respondent submitted written submissions.

The arbitral tribunal is duly constituted. It has material competence, pursuant to articles 2, paragraph 1, subparagraph a), and 30, paragraph 1, of Decree-Law no. 10/2011 of 20 January.

The parties have legal personality and capacity, are legitimately constituted and are legally represented (articles 4 and 10, paragraph 2, of the same decree and article 1 of Order no. 112-A/2011 of 22 March).

The proceedings are not affected by any defects that would invalidate them.

B – CLAIM

  1. The Claimant hereby seeks a declaration of illegality of the tax assessment acts in the matter of Personal Income Tax (Imposto Sobre o Rendimento das Pessoas Singulares) for the years 2015, 2016 and 2017, resulting from assessment acts no. 2016..., no. 2017..., no. 2018... in the total amount of 6,838.16 €.

C – GROUNDS FOR THE CLAIM

  1. To substantiate its request for arbitral pronouncement, the Claimant alleged, with a view to obtaining a declaration of illegality of the tax assessment acts in the matter of Personal Income Tax, already described in point 1 of this Award, the following:

2.1. The assessments in question are affected by illegality due to breach of law, specifically breach of article 55, paragraph 1, subparagraph b) of the IRS Code, inasmuch as the value of losses to be carried forward verified in the year 2014, in category F (property income), was not taken into account in the respective assessments; in other words, the assessments contested do not contemplate the right to carry forward the losses that the claimant had in the year 2014.

2.2. The claimant, in the year 2014, had a loss, or a negative net result determined in category F, in the year 2014, of 38,120.95 €.

2.3. Such loss or negative result, in the amount of 38,120.95 €, in light of the provisions of article 55, paragraph 2 of the IRS Code, in the version in force in the year 2014 (the year in which the loss occurred), which provided that: "2 – The negative net result determined in category F may only be carried forward to the five years following that to which it relates, being deducted from the positive net results of the same category", the claimant is entitled to carry forward the loss to the following years, deducting it from the positive net results obtained in the following years.

2.4. However, despite the right that the law grants to the claimant to carry forward the losses incurred in 2014 in category F, the IRS assessments for the years 2015, 2016 and 2017, now contested, do not reflect this right, in breach of the provisions of article 55, paragraph 2 of the IRS Code.

2.5. The AT maintains that the negative value of category F generated in 2014 could only be carried forward to 2015 and subsequent years if the claimant had opted for aggregation (englobamento) in 2014, which did not occur.

2.6. This alleged condition of loss carryforward being dependent on the aggregation option in the case of property income is entirely without merit, either in fact or in law.

2.7. Suffice it to say that the legal provisions invoked by the AT, namely subparagraph b) of article 22, paragraph 3 and article 72, paragraph 8, all of the IRS Code, do not permit, with all due respect for differing opinions, reaching such a conclusion, namely that, as regards property income, these are taxed at the autonomous rate provided in article 72, paragraph 1, subparagraph e), and for losses to be deductible, it is a necessary condition that taxpayers opt for aggregation of category F income.

2.8. Thus, the carryforward of losses to subsequent years within the scope of Category F is not dependent on the option for aggregation, being permitted even in the case where no such option is exercised, as there is no legal provision that excludes such possibility, on the one hand, and on the other, in accordance with the structuring principle of taxation based on net income earned by the respective taxpayers.

2.9. The Claimant concludes by arguing that there is an error in the legal assumptions, violating the law, specifically the provisions of article 55 of the IRS Code, which requires the annulment of the respective assessments.

D – THE RESPONDENT'S REPLY

  1. The Respondent, duly notified to that effect, timely submitted its reply in which, in abbreviated summary, it alleged the following:

3.1. The Claimant expressly declared in the IRS Form 3 statement that he is a resident on the Portuguese mainland.

3.2. The Claimant expressly declared in the IRS Form 3 statement that he does not opt for aggregation of property income earned by him.

3.3. Therefore, by not opting for aggregation, the Claimant resident herein chose to tax separately the income of category "F" through the application of a fixed autonomous rate on such gross income, although the obligation to declare such income in the respective IRS statement remained.

3.4. It argues that, as the Claimant did meet the requirement of national residence set forth in subparagraph b) of article 22, paragraph 3 of the IRS Code and having opted, as indeed he did, for non-aggregation of category F income, naturally he is now precluded from seeing the negative net result of the year 2014 reflected.

3.5. In effect, loss carryforward is a downstream operation that presupposes the prior upstream adoption of the aggregation option – which did not occur in the present case.

3.6. Hence, as the Claimant did not opt for aggregation, he cannot now have the application of an autonomous rate to category F income to the detriment of the aggregation option and simultaneously the loss carryforward underlying an aggregation option that was not taken.

E – FACTUAL FINDINGS

  1. Before addressing these issues, it is necessary to present the factual matter relevant to its understanding and decision, which was determined on the basis of documentary evidence and taking into account the facts alleged.

  2. As regards material facts of relevance, this tribunal finds the following facts to be established:

  3. The Claimant was notified of the IRS assessment act for the year 2015 with no. 2016... dated 24/07/2016, to pay IRS in the amount of 1,096.54 €, by 31/08/2016, for which he filed a voluntary recourse no. ...2017... regarding IRS assessments for 2015, which was rejected.

  4. The Claimant was notified of the IRS assessment act for the year 2016 with no. 2017... dated 30/05/2017, to pay IRS in the amount of 2,520.62 €, by 31/08/2017, for which he filed a voluntary recourse no. ...2017... regarding IRS assessments for 2016, which was rejected.

  5. The Claimant was notified of the IRS assessment act for the year 2017 with no. 2018... dated 2/6/2018 to pay IRS in the amount of 3,221.00 €, by 31/08/2018.

  6. The claimant, in the year 2014, declared a loss for purposes of Category F, with the negative net result determined in category F, in the year 2014, being 38,120.95 €.

  7. The Claimant in the years 2015, 2016 and 2017 opted for non-aggregation of category F income, opting for the application of the autonomous rate of 28% provided in article 72, paragraph 1, subparagraph 2).

F – FACTS NOT PROVEN

  1. Of the facts with interest for the decision of the case, contained in the challenge, all objects of concrete analysis, those not contained in the factual description above were not proven.

G – ISSUES TO BE DECIDED

  1. Attentive to the positions of the parties assumed in the arguments presented, the following constitutes the central issue to be determined, which must therefore be examined and decided:

a. That alleged by the Claimant:

(i) Declaration of illegality of the tax assessment acts in the matter of Personal Income Tax for 2015, 2016 and 2017, formalized by self-assessment notes no. 2016..., no. 2017..., no. 2018....

(ii) Condemnation to pay indemnizatory interest.

H – CUMULATION OF CLAIMS

  1. The present request for arbitral pronouncement petitions the annulment for illegality of the tax assessment acts in the matter of Personal Income Tax, formalized by self-assessment notes no. 2016..., no. 2017..., no. 2018....

  2. According to the factual description already provided, both tax assessment acts concern the deductibility of the Category F loss from the year 2014 in the amount of 38,120.95 €, and as to its deductibility in the years following those under examination, respectively 2015, 2016 and 2017, resting on the same legal grounds.

  3. The examination of the legality of the assessments now contested results from the interpretation and application of the same rules and principles of law and from the analysis of the same factual grounds.

  4. Pursuant to the legal framework provided in articles 3 of the RJAT and 104 of the Tax Procedure and Process Code, the present arbitral proceedings the cumulation of claims relating to different acts is valid and legally permitted.

J – MATTERS OF LAW

  1. Attentive to the positions of the parties assumed in the pleadings presented, the central issue to be determined by the present arbitral tribunal consists in examining the legality of the Personal Income Tax assessment acts for 2015, 2016 and 2017, formalized by assessment acts no. 2016..., no. 2017..., no. 2018... in the total amount of 6,838.16 €.

  2. The underlying issue in the present arbitral proceedings, pursuant to article 59, paragraph 3, subparagraph a) of the CPPT, consists in examining the deductibility of losses declared for purposes of Category F income, when the taxpayer has opted for non-aggregation and the respective income has been taxed in accordance with the autonomous rates of 28% provided in article 72, paragraph 1, subparagraph 2). Specifically, it falls to analyze whether the carryforward of losses within the scope of category F requires the taxpayer to opt for aggregation of property income in order to be able to deduct losses in subsequent years.

  3. In summary, the Claimant argues that the losses it declared in the year 2014 in the amount of 38,120.95 € are deductible from its property income for the five years following, irrespective of having opted for non-aggregation.

  4. The Respondent, in counter-argument, contends that the Claimant, having opted for non-aggregation of category F income, could not deduct the losses declared in 2014.

  5. There is abundant jurisprudence on this issue raised in the present proceedings, which will be closely followed. We note in particular the decisions of CAAD rendered in cases numbered 96/2015-T; 314/2017-T; 96/2015-T; 481/2017-T; 338/2016-T, which we adopt.

  6. The aforementioned jurisprudence decided to the effect that aggregation of category F property income is not mandatory for the deductibility of losses, and in this sense the present issue is supported by the following grounds.

  7. With regard specifically to property income, the Preamble to the IRS Code, in its point 11, already provides for the taxation of income actually earned, the respective deductions to the tax liability, and the deduction of expenses, as stated in point 11: "In the field of property income (category F), only the income actually received from rented properties, both urban and rural, are included in the tax base, and not, as happened under the system of property contribution, the rental value or ground rent of unrented properties, since the aim is to tax only income actually earned. (...) Concurrently, a municipal contribution on the property value of rural and urban properties is created, due by their owners, the collection of this being deducted from the IRS collection, on the part proportional to the aggregated income from properties and up to the amount thereof. In addition to this deduction, all expenses relating to the properties are provided for deduction in this income category, and not just the presumed charges provided for in the current regime of property contribution." (our emphasis).

  8. The legal regime for the deduction of losses examined here, for the year in which the loss occurred, respectively the year 2014, was provided for in article 41, paragraph 1 "From gross income referred to in article 8, expenses for maintenance and upkeep incumbent upon and borne by the taxpayer and documented by proof, as well as the municipal property tax and stamp duty that applies to the value of properties or part of properties whose income is subject to taxation in the tax year, are deducted."

  9. Moreover, the legislation provides for loss carryforward, as provided in article 55, paragraph 2 "The negative net result determined in category F may only be carried forward to the five years following that to which it relates, being deducted from the positive net results of the same category. (Amendment given by Law no. 64-B/2011 of 30 December)".

  10. The taxpayer is able to deduct expenses borne by him, with their carryforward for up to five years following the year in which they occur.

  11. In this sense, the Arbitral Decision 314/2017-T supports this position, which we endorse, where it states: "However, the determination of net income is not satisfied merely by the consideration of deductions specific to each income category, since the expenses incurred in obtaining the income of a given year may exceed the income of that same year. Hence the need to, under pain of taxation striking at the source generating the income, still permit the deduction of losses from previous years which, after all, are nothing more than the excess over the specific deduction to be considered in the year in which the expenses are incurred. From a pure perspective of global net income taxation, loss transferability between income categories would be justified; however, the legislator soon realized that transferability without restrictions would entail 'a significant reduction in revenue', renouncing it without, however, failing to establish it as a general rule, relating to certain income categories, establishing loss carryforward within certain other categories, in future years (point 14 of the Preamble to the IRS Code), for limited periods.

  12. A position equally defended by Professor Paula Rosado Pereira, who states "the right to deduction of maintenance and upkeep expenses related to the rented property does not depend on the exercise by the taxpayer of the option for aggregation of property income and subjection thereof to the general progressive IRS rates".

  13. Addressing the issue, the legislator is quite clear within the scope of the IRS Code rules relating to aggregation and the respective deductions. Having distinguished and implemented different regimes as to loss deductions and deductions to tax liability, a clear distinction, wherein it expressly established in article 55, paragraph 6 that deductions would only be allowable when the taxpayer opts for aggregation, specifically "The negative balance determined in a given year, relating to the operations provided for in subparagraphs b), e), f) and g) of paragraph 1 of article 10, may be carried forward for the two following years, to income of the same nature, when the taxpayer opts for aggregation."

  14. Within the scope of article 55, paragraph 6, it expressly provides that carryforward is only possible if the taxpayer opts for aggregation.

  15. It did not make this provision in the carryforward analyzed in the present case.

  16. In effect, beyond the temporal limitation to the deduction of losses determined within Category F, article 55, paragraph 2 of the IRS Code does not establish any other requirement for such deductibility, contrary to what it did regarding article 55, paragraph 6, where it expressly refers to "when the taxpayer opts for aggregation."

  17. Concluding that article 55, paragraph 2, only imposes a temporal limitation to deductions and does not require that income be aggregated for their deduction.

  18. Let us now examine the regime of rates provided in articles 68 et seq. of the IRS Code, and in particular the question of deductions at special rates provided in article 72, examined here.

  19. Article 72, paragraph 1, subparagraph e) establishes: "The following are taxed at the autonomous rate of 28%: e) Property income." and in article 72, paragraph 8 "Income provided for in subparagraphs c) to e) of paragraph 1, in paragraphs 5 and 6 may be aggregated by option of their respective holders resident in Portuguese territory."

  20. The Claimant opted for non-aggregation of Category F income, with an autonomous rate being applied to him.

  21. We are faced with an autonomous rate and not a liberatory rate, a distinction highly relevant for purposes of deductions, as we shall see.

  22. The legislator implemented two distinct regimes, one for liberatory rates and another for the remaining rates provided in articles 68 et seq. of the IRS Code.

  23. Contrary to what is verified with liberatory rates, where express provision is made for retention at source as definitive – article 71, paragraphs 1 and 4 – the special rates of articles 68, 68-A and 72 do not contemplate such definitive retention; had such been the legislator's intention, it would have extended such definitive retention to the remaining rates, including autonomous rates.

  24. In this sense, Rui Duarte Morais defends, regarding the distinction between liberatory rates and autonomous rates: "Note that, since it is a matter of a special rate (and not a liberatory rate), this is applied to income determined in accordance with general terms, that is, to net income, meaning that the taxpayer remains permitted to make the specific deductions that the law provides for. As he will also maintain the right to carry forward losses that he had in this category in prior years"

  25. In these terms, and in light of all that has been expounded and by way of conclusion, the legal nature of loss carryforward determined in category F does not depend on prior option for aggregation of property income, all the more so since we are faced with a rule that permits deduction of expenses from gross income and not from aggregated income.

  26. Accordingly, it results from the combined interpretation of the aforementioned rules, the jurisprudence and doctrine cited, that the possibility of loss deduction provided in article 41, as well as the carryforward of losses in subsequent years, provided in article 55, both of the IRS Code, precedes the option provided in article 72 of the same Code, leaving no other conclusion than that in the assessments subject to the request for arbitral pronouncement, the rules provided in the IRS Code in force at the date of the facts must be applied, including those relating to deductions specific to category F and the loss deduction provided in article 55, since, in the specific case, the legislator did not expressly establish a rule requiring the aggregation of income to be taxed, the taxpayer may thus deduct the respective losses in the five years following without having to opt for aggregation of such income.

I – MATTERS OF PREJUDICIAL KNOWLEDGE

  1. In the sentence, the judge must pronounce on all issues that he must examine, abstaining from pronouncing on issues of which he must not know (final segment of paragraph 1 of article 125 of the CPPT), and the issues on which the tribunal's powers of cognition fall are, in accordance with paragraph 2 of article 608 of the CPC, applicable subsidiarily to arbitral tax proceedings, by referral from article 29, paragraph 1, subparagraph e), of the RJAT, "the issues that the parties have submitted for its examination, excepting those whose decision is prejudiced by the solution given to others (...)".

  2. In light of the solution given to the issue relating to the assumptions of taxation of the Claimants' income under the regime applicable to married taxpayers not judicially separated in persons and property, the examination of the remaining issues included in the request for arbitral pronouncement is prejudiced.

L – INDEMNIZATORY INTEREST

  1. The Claimant also petitions for payment of indemnizatory interest.

  2. In light of the foregoing, the IRS assessment, in the part covered by the annulment to be decreed, results from errors of fact and law attributable exclusively to the tax administration, inasmuch as the Claimant fulfilled its duty to declare and were committed by it and it could not have been unaware of different understandings.

  3. Article 43 of the General Tax Law, under the heading 'payment of undue tax liability', has as its purpose the intention to compensate the taxpayer for the deprivation of the amount paid undue.

  4. Article 43 of the General Tax Law, paragraph 2 – "There is also deemed to be error attributable to the services in cases where, although the assessment is made on the basis of the taxpayer's statement, he has followed in completing it the generic guidelines of the tax administration, duly published."

  5. In truth, being demonstrated that the claimant paid the tax challenged in an amount exceeding what is due, by force of articles 61 of the CPPT and 43 of the LGT, the Claimant has the right to the indemnizatory interest due, such interest to be calculated from the date of payment of the undue (annulled) tax until the date of issuance of the respective credit note, with the term for such payment being calculated from the beginning of the term for voluntary performance of the present decision (article 61, paragraphs 2 to 5, of CPPTRIB), all at the rate ascertained in accordance with the provisions of paragraph 4 of article 43 of the LGT.

  6. The claimant's request is granted.

M – DECISION

Accordingly, in light of all the foregoing, the present Arbitral Tribunal decides:

It finds the request for declaration of illegality of the tax assessment acts in the matter of Personal Income Tax, no. 2016..., no. 2017..., no. 2018... in the total amount of 6,838.16€, well-founded, due to breach of law, for error regarding legal assumptions, which justifies the declaration of their illegality and annulment.

It condemns the Respondent to reimburse the Claimant in the amount incorrectly assessed and paid of 6,838.16€, plus payment of indemnizatory interest already accrued for the period, to be calculated from the payment of the tax in accordance with paragraphs 2 to 5 of article 61 of the CPPT at the rate ascertained in accordance with the provisions of paragraph 4 of article 43 of the LGT until complete and effective reimbursement.

The value of the case is set at 6,838.16 € based on the value of the assessment, taking into account the economic value of the case as measured by the amount of the tax assessments contested, and accordingly the costs are set in the respective amount of 612.00 € (six hundred and twelve euros), to be borne by the Respondent in accordance with article 12, paragraph 2 of the Tax Arbitration Regime, article 4 of the RCPAT and Schedule I attached to the latter – paragraph 10 of article 35, and paragraphs 1, 4 and 5 of article 43 of the LGT, articles 5, paragraph, subparagraph a) of the RCPT, 97-A, paragraph 1, subparagraph a) of the CPPT and 559 of the CPC).

Notify accordingly.

Lisbon, 1 March 2019

The Arbitrator

Paulo Ferreira Alves

Frequently Asked Questions

Automatically Created

What is the deduction of Category F losses (Dedução Perdas Categoria F) under Portuguese IRS tax law?
Category F loss deduction (Dedução Perdas Categoria F) allows Portuguese taxpayers to carry forward negative net results from property rental income for up to five years under Article 55(2) of the IRS Code. These losses can be deducted from positive property income in subsequent years. However, the Tax Authority argues this carryforward is conditional on electing income aggregation (englobamento) in the year the loss occurred, while taxpayers contend the law imposes no such explicit requirement.
How does Article 55(1)(b) of the Portuguese IRS Code apply to the deduction of rental income losses?
Article 55(1)(b) of the Portuguese IRS Code governs how rental income losses are treated in tax assessments. Article 55(2) specifically provides that negative net results in Category F may be carried forward for five years and deducted from positive results in the same category. The central dispute in CAAD case 534/2018-T concerns whether this carryforward right requires taxpayers to have opted for income aggregation, or whether it applies automatically based on the principle of net income taxation.
Can taxpayers deduct Category F property rental losses against other income categories in Portuguese IRS?
No, Category F property rental losses cannot be deducted against other income categories in Portuguese IRS. Article 55(2) explicitly limits the deduction to 'positive net results of the same category' (Category F). Losses from rental properties can only offset future rental income gains, not employment income (Category A), business income (Category B), or other income types. This ring-fencing prevents taxpayers from using property losses to reduce tax on unrelated income sources.
What was the outcome of CAAD arbitration process 534/2018-T regarding IRS tax assessments for 2015, 2016, and 2017?
The arbitration decision in CAAD process 534/2018-T centered on whether €38,120.95 in Category F losses from 2014 could be carried forward to offset property income in 2015-2017 without electing aggregation. The taxpayer challenged IRS assessments totaling €6,838.16, arguing Article 55(2) permits loss carryforward regardless of aggregation choice. The Tax Authority opposed this, maintaining that separate taxation at autonomous rates under Article 72 precludes loss carryforward benefits. The complete decision outcome would clarify this critical interpretation of Portuguese tax law.
How can taxpayers challenge IRS tax assessments through CAAD arbitration in Portugal?
Taxpayers can challenge IRS assessments through CAAD arbitration by filing a request with the Administrative Arbitration Center (CAAD) within specific deadlines. In case 534/2018-T, the tribunal was constituted on January 9, 2019, after the request was accepted on October 30, 2018. The process involves appointing arbitrators (or automatic appointment if parties don't designate one), written submissions from both parties, and a formal decision. CAAD provides an alternative dispute resolution mechanism to traditional tax courts, offering faster resolution of tax controversies including IRS assessment disputes.