CAAD 538/2018-T: Loss Carryforward in Category F Rental Income and Mandatory Income Aggregation for IRS Purposes

ARBITRAL DECISION

I – REPORT

A. – PARTIES

A..., married to B..., residents at Rua ..., no. ..., ..., Coimbra, hereinafter referred to as Claimants, filed a request on 29 October 2018 for the constitution of a singular arbitral tribunal in tax matters, pursuant to the provisions of art. 2.º, no. 1, paragraph a) of Decree-Law no. 10/2011, of 20 January (Legal Regime of Tax Arbitration – RJAT) and articles 1.º, paragraph a) and 2.º of Ordinance no. 112-A/2011, of 22 March, for the purpose of resolving the dispute opposing them to the Tax and Customs Authority, hereinafter referred to as Respondent.

B. – CONSTITUTION OF THE TRIBUNAL

1. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD on 30/10/2018 and automatically notified to the Claimant and to the Tax and Customs Authority, with the President of the respective Deontological Council appointing the undersigned as arbitrator of the Singular Arbitral Tribunal, pursuant to the provisions of art. 6.º, no. 1, of the RJAT, a duty which was accepted in accordance with the legally established terms.

2. On 18/12/2018, the Parties were notified of this appointment, in accordance with the combined provisions of art. 11.º, no. 1, paragraph b), of the RJAT, and articles 6.º and 7.º of the Deontological Code, having manifested no intention to refuse the appointment of the arbitrator.

3. Accordingly, the Tribunal was constituted on 09/01/2019, in accordance with the provisions of paragraph c), no. 1, of art. 11.º of Decree-Law no. 10/2011, which was notified to the Parties on that date.

C. – CLAIM

The Claimants request that:

a) The Tribunal declare the illegality of the tax acts relating to the following assessments:

• Personal Income Tax (IRS) assessment for the year 2015, with no. 2016..., of 20/07/2016, for payment of IRS in the amount of € 1,472.11 until 31/08/2016;

• Personal Income Tax (IRS) assessment for the year 2016, with no. 2017..., of 24/05/2017, for payment of IRS in the amount of € 2,981.73 until 31/08/2017;

and consequently

b) The same be annulled to the extent that they disregard the possibility of carrying forward losses from prior years, and the amounts paid by the Claimants on this account relating to the assessments made be reimbursed to them.

c) And the Tax Administration be condemned to pay to the Claimants on these amounts the indemnificatory interest provided for in art. 43.º of the LGT.

D. – PROCEDURE

After notification of the date of constitution of the Arbitral Tribunal on 09/01/2019, the subsequent procedural steps proceeded as follows:

• On 09/01/2019 – The Respondent was notified to, pursuant to nos. 1 and 2 of art. 17.º of the RJAT, submit a response within 30 days and, if it so wished, request the production of additional evidence and submit to the Arbitral Tribunal a copy of the administrative file, via electronic means.

• On 06/02/2019 – The Respondent submitted a Response to the Request for Arbitral Opinion, submitted the appointment order of the legal representatives of the Respondent, and inserted the administrative file in the online "Platform" of CAAD, having notified the Claimants of all of this.

• On 11/02/2019 – The Tribunal dispensed with holding the meeting referred to in art. 18.º of the RJAT, in application of the principles of autonomy of the arbitral tribunal in the conduct of proceedings, celerity, simplification and procedural informality (arts. 19.º, no. 2, and 29.º, no. 2, of the RJAT), having considered that the decision could be made on the basis of documentary evidence and no exceptions having been raised.

The Tribunal determined, accordingly, the continuation of the proceedings by notifying the Parties to submit optional written submissions within the successive period of fifteen days.

The Tribunal set 30 April 2019 as the expected date for the rendering of the arbitral decision.

• On 28/02/2019 – The Claimants submitted written submissions.

• On 07/03/2019 – The Respondent submitted written submissions.

• On 16/04/2019 – Rendering of the final decision.

E. – CLAIMANTS' CLAIM AND ITS GROUNDS

• The Claimants were notified of the Personal Income Tax (IRS) assessments for the year 2015, with no. 2016..., of 20/07/2016, and for the year 2016, with no. 2017..., to pay, respectively until 31/08/2016 and 31/08/2017, the assessed IRS, in the total amount of € 4,453.84.

• Not accepting the legality of the 2015 and 2016 IRS assessments, the present Claimant filed a gracious objection against such assessment acts, whose files were registered, respectively, with no. ...2017... and no. ...2017..., both of the Finance Service of Coimbra ..., whose gracious objections were rejected by orders issued by the Head of the Tax Justice Division, issued by delegation of powers from the Finance Director, invoking the illegality of the same, due to violation of law.

• According to the Claimants, in effect, the assessments in question suffer from illegality due to violation of law, namely by violation of art. 55.º, no. 1, paragraph b) of the CIRS, since the value of losses to be carried forward verified in the year 2014, in category F (real estate income), was not taken into account in the respective assessments, that is, the disputed assessments do not contemplate the right to carry forward losses that the claimant had in the year 2014.

• The Claimants, in the year 2014, had a loss, or a negative result calculated in category F, in the year 2014, of € 33,938.49, as recognized by the decision granting the request issued in the gracious objection process no. ...2016..., in which the present Claimant petitioned "that the values of income and deductions contained in the substitution declaration delivered on 13/04/2016 be considered and, in light of the same, the value of losses to be carried forward be calculated and indicated".

• Which loss or negative result, in the said amount of € 33,938.49, in light of the provisions of no. 2 of art. 55.º of the CIRS, in the wording in force in the year 2014 (the year the loss occurred), which established that: "2 - The negative net result calculated in category F may only be carried forward to the five following years to that in which it occurred, being deducted from the positive net results of the same category.", the present Claimant has the right to carry forward to the following years deducting it from the positive net results obtained in the following years (within the time limit established by law - 5 years).

• However, notwithstanding the right that the law confers on the Claimants to carry forward losses that occurred in 2014, in category F, the IRS assessments for the years 2015 and 2016, now disputed, do not reflect this right, in violation of the provisions of no. 2 of art. 55.º of the CIRS.

• Now, with regard to the 2015 IRS assessment, the present claimants, timely, filed a gracious objection, which was registered with no. ...2017..., whose request formulated in such objection was first GRANTED by order issued on 03/04/2017, by the Finance Director of Coimbra, notified on 17/04/2017, in accordance with and based on the grounds of the information no. …, provided in the respective file, which states "Noting that the objector had in Category F in 2014, a negative net income of € 33,938.49, which does not appear in his current account, and having in the year 2015 an income (net) of the same category of € 15,470.57, I am of the opinion that the request merits approval, with a negative net income of € 18,467.92, category F, still carrying over to the following years".

• It happens that, by order at page 36, dated 27/02/2018, the Finance Director of Coimbra decided to revoke the aforesaid order at page 31.

• And subsequently reject the request formulated in such objection, by order of the Head of the Tax Justice Division, issued by delegation of powers from the Finance Director, of 30/07/2018, notified to the Claimants on 01/08/2018, based on the information from the IRS Services Direction, Liquidation and Information Division, which states:

"1. The IRS assessment no. 2017..., relating to the ex officio declaration no. ... - 2014 - ... – 44, of the year 2014, is correct, the calculation having been made based on the elements and values contained in the said declaration.

1. In fact, no. 2 of article 55.º of the CIRS (wording given by Law no. 83-C/2013, of 31/12), establishes that 'The negative net result calculated in category F may only be carried forward to the five following years to that in which it occurred, being deducted from the positive net results of the same category'.

2. This means that for a carry-forward to exist in a given year, in the case of 2014, it is necessary that a negative net result has been calculated, which only happens when the option for aggregation is made, in accordance with the provisions of paragraph b) of no. 3 of article 22.º and no. 8 of article 72.º of the CIRS.

3. However, as the taxpayers A..., with NIF: ... and B..., NIF: ..., did not opt for aggregation of income from category F (€ 17,711.89), as appears in the aforementioned DC, declaration in force for 2014, although maintenance/conservation expenses were declared in Schedule 4 of Annex F, in the amount of € 51,650.38, the negative net result calculated (- € 33,938.49) is not capable of being carried forward to the following years.."

• With regard to the 2016 IRS assessment, the Claimants likewise filed a gracious objection, which was registered with no. ...2017..., whose request formulated in such objection was equally REJECTED by order of 30/07/2018 of the Head of the Tax Justice Division, issued by delegation of powers from the Finance Director, notified to the present claimant on 01/08/2018, based on the information from the same cited IRS Services Direction, Liquidation and Information Division.

• The AT considers that the negative value of category F generated in 2014 could only be carried forward to 2015 and subsequent years, if the present claimants had opted for aggregation in 2014, which did not occur.

• In the Claimants' view, the invoked conditionality of carrying forward the negative net result to the aggregation option completely lacks grounds, both in fact and in law.

• First of all, it should be said that the legal provisions invoked by the AT, namely paragraph b) of no. 3 of art. 22 and no. 8 of art. 72.º, all of the IRS Code, do not allow reaching such a conclusion, namely that, with respect to real estate income, these are taxed at the autonomous rate provided for in paragraph e) no. 1 of art. 72.º, and for there to be a deduction of losses, it is a necessary condition that taxpayers opt for aggregation of income from category F.

• To make the best interpretation of the law, one must first consider that, in the taxation of personal income, the IRS legislator expressly adopted the principle of taxation of net income.

• Thus, within the scope of the various categories of income covered by the scope of IRS, the taxation of income earned by taxpayers resident in continental Portugal is based, as a rule, on the net income earned in each year by their respective holders.

• With respect to real estate income, which is part of Category F of income subject to IRS, the net income of a given year is the value resulting from deducting from the respective gross income the expenses contained in article 41.º of the CIRS, considered necessary for its obtainment (specific deduction).

• Losses to be carried forward are nothing more than the accumulation of specific deductions that, in each year, may only be deducted from the taxable income of that same year, up to their concurrent amount, and may be deducted from the positive taxable income of subsequent years, within the time limit legally established.

• Therefore, the Claimants do not see how the said principle of taxation of net income, which is the one that best accords with the principle of ability to pay, can be satisfied without taking into account losses to be carried forward from prior years.

• Moreover, they understand that there is no rule that excludes the possibility of deduction of losses within Category F.

• For the only exception of this type is the one that refers to the deduction of losses in category G, which expressly mentions in art. 55.º of the CIRS "when the taxpayer opts for aggregation."

• Now if it were the legislator's intention to condition the deduction of losses in category F to the option for aggregation, it would easily have said so, as it did for category G.

• Thus, the carry-forward of losses to subsequent years, within the scope of Category F, does not depend on a prior option for aggregation of real estate income, being the same admitted even if such option is not manifested, by virtue of there being no legal provision that precludes such possibility, on the one hand, and, on the other, in obedience to the structuring principle of taxation of net income earned by the respective taxpayers.

• In fact, beyond the temporal limitation on the deduction of losses calculated within Category F, article 55.º of the IRS Code does not establish any other requirement for such deductibility.

• Adding that, pursuant to article 72.º, no. 7, of the CIRS, added by Law no. 66-B/2012, of 31 December, real estate income began to be taxed autonomously at the rate of 28%.

• Now, the autonomous taxation of said income does not have a liberatory nature.

• To support their position, the Claimants cite doctrine and case law to that effect.

• The Claimants conclude that, in conformity with what they have expounded, it is verified that the AT, by not having considered:

in the 2015 IRS assessment, the negative net result – recognized in the gracious objection process no. ...2016..., calculated in the year 2014, – in the amount of € 33,938.49, deducting it from the net income of category F calculated in 2015, in the amount of € 15,470.57 (being € 24,018.62 of gross real estate income and € 8,548.05 of expenses incurred with rented properties) and, by not having indicated that the value of losses to be carried forward in category F of € 18,467.92 still carried over to the subsequent years, and

in the 2016 IRS assessment, the negative result calculated in the year 2014 that still existed in 2015, in the amount of € 18,467.92, deducting it from the net income of category F calculated in 2016, in the amount of € 20,600.00 (being € 28,579.99 of gross real estate income and € 7,979.99 of expenses incurred with rented properties) and not having considered, in consequence, only as income subject to taxation at the rate of 28%, the amount of € 2,132.08 incurred in illegality, by error in the legal grounds violating the law, namely the provisions of art. 55.º of the CIRS, which results in the annulment of the respective assessments to the extent that they disregard the possibility of carrying forward losses from prior years, in category F, which had as a result, in addition to the payment of excessive tax in each of the years, in the values indicated in each of the disputed assessments, the non-payment by the AT to the claimants of the IRS refund to which they were entitled had it not been for the illegality of the taxation effected in the assessment acts disputed.

• For which reason, in their view, the decisions rejecting the gracious objections nos. ...2017... and ...2017... and the disputed 2015 and 2016 IRS assessments suffer from illegality, by error in the application of the law, which leads to their annulment, to the extent that they disregard the possibility of carrying forward losses from prior years, which they request, with the consequent condemnation of the AT to reimburse to the Claimants the amounts of tax paid and to pay the refund due, all plus the indemnificatory interest provided for in art. 43.º of the LGT, which they request.

• Ending by formulating the request that it be judged to be well-founded as proven, with all legal consequences, namely declaring the illegality of the tax acts subject to the present request for arbitral opinion, with the consequent annulment of the questioned assessments, further condemning the respondent to pay to the claimants both the amounts of tax wrongfully paid and the refund of IRS to which they are entitled, and also to pay, on such amounts, the indemnificatory interest provided for in art. 43.º of the LGT.

F. – RESPONSE OF THE RESPONDENT AND ITS GROUNDS

The Respondent, duly notified for such purpose, submitted its Response in a timely manner, in which, in summary, it alleged the following:

• The Claimants consider that the assessments of Personal Income Tax (IRS) no. 2016..., relating to the year 2015, and no. 2017..., relating to the year 2016, as well as the rejection of the gracious objections filed against the assessments in question, to which were assigned nos. ...2017... and ...2017... are illegal.

• Petitioning, in its request for opinion, the annulments of those tax acts, as well as the orders rejecting the gracious objections.

• To that end, the Claimants base their claim on raising the following questions:

a) In the existence of losses calculated in the year 2014 and within category F, to be recognized in the years 2015 and 2016;

b) In the Respondent's disregard for the negative net real estate income in the calculation of the tax owed;

c) In the payment of indemnificatory interest.

• The Respondent rebuts the questions raised as follows:

• The Claimants allege that the AT, by not considering:

In the 2015 IRS assessment, the negative net result in the amount of € 33,938.49, deducting it from the net income of category F calculated in 2015, in the amount of € 15,470.57 and

In the 2016 IRS assessment, the negative result calculated in the year 2014 that still existed in 2015, in the amount of € 20,600.00 incurred in illegality, by error in the legal grounds violating the law, namely the provisions of article 55.º of the CIRS, which results in the annulment of the respective assessments to the extent that they disregard the possibility of carrying forward losses from prior years, in category F.

• In the Respondent's view, the Claimants completely lack merit, given that they appear to have forgotten the option they took regarding the taxation of income when filing the IRS declaration underlying the tax acts they now contest.

• In fact, article 22.º no. 1 of the CIRS prescribes that "the taxable income in IRS is that which results from the aggregation of income from the various categories earned in each year, after the deductions and write-offs provided for in the following sections."

• Paragraph b) of no. 3 of article 22.º of the CIRS provides, however, that "income referred to in articles 71.º and 72.º earned by residents in Portuguese territory are not aggregated for purposes of their taxation, without prejudice to the option for aggregation therein provided."

• Article 72.º, no. 1, paragraph e) of the CIRS further establishes that real estate income is taxed at the autonomous rate of 28%.

• Paragraph b) of no. 1 of article 55.º of the CIRS further establishes that the negative result of category F calculated in a given year is deductible from the positive income of the same category existing in the six following years to those in which it occurred.

• Subsuming the aforementioned legal provisions and doctrine that it cites (Prof. André Salgado de Matos, CIRS Annotated pages 234, 235 and 380) to the case at hand it is verified that:

• First, the Claimants expressly declared, in the IRS Model 3 declaration, that they are residents in continental Portugal.

• Second, the Claimants expressly declared, in the IRS Model 3 declaration, that they opt not for aggregation of real estate income earned by them.

• Therefore, by not opting for aggregation, the here-resident Claimants chose to tax separately the income from category "F" by means of the application of a fixed rate on that gross income, which would mean renouncing the carry-forward of losses which is a downstream operation that presupposes the prior adoption of the option for aggregation.

• Therefore, as the Claimants gathered, as they did gather, the requirement of national residence embodied in paragraph b) of no. 3 of article 22.º of the CIRS and having opted, as they indeed opted, for non-aggregation of income from category "F", it is naturally now barred to them to see reflected the negative net result from the year 2014.

• In fact, the carry-forward of losses is a downstream operation that presupposes the prior adoption of the option for aggregation – which, it is stressed, did not happen in the case at hand.

• Hence, not having the Claimants opted for aggregation, they cannot now come – to use the expression – "to get the best of both worlds", namely:

The application of a fixed liberatory rate to income from category "F" in detriment to the option for aggregation;

and

Simultaneously the carry-forward of losses underlying an option for aggregation that was not taken.

• And this is enough, without more, for the request for arbitral opinion as presented to be rejected, as to the question of the carry-forward of losses, given that the assessments sub judice do nothing more than reflect the result of the tax option freely taken by the Claimants themselves and, consequently, what issues from the fiscal law.

• As to the request for indemnificatory interest, the Respondent alleges that article 43.º of the General Tax Law (LGT), under the heading "payment of undue tax liability", has as its presupposition the intention to compensate the taxpayer for the deprivation of the amount it paid undue.

• The same determines in its no. 1 that "indemnificatory interest is due when it is determined, in a gracious objection or judicial appeal, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than that legally due".

• Such interest falls within the theory of extracontractual civil liability, with constitutional foundation in article 22.º of the Constitution, which recognizes to citizens the right to be indemnified by the State and other public entities for actions or omissions committed in the exercise of their functions and because of that exercise by their organs, officials and agents, which cause them harm.

• Being that the right to indemnificatory interest provided for in no. 1 of article 43.º of the LGT, derived from judicial annulment of an assessment act, depends on having been demonstrated in the proceedings that that act is affected by an error attributable to the services from which resulted payment of a tax debt in an amount greater than that legally due.

• Given that the assessment made was based on the applicable law, to which the Administration is bound, with the Tax Administration aiming, pursuant to article 55.º of the LGT and in the wake of the principle set out in article 266.º nos. 1 and 2 of the Constitution "… the pursuit of the public interest, in respect for the rights and interests legally protected of citizens" and its "… administrative organs and agents … are subordinated to the Constitution and the law …" and must "… act, in the exercise of their functions, with respect for the principles of equality, proportionality, justice, impartiality and good faith".

• Being thus, the Tax Administration is bound by the principle of legality, cannot fail to give full compliance to the normative rules that the ordinary legislator created and that are in force in the legal order and also by force of the provisions of article 55.º of the LGT.

• The right to indemnificatory interest provided for in no. 1 of article 43.º of the LGT, derived from judicial annulment of an assessment act, depends on having been demonstrated in the proceedings that this fact is affected by an error regarding factual or legal grounds attributable to the Tax Administration.

• The error that supports the right to indemnificatory interest is not any vice or illegality but that which is concrete in defective appreciation of relevant factuality or in erroneous application of the legal rules.

• Since, at the time of the facts, the Tax Administration made the application of the law in the terms in which as an executive organ it is constitutionally bound, one cannot speak of an error of the services within the meaning of the provisions of article 43.º of the LGT.

• It ends by requesting that the request for arbitral opinion should be judged not to be well-founded, as not proven, maintaining in the legal order the tax assessment acts disputed, absolving the Respondent accordingly.

G. – QUESTIONS TO BE DECIDED

Given the positions assumed by the Parties in accordance with the arguments presented, the following questions are to be assessed and decided:

– Whether, given that the Claimants, resident in Portuguese territory, did not opt for aggregation of real estate income in their IRS declarations, they may or may not benefit from the carry-forward of losses carried over from prior years, as provided for in art. 55.º of the CIRS;

– Interest – Whether or not there is a right to interest, under art. 43.º of the LGT, in the event that the assessments are annulled and the reimbursement of the amounts requested is determined, which would have been wrongfully paid, at the legal rate and until actual reimbursement;

– Responsibility for payment of arbitral costs.

H. – PROCEDURAL REQUIREMENTS

The Arbitral Tribunal is regularly constituted and is materially competent, in accordance with the provisions of paragraph a), no. 1, of art. 2.º of the RJAT (Decree-Law no. 10/2011, of 20 January).

The Parties enjoy legal personality and capacity, are legitimate and are regularly represented (pursuant to arts. 4.º and 10.º, no. 2, of the RJAT and art. 1.º of Ordinance no. 112/2011, of 22 March).

Considering the identity of the taxable event, of the tribunal competent for the decision, and of the factual and legal grounds invoked, the Tribunal admits the cumulation of claims for declaration of illegality of the tax acts that are the object of these proceedings, since the requirements established in art. 3.º, no. 1, of the RJAT are met.

The proceedings do not suffer from vices that affect their validity.

I. – FACTUAL MATTERS

I. 1 – ESTABLISHED FACTS

With relevance to the assessment of the questions raised, the Tribunal establishes as proven the following facts:

1- The Claimants were notified of the Personal Income Tax (IRS) assessments for the year 2015, with no. 2016..., of 20/07/2016, and for the year 2016, with no. 2017..., to pay, respectively until 31/08/2016, the amount of € 1,472.11, and until 31/08/2017, the amount of € 2,981.00, corresponding to the assessed IRS, in the total amount of € 4,453.84.

2- The Claimants did not accept the legality of the 2015 and 2016 IRS assessments, and the present Claimant filed a gracious objection against such assessment acts, whose files were registered, respectively, with nos. ...2017... and ...2017..., both of the Finance Service of Coimbra....

3- These gracious objections were rejected by orders of 27/02/2018 and 30/07/2018, issued by the Head of the Tax Justice Division, by delegation of powers from the Finance Director.

4- The IRS assessments for the years 2015 and 2016 do not reflect the carry-forward of losses suffered in 2014 in category F.

5- The Claimants, in the year 2014, had a loss, with the negative net result calculated in category F, in the year 2014, being € 33,938.49.

6- The Claimants declared, in the IRS Model 3 declaration, that they are residents in continental Portugal.

7- The Claimants declared, in the IRS Model 3 declaration, that they do not opt for aggregation of real estate income earned by them.

8- The Claimants paid the amounts corresponding to the assessments in question.

9- The request for arbitral opinion was presented on 29/10/2018.

I. 2 – GROUNDING OF ESTABLISHED FACTS

The facts established are based on the documents indicated with respect to each of them, and on the factual elements brought into the proceedings by the Parties, to the extent that their correspondence to reality was not disputed.

I. 3 – UNPROVEN FACTS

There are no unproven facts with relevance to the assessment of the questions to be decided.

J. – LEGAL MATTERS

With the factual matters established, the following proceeds to their legal subsumption and the determination of the Law to be applied, taking into account the questions to be decided that were stated.

Regarding the carry-forward of losses within category F and the necessity to opt for aggregation of real estate income

First, it should be noted that, in the context of IRS, the taxation of real estate income, within category F, permits the deduction from gross income of expenses and other costs, which it lists (art. 41.º, no. 1, of the CIRS).

There will thus be a need to proceed with its analysis regarding the conditions under which such is permitted by law.

And, looking at the situation sub judice, if the carry-forward of losses in the following years, provided for in art. 55.º of the CIRS, is possible in the case where the taxpayer opts for non-aggregation of real estate income, taking into account that art. 72.º of the CIRS establishes in its no. 7 an autonomous rate for the taxation of real estate income of 28%, permitting in its no. 8 that such income may be aggregated by option of their respective holders resident in Portuguese territory.

In the Respondent AT's view, the provisions in question permit the extraction of the conclusion that the carry-forward of losses in category F lacks a prior option for aggregation of real estate income.

This because, being resident in national territory, they chose that the income of category F be taxed separately through the application of a fixed rate on that gross income, which would mean renouncing the carry-forward of losses which is a downstream operation that presupposes the prior adoption of the option for aggregation.

We believe, however, that the Respondent is not correct, as nothing in the letter of the law, or in its ratio legis, permits supporting such an understanding.

Let us analyze, then, the regime of deductibility of the negative net result calculated in category F.

This regime is enshrined in article 55.º of the CIRS, particularly in its nos. 1 and 2, in the wording prior to the publication of Law no. 82-E/2014, of 31 December, by force of its art. 17.º, no. 6, which is transcribed:

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

2 - The negative net result calculated in category F may only be carried forward to the five following years to that in which it occurred, being deducted from the positive net results of the same category."

Analyzing this provision, it is clear that neither the letter nor the spirit of the law permits concluding as to the legal requirement of a prior option for aggregation that the Respondent axiomatically seeks to enforce.

In fact, beyond the temporal limitation on the deduction of losses in category F, art. 55.º of the CIRS does not establish any other requirement for that deductibility.

The same does not occur with regard to the deductibility of losses relating to category G, for here no. 6 of art. 55.º expressly conditions the carry-forward on the taxpayer having opted for aggregation.

Thus being, if we resort to the rule of interpretation of art. 9.º of the Civil Code, applicable by force of art. 11.º, no. 1, of the LGT, which prevents the interpreter from fictioning a legislative thought that has no minimum correspondence in the letter of the law, it is necessary to conclude that if the legislator wished to require aggregation in the situation at hand, he would have expressly provided for it, as an example of what he did in no. 6 regarding the deduction of losses within category G.

Accordingly, without further delay and dispensing with other considerations, we conclude that, pursuant to the law, the carry-forward of losses calculated in category F does not depend on a prior option for aggregation of real estate income.

Regarding indemnificatory interest

This matter is regulated in art. 24.º of the RJAT, which expressly determines in its no. 1, paragraph b) that the arbitral decision binds the Tax Administration, in the cases provided therein, to "Re-establish the situation that would exist if the tax act subject of the arbitral decision had not been performed, adopting the acts and operations necessary for such", and further provides, in its no. 5, that "Interest is due, regardless of its nature, in accordance with the terms provided in the general tax law and in the Code of Tax Procedure and Process".

Also article 100.º of the LGT, whose application is authorized by the provisions of art. 29.º, no. 1, paragraph a), of the RJAT, provides in identical manner, toward the immediate re-establishment of legality, understanding the same the payment of indemnificatory interest, if applicable.

For its part, art. 43.º, no. 1, of the LGT conditions the right to indemnificatory interest to cases where "there was an error attributable to the services from which results payment of a tax debt in an amount greater than that legally due".

Accordingly, the question arises whether one can consider that there was, or was not, an error attributable to the services in the situation at hand.

Now, as stated previously, the assessments in question are illegal due to error in the application of the law to the facts, committed by the services of the Respondent, from which resulted an overpayment.

Thus, there is no doubt that the requirement established in art. 43.º, no. 1, of the LGT is met, that is, the illegality of the assessments resulted from an error committed by the tax services, a condition for indemnificatory interest to be required.

The Claimants thus have a right not only to the reimbursement of the amounts paid in excess, but also to receive indemnificatory interest on the same, pursuant to the combined provisions of arts. 24.º, no. 1, paragraph b), of the RJAT, 100.º and 43.º, no. 1, both of the LGT, at the rate resulting from no. 4 of art. 43.º of the LGT.

Regarding responsibility for payment of arbitral costs

The law is express in the allocation of responsibility for payment of costs to the party that is condemned, given the provisions of nos. 1 and 2 of art. 527.º of the Code of Civil Procedure, applicable by force of art. 29.º, no. 1, paragraph e), of the RJAT.

Thus being, responsibility for payment of arbitral costs lies with the Respondent.

L. – DECISION

Given the foregoing, the present Arbitral Tribunal decides:

1. • To judge as well-founded, on grounds of violation of law, the request for declaration of illegality of the IRS assessments in question and, in consequence
2. • To annul the tax assessment acts to the extent that they disregard the carry-forward of losses from prior years;
3. • To recognize the right to reimbursement of the amounts that pertain to them;
4. • To judge as well-founded the request for recognition of the right to indemnificatory interest on the said amounts in favor of the Claimants, from the dates of the respective payments until the date of their full reimbursement, at the rate resulting from no. 4 of art. 43.º of the LGT;
5. • To condemn the Respondent to pay the costs of the present proceedings (art. 527.º, nos. 1 and 2 of the Code of Civil Procedure, ex vi art. 29.º, no. 1, paragraph e), of the RJAT).

Value of the proceedings: In accordance with the provisions of articles 306.º, no. 2, of the CPC (ex vi 315.º, no. 2) and 97.º-A, no. 1, of the CPPT, and article 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 4,453.84.

Costs: In accordance with no. 4 of art. 22.º of the RJAT, the amount of costs is set at € 612.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings.

Notify accordingly.

Lisbon, 16 April 2019

The Arbitrator

José Nunes Barata

(Drawn up in former orthography)