Process: 543/2015-T

Date: May 23, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision (Process 543/2015-T) addresses the tax treatment of income derived from urban land subdivision operations under Portuguese IRS law. The taxpayer challenged an IRS assessment of €145,098.08 for the 2008 tax year, which resulted from a tax inspection that identified the sale of 50 urban properties forming part of a 57-plot subdivision in the municipality. The central tax issue concerned whether proceeds from these sales should be classified as commercial income under Category B of IRS or as capital gains. The Tax and Customs Authority classified the income as commercial activity pursuant to article 4, paragraph 1, sub-paragraph e) of the Personal Income Tax Code (PITC) and Administrative Circular No. 16/1992, which specifically addresses subdivision operations (operações de loteamento). The inspection determined that when properties form part of a subdivision operation subject to municipal licensing and urbanization contracts, their sale constitutes commercial or business activity rather than occasional capital gains. The taxpayer followed the complete administrative appeals procedure, initially filing an administrative complaint (case …2014…) which was rejected on December 11, 2014, then a hierarchical appeal (…2014…) denied on May 10, 2015, before requesting CAAD arbitration on August 10, 2015. The Collective Arbitral Tribunal was properly constituted on November 4, 2015, under the Legal Framework for Arbitration in Tax Matters (LFATM). The tribunal confirmed its material competence under articles 2(1)(a), 5, 6(1), and 11(1) of LFATM to adjudicate IRS disputes involving urbanistic activities. A hearing was held on April 1, 2016, with witness testimony from two witnesses presented by the claimant, despite the Tax Authority's opposition and non-appearance at the hearing.

Full Decision

ARBITRAL DECISION

Claimant: A…

Respondent: Tax and Customs Authority

I - REPORT

  1. The taxpayer A…, with TIN number … (hereinafter "Claimant"), filed on 10 August 2015 a request for establishment of a Collective Arbitral Tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM"), naming as respondent the Tax and Customs Authority (hereinafter "TCA" or "Respondent").

  2. The Claimant seeks an arbitral decision on the illegality of the decision dismissing the hierarchical appeal No. …2014…, filed against the express rejection of the administrative complaint referred to in case No. …2014…, filed against the Personal Income Tax assessment (and compensatory interest) No. 2011… of 24 October 2011, relating to the year 2008, in the total amount of €145,098.08. It presents two witnesses.

  3. The request for establishment of the Arbitral Tribunal was accepted by the Honourable President of CAAD and automatically notified to the TCA on 7 September 2015.

  4. Pursuant to the provisions of article 6, paragraph 2, sub-paragraph a) and article 11, paragraph 1, sub-paragraph b) of the LFATM, as amended by article 228 of Law No. 66-B/2012 of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of their appointments within the applicable timeframe, and notified the parties of this appointment on 20 October 2015.

  5. The Collective Arbitral Tribunal was constituted on 4 November 2015; it was constituted properly and is materially competent, in accordance with articles 2, paragraph 1, sub-paragraph a), 5, 6, paragraph 1, and 11, paragraph 1 of the LFATM (as amended by article 228 of Law No. 66-B/2012 of 31 December).

  6. Subsequently, by Decision of the President of the Ethics Council of CAAD dated 4 December 2015, one of the alternate arbitrators was replaced.

  7. Pursuant to paragraphs 1 and 2 of article 17 of the LFATM, the TCA was notified on 4 November 2015 to file its response.

  8. The TCA filed its response on 10 December 2015, accompanied by the Administrative File.

  9. In this response the TCA invokes two exceptions, one dilatory and one peremptory; and alleges, in summary, the complete lack of merit of the Claimant's request, in addition to expressing opposition to the necessity of witness testimony in this case.

  10. The Arbitral Decision of 7 March 2016 granted the Claimant the opportunity to respond to the exception raised in the TCA's response.

  11. In a Motion dated 14 March 2016 the Claimant insisted on the need for witness testimony at the hearing on the merits, indicating that the witnesses it presented should testify on articles 17 to 21, 26 and 27 of the initial request.

  12. The Arbitral Decision of 15 March 2016 set, pursuant to article 18 of the LFATM, 1 April 2016 for the hearing on the merits, acknowledging, against the position expressed by the TCA, the necessity of witness examination.

  13. In a Motion dated 16 March 2016 the Respondent requested the use of a recording of witness testimony produced in another case presenting similarities to the subject matter of this case, given that they involved the same two witnesses presented by the Claimant in this case. It accordingly requested cancellation of the witness examination procedure.

  14. The Arbitral Decision of 16 March 2016 granted the Claimant the opportunity to respond to the motion presented by the TCA.

  15. In a Motion dated 28 March 2016 the Claimant informed that it would not waive witness examination by its presented witnesses, but requested postponement of the hearing date due to the inability of one witness to appear.

  16. The Arbitral Decision of 28 March 2016 rejected the TCA's request, ordering maintenance of the witness examination on the scheduled date, with the possibility of setting another date for examination of the unavailable witness.

  17. On 1 April 2016 the hearing on the merits took place.

  18. The TCA's representatives did not appear; nevertheless, it was decided to proceed, pursuant to article 19 of the LFATM.

  19. At this hearing, the witnesses presented by the Claimant, B… and C…, were examined.

  20. At the conclusion of the hearing the Claimant and Respondent were notified to file written arguments in successive periods of 15 days.

  21. Pursuant to article 21, paragraph 2 of the LFATM, the Tribunal set 31 May 2016 as the deadline for rendering the Arbitral Decision.

  22. The Claimant filed its written arguments on 19 April 2016.

  23. The Respondent filed its written counter-arguments on 4 May 2016.

  24. The case does not suffer from any defects and, once the issues of exception raised in the TCA's response are resolved, no further questions, preliminary or subsequent, prejudicial or of exception, remain that would prevent consideration of the merits of the case, and the conditions are met for a final decision to be rendered.

  25. The TCA appointed its representatives in the case and the Claimant filed a power of attorney (and subsequently a delegation thereof), thus ensuring both Parties are properly represented.

  26. The Parties have legal personality and capacity and have standing, pursuant to articles 4 and 10, paragraph 2 of the LFATM and article 1 of Ordinance No. 112-A/2011 of 22 March.

II - LEGAL REASONING: FACTS

II.A. Facts Considered Proven and Relevant to the Decision

  1. The Claimant was notified of the Personal Income Tax assessment statement No. 2011…, of 24 October 2011, relating to the year 2008 (amount of €132,508.01), of the statement of compensatory interest assessment No. 2011… (amount of €12,590.07) and of the statement of compensation and notice of collection, in the total amount of €145,098.08.

  2. Assessment No. 2011… is the result of a correction following a tax inspection carried out on the Claimant (based on Service Order No. OI2011…), which resulted in an Inspection Report dated 10 October 2011.

  3. The Claimant filed a request for review of the tax assessment, pursuant to article 78 of the General Tax Code.

  4. By Decision of 14 October 2013, that request was converted into an administrative complaint in case No. …2014…, which, by Decision of 11 December 2014, was rejected.

  5. Against this rejection, a hierarchical appeal No. …2014… was filed on 26 December 2014, which in turn, by Decision of 10 May 2015, was denied.

  6. In the inspection carried out on the Claimant regarding the year 2008, it was found that the Claimant had sold to D…, Lda., 50 urban properties of which it was joint owner (the other joint owner being the Claimant's aunt), without such sales having been reported in the income declaration for that year.

  7. These properties were part of a subdivision (of 57 plots) located in the municipality of …, resulting from a contract relating to urbanization with the Municipal Council … and subject to a Subdivision License in 2000.

  8. In 2003 the contract was amended, so that the Municipal Council would receive the proceeds from the sale of the plots, instead of receiving the plots themselves as had been initially agreed.

  9. In the course of the tax inspection it was determined that the income resulting from the sale of the properties, as they were part of a subdivision operation, constituted a commercial activity and therefore met the requirements for inclusion in Category B of the Personal Income Tax, in accordance with article 4, paragraph 1, sub-paragraph e) of the Personal Income Tax Code (PITC) and Circular No. 16 of 14 September 1992.

  10. With respect to 2008, the Claimant proceeded with the sale of 50% of the properties, which resulted in taxable income in Category B, pursuant to the provisions of article 4, paragraph 1, sub-paragraph e) of the PITC.

  11. The taxable value of these sales was determined in accordance with article 31-A of the PITC, so that, as the patrimonial value of the alienated properties exceeded the registered value, for purposes of determining taxable income, the patrimonial value was considered, which amounted to €3,329,520.00, corresponding to the Claimant, given the joint ownership, 50% of this value, in the amount of €1,664,760.00, classified under the simplified taxation regime and subject to a taxation coefficient of 20% (€1,664,760.00 x 0.20% = €332,952.00).

  12. During the Tax Inspection, the Claimant authorized access to its bank accounts as a way to prove the actual value of the alienation of the plots.

II.B. Facts Considered Not Proven

Based on the documentary evidence available in the case and consensually accepted by the parties, and based on the witness testimony presented at the hearing on the merits, it is found that, with relevance to the decision of the case, nothing further was proven.

III - LEGAL REASONING

III.A. Position of the Claimant

a) The Claimant begins by alleging that the qualification of the sale of the plots does not constitute a commercial activity for purposes of inclusion in Category B of Personal Income Tax, in accordance with article 4, paragraph 1, sub-paragraph e) of the PITC and Circular No. 16 of 14 September 1992. And this essentially because the Claimant, and also its joint owner in the subdivision, had no interest whatsoever in the subdivision of the property, and even less in any speculative intermediation or in obtaining profits from the said alienation of the plots.

b) Regarding the subdivision, the Claimant alleges that it was imposed by the Municipal Council … under threat of expropriation of the property, which was a family estate.

c) Demonstrating that there was no intentionality whatsoever in the establishment of the subdivision, and therefore in the subsequent acts, according to the Claimant, the intentional practice directed at obtaining gains would be excluded, and therefore the economic element that is a prerequisite for the classification of the gains as Category B of Personal Income Tax.

d) The gains obtained with the alienation of the plots should therefore be classified as Category G of Personal Income Tax, capital gains, insofar as they arose fortuitously.

e) Their inclusion in Category B would rest on non-existent tax facts determining an incorrect and voidable quantification of income.

f) If such qualification were to be maintained, the Claimant emphasizes that the income declared was that which was actually obtained, since, in accordance with what was agreed with the Municipal Council …, 50% of the sale value was delivered to it.

g) The provision of article 31-A of the PITC, which requires consideration of the Patrimonial Value if higher than the value in the contract, admits proof to the contrary pursuant to the procedure provided in article 139 of the Corporate Income Tax Code (CITC); but the Claimant did not initiate that procedure because, within the deadline established for that purpose, it never occurred to it that the qualification of the income would be questioned and the applicable taxation reviewed.

h) The Claimant argues that, now that the TCA has set the taxable income in different terms, it should be granted the opportunity to prove that the actual price was that declared in the contract, and not the Patrimonial Value: the total price of €1,250,000.00.

i) To that end, not only did the Claimant permit access to its bank accounts during the Tax Inspection as a way to prove this value, or better, its share in that value, in the amount of €312,500.00; but also points out the fact that there is a receipt issued by the Municipal Council … itself which, corresponding to 50% of the value of the sale of the plots, also proves the amounts in question.

j) Otherwise, the Claimant would be faced with taxation representing approximately half of the amount received, a disproportionate, unjust burden, and inconsistent with its tax-paying capacity.

k) Furthermore, the Claimant argues that the limitation imposed by articles 31-A of the PITC and 64, paragraph 2 of the CITC is intended to prevent abusive practices, and in particular collusion between sellers and buyers with simulations of prices in the area of transfer pricing – but that the Claimant never had any relationship with the company that acquired the plots, nor even negotiated with it, insofar as it was the Municipal Council … that assumed exclusive leadership of the negotiations on the seller's side.

l) Regarding the dismissal of the hierarchical appeal, the Claimant alleges that the mandatory duty to rule was violated in that not all arguments and requests presented were analyzed, as had already occurred in the rejection of the administrative complaint.

m) From all of this it would be clear the grounds for annulment of the impugned decision, based on incorrect determination and quantification of tax facts, pursuant to article 100 of the Tax Procedure Code.

n) In its Arguments, the Claimant argues that the exception of material incompetence invoked by the Respondent in its response is without merit – because in its view this is not now a question of proving the actual price (in violation of article 139, paragraph 7 of the CITC) but only of assessing the illegality of assessment acts, in the strict terms of article 2, paragraph 1, sub-paragraph a) of the LFATM – specifically the additional Personal Income Tax assessment that was already assessed and confirmed by the TCA in the hierarchical appeal from the rejection of the administrative complaint filed against that tax act.

o) The Claimant further adds, on this point, that the subject matter in dispute is solely the legal-tax qualification of the gains resulting from the sale, insisting that these gains were declared as capital gains and that this is the appropriate qualification in the specific case, and that it was the TCA that requalified them as "business income," making only then necessary a verification of the actual price – which would have been unnecessary if the Claimant's proposed qualification had been maintained.

p) Thus, in its understanding, there would only be preclusion of the right to challenge the assessment on the grounds of illegality of the corrections made to the transmission value if it had been the Claimant itself that initially considered such income as business income.

q) As to the substance of what is disputed, the Claimant reiterates in Arguments everything it argued in its Initial Request.

r) Adding that, if the TCA's understanding prevails, the tax should have applied to the "informal partnership" composed of the Claimant and its Aunt, pursuant to articles 15 and 16, paragraph 3 of the General Tax Code, article 3, paragraphs 1 and 2 of the Tax Procedure Code and articles 2, paragraphs 1, sub-paragraph b) and 2, and 3, paragraphs 1, sub-paragraph a) and 4 of the CITC, and not separately against each of them – constituting a nullity, pursuant to article 134, paragraph 2 of the Administrative Procedure Code, due to the absence of the subjective element on the passive side, an essential element of the tax legal relationship.

s) Moreover, in Arguments the Claimant argues that, pursuant to the general provision of article 74, paragraph 1 of the General Tax Code, the burden of proof of the facts from which it derives its requalification of the obtained income rests with the TCA. And that proof has not been made, namely that a commercial activity was exercised with the deliberate purpose of generating a profit from the taxed operations – arguing the Claimant that, quite to the contrary, it was proven, particularly by the leadership of the Municipal Council and by the prominence of its interest, the absence of those prerequisites in the Claimant's conduct.

t) On the other hand, the Claimant emphasizes that, pursuant to a Defense filed by the TCA in reactive litigation over the sale, in 2009, of other plots from the same subdivision (as per the document attached to the Arguments), the TCA itself understands that these can be classified in Category G, contradicting the understanding it seeks to uphold in the present case, which is the submission of that sale to Category B of Personal Income Tax.

u) The Claimant insists that, even if the income were to be subject to Category B, then the path leading to taxation of actual income should not be blocked through the invocation of the presumption established in article 31-A of the PITC, as if it were an irrebuttable presumption, and instead the Claimant should be granted the opportunity to avail itself of the alternative means provided in article 64 of the Tax Procedure Code to demonstrate that the sale of the plots was not made at its Patrimonial Value.

III.B. Position of the Respondent

a) In its response, the TCA begins by invoking the dilatory exception of material incompetence of the arbitral tribunal.

 1. The TCA recalls that, in its request for arbitral decision, the Claimant expressed the intention to now demonstrate that the actual price of the alienation of the plots was that declared in the contract.

 2. However, pursuant to article 139 of the CITC which the Claimant invokes, such demonstration of the actual price can only occur before the competent Director of Finance, through a Request.

 3. From a reading of article 2, paragraph 1, sub-paragraph a) of the LFATM, it results "a contrario" that the Arbitral Tribunal is not materially competent to decide on this matter of proof of actual price through the legally provided procedure, which is an administrative procedure within the exclusive competence of the Director of Finance.

 4. We would thus be facing a dilatory exception preventing consideration of the merits of the case, pursuant to article 576, paragraphs 1 and 2 of the Civil Procedure Code, by virtue of article 2, sub-paragraph e) of the Tax Procedure Code and article 29, paragraph 1, sub-paragraphs a) and e) of the LFATM.

b) Next, and still by exception (peremptory), the TCA considers the inadmissibility of assessment of the alleged violation of article 139, paragraph 7 of the CITC.

 1. Beginning by emphasizing the fact that article 139, paragraph 7 of the CITC established a mechanism for elimination of the presumption of use of the Patrimonial Value, from which necessarily results that the filing of judicial challenge must be subsequent to the proper procedure for demonstration of the correspondence, or not, between the transmission value and the declared value, and this procedure, which follows articles 91 and 92 (and also 86, paragraph 4) of the General Tax Code, cannot be subsequent to the commencement of that challenge.

 2. On the other hand, the TCA recalls that article 86 of the General Tax Code requires exhaustion of all available administrative remedies before an autonomous contentious challenge can be made, and that it is also essential there that the procedure provided in article 139 of the CITC have been previously invoked, which in this case did not occur.

 3. Being thus, the consequence, according to the Respondent, is that any other defects may be attributed to the assessment, but the question of actual price cannot be assessed contentiously without this constituting an illegality by violation of article 139, paragraph 7 of the CITC.

c) By way of challenge, the TCA disputes the relevance of the Claimant's arguments regarding the absence of economic, or profit-making, motivation in the sale of the plots - and this particularly because it argues that it is demonstrated that the sale was part of a subdivision operation, and thus properly falls within Category B of Personal Income Tax by the combined application of articles 3 and 4, paragraph 1, sub-paragraph g) of the PITC and Circular No. 16 of 14 September 1992 of the Department of Personal Income Tax.

d) On the other hand, the TCA argues that Category G of Personal Income Tax is merely residual, applying by exclusion of business and professional income, and exclusively to fortuitous gains that were generated outside the productive activity of their recipient, or the assumption of risks by this person - not being, in sum, expected or presumed, nor capable of being promoted by direct action of the beneficiary.

e) This would not apply in the case of the Claimant, who for a long time was agreeing with the Municipal Council … a set of cessions and counterparts that culminated in the business of alienation of the plots - a business from which resulted the expected income, in addition to a set of benefits and patrimonial valuations that the Claimant was commercially obtaining from the Municipal Council … itself.

f) The allegations of pressure or threat by the Municipal Council … were not proven and it does not appear that they interfered with a balanced distribution of gains and risks and counterparts among all those involved in the transaction.

g) Furthermore, the TCA emphasizes that the weight of the prior subdivision in the configuration of the sale business and in the modulation of its respective price is obvious, so that it makes no sense to insist on the idea of an unexpected and occasional gain - even when the subdivision that served as its basis is, that said, isolated or occasional.

h) The TCA concludes that what was at issue was a true and genuine business activity, albeit one that was non-habitual for the taxpayer. There was, therefore, a clear economic element in the transaction, calling for the classification of the income in Category B of Personal Income Tax.

i) As to the determination of taxable income, the Respondent recalls that the patrimonial value of the set of real estate was, in 2008, €3,329,520.00, and that this value was determined before the transmission and was not contested (as it could have been pursuant to article 76 of the Real Estate Transfer Tax Code), so that the total value allegedly achieved, of €1,250,000.00, being lower (and much so), triggers the regime provided in article 31-A of the PITC, which requires consideration, for purposes of determining taxable income, of the value that served as the basis for the levy of Real Estate Transfer Tax (the Patrimonial Value), when this, of the two, is the higher value.

j) It was the Claimant's responsibility to provide timely proof to the contrary, pursuant to article 139 of the CITC, and it did not do so, thereby legitimizing definitively the calculation of taxable income from the patrimonial value of the real estate (€1,664,760.00, that is, 50% of €3,329,520.00). The Claimant could even have requested a new appraisal of the urban properties that were the subject of transmission (pursuant to article 76 of the Real Estate Transfer Tax Code): but, again, it did not.

k) In Counter-Arguments, the Respondent maintains that the Arbitral Tribunal is materially incompetent to assess the Claimant's request to demonstrate the actual price - either because the opportunity to do so passed, or because such request can only be assessed in the context of a procedure and by the competent director of finance.

l) The Respondent takes the opportunity to point out and denounce what it designates as the "subtle expansion of the cause of action" attempted in the Claimant's Arguments, by introducing the subject of the "informal partnership" as if it were a subject already previously addressed and admitted by the TCA, either in this case or in the procedures leading to it - which it categorically denies, recalling instead that these are facts and grounds not previously raised, so the Tribunal is barred from assessing this question, particularly because this would consummate an inadmissible expansion of the cause of action.

m) But the Respondent further emphasizes that, if this point were to be admitted, it would only evidence the contradiction underlying the Claimant's arguments, since the "informal partnership," if its existence is proven (which was not done), would confirm the presence of a commercial activity.

n) As to the substance of what is disputed, the Respondent reiterates in Counter-Arguments everything it argued in its Response, emphasizing particularly that it cannot be considered that there are pure capital gains, insofar as the patrimonial increase that was the subject of assessment resulted from action by the beneficiary conducive to that gain, as was abundantly proven by the agreement established with the Municipal Council and by the subdivision of land resulting therefrom, from which resulted valuations transformed into profits at the moment of alienation - valuations and profits that had nothing fortuitous or unexpected about them.

o) The TCA therefore insists on the fact that the assessment in question cannot fail to rest on the value that served as the basis for the levy of Real Estate Transfer Tax, in the absence of proof that the realization value was lower than that.

III.C. Questions to be Decided

Three legal questions must be assessed: A) The dilatory exception of material incompetence of the Arbitral Tribunal to assess proof of the actual price of the alienation of the plots; B) The peremptory exception of untimeliness of proof of the actual price for purposes of elimination of the presumption that the alienation of the plots was carried out at its Patrimonial Value; C) The legal-tax qualification of the income obtained with the alienation of the plots, for purposes of its classification in Category B or Category G of Personal Income Tax.

In its Initial Request, the Claimant requests an arbitral decision on the illegality of the decisions that successively confirmed the Personal Income Tax assessment relating to the year 2008 (adding compensatory interest to it).

And it does so essentially on two grounds (to which it added another in Arguments, regarding possible erroneous identification of the subjective element of the tax relationship - but which, as it does not appear in the Initial Request, we will not consider):

  1. An incorrect legal-tax qualification of the income obtained with the alienation of the plots, for purposes of its classification in Category B or Category G of Personal Income Tax.

  2. An incorrect quantification of the income obtained with the alienation of the plots, for purposes of elimination of the presumption established by article 31-A of the PITC through the procedure provided in article 139 of the CITC.

As to the first ground, it has been proven that the alienation of the plots was preceded by subdivision operations within the scope of a contractual arrangement that clearly aimed at the valorization of the goods to be alienated, so that the income resulting from the alienation could never, without serious distortion of the concept, be considered a "capital gain," in the fortuitous, occasional, and residual sense that the Law attributes to it in articles 9 and 10 of the PITC, in keeping moreover with its doctrinal genesis, rooted in the idea of "windfall profits."

The classification of the alienation of the plots in Category G of Personal Income Tax would require, therefore, prior demonstration of its non-classification in any other category of income. However, it happens that the precedence of the valorization of the land through its subdivision and urbanization, as moreover the very involvement - or even leadership - of the Municipal Council … in this process and in the subsequent alienation of the plots, demonstrate that it was an urbanization activity and exploitation of subdivisions, perfectly subsumable under article 4, paragraph 1, sub-paragraph g) of the PITC, and therefore classifiable in Category B of income.

Reinforcing this conclusion is not only the fact that article 3, paragraph 1, sub-paragraphs a), 2, h) and 3 of the PITC excludes any requirement of "habituality" in the definition of activities generating income classifiable in Category B, and indeed encompasses within it even isolated acts that "do not result from a foreseeable or repeated practice"; as is also the fact that the Claimant obtained evident benefit from the valorization that the subdivision and urbanization determined in the land that it alienated.

As to the first ground, then, the TCA must be absolved of the request for annulment based on incorrect qualification of the income obtained with the alienation of the plots, for purposes of its classification in categories of Personal Income Tax income.

Being thus, as the assessment of tax being impugned is not annulled, the assessment of the dilatory exception of material incompetence of the Arbitral Tribunal is rendered moot - but it will always be observed that, if it were not rendered moot, this exception would have to be considered well-founded, since the determination of the correct quantification, with possible elimination of the established presumption, depends on a procedure provided in article 139, paragraph 3 of the CITC, without which any challenge on that ground cannot be assessed (article 139, paragraph 7 of the CITC) - thus constituting a condition of challengeability that the Arbitral Tribunal does not have the competence to waive or to substitute (as results "a contrario" from article 2, paragraph 1, sub-paragraph a) of the LFATM itself).

The assessment of the peremptory exception of untimeliness of proof of the actual price for purposes of elimination of the presumption that the alienation of the plots was carried out at its Patrimonial Value is equally rendered moot, and for the same reason that the assessment of tax being impugned has not been annulled.

The assessment of the assessment of compensatory interest is also rendered moot, finally, given the dependence of these on the assessment of tax being impugned itself, which is not annulled.

IV. DECISION

In light of all the foregoing, it is decided to judge the request for arbitral decision to be without merit:

a) Absolving the Respondent of the request for annulment of the Personal Income Tax assessment based on incorrect qualification of taxable income.

b) Absolving the Respondent of the request for annulment of the assessment of compensatory interest.

V. Value of the Case

The value of the case is fixed at €145,098.08, pursuant to the provisions of article 97-A of the Tax Procedure Code, applicable by virtue of article 29, paragraph 1, sub-paragraph a) of the LFATM and article 3, paragraph 2 of the Regulations on Costs in Arbitration Proceedings in Tax Matters (RCPAT).

VI. COSTS

Costs to be borne by the Claimant, given that the present request was judged without merit, in the amount of €3,060.00, pursuant to Table I of the RCPAT, and in compliance with articles 12, paragraph 2, and 22, paragraph 4, both of the LFATM.

Lisbon, 23 May 2016

The Arbitrators

José Baeta Queiroz
(President)

Fernando Araújo

Arlindo José Francisco

Frequently Asked Questions

Automatically Created

How are capital gains from urban land subdivision operations taxed under Portuguese IRS?
Under Portuguese IRS law, capital gains from urban land subdivision operations (operações de loteamento) are taxed as commercial income under Category B, not as capital gains. According to article 4, paragraph 1, sub-paragraph e) of the Personal Income Tax Code (PITC) and Administrative Circular No. 16 of September 14, 1992, when a taxpayer sells properties that form part of a licensed subdivision operation subject to urbanization contracts with municipal authorities, the proceeds constitute business or commercial activity income. The taxable value is determined under article 31-A of the PITC, and the entire income from such sales must be declared as Category B income in the relevant tax year.
Does the CAAD arbitral tribunal have competence to rule on IRS disputes involving urbanistic activities?
Yes, the CAAD (Centro de Arbitragem Administrativa) arbitral tribunal has full competence to rule on IRS disputes involving urbanistic activities and subdivision operations. This competence is established under articles 2, paragraph 1, sub-paragraph a), 5, 6, paragraph 1, and 11, paragraph 1 of the Legal Framework for Arbitration in Tax Matters (LFATM - Decree-Law No. 10/2011 of January 20), as amended by article 228 of Law No. 66-B/2012 of December 31. The tribunal can adjudicate the legality of tax assessments related to commercial income classification from urbanistic activities, including determinations regarding whether subdivision sales constitute Category B commercial income versus capital gains.
What is the procedure for challenging an IRS tax assessment on capital gains through arbitration in Portugal?
The procedure for challenging an IRS tax assessment on capital gains through CAAD arbitration involves several sequential steps: (1) First, file an administrative complaint (reclamação graciosa) against the tax assessment within the legal deadline; (2) If the administrative complaint is rejected, file a hierarchical appeal (recurso hierárquico) to the superior tax authority; (3) After exhausting these administrative remedies, submit a request for establishment of an arbitral tribunal to CAAD pursuant to articles 2 and 10 of LFATM; (4) The CAAD President accepts the request and notifies the Tax and Customs Authority; (5) The Ethics Council appoints arbitrators to constitute the Collective Arbitral Tribunal; (6) The Tax Authority files its response; (7) A hearing on the merits may be held with witness testimony if necessary; (8) The tribunal issues an arbitral decision within the statutory deadline.
Can a taxpayer file a hierarchical appeal before requesting CAAD arbitration on IRS capital gains disputes?
Yes, a taxpayer must file a hierarchical appeal before requesting CAAD arbitration on IRS capital gains disputes. The hierarchical appeal (recurso hierárquico) is part of the mandatory administrative appeals procedure that must be exhausted before accessing arbitration. The proper sequence is: (1) administrative complaint against the tax assessment decision, (2) hierarchical appeal if the administrative complaint is rejected, and (3) only after the hierarchical appeal is decided (whether denied or granted) can the taxpayer request CAAD arbitration. This requirement ensures that administrative remedies are fully exhausted before judicial or arbitral review. The arbitration request challenges the decision on the hierarchical appeal, not directly the original tax assessment.
What legal framework governs the taxation of profits from land subdivision (loteamento) under Portuguese tax law?
The legal framework governing taxation of profits from land subdivision (loteamento) under Portuguese tax law includes: (1) Article 4, paragraph 1, sub-paragraph e) of the Personal Income Tax Code (PITC/CIRS), which classifies income from subdivision operations as Category B commercial or business income; (2) Administrative Circular No. 16 of September 14, 1992, which provides specific guidance on the tax treatment of subdivision operations; (3) Article 31-A of the PITC, which establishes the methodology for determining taxable value from such operations; (4) Municipal licensing requirements and urbanization contracts that define subdivision operations; and (5) The Legal Framework for Arbitration in Tax Matters (LFATM - Decree-Law No. 10/2011) for dispute resolution procedures. These provisions create a comprehensive regime distinguishing subdivision activities from occasional capital gains transactions.