Process: 556/2018-T

Date: July 22, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 556/2018-T) addresses the deductibility of Category F expenses under Article 41 of the Portuguese IRS Code and the requirement for proper reasoning in tax assessments. The taxpayers challenged an IRS assessment for 2013 that partially denied deductions for rental property expenses, including utilities (electricity, water, gas) and IMI (Municipal Property Tax). The core issues were: (1) whether the Tax Authority's assessment suffered from lack of reasoning (falta de fundamentação), and (2) whether expenses documented in the name of a co-lessee rather than the taxpayer could be deducted. The taxpayers argued the initial notification provided only generic references to Article 41 without specific explanation for denying deductions, constituting a voidable defect under Article 99(c) of the Tax Procedure Code. They contended that subsequent reasoning provided during hierarchical appeal or in CAAD proceedings cannot cure initial defects. Regarding substantive deductibility, the taxpayers maintained that utilities constitute maintenance expenses under Article 41, and that claiming 50% of expenses paid by a co-lessee reflects their proportional share in a shared lease arrangement. The Tax Authority did not dispute the nature of expenses but rejected deductions because invoices were issued in another person's name. This case illustrates fundamental procedural requirements in Portuguese tax law: assessments must contain sufficient reasoning at issuance, and taxpayers have recourse through hierarchical appeal followed by CAAD arbitration to challenge defective assessments and claim compensatory interest on overpaid taxes.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1. A..., tax identification number..., and B..., tax identification number..., married, with address at Rua ... no...., ..., ...-... Lisbon, (hereinafter referred to as "Requesters") filed, on 09-11-2018, a request for arbitral pronouncement, pursuant to Article 2, paragraph 1, sub-paragraph a) and Article 10, paragraphs 1 and 2 of the Legal Regime for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter referred to as "LRTA") and Articles 1 and 2 of Administrative Rule no. 112-A/2011, of 22 March.

1.2. The Requesters seek the pronouncement of the Arbitral Tribunal with a view to declaring the annulment of the decision partially denying the hierarchical appeal no. ...2015... as well as the partial annulment of the Personal Income Tax (PIT) assessment no. 2014..., for the year 2013, and the reimbursement of overpaid tax, accrued with the legally due compensatory interest and default interest, and also seeking a ruling condemning the Tax and Customs Authority to pay the arbitration costs.

1.3. The defendant is the Tax and Customs Authority (hereinafter referred to as "Respondent").

1.4. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 12-11-2018.

1.5. Pursuant to sub-paragraph a) of paragraph 2 of Article 6 and sub-paragraph b) of paragraph 1 of Article 11 of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council of CAAD appointed as arbitrator of the sole arbitral tribunal the Honourable Dr. Olívio Mota Amador, who, within the applicable period, communicated acceptance of the assignment.

1.6. The parties were notified on 03-01-2019 of the appointment of the arbitrator, and neither manifested a will to challenge the appointment, in accordance with the combined provisions of Article 11, paragraph 1, sub-paragraphs a) and b), of the LRTA and Articles 6 and 7 of the CAAD Code of Deontology.

1.7. In accordance with the provisions of Article 11, paragraph 1, sub-paragraph c), of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 23-01-2019.

1.8. The Respondent, duly notified through the arbitral order of 24-01-2019, filed its Response on 26-02-2019.

1.9. The Arbitral Tribunal, by order dated 01-03-2019, notified the Requesters to indicate the facts regarding which they requested the examination of the witness indicated in the request for arbitral pronouncement.

1.10. On 11-03-2019, the Requesters indicated the facts regarding which they intended to examine the witness and requested the addition of a new document to the proceedings.

1.11. The Arbitral Tribunal, by order dated 13-03-2019, notified the Respondent to state, if it so wished, within the period of five days, its position regarding the document presented by the Requester. The Respondent made no statement.

1.12. By order dated 09-04-2019, the Arbitral Tribunal determined: (i) Admit into the record the document joined by the Requesters on 11-03-2019; (ii) Set 10 May at 10:30 a.m. for the examination of the witness indicated by the Requesters.

1.13. The Respondent, on 26-04-2019, requested that the Arbitral Tribunal set a new date for the witness examination due to scheduling difficulties.

1.14. The Arbitral Tribunal, by order dated 07-05-2017, set 21 May at 3:00 p.m. as the new date for the witness examination.

1.15. The Arbitral Tribunal, on 21-05-2019, proceeded to examine witness C..., pursuant to the minutes which are in the present arbitral proceedings and which are hereby considered, for all purposes, as fully reproduced. In the said session the Tribunal: (i) notified the Requesters and the Respondent to present written submissions, in that order and successively, within a period of 10 days; (ii) admitted the document presented by the Requesters, with the Respondent having the opportunity to state its position within the period for written submissions; (iii) set 01-07-2019 as the date for delivery of the arbitral decision, a date that was subsequently postponed through orders of the Arbitral Tribunal dated 01-07-2019 and 15-07-2019.

1.16. The written submissions were presented by the Requesters on 31-05-2019 and by the Respondent on 12-06-2019.

1.17. The position of the Requesters, in accordance with the provisions of the request for constitution of the Arbitral Tribunal and the written submissions, is, in summary, as follows:

1.17.1. In the notification the Tax Authority limited itself to making generic references to the provisions of the Personal Income Tax Code, never specifically referring to the reason for considering that such expenses did not meet the requirements for deductibility provided for in Article 41 of the Personal Income Tax Code (in the version in force at the date of the facts), which is why the assessment should be annulled due to lack of reasoning.

1.17.2. Although the Tax Authority, in its review of the hierarchical appeal, elaborates somewhat more on references to the supporting documents of the deducted expenses, it continues to refer generically that they are not issued in the name of the taxpayer. It is only in the response to the Request for Arbitral Pronouncement that the Tax Authority analyzes each of the documents attached and ceases to assert generically that the documents are not issued in the name of the taxpayer.

1.17.3. In truth, subsequent or ex post facto reasoning following the issuance of tax assessment acts is absolutely irrelevant for the purposes of assessing the legality of such acts, and therefore it cannot be admitted in court. This is to say that, since the Tax Authority did not take care to reason the corrections that were at the origin of the assessment act, it could not now seek to reason the assessment act.

1.17.4. Now the defect of lack of reasoning constitutes an autonomous defect separate from merely formal defects (see Article 99, sub-paragraph c), of the Code of Tax Procedure and Process), and determines the voidability of the tax assessment act.

1.17.5. The assessment should also be annulled as the expenses in question are tax-deductible as declared by the Requesters, meeting the legal requirements for this purpose.

1.17.6. The expenses whose invoices were attached as document no. 16 and document no. 18 attached to the request for arbitral pronouncement refer to expenses for electricity, water and gas, etc., which is why they should be considered maintenance expenses for the purposes of the deduction provided for in Article 41 of the Personal Income Tax Code.

1.17.7. As for the fact that the invoices are issued in the name of the other lessee (C...), it is important to note that the Requesters only considered in their income statement 50% of the total value of the amounts paid and referred to in the invoices, as that is the value attributable to them in virtue of the lease being shared. This is a perfectly normal procedure and one that, moreover, cannot be avoided when co-owners are involved.

1.17.8. With regard to expenses related to IMI (Municipal Property Tax), the Tax Authority never questioned the eligibility of the nature of the expense, as paragraph 1 of Article 41 of the Personal Income Tax Code (in the version in force at the date of the facts) specifically provided for the deduction of the amount of IMI paid.

The Tax Authority does not accept, in the present case, the deduction of IMI, as the proof of its payment is only in the name of the other lessee. Once again, this occurs only for practical reasons between the lessees.

1.18. The position of the Respondent, expressed in the response and in the written submissions, can be summarized as follows:

1.18.1. With regard to the alleged lack of reasoning, it is reiterated that jurisprudence states that to reason… "(…) Does not mean an exhaustive description of all the reasons that determine its issuance, but implies properly clarifying its recipient of the motives that are at the genesis and the reasons that support its content. (...) This duty to provide reasoning thus aims to allow the recipient of the act to know the cognitive and evaluative path of this, allowing them to know what the motives were that led the Administration to its issuance. (...) An act is properly reasoned whenever the administered party, placed in the position of a normal recipient – the prudent person of whom Article 487, paragraph 2 of the Civil Code speaks – remains clarified about the reasons that motivated it." (in Judgment of the Supreme Administrative Court in case no. 016217 of 28-10-1998).

1.18.2. Now, it is demonstrated that the Requester understood perfectly the meaning and scope of the tax act which is the subject of the present request for arbitral pronouncement, as results from their own legal-argumentative exercise in their statement. For, it is not possible to affirm that a given act is without reasoning when, in the present case, the contextual motivation allowed its recipient to know the facts and legal reasons that led the Respondent to make the decision in question, with that meaning and content.

1.18.3. With regard to the expenses referred to in sub-paragraph c) which the Requesters claim to be various "maintenance fees" – document no. 14 – the truth is that from a simple reading of the document it is only verified that the issuer is D..., and that no conservation or maintenance expenses are specified, but rather the charging of "a monetary fee ...", arising from contractual obligations to contribute to a common fund – ... . Revealing that it is an expense for the management of their assets and not any conservation and maintenance expense.

1.18.4. It is not possible to extract from the documents presented the conclusion sought by the Requesters, due to lack of evidentiary support compatible with the claim. Therefore, it must be concluded that such expenses do not meet the conditions to be ineligible, as they do not fall within the provisions of paragraphs 1 and 2 of Article 41 of the Personal Income Tax Code, as they are not considered maintenance or conservation expenses, nor charges for conservation, use and others that, under civil law, the condominium must necessarily bear.

1.18.5. With regard to the expenses referred to in sub-paragraph d) of Article 30 of the request for arbitral pronouncement, related to document no. 15 – it is verified that it refers to an element related to an electrical appliance (air conditioning remote control), immediately excluded from the letter of the law (Article 41 of the Personal Income Tax Code).

1.18.6. With regard to the expenses referred to in sub-paragraphs e) and g) of Article 30 of the request for arbitral pronouncement, related to document no. 16 – it is verified that they relate to tariffs for water, gas and electricity supply. Regarding the deductibility of these expenses, CAAD decided in case 240/2017-T, that they do not integrate the concepts of "maintenance and conservation" and consequently cannot be deducted from the gross income of category F, in accordance with the provisions of paragraph 1 of Article 41 of the Personal Income Tax Code.

1.18.7. With regard to the IMI expense (document no. 17), it also cannot be accepted, as the documents presented are issued in the name of C... . Under Article 8 of the Personal Income Tax Code, it can only be deduced that the IMI expense that is borne by the taxpayer, is supported by them and is documentally proven. Therefore, the formal requirement is not being met, that is the document issued in the name of the present Requesters.

1.18.8. Given the foregoing, we find that the Requester indeed did not present documentary proof proving that they bore those expenses which they now seek to deduct in Personal Income Tax – thus not respecting the letter and spirit of the rule enshrined in Article 41 of the Personal Income Tax Code.

1.19. The Arbitral Tribunal is materially competent and is regularly constituted in accordance with Articles 2, paragraphs 1, sub-paragraph a), 5 and 6, paragraph 1, of the LRTA.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented in accordance with the provisions of Articles 4 and 10, paragraph 2, of the LRTA and Article 1 of Administrative Rule no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

No exceptions were raised.

There are no other circumstances that prevent the merits of the case from being decided.

In these terms, the Arbitral Tribunal is regularly constituted to review and decide the subject matter of the case.

2. MATERIAL FACTS

2.1. Facts established as proven

With relevance to the review and decision of the questions raised, the following facts are given as established and proven:

The Requesters, on 30-05-2013, filed the Personal Income Tax declaration – Model 3 – for the year 2013, identified under number ... (see Document no. 1 attached to the request for arbitral pronouncement);

In Annex F of the Personal Income Tax declaration – Model 3, identified in the preceding sub-paragraph, the Requesters declared, in Field 401, rental income in the amount of €5,216.07 and expenses in the amount of €3,652.95 (see Document no. 1 attached to the request for arbitral pronouncement);

The Finance Service Lisbon..., through office no. ..., of 23-06-2014, notified the Requesters of the "(…) need to prove the amounts of expenses of the leased properties" (see Document no. 2 attached to the request for arbitral pronouncement);

The Finance Service Lisbon..., through office no. ..., of 24-07-2014, notified the Requesters for prior hearing regarding the declaration, identified in sub-paragraph A), "(…) in which the following inaccuracies are found: Need to prove the amounts of expenses of the leased properties" (see Document no. 3 attached to the request for arbitral pronouncement);

The Requesters traveled to the Finance Service of Lisbon..., on 14-07-2014 and 06-08-2014 (see Documents nos. 2 and 3 attached to the request for arbitral pronouncement);

The Finance Service Lisbon..., through office dated 14-11-2014, notified the Requesters of the existence of discrepancies in that "(…) the supporting documents relating to the expenses declared in Annex F do not meet the requirements of Article 41 of the Personal Income Tax Code and are not issued in the name of the taxpayer" and that an official declaration shall be drawn up and the missing tax calculated (see Document no. 4 attached to the request for arbitral pronouncement);

The Requesters were notified of the additional Personal Income Tax assessment no. 2014..., issued on 21-11-2014, resulting in tax to pay in the amount of €153,052.13 (see Document no. 5 attached to the request for arbitral pronouncement);

The Requesters were notified of the Statement of Account Settlement, through document no. 2014..., being notified to proceed to payment of €1,081.57, as they had already paid the amount of €151,970.56 (see Document no. 6 attached to the request for arbitral pronouncement);

The Requesters paid the additional Personal Income Tax assessment, identified above, in the present proceedings (see page 249 of the Administrative File);

The Requesters filed, on 04-05-2015, a gracious complaint against the assessment, identified in sub-paragraph G), which received number ...2015... (see Document no. 7 attached to the request for arbitral pronouncement);

The Requesters were notified, through the office of the Finance Directorate of Lisbon no. ..., to exercise their right of prior hearing, in accordance with Article 60 of the General Tax Law, having, on 05-10-2015, sent a document exercising that right (see page 251 of the Administrative File);

The gracious complaint, identified in sub-paragraph J), was denied by decision dated 22-10-2015, issued by the Head of Division of Administrative Justice of the Finance Directorate of Lisbon, pursuant to delegation of powers (see pages 246 and 254 of the Administrative File);

The Requesters, on 27-11-2015, filed a hierarchical appeal, pursuant to the provisions of Article 66 of the Code of Tax Procedure and Process, directed to the Minister of State and Finance, which received number ... (see Document no. 8 attached to the request for arbitral pronouncement);

By decision of the Head of Division of the Central Service of the Personal Income Tax Directorate issued on 07-08-2018, pursuant to delegation of powers, the hierarchical appeal, identified in the preceding sub-paragraph, was partially granted (see Document no. 9 attached to the request for arbitral pronouncement);

The expenses in the total amount of €3,652.95, recorded in Field 401 of Annex F of the Personal Income Tax declaration – Model 3, identified in sub-paragraph B), consist of the following supporting documents:

7 invoices issued by D... in the name of A... with the description – "Commission D...t"; (see Document no. 12 attached to the request for arbitral pronouncement);

1 invoice issued by D... in the name of A... with the description – "Maintenance Service. Unclog shower" (see Document no. 13 attached to the request for arbitral pronouncement);

4 invoices issued by D... in the name of A... with the description –"Monetary Fee – ... . Common Reserve Fund ..." (see Document no. 14 attached to the request for arbitral pronouncement);

1 invoice issued by D... in the name of A... with the description –"Maintenance Service. Air conditioning remote control replacement" (see Document no. 15 attached to the request for arbitral pronouncement);

12 invoices issued by G... in the name of C... with the description – "Availability Tariff. Water Consumption. Sewage Tariff. Solid Waste Tariff. Water Resources Fee. Water Quality Control Fee" (see Document no. 16 attached to the request for arbitral pronouncement);

3 invoices issued in the name of C... with the amount relating to the 1st, 2nd and 3rd Installments of Municipal Property Tax (see Document no. 17 attached to the request for arbitral pronouncement);

4 invoices issued by E... in the name of C... with the amount relating to the electricity supply under contract no. ... (see Document no. 18 attached to the request for arbitral pronouncement);

With regard to the expenses identified in iii), iv), v), vi) and vii) of the preceding sub-paragraph, the Requesters contest the Tax Authority's understanding of not considering them deductible under Article 41 of the Personal Income Tax Code (see no. 17 of the Written Submissions of the Requesters);

The property that gave rise to the rental income and expenses referred to in sub-paragraph O) is identified in Field 401 of Annex F of the Personal Income Tax declaration – Model 3, Municipality (code): ...; Type: U; Article ...; Fraction/Section AR (see Document no. 1 attached to the request for arbitral pronouncement);

The property identified in the preceding sub-paragraph was acquired in a financial lease regime by the Requesters and by C... pursuant to the real estate financial lease contract no. ..., entered into with F..., S.A. (see Document no. 10 attached to the request for arbitral pronouncement);

The Requesters and C..., as lessees, sub-leased the property described in sub-paragraph Q) to D... S.A., pursuant to a service provision contract for the promotion and operation of tourist accommodation (see Document no. 10 attached to the request for arbitral pronouncement);

With regard to the property described in sub-paragraph Q), C... declared in Annex F of the Personal Income Tax declaration – Model 3, in Field 401, rental income in the amount of €5,216.07 and expenses in the amount of €3,652.95 (see Document no. 19 attached to the request for arbitral pronouncement).

2.2. Facts established as not proven

There are no other facts with relevance for the review of the merits of the case that have not been proven.

2.3. Reasoning of the material facts proven and not proven

Regarding the material facts, considering the provisions of Article 123, paragraph 2, of the Code of Tax Procedure and Process and Article 607, paragraph 3, of the Code of Civil Procedure (CPC), applicable pursuant to Article 29, paragraph 1, sub-paragraphs a) and e), of the LRTA, the Tribunal does not have to rule on everything that was alleged by the parties, with the duty to select the facts that matter for the decision and discriminate the proven from the unproven facts.

Thus, in accordance with the provisions of Article 596 of the Code of Civil Procedure (CPC), applicable pursuant to Article 29, paragraph 1, sub-paragraph e), of the LRTA, the facts relevant to the judgment of the case were chosen and delimited according to their legal relevance, which was established taking into account the legal questions raised.

As for the material facts given as proven, the conviction of the Arbitral Tribunal was based on the free evaluation of the documentary evidence attached to the record, whose authenticity was not questioned, and on the testimony of witness C..., who appeared impartial in their testimony and to have knowledge of the facts they reported.

Taking into account the positions assumed by the parties, in light of Article 110, paragraph 7, of the Code of Tax Procedure and Process, the documentary evidence attached to the record, and the testimonial evidence identified above, were considered proven, with relevance for the decision, the facts listed above.

3. LEGAL MATTERS

3.1. Questions to be decided

The main question to be decided in the present case concerns the possibility of deducting, pursuant to Article 41 of the Personal Income Tax Code, the expenses identified in iii), iv), v), vi) and vii) of sub-paragraph O) of paragraph 2.1 above, which were declared by the Requesters in Annex F of their Personal Income Tax declaration relating to a sub-leased property generating rental income (Category F).

Previously, it is important to analyze the Requesters' allegation relating to the lack of reasoning of the challenged act.

Finally, the Requesters make a request for compensatory interest and default interest.

This must be addressed.

3.2. Application of law to the present case

3.2.1. The first question that must be addressed concerns the lack of reasoning underlying the challenged act, which was alleged by the Requesters (see 1.17.1 to 1.17.4 above) and to which the Respondent responded in the opposite sense (see 1.18.1 and 1.18.2 above).

3.2.2. In this regard, it is important to consider the provisions of Article 268, paragraph 3, of the Constitution of the Portuguese Republic (CRP) and Article 77, paragraph 1 of the General Tax Law (LGT).

Article 268, paragraph 3, of the CRP establishes that "administrative acts are subject to notification to the interested parties, in the form provided by law, and require express and accessible reasoning when they affect legally protected rights or interests."

Article 77, paragraph 1, of the LGT provides that the "(…) decision of the procedure is always reasoned by means of a succinct exposition of the facts and legal reasons that motivated it, the reasoning being able to consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax audit report".

In the annotation to Article 77 of the LGT, Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa state "As the Supreme Administrative Court has understood, the legal and constitutional requirement of reasoning primarily aims to allow the interested parties knowledge of the reasons that led the administrative authority to act, in order to enable them a conscious choice between accepting the legality of the act and its contentious challenge. To achieve such an objective, the reasoning must provide the recipient of the act with the reconstitution of the cognitive and evaluative path taken by the authority that issued the act, so that it can be clearly known the reasons why it decided the way it did and not differently." (see General Tax Law. Annotated and Commented, 4th ed., Lisbon, Encontro da Escrita Publisher, 2012, pp. 675).

The jurisprudence of the Supreme Administrative Court has held that "(…) the duty to provide reasoning requires that a normal recipient, placed in the position of the appellant, in light of the express content of the act, can grasp the logical-legal path taken by the appealed authority to reach such decision, in order to be able to determine, consciously, toward or against the challenge." (see Judgment of the Supreme Administrative Court of 11-11-1998, case no. 31339).

The reasoning must consist of an exposition of the facts and legal grounds that motivated the decision. The facts and legal grounds of the decision must be perceptible, clear and understandable to the taxpayer. The taxpayer may obviously disagree with the sense of the Tax Authority's decision, but must fully understand the meaning of it and that it is not a pure demonstration of arbitrariness.

It is important to emphasize that manifestly insufficient reasoning is equivalent to lack of reasoning for all legal purposes.

Thus, when faced with a concrete tax act, the required reasoning is that which proves necessary and adequate for a normal taxpayer, with common knowledge and normally diligent, to understand the logical-legal path taken by the Tax Authority to reach such decision (see Arbitral Decision of 29-12-2017, issued in case no. 336/2016-T).

3.2.3. In the present arbitral proceedings, it is necessary to verify the terms in which the Respondent reasoned the exclusion of deductibility of certain expenses declared by the Requesters in Annex F of the Personal Income Tax declaration for the year 2013, and consequently determined the additional assessment issued based on the corrections made.

From the facts in the present arbitral proceedings, it is verified only that the office of the Finance Service Lisbon..., of 14-11-2014, which notified the Requesters of the existence of discrepancies, stated that "(…) the supporting documents relating to the expenses declared in Annex F do not meet the requirements of Article 41 of the Personal Income Tax Code and are not issued in the name of the taxpayer" and that an official declaration shall be drawn up and the missing tax calculated (see sub-paragraph F) of paragraph 2.1 above). Subsequently, the Requesters were notified of the additional assessment issued on 21-11-2014 for the year 2013 and the Statement of Account Settlement (see sub-paragraphs G) and H) of paragraph 2.1 above).

Thus, the reasoning provided by the Respondent to exclude certain expenses declared by the Requesters in Annex F of the Personal Income Tax declaration is based on two components.

In the first, the Tax Authority states that the supporting documents relating to the expenses declared in Annex F do not meet the requirements of Article 41 of the Personal Income Tax Code.

In the second, the Tax Authority states that the supporting documents relating to the expenses declared in Annex F are not issued in the name of the taxpayer.

3.2.4. The assertion that the supporting documents relating to the expenses declared in Annex F by the Requesters do not meet the requirements of Article 41 of the Personal Income Tax Code is based only on the indication of a legal norm preceded by a conclusion devoid of any explanation, even succinct, that supports it.

Furthermore, the legal regime provided for in Article 41 of the Personal Income Tax Code lacks interpretive effort. Given the provisions of that norm, the rule for deductibility of category F costs is associated with costs for maintenance and conservation necessary to obtain taxable rental income, but which the legislator does not define in the Personal Income Tax Code.

In this respect, the reasoning appears clearly insufficient in not evidencing, even if briefly, which legal requirements are not met and led to the exclusion of the deductibility of those expenses.

3.2.5. The assertion that the supporting documents relating to the expenses declared in Annex F are not issued in the name of the taxpayer contradicts the elements in the present arbitral proceedings (see sub-paragraph O) of paragraph 2.1 above). In fact, the expenses recorded by the Requesters in Field 401 of Annex F of the Personal Income Tax Declaration Model 3 are supported by a total of thirty-two invoices, of which thirteen invoices are issued in the name of the taxpayer A..., now Requester in the present arbitral proceedings. In the remaining nineteen invoices the name of a third party (C...) appears. On the other hand, it is verified that there are expenses supported by invoices issued in the name of the taxpayer A... that were not considered by the Tax Authority, for example, the expenses relating to the Common Reserve Fund... (see iii) of sub-paragraph O) and sub-paragraph P) of paragraph 2.1 above). Also in this part there is the absence of any explanation, even succinct, that supports the assertion of the Tax Authority.

3.2.6. Thus, the two components on which the reasoning of the challenged act is based prove to be insufficient to understand the facts and legal reasons that led to the exclusion of the deductibility of the expenses recorded by the Requesters in Field 401 of Annex F of the Personal Income Tax Declaration Model 3 and consequently determined the additional assessment and the Statement of Account Settlement.

From the preceding analysis, it follows that the tax act, which is the subject of the request for arbitral pronouncement, does not meet a minimum level of information that permits considering the requirements that, at the constitutional, legal, jurisprudential and doctrinal level, are required for the reasoning of tax acts to be satisfied.

3.2.7. The Respondent argues, in order to dismiss the defect of lack of reasoning, that the Requesters understood perfectly the meaning and scope of the tax act because this results from the argumentative exercise they made before the Arbitral Tribunal (see nos. 9 to 11 of the written submissions of the Respondent filed in the arbitral proceedings).

We cannot accept, with due respect, this position of the Respondent, as it is unacceptable, under penalty of subverting the entire framework of constitutional and legal constraint in effect in this matter, that, when faced with manifest deficiencies in reasoning for which the Tax Authority alone is responsible, the burden is placed on the taxpayer to detect and remedy such reasoning deficiencies.

Reasoning is a requirement of the act itself and it is the responsibility of its author to reason it on facts and law. The taxpayer cannot be bound to substitute themselves for the author of the act in the search for the meaning of the reasoning in order to exercise their defense guarantees more effectively. In the event of deficient performance of the duty to provide reasoning by the Tax Authority, it is not the responsibility of the taxpayer to make assumptions and attempt to discern the complete reasoning for that act. Consequently, the deficient performance of the duty to provide reasoning, incumbent upon the Tax Authority, cannot be convalidated by the action of the taxpayer.

3.2.8. In these terms, the alleged omission of formality resulting from the failure to comply with the legal duty to provide reasoning, which, in accordance with Article 268 of the CRP and Article 77 of the LGT, rests on the Tax Authority, should be considered substantiated. Consequently, the challenged act suffers from the defect of lack of reasoning, whereby it is illegal and must be annulled.

In this way, the examination of the remaining questions raised by the Requesters is rendered moot.

3.2.9. Finally, the Requesters also make a request for compensatory interest that should accrue to the reimbursement of the overpaid tax. In accordance with Article 43, paragraph 1, of the LGT, compensatory interest is owed when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed.

On this question, Councilor Jorge Lopes de Sousa expressed, in annotation to Article 61 of the Code of Tax Procedure and Process, a position with which we completely agree, according to which "... the existence of formal defects or incompetence means that there was a violation of the procedural rights of the administered parties and, therefore, justifies the annulment of the act, as it is affected by illegality. But the recognition of a defect of those types does not imply the existence of any defect in the tax legal relationship, that is, any judgment on the improper nature of the pecuniary obligation collected by the Tax Administration on the basis of the annulled act, limited to expressing the non-conformity with the law of the procedure adopted to declare or collect it or the lack of competence of the authority that required it. Now, it is unquestionable that when a defect relating to the tax legal relationship is detected, compensation to the taxpayer is imposed, as the existence of that defect implies the injury of a subjective legal situation, embodied in the imposition on the taxpayer of the effectuation of a patrimonial obligation contrary to law. Therefore, it can be justified that in these situations, there being no doubts that the patrimonial requirement made to the taxpayer implies for them a prejudice not admitted by the substantive tax rules, it be given as established its existence and the amount of that prejudice be presumed, with its evaluation made in advance through the fixation of compensatory interest in their favor. However, in cases where the defect that leads to the annulment of the act relates to a rule that regulates the activity of the Administration, the latter reveals nothing about the tax legal relationship and the improper nature of the obligation in light of the substantive tax rules. In these cases, the annulment of the act does not imply that there has been an injury to the substantive legal situation and, consequently, from the annulment one cannot conclude that there has been a prejudice deserving reparation. Therefore, it can be considered justified that in these situations, not resulting from the annulment decision the proof of the existence of a prejudice, not to presume its value, fixing compensatory interest, but only to return what was received, which may already constitute a benefit for the taxpayer in light of their tax situation." (in Code of Tax Procedure and Process, vol. I, 6th ed., Lisbon, Áreas Publisher, 2011, pp. 531 and 532).

This is also a position reiterated in the jurisprudence of the Supreme Administrative Court (see Judgment of the Supreme Administrative Court of 07-09-2011, appeal no. 0416/11, available at www.dgsi.pt).

In the present case, the annulment of the additional assessment results from the defect of lack of reasoning and not from any illegality in light of substantive rules that expresses the improper nature of the tax obligation. Thus, it cannot be concluded, in accordance with Article 43 of the LGT, that the requirements are met for the Requesters to be compensated, whereby the request of the Requesters regarding compensatory interest is dismissed.

3.2.10. The Requesters, in the request for arbitral pronouncement, also refer to the request for legally due default interest, but at this stage there is no legal ground whatsoever to condemn the Respondent to pay default interest.

4. DECISION

In these terms, this Arbitral Tribunal decides:

a) To judge the request for arbitral pronouncement well-founded and declare the illegality of the challenged assessment due to the defect of lack of reasoning;

b) To declare the annulment of the decision partially denying the Hierarchical Appeal no. ...2015..., as well as the partial annulment of the Personal Income Tax assessment no. 2014..., for the year 2013, with the due legal consequences;

c) To judge the request for payment of compensatory interest and default interest not well-founded.

5. VALUE OF THE CASE

The value of the case is fixed at €1,050.98 (one thousand fifty euros and ninety-eight cents), in accordance with Article 97-A, paragraph 1, sub-paragraph a), of the Code of Tax Procedure and Process, applicable pursuant to sub-paragraphs a) and b) of paragraph 1 of Article 29 of the LRTA and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

6. COSTS

The arbitration fee is fixed at €306.00 (three hundred and six euros), in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, as the request was fully well-founded, in accordance with the provisions of Articles 12, paragraph 2, and 22, paragraph 4, both of the LRTA, and Article 4, paragraph 4, of the aforementioned Regulation.

Let notification be made.

Lisbon, Administrative Arbitration Center, 22 July 2019.

The Arbitrator

Olívio Mota Amador

Frequently Asked Questions

Automatically Created

What expenses can be deducted under Category F (rental income) of the Portuguese IRS code under Article 41?
Under Article 41 of the Portuguese IRS Code (in the version applicable to 2013), taxpayers earning rental income (Category F) could deduct maintenance and conservation expenses for the property, Municipal Property Tax (IMI), condominium fees, and other costs directly related to generating rental income. To be deductible, expenses must be properly documented with invoices or receipts, must be necessary for maintaining the property or generating income, and should be issued in the taxpayer's name. The law allows deduction of actual documented expenses or, alternatively, a flat-rate deduction. Maintenance expenses include utilities like electricity, water, and gas when these are the landlord's responsibility, as well as repairs, insurance, and property management fees. The key requirement is that expenses must be supported by valid documentation and directly connected to the rental activity.
What constitutes a lack of reasoning (falta de fundamentação) in Portuguese tax assessments?
Lack of reasoning (falta de fundamentação) in Portuguese tax assessments occurs when the Tax Authority fails to provide sufficient explanation for its decision, particularly when correcting taxpayer declarations or denying claimed deductions. According to Article 77 of the Tax Procedure Code (Código de Procedimento e de Processo Tributário), tax acts must state the legal and factual grounds supporting the decision. A defect in reasoning constitutes grounds for annulment under Article 99(c) of the same Code. Portuguese courts and CAAD tribunals have established that reasoning must be contemporaneous with the act itself—defects cannot be cured by subsequent elaboration during hierarchical appeal or litigation. The reasoning must be specific, not merely generic references to legal provisions; it should explain why particular expenses were rejected or adjustments made. This requirement ensures taxpayers understand the basis for assessments and can effectively exercise their right to challenge decisions. Insufficient reasoning renders the act voidable, protecting taxpayers' constitutional rights to effective judicial protection.
How can taxpayers challenge IRS assessments through hierarchical appeal (recurso hierárquico) and CAAD arbitration?
Taxpayers can challenge IRS assessments through a two-tier administrative and judicial process. First, they may file a hierarchical appeal (recurso hierárquico) with the Tax Authority within 120 days of notification, requesting review by a superior authority. This is optional but suspends deadlines for judicial challenge. If the hierarchical appeal is denied or partially denied, taxpayers can then seek judicial review through either administrative courts or CAAD (Centro de Arbitragem Administrativa) tax arbitration. CAAD arbitration, available since 2011 under Decree-Law 10/2011, offers a faster alternative to traditional courts. To initiate arbitration, taxpayers file a request for arbitral pronouncement within 90 days of the final administrative decision, pay the required fee, and specify the grounds for challenge (annulment, declaration of illegality, or declaration of non-existence). The arbitration tribunal, consisting of one or three arbitrators depending on case value, reviews the case and issues a binding decision typically within six months. CAAD decisions have the same effect as court judgments and can award compensatory interest on overpaid taxes.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when a tax assessment is annulled by CAAD?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when a tax assessment is annulled by CAAD or courts, provided certain conditions are met. Under Article 43 of the Portuguese General Tax Law (Lei Geral Tributária), compensatory interest is due when taxes were paid in excess due to errors attributable to the Tax Authority. The interest compensates taxpayers for the financial loss of having funds wrongly retained by the State. The calculation begins from the date of payment of the undue tax until reimbursement, at the legal interest rate established annually. However, compensatory interest is not due if the taxpayer caused the error, if payment was made voluntarily without a legal obligation, or in cases of mere interpretation differences where the Tax Authority acted in good faith. In CAAD arbitration decisions that annul assessments for procedural defects (like lack of reasoning) or substantive errors (like incorrect denial of deductions), the tribunal typically orders reimbursement of overpaid tax plus compensatory interest. Taxpayers must specifically request this in their arbitration petition, as it does not automatically apply without being claimed.
What is the procedure for requesting CAAD tax arbitration to annul an IRS income tax assessment in Portugal?
The procedure for requesting CAAD tax arbitration to annul an IRS assessment involves several steps. First, taxpayers must exhaust or waive administrative remedies; typically this means filing and receiving a decision on a hierarchical appeal, though direct arbitration is possible in some cases. Within 90 days of the final administrative decision (or notification of assessment if no hierarchical appeal filed), taxpayers submit a request for arbitral pronouncement to CAAD via the online platform or in person. The request must identify the parties, specify the contested act, state the legal and factual grounds for challenge, indicate the desired relief (annulment, declaration of illegality), and include supporting documents. A filing fee applies, calculated as a percentage of the amount in dispute (minimum €306, with reduced rates for lower amounts). CAAD's President reviews the request for admissibility and appoints an arbitrator within 5 days. The appointed arbitrator must accept within 5 days, after which the tribunal is formally constituted. The Tax Authority has 30 days to file a response. The tribunal may hold hearings, examine witnesses, and request additional documents. The arbitral decision must be issued within 6 months of tribunal constitution (extendable once). Decisions are binding, enforceable as court judgments, and subject to limited appeal only on points of law to the Central Administrative Court.