Process: 56/2018-T

Date: December 21, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 56/2018-T) addresses whether taxpayers can rebut the presumption that real estate realization value equals the tax patrimonial value (VPT) when calculating IRS capital gains. The Claimant sold a property in 2013 for €210,000, significantly below its VPT of €278,580. The Tax Authority (AT) issued an assessment applying the higher VPT as the realization value under Article 44(2) of the Personal Income Tax Code (CIRS), resulting in an additional tax liability of €10,651.43. The Claimant argued that the statutory presumption should be rebuttable under Article 73 of the General Tax Law (LGT), which permits proof to the contrary for all tax presumptions. The case highlights the tension between the 2013 legislative framework, which did not explicitly allow rebuttal, and the 2014 CIRS reform that introduced Article 44(5) expressly permitting taxpayers to prove lower actual realization values. The Claimant cited doctrine, Constitutional Court dissenting opinions, and Supreme Administrative Court case law supporting the application of Article 73 LGT to rebut valuation presumptions. The dispute centers on whether the pre-2014 legislation permitted challenging the VPT presumption, the evidentiary requirements for proving actual sale prices below VPT, and how mortgage debt payments affect capital gains calculations. This case represents important clarification on taxpayer rights to challenge AT valuations in real estate transactions where economic circumstances justify sale prices below official assessments.

Full Decision

ARBITRAL AWARD

The singular Judge, Ana Teixeira de Sousa, designated by the Ethics Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, hereby awards the following:

I – STATEMENT OF FACTS

A..., identified with the Citizen Card No. ... and with the Tax Identification Number ..., resident at ... No. ..., ...-... Lisbon, now Claimant, presented on 15 February 2018 a request for constitution of an Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "AT" or "Respondent") is named as Respondent.

The present Request for Arbitral Decision concerns the act of assessment of Personal Income Tax (IRS) No. 2017..., the assessment of Compensatory Interest No. 2017..., and the Statement of Account Adjustment No. 2017..., with reference to the year 2013, from which results a balance ascertained to be paid of € 10,651.43 (ten thousand, six hundred and fifty-one euros and forty-three cents) (cf. Docs. No. 1 and No. 2).

The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and automatically notified to the AT on 19 February 2018. Pursuant to the provisions of subsection a) of No. 2 of Article 6 and subsection b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66B/2012, of 31 December, the Ethics Council designated the arbitrator, who communicated acceptance of the assignment within the applicable period.

The Collective Arbitral Tribunal was constituted on 24 April 2018, in accordance with the provisions of Articles 2, No. 1, subsection a), 5, 6, No. 1, and 11, No. 1 of the RJAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December).

In the request for arbitral decision, the Claimant essentially invokes in his favor that:

The now Claimant was a co-owner, with B..., of the autonomous unit designated by ..., in the ... of the property located at Rua ..., No. ... and ..., in the parish of ..., municipality of Lisbon, described in the Land Registry Office of Lisbon under registration ... of said parish of ... and currently registered in the urban property register under article ... (former article ...), whose tax property value was, on the date of 4 April 2013, of € 278,580, as shown in the public deed of sale of said autonomous unit.

On the referred date of 4 April 2013, the Claimant and the co-owner of the said urban property concluded, by means of a public deed, a contract of purchase and sale of the property, in their capacity as sellers, having transferred ownership of the property at the fixed price of € 210,000.

Of the contracted price, € 126,869.59 were channeled to payment of a debt of the former co-owners to Bank C..., S.A., resulting from a mortgage credit constituted to finance the acquisition of the autonomous unit in question, with the remainder divided between the Claimant and B..., in negotiations occurring within the context of the divorce proceedings referred to.

Following this, the Claimant submitted, in the year 2014, a Personal Income Tax Declaration, having as its basis – in the calculation of capital gains – the realization value of € 210,000, calculating a capital loss of € 1,988.

In 2017, the Claimant was notified, by Official Letter No. ..., dated 7 November 2017, of the alleged existence of inaccuracies concerning his income declaration for the year 2013, with the Tax Authority stating only that: The realization value of the property with identification ..., art. ..., fraction D recorded with the sale value of 210,000.00€ but with tax property value of 278,580.00€. In accordance with No. 2 of Article 44 of the Personal Income Tax Code (CIRS), the tax property value is considered the realization value, as it is higher.

Following this, the Claimant was notified of the said act of assessment of Personal Income Tax No. 2017... and respective assessment of Compensatory Interest No. 2017..., in the total amount of € 14,986.10, and also of the Statement of Account Adjustment No. 2017..., in which an amount to be paid of € 10,651.43 is ascertained, with payment deadline of 3 January 2018.

The Claimant, as referred to above, proceeded to payment of the ascertained amount (€ 10,651.43) on 3 January 2018.

These acts of assessment are based on the understanding of the Tax Authority that, in the calculation of capital gains realized from the sale of the autonomous unit identified above, the Claimant should have considered, as the realization value, the tax property value of the property, because it was superior to the value that appears in the deed and which was, in fact, the contracted value.

The CLAIMANT argues that he should be permitted to demonstrate that the actual selling price of the property does not correspond to the tax property value, that is, that he should be permitted to rebut the presumption provided for in No. 2 of Article 44 of the Personal Income Tax Code, pursuant to Article 73 of the General Tax Law, which provides that "the presumptions established in the norms of tax incidence always admit proof to the contrary".

At the time of the facts, in 2013, it followed from the provision of subsection f) of No. 1 of Article 44 of the Personal Income Tax Code that, for the determination of gains subject to Personal Income Tax, the realization value was the value of the respective consideration.

However, in the case of real rights over immovable property, the law provided, in No. 2 of that legal provision, that, when superior, the values at which the assets would have been considered for purposes of assessment of municipal tax on onerous transmission of property would prevail, or, if there were no occasion for such assessment, those that would be due, if applicable.

Now, pursuant to No. 1 of Article 12 of the Municipal Property Transfer Tax Code (IMT), as drafted on the date of the facts, the Municipal Property Transfer Tax would be levied on the value stated in the deed or contract or on the tax property value of the properties, whichever was greater.

This rule, when it determines the value subject to tax, constitutes a mere presumption regarding the realization value, and thus admits proof to the contrary (cf. Article 73 of the General Tax Law).

That is, in light of everything that has been set out and will be set out, it is correct to conclude that the provision in analysis, insofar as it considers the tax property value as the realization value, when superior to the actual real price, has the nature of a presumption, and is subsumable under the provision of Article 73 of the General Tax Law, and thus is subject to proof to the contrary.

Moreover, with the reform of Personal Income Tax effected in 2014, the legislature began to provide, expressly, for the rebuttal of said presumption of consideration of the tax property value as the realization value, when superior to the value of the consideration.

providing, in No. 5 of Article 44 of the Personal Income Tax Code, now in force, that the provision in No. 2 does not apply if proof is made that the realization value was lower than that provided therein.

The Claimant invokes various doctrine and case law, among which the Judge Counselor Gonçalo de Almeida Ribeiro, in his dissenting opinion expressed in the Decision of the Constitutional Court No. 211/2017, of 2 May 2017, emphasizing the systematic interpretation of Article 73 of the General Tax Law and its sufficiency, as well as of ordinary law to allow proof to the contrary in this scope;

The broader understanding of the rule of incidence has been adopted by case law in the application of Article 73 of the General Tax Law, with the Claimant highlighting, in particular, the Decisions of the Supreme Administrative Court in cases No. 0609/10, of 17 November 2010, No. 0997/10, of 2 March 2011, No. 0988/10, of 23 March 2011; and No. 0441/11, of 29 February 2012; affirming in that first Decision: "The rule established in Article 73 of the General Tax Law applies not only to the rules of tax incidence in the strict sense, but also in relation to other norms that establish fictions that influence the determination of taxable matter (either directly, through fictitious values for taxable matter, or indirectly, by fictitiously fixing the values of income relevant for its determination), since the adverb 'always' used there conveys the idea of a fundamental principle of the entire tax legal system, a corollary of the principle of equality in the distribution of public burdens, based on the principle of taxpaying capacity".

In this sense, regarding the rebuttal of said presumption, prior to the Personal Income Tax Reform, there was also case law that ruled on the matter, in particular the Central Administrative Court South, in the Decision rendered in Case No. 6052/12, where it was decided that "The realization value for purposes of taxation of capital gains in Personal Income Tax, when the declared sale price of urban property is lower than the tax property value, the latter found by the rules of the Municipal Property Transfer Tax, is this the value considered as the realization value" (…) In this case, if such realization value was lower than that thus declared, it is the taxpayer upon whom rests the burden of such assertion and proof, in order to rebut the presumption resulting from that declaration".

For the Claimant, it seems clear that there is no artificial and illegitimate exploitation of a tax advantage, but merely a consequence of the abnormal conditions in which the parties concluded the contract, and, on the part of the sellers, there was sales pressure as a result of their divorce proceedings, as referred to above.

Thus, the Claimant, in the present Request for Arbitral Decision, presents documents and calls witnesses intended to effect proof of the facts alleged and previously stated,

And argues that it follows from the public deed of purchase and sale and, as well, from all other documentation attached in the context of the present Request for Arbitral Decision, such as the document evidencing the channeling of the amount resulting from the sale, that there are no doubts that the effective sale price of the property, that is, the consideration received by the co-owners, was € 210,000, as the Claimant correctly considered in his Model 3 Income Declaration for the year 2013 — and not € 278,580, which corresponds to the tax property value.

The Claimant concludes by requesting that the petition be judged well-founded, annulling the acts of assessment of Personal Income Tax and compensatory interest identified above regarding the year 2013 with the necessary legal consequences, in particular the reimbursement of the amount of tax paid plus compensatory interest.

Pursuant to the notification, for this purpose, the AT submitted its Response, accompanied by the Administrative File, arguing for the complete lack of merit of the Claimant's petition, contending in its favor, among other things, the specific understanding set out in the Arbitral Decision rendered in case 685/2014-T of this CAAD. It argues, fundamentally, the following:

The Respondent considers that the model 3 income declaration, referring to the year 2013, presented now, does not suffer from any error or discrepancy.

It concludes that there is no doubt that the effective sale price of the property, that is, the consideration received by the co-owners, was € 210,000.00, as the Claimant correctly considered in his model 3 income declaration for the year 2013, and not € 278,580.00, which corresponds to the tax property value.

The issue to be decided in the present proceedings consists in determining whether the realization value for purposes of capital gains in Personal Income Tax should be the tax property value resulting from the assessment in Municipal Property Transfer Tax, when superior to the value declared as the transmission price of the urban property, which the taxpayer came to declare in model 3 declaration.

The Claimant presented the model 3 income declaration for the year 2013, having declared in Annex G, as the acquisition value, the value of € 66,090.00 and as the realization value € 105,000.00, given that only half belonged to him, as appears on page 5 of the administrative file.

Following discrepancies verified by the services, corrections were made to his model 3 Personal Income Tax declaration for 2013, and consequently, the assessment No. 2017... and the statement of account adjustment No. 2017..., dated 2017-11-27, notified by official letter No. ... of SF Lisbon..., which he now challenges, prevailed, since the tax property value of the property, on the date of sale, was € 278,580.00.

The legislature, aware that there could be situations of inadequacy between the market value and the tax property value of properties as a result of changes that were occurring in the real estate market, established, in 2009, a legal regime that allows the taxpayer to prove that the tax value is distorted in relation to the normal market value.

Such mechanism is contained in the wording of Article 76, No. 4 of the Municipal Property Transfer Tax Code, introduced by Law No. 64-A/2008, of 31/12, which provides that, when the tax property value fixed in accordance with the provisions of Articles 38 et seq. of the Municipal Property Transfer Tax Code is distorted in relation to the normal market value, a new assessment shall be carried out in accordance with the rules in No. 2 of Article 46 or by application of the comparative method of market values.

In this way, there exists in the legal system an instrument at the disposal of the Claimant that would have allowed him to demonstrate what the market value of the property is and that the tax property value is, in relation to the former, distorted, which prevents the consideration of the proposed modernizing interpretation.

Following the understanding of Menezes Leitão, constitutional compliance of the proposed measures was guaranteed through the possibility of intervention by the transferor in the fixation of the tax property value by requesting the second assessment, as well as by the fact that the transfer of property at an amount lower than the fixed tax property value constitutes a situation of presumed tax fraud or a waiver of actual taxpaying capacity.

For the Respondent, to admit the disregard of the tax property value would constitute a revocatory or abrogating interpretation, which is only admissible when the legislative formula is so poorly inspired that it does not even manage to allude with minimum clarity to the hypotheses it intends to cover and, taken literally, covers others that are definitely not in the spirit of the law (cf., BAPTISTA MACHADO, op. cit., p. 186.), which is certainly not the case.

As to the principle of taxpaying capacity and taxation based on actual income, the Respondent appeals to the doctrinal contribution of Professor Menezes Leitão in "The Conformity with the Constitution of the Portuguese Republic of the New Formula for the Determination of Tax Property Value", published in the Revista Fisco, Nos. 113/114, which states: "to allow taxation at a value lower than the tax property value of properties, merely because the transferor decided to fix a price lower than this, makes little sense. In fact, first, it seems highly improbable that someone would decide to transfer a property at an amount lower to its objectively fixed tax property value, and if they did, such would be an absolutely extraordinary circumstance, which seems justified that it may not be relevant for purposes of taxable income. In fact, beyond the strong presumption of tax fraud that exists in the declaration of a transfer price below the tax property value of the property, the truth is that the taxpayer does not cease to evidence possession of the taxpaying capacity corresponding to the objectively fixed tax property value when effecting the transfer of the property, merely effecting a waiver of obtaining the income corresponding thereto, which may function to their detriment, but there is no reason why it should equally function to the detriment of the Tax Administration."

But even if the Respondent deemed the Claimant's petition well-founded and allowed him to demonstrate that the effective value of the sale does not correspond to the tax property value, it would still be said that to achieve such proof it is not enough to invoke the execution of the public deed of purchase and sale.

To rebut the legal presumption, the taxpayer would have to effect proof to the contrary, pursuant to Article 73 of the General Tax Law, namely would have to prove the existence of abnormal market conditions that justified his option to realize the transaction at values lower than the minimum sale value, that is, the tax property value of the property.

It is incumbent upon the taxpayer to rebut the presumption through proof to the contrary, which requires the demonstration of the abnormal or extraordinary circumstances that led to the realization of the transaction of the property at an amount lower than its objectively fixed tax property value, pursuant to No. 2 of Article 350 of the Civil Code and Article 73 of the General Tax Law.

Being that the proof presented by the Claimant - which consists merely of copies of emails and deed - does not fulfill this purpose;

As follows from the provision of Article 371 of the Civil Code regarding the probative force of authentic documents, the deeds of purchase and sale of the properties in question do not prove that what was declared by their respective parties corresponds to the truth.

Equally, there is no cheque or bank transfer that demonstrates, unequivocally, that such was the amount effectively received as consideration for the onerous transfer of said property, even if such receipt were to be made by other means.

As for the copies of the emails exchanged, there is a manifest absence of probative force before what is alleged.

To prove that the sale value of the property was in fact € 210,000.00, substantially lower than its Tax Property Value, the Claimant limits himself to submitting a copy of the deed thereof, without real estate intermediation, whose acquisition was effected by the mother of the co-owner thereof, and emails that reference amounts to be divided, documents these, of great lack of probative force before what he comes to invoke in the present arbitral proceedings.

For the Respondent Entity, in situations such as the present, No. 2 of Article 44 of the Personal Income Tax Code only bears the sense of considering the tax property value for the calculation of the capital gain, sustaining that there is no violation whatsoever of the principle of taxpaying capacity, in particular because "beyond the strong presumption of tax fraud that exists in the declaration of a transfer price below the tax property value of the property, the truth is that the taxpayer does not cease to evidence possession of the taxpaying capacity corresponding to the objectively fixed tax property value when effecting the transfer of the property, merely effecting a waiver of obtaining the income corresponding thereto".

The Respondent concludes by the complete lack of merit of the present request for arbitral decision, with the legal consequences thereof.

On 11 September, the hearing of the Tribunal took place pursuant to Article 18 of the RJAT for the purpose of examination of a witness presented by the Claimant, with the Tribunal not admitting the testimony of a party that had also been proposed by the Claimant.

The witness was heard in the capacity of lawyer who handled the Claimant's divorce, with the same delivering the power of attorney that was handed to him by the Claimant at the time of the facts and which was attached to the proceedings, in which he gives him authority to sell the property at the price of € 210,000.00.

The witness stated that he would have acted as legal representative of the Claimant in the realization of a transaction of free will, the purchase and sale of the property in question, located in a noble area of Lisbon, at a price lower than market value, having testified as to the difficulty of the relationship between the Claimant and his ex-wife, co-owner of the property, which would have made the sale thereof difficult.

On 21 September 2018, the Claimant submitted written arguments in which he reiterates the arguments already presented in the initial petition, concluding to the effect that:

the Claimant succeeded, by resorting to the deed of purchase and sale and by means of a witness that he brought to the proceedings, in effecting proof that the price that appears in the public deed was the one actually practiced;

there is no artificial and illegitimate exploitation of a tax advantage, but merely a consequence of the abnormal conditions in which the parties concluded the contract, and, on the part of the sellers, there was sales pressure as a result of his divorce proceedings, as referred to above.

On 26 September 2018, the Respondent submitted its arguments considering the following:

In light of the documents submitted by the Claimant and in light of the statements of the witness called by him, no proof was made that rebuts the legal presumption.

Not corresponding the contract value to the tax property value, it is incumbent upon the taxpayer to prove the existence of abnormal market conditions or extraordinary circumstances that led to the realization of the sale of the property at an amount lower than its objectively fixed tax property value.

The Claimant, whether through the documents submitted or through the testimonial proof presented, did not prove the existence of such circumstances.

II – PURGING OF DEFECTS

The Tribunal is competent.

The parties have legal personality and capacity and benefit from procedural legitimacy, pursuant to Articles 4 and 10, No. 2, of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March, as well as No. 5 of Articles 22 of the General Tax Law, 70, No. 1, and 99 of the Tax Procedural Code.

The AT proceeded with the designation of its Representatives in the proceedings and the Claimant submitted a power of attorney, the Parties thus being duly represented.

The proceedings do not suffer from any nullities.

No preliminary or subsequent issues, prejudicial or exceptional in nature, that would prevent the examination of the merits of the case were raised, the conditions being thus met for a final decision to be rendered.

III. MERITS

III.1. MATTERS OF FACT

1st SECTION – FACTS PROVEN

With respect to the factual matters relevant to the decision in the case, the following facts are considered proven:

The now Claimant was a co-owner, with B..., of the autonomous unit designated by ..., in the ... of the property located at Rua ..., No.... and ..., in the parish of ..., municipality of Lisbon, described in the Land Registry Office of Lisbon under registration ... of said parish of ... and currently registered in the urban property register under article ... (former article ...), whose tax property value was, on the date of 4 April 2013, of € 278,580, as shown in the public deed of sale of said autonomous unit (cf. Doc. No. 3).

On the referred date of 4 April 2013, the Claimant and the co-owner of the said urban property concluded, by means of a public deed, a contract of purchase and sale of the property, in their capacity as sellers, having transferred ownership of the property at the fixed price of € 210,000 (cf. Doc. No. 3).

The said sale occurred following the divorce between the said ex-co-owners of the property (testimonial evidence).

Of the contracted price, € 126,869.59 were channeled to payment of a debt of the ex-co-owners to Bank C..., S.A., resulting from a mortgage credit constituted to finance the acquisition of the autonomous unit in question, with the remainder divided between the CLAIMANT and B..., in negotiations occurring within the context of the divorce proceedings (cf. Doc. No. 4).

The Claimant submitted, in the year 2014, a Personal Income Tax Declaration, considering as the realization value € 210,000, calculating a capital loss of € 1,988,

which was reflected in the amount of Personal Income Tax to be paid that year for 2013, and which was € 4,329.91 — an amount that was, moreover, already paid by him (cf. Doc. No. 5).

The Claimant was notified, by Official Letter No. ..., dated 7 November 2017, of the alleged existence of inaccuracies concerning his income declaration for the year 2013, with the Tax Authority stating only that: The realization value of the property with identification ..., art. ..., fraction D recorded with the sale value of 210,000.00€ but with tax property value of 278,580.00€. In accordance with No. 2 of Article 44 of the Personal Income Tax Code (CIRS), the tax property value is considered the realization value, as it is higher. (cf. Doc. No. 6).

By this logic, the Claimant was notified of the said act of assessment of Personal Income Tax No. 2017... and respective assessment of Compensatory Interest No. 2017..., in the total amount of € 14,986.10, and also of the Statement of Account Adjustment No. 2017..., in which an amount to be paid of € 10,651.43 is ascertained, with payment deadline of 3 January 2018 (cf. Docs. No. 1 and 2).

2nd SECTION – FACTS NOT PROVEN

There are no other facts relevant to the examination of the merits of the case that were not proven.

3rd SECTION – RATIONALE FOR THE MATTERS OF FACT PROVEN AND NOT PROVEN

At issue is the interpretation of Article 45 of the Personal Income Tax Code regarding the acquisition values and realization values to be considered for purposes of calculation of the capital gain obtained from the transfer of the above-mentioned property.

The question in debate in the present proceedings concerns the determination of the realization value to be considered in the calculation of the capital gain realized from the transmission, on 5 September 2013, of a property owned by the Claimant.

For the Respondent Entity, No. 2 of Article 44 of the Personal Income Tax Code requires that the tax property value be considered as the realization value when that value is superior to that of the respective consideration, whereas the Claimant argues that he should be permitted to demonstrate that the actual selling price of the property was lower than the tax property value of the property.

At the time of the facts, in 2013, it followed from the provision of Article 44 of the Personal Income Tax Code that for the determination of gains subject to Personal Income Tax, the realization value was the value of the respective consideration.

However, in accordance with No. 2 of the same legal provision, in the case of real rights over immovable property, the law provided that, when superior, the values at which the assets would have been considered for purposes of assessment of municipal tax on onerous transmission of property would prevail, or, if there were no occasion for such assessment, those that would be due, if applicable. That is, under this rule, the tax property value of the transmitted property prevailed over the value declared in the public deed of purchase and sale.

With the Personal Income Tax reform, approved by Law No. 82-E/2014, of 31 December, the possibility was expressly introduced of disregarding the tax property value through proof of the actual transmission price, with No. 5 of Article 44 of the Personal Income Tax Code providing that "The provision of No. 2 does not apply if proof is made that the realization value was lower than that provided therein. Being determined, in turn, in No. 6 of the same legal provision that "The proof referred to in the preceding number must be effected in accordance with the procedure provided for in Article 139 of the Corporate Income Tax Code, with the necessary adaptations".

It is important to determine whether, prior to the introduction of the current Nos. 5 and 6 to Article 44 of the Personal Income Tax Code, the disregard of the tax property value as the transmission value through proof of the actual price of transmission would have been admissible, despite this possibility not being enshrined in law.

In the construction of the concept of taxable income, the Personal Income Tax Code adopts the accrual-income conception, according to which the taxable base of this tax encompasses every increase in the taxpayer's purchasing power, including therein capital gains (viewed as patrimonial increases that do not derive from a productive activity, but that have some economic significance and are susceptible to control by the Tax Authority, among which are included real property capital gains) and, in a general manner, irregular income and fortuitous gains, which should also be considered manifestations of taxpaying capacity.

Capital gain should be defined, in principle, by the difference between the realization value and the acquisition value, especially when the tax-generating event is described as an onerous transfer, and is thus subject to the principle of realization (cf. Article 44 of the Personal Income Tax Code).

In these terms, taxation independent of the actual income increase and consequent increase in taxpaying capacity must be limited and subject to the principle of legality, which follows from the very basic idea of the Personal Income Tax Code.

In the sense advocated that No. 2 of Article 44 of the Personal Income Tax Code should be interpreted as a mere presumption, susceptible to proof to the contrary, both doctrine and case law have already pronounced.

Regarding the provision in analysis, among other authors, Xavier de Basto expressly states that "(…) it should be interpreted in the sense that it merely establishes a presumption regarding the realization value, which yields to proof to the contrary, that is, proof that the realization value was actually lower than the value taken as the basis for the assessment of the Municipal Property Transfer Tax", because, otherwise, "we would end up taxing not the actual income obtained from the transmission, but a normal income (cf. Xavier de Bastos - Personal Income Tax - Real Incidence and Determination of Net Income, Coimbra, 2007, p. 446).

Adding that given that the norm "is included in the system of the Personal Income Tax Code, in the chapter of determination of taxable matter and not in the chapter of incidence, it is materially a rule of incidence, because it determines after all, ultimately, the value that must be submitted to tax. We would thus say that in this No. 4, what was established was a presumption regarding the realization value, which can be set aside by proof to the contrary" (cf. Xavier de Bastos - Personal Income Tax - Real Incidence and Determination of Net Income, Coimbra, 2007, p. 447).

But more, this interpretation, according to which No. 2 of Article 44 of the Personal Income Tax Code establishes a presumption, susceptible to proof to the contrary, is also imposed by the existence of parallel regimes under Personal Income Tax and Corporate Income Tax.

In fact, the introduction of the current Nos. 5 and 6 of Article 44 of the Personal Income Tax Code result from the recognition that the possibility of disregarding the tax property value through proof of the actual transmission price should also be expressly enshrined with reference to No. 2 of the same legal provision.

As to this problem, Xavier de Bastos already warned that a differentiated regime for real property capital gains in comparison to business and professional income is not to be accepted, as "There would then be, for equal income, differentiated treatments, without any valid justification, to the detriment of the principle of equality. One must therefore, in our view, consider that No. 4 of Article 44 contains a presumption, which can be set aside, proving that the realization value was actually lower than the "tax value" for purposes of a patrimonial tax such as the Municipal Property Transfer Tax". (cf. Xavier de Bastos - Personal Income Tax - Real Incidence and Determination of Net Income, Coimbra, 2007, p. 448).

Recently, the Constitutional Court (cf. Decision No. 211/2017, rendered on 02/05/2017, in Case No. 285/15, of the 3rd section) ruled that this rule contained in No. 2 of Article 44 of the Personal Income Tax Code was unconstitutional, "in the interpretation according to which, for purposes of the determination of gains subject to Personal Income Tax relating to capital gains arising from the onerous transfer of immovable property, an 'irrebuttable presumption' is established therein, by violation of the principle of taxpaying capacity inherent in Articles 103, No. 1, and 13 of the Constitution of the Portuguese Republic", with the Court understanding that, whether the technique used by the legislature is understood "as a true and proper presumption (the law presumes the value of the income obtained by reference to the tax property value, as a standard value or normal or presumed income) or as a fiction (the law feigns that with the sale an income equal to the tax property value of the property was obtained) in the determination of the gain obtained with the onerous transaction of the property for purposes of calculation of capital gains – thus admitting the distinction between the two concepts – it is certain that the result of its application does not differ as to the calculation of taxable matter, in that, in one case as in the other, the tax property value of the property prevails in the determination of the tax base (with proof to the contrary not being admitted, even in the hypothesis that it is a presumed income), thus disregarding the income actually obtained by the taxpayer when lower than that resulting from the reference value established."

And given that presumptions in tax incidence matters can be explicit, revealed by the use of the expression "presume-se" or similar, but "can also be implicit in rules of incidence, particularly objective incidence", when certain values are considered as constituting taxable matter, it appears to us that, in the case, since the taxable income of Personal Income Tax "is what results from the aggregation of the various categories earned in each year" (Article 22 of the Personal Income Tax Code), here too it is to be concluded that "… the norms that fictitiously determine values for purposes of determining the measure of income contain implicit presumptions, since it cannot be accepted, in light of the constitutional principle of equality, that one wishes to tax income that does not exist; for this reason, the fictions of taxable matter values were introduced in law on the presumption that the values determined by way of presumption correspond to reality.

It is this interpretation that is in harmony, on the one hand, with the principle stated in Article 11, No. 3, of the General Tax Law that, in cases of doubt about the interpretation of tax norms, "attention should be paid to the economic substance of the tax facts" and, on the other hand, with the principle of equality in the distribution of public burdens, which requires that the taxation of the generality of taxpayers, whenever possible, be based on the economic reality underlying the tax facts and does not accord with the existence of special cases of taxation based on fictitious values in situations in which the actual value of the tax facts is known or ascertainable: as taxing income that does not exist would result in those who did not have it being taxed as those who did, and this offends the principle of equality, it is 'always' possible to demonstrate the reality of income, rebutting what is presumed in the relevant norms for the fixation of values for its calculation.

The Tribunal therefore concludes that the Claimant has the possibility of demonstrating that the value at which he transferred the property in analysis is actually lower than its respective tax property value.

Notwithstanding, even if the Claimant's petition is accepted and he is permitted to demonstrate that the effective sale value does not correspond to the tax property value, it would still be said that to achieve such proof it is not enough to invoke the execution of the public deed of purchase and sale.

To rebut the legal presumption, the taxpayer would have to effect proof to the contrary, pursuant to Article 73 of the General Tax Law, namely would have to prove the existence of abnormal market conditions that justified his option to realize the transaction at values lower than the minimum sale value, that is, the tax property value of the property.

It is incumbent upon the taxpayer to rebut the presumption through proof to the contrary, which requires, among other things, the demonstration of the abnormal or extraordinary circumstances that led to the realization of the transaction of the property at an amount lower than its objectively fixed tax property value, pursuant to No. 2 of Article 350 of the Civil Code and Article 73 of the General Tax Law.

Being that the proof presented by the Claimant - which consists merely of copies of emails and deed and a witness - does not fulfill this purpose;

It follows from the provision of Article 371 of the Civil Code regarding the probative force of authentic documents that the deeds of purchase and sale of the properties in question do not prove that what was declared by their respective parties corresponds to the truth.

According to case law widely diffused (see, by way of illustration, Decision STJ 28247/10.4T2SNT-A-L1.S1 of 15 April 2015), the full probative force of the document – public deed – only extends to what the notary's perceptions encompass – existence of the declaration – but not to the veracity of its content, in the specific case that the seller actually received the stated amount as the price.

This fact may be impugned by any of the parties without need to allege falsity of the document, since it provides full proof regarding the materiality of the attested statements, but not as to the strict sense, sincerity, veracity, or validity of the declarations made by the parties.

Equally, the Claimant did not present a cheque or bank transfer that demonstrates, unequivocally, that such was the amount effectively received as consideration for the onerous transfer of said property, even if such receipt were to be made by other means.

As for the copies of the emails exchanged, there is a manifest absence of probative force before what is alleged.

To prove that the sale value of the property was in fact € 210,000.00, substantially lower than its Tax Property Value, the Claimant limits himself to submitting a copy of the deed thereof, without real estate intermediation, whose acquisition was effected by the mother of the co-owner thereof, and emails that reference amounts to be divided, documents these, of great lack of probative force before what he comes to invoke in the present arbitral proceedings.

The witness presented presents merely a power of attorney, which is contained in the public deed of purchase and sale of the property, and thus the same does not constitute sufficient proof to rebut the legal presumption that the sale of the property below the market price was due to abnormal or extraordinary circumstances, pursuant to No. 2 of Article 350 of the Civil Code and Article 73 of the General Tax Law.

From the statements of the witness, only was it proven that he acted as legal representative of the Claimant in the realization of a transaction, the purchase and sale of the property in question, located in a noble area of Lisbon, at a price lower than market value, without it being proven what causes justify a discrepancy between the market value of the property and the sale value thereof.

The Claimant did not present appraisal reports of the real estate market that would justify said discrepancy.

Even if it were not possible for the Claimant to use the legal mechanism that came to be provided for in the current Article 44 of the Personal Income Tax Code, which came into force on 1/1/2015, he could at least, for absolute conviction of the Tribunal, have opened his banking secrecy to the AT services, in order to demonstrate all the transparency of the transaction realized, as well as attach the respective contracts of promise of purchase and sale – which neither one nor the other he did.

Thus, the Tribunal cannot but accept as reliable the tax property values corrected by the AT Services, by not accepting the proof made with unequivocal and absolutely sufficient evidence, on which ground it is concluded that the tax assessment acts put in question by the Claimant were legally effected, as has been demonstrated.

As for the compensatory interest, in light of all that precedes, it is proven that there was actual delay in the payment of the tax due, in the part corresponding to the difference in Personal Income Tax calculated in the assessment based on the declaration presented by the Claimant in 2014, in the amount of € 4,329.91 and that calculated in the corrective assessment with No. 2017..., from which results a balance ascertained to be paid of € 10,651.43, in view of the provision of Article 35, No. 1 of the General Tax Law, and thus they are due with respect to this difference.

IV – DECISION

On these grounds, this Arbitral Tribunal hereby awards:

  1. To judge the petition for declaration of illegality of the act of assessment of Personal Income Tax No. 2017... and the assessment of Compensatory Interest No. 2017... with reference to the year 2013 to be without merit;

  2. To judge the petition for annulment of the compensatory interest subject to assessment and exigible as a consequence of the corrective assessment previously referred to to be without merit;

  3. To condemn the Claimant in payment of the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at € 14,986.10, pursuant to Article 97-A, No. 1, a), of the Tax Procedural Code, applicable by virtue of subsections a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at € 918.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, pursuant to Articles 12, No. 2, and 22, No. 4, both of the RJAT.

Notify.

Lisbon, 21 December 2018

The Singular Arbitral Tribunal,

(Ana Teixeira de Sousa)

The drafting of the present decision is governed by the old orthography.

Frequently Asked Questions

Automatically Created

What happens when the sale price of a property is lower than its tax patrimonial value (VPT) for IRS capital gains purposes in Portugal?
When the declared sale price of a property is lower than its tax patrimonial value (VPT), the Portuguese Tax Authority applies Article 44(2) of the Personal Income Tax Code (CIRS), which presumes the realization value to be the higher VPT for capital gains calculation purposes. This means taxpayers are taxed on the official property valuation rather than the actual transaction price. However, under Article 73 of the General Tax Law (LGT), this constitutes a rebuttable presumption, allowing taxpayers to provide evidence that the actual sale price was genuinely lower. Since the 2014 CIRS reform, Article 44(5) explicitly permits this rebuttal, though case law suggests the right existed previously through LGT Article 73.
Can taxpayers challenge the presumption that the realization value equals the VPT under Portuguese IRS rules on real estate capital gains?
Yes, taxpayers can challenge the presumption that realization value equals the VPT under Portuguese IRS rules. Article 73 of the General Tax Law establishes that all tax presumptions admit proof to the contrary. For real estate capital gains, taxpayers must provide documentary evidence demonstrating the actual transaction price, such as notarial deeds, bank transfer records, mortgage settlement documents, and contextual factors justifying below-market sales (divorce proceedings, financial distress, family transactions). The 2014 legislative reform made this explicit in Article 44(5) CIRS, but legal scholars and case law, including Supreme Administrative Court decisions from 2010-2011, confirm this right existed under the general principle of Article 73 LGT even before the specific amendment.
How does the Portuguese Tax Authority (AT) calculate capital gains when the declared sale price is below the property's assessed tax value?
The Portuguese Tax Authority calculates capital gains by comparing the realization value against the acquisition value. When the declared sale price falls below the property's VPT, AT automatically applies Article 44(2) CIRS, substituting the higher VPT as the realization value. This creates a deemed capital gain even when the actual transaction resulted in a loss. The AT cross-references the sale price in the deed against the VPT registered for Municipal Property Transfer Tax (IMT) purposes under Article 12 of the IMT Code. The authority then issues an assessment for the additional tax due on the inflated gain, plus compensatory interest. Taxpayers receive notification of detected inaccuracies and may contest through administrative appeals or CAAD arbitration.
What legal remedies are available through CAAD arbitration to dispute IRS capital gains assessments on real estate transactions?
Taxpayers disputing IRS capital gains assessments on real estate can request CAAD arbitration under the Legal Regime for Administrative Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). This provides an alternative to judicial courts with faster resolution. Remedies include: (1) challenging the AT's application of the VPT presumption by presenting evidence of actual lower sale prices; (2) invoking Article 73 LGT to rebut the presumption in Article 44(2) CIRS; (3) citing Constitutional Court opinions and Supreme Administrative Court jurisprudence supporting taxpayer rights to prove actual values; (4) presenting contextual evidence (divorce settlements, debt obligations, market conditions) justifying below-VPT sales; and (5) claiming retroactive application of the explicit rebuttal provision introduced in the 2014 CIRS reform under principles of taxpayer protection.
How are mortgage payments and acquisition debts treated when calculating real estate capital gains under Portuguese IRS law?
Mortgage payments and acquisition debts affect real estate capital gains calculations by reducing the net proceeds received by the seller, though they don't directly alter the realization value. Under Portuguese IRS law, the capital gain equals the realization value minus the acquisition value (adjusted for inflation and improvements). When property sale proceeds are channeled directly to discharge mortgage debt, as occurred in this case where €126,869.59 of the €210,000 sale price paid Bank C mortgage obligations, this demonstrates the economic reality of the transaction but doesn't change the computational formula. The actual cash received by sellers may be substantially less than the nominal sale price, supporting arguments that the transaction price genuinely reflected market conditions rather than artificial undervaluation. These circumstances constitute relevant evidence when rebutting the VPT presumption.