CAAD 587/2017-T: Deduction of Property Management Expenses Under IRS Article 41 Allowed

ARBITRAL DECISION

REPORT

A..., NIF..., with address at ..., no. ..., ...-... Lisbon (hereinafter, the "Claimant"), came, pursuant to the terms and for the purposes of Articles 2, paragraph 1, subparagraph a) and 10, paragraph 1, subparagraph a) of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (hereinafter, "LRATM"), to request the constitution of an Arbitral Tribunal, with the intervention of a sole arbitrator, wherein the Tax and Customs Authority is the Respondent (hereinafter, "Respondent" or "TA"), with a view to the declaration of partial illegality and consequent annulment of the additional assessment of Personal Income Tax (hereinafter, "PIT") No. 2014..., of 26 June 2014, relating to the tax year 2012, in the amount of €4,005.18, and of the rejection of the hierarchical appeal No. ...2014..., filed following the rejection of the administrative complaint No. ...2014..., relating to the aforementioned assessment.

The Claimant alleges, in summary, that:

• She is a usufructuary of an urban property located on ..., Street, constituted under a regime of vertical division of ownership, registered in the urban property matrix under article U-... of the parish of ... (hereinafter, the "Property").

• In the year 2012, the Claimant received rents from the Property, which was entirely leased, and consequently submitted PIT Form 3, declaring the real estate income obtained.

• On 20 July 2013, PIT assessment No. 2013... was issued, in which an amount payable of €33,208.63 was calculated, which was paid by the Claimant on 28 August 2013.

• Taking into account her personal circumstances, given her age, she entrusted the administration of the building to a specialized company that provided for all operations relating to the management and normal functioning of the property.

• For this purpose, she entered into a service provision contract, on a fee basis, for the amount of €738.00 monthly, having paid, in 2012, a total amount of €8,856.00.

• Subsequently, she was notified by the TA to correct the PIT Form 3 that she had submitted - in which she included the amount referred to in the previous number as maintenance and conservation expenses - on the ground that these expenses would not be eligible under Article 41 of the PIT Code because the administration of the property had been exercised by a third party and not by herself.

• In this context, she submitted physical documents evidencing that she had incurred the aforementioned expenses with the TA.

• The aforementioned documents were not challenged, neither in substance, nor as regards the actual realization of the expense, nor even as to their documentary suitability.

• In any case, she submitted the replacement PIT Form 3 that was required of her, in which she did not include those expenses, which resulted in the PIT assessment, in the amount of €37,213.81, that is, with an additional amount of €4,005.18, where €152.82 is included as compensatory interest.

• Based on the declaration submitted according to the instructions of the Tax Service, the Claimant paid the additional amount of €4,005.18, but filed an administrative complaint disagreeing with the understanding advocated by the Respondent.

• The administrative complaint was rejected on the following ground: "expenses with property management are not maintenance or conservation expenses, as they stem from the manner adopted by the present complainant to manage the property, that of resorting to a service provision practiced by third parties for this purpose, and therefore cannot be considered for the purposes of what is established in Article 41 of the PITC, due to lack of legal support".

• Faced with this decision, she appealed the decision of the Head of the Tax Service Finance Department of Lisbon Tax Service-..., the outcome of which was a rejection decision, but now also because "the hierarchical appeal should not constitute a duplication of the arguments put forward at an earlier time, already known and assessed by the tax administration. Rather it serves to convert, in a substantiated manner, the understandings set out by the services and with which one disagrees, presenting new facts not taken into consideration by the services, either through lack of knowledge or through improper assessment...".

• The reasoning of the decision rejecting the hierarchical appeal is strange when it disregards the principle of mandatory double-degree review provided for in Articles 56 of the General Tax Law (hereinafter, "GTL") and 41 of the Code of Tax Procedure and Process ("CTPP").

• The legal regime of general tax procedures must not be confused, given that no new administrative complaint was filed, but a new request for review expressly enshrined in law – the hierarchical appeal.

• From the interpretation of Articles 56 of the GTL and 41 of the CTPP combined with Article 76 of the CTPP, the possibility of filing a hierarchical appeal from the unfavorable decision taken in administrative complaint proceedings is expressly contemplated.

• The TA is obliged to pronounce itself on the questions presented, whether or not they have the same grounds, and the unfavorable decision on the hierarchical appeal is subject to appeal through the judicial remedy.

• The rejection decision suffers from a defect of violation of law due to improper application of the norms to the facts that occurred and procedures used, which should lead to the annulment of the decision of the hierarchical appeal.

• The rejection decision also suffers from a defect of violation of law due to error in the legal presuppositions when it sanctions the understanding that in determining the taxable matter of Category F that resulted in the assessment, the expenses incurred with the company that carried out the administration of the condominium of the property should not be considered because they are not eligible under Article 41 of the PIT Code.

• For the purpose of calculating the net income of Category F, Article 41, paragraph 1 of the PIT Code considers deductible: (i) maintenance and conservation expenses that are incumbent on the taxpayer, (ii) are borne by him, (iii) and are documentally proven, as well as (iv) the Municipal Property Tax and Stamp Duty that incide on the property.

• In the list of eligible expenses, the legislator only enumerates the aforementioned conditions. It does not mention whether they stem from direct or indirect exercise by the taxpayer of the administration of the property, being satisfied with the fact that they have been borne by the taxpayer, imputable to the leased property and actually realized.

• The legislator determines that eligible expenses are those derived from the costs that the co-owner (in this case the owner) must bear with the administration of the unit in the property constituted under the form of horizontal division of ownership or of the property in a regime of vertical division of ownership.

• Maintenance expenses comprise the management of the property and are those that relate to the day-to-day running of the building, namely expenses with energy, water, maintenance of elevators, cleaning, porters and all current administration expenses.

• In the expenses of administration of the condominium, regardless of whether it is horizontal or vertical division of ownership, with regard to leased properties, their necessity can only be analyzed, so it will be irrelevant whether the administration is exercised by the owner or by someone contracted by him for this purpose.

• The law does not distinguish this, and the TA does not justify – thus incurring in lack of reasoning – the reason for the discrimination depending on whether the administration is carried out by the taxpayer himself or when he entrusts this task to third parties.

• The rejection decision is illegal due to lack of reasoning, because the decision does not allow one to determine what reason leads the Respondent to distinguish the acceptance of costs enumerated in Article 41 of the PIT Code based on the nature of the buildings, and also what reason the beneficiary of the income is obliged to directly exercise the administration of the building himself without being able to be considered as an eligible cost the expense he incurs by entrusting this task to third parties.

• It does not seem that the legislator intended that the holder of rents in properties constituted in vertical division of ownership was obliged to himself administer the property, if this were the case, there would be a flagrant violation of the principle of equality of taxpayers before the law.

• There is an error of law attributable to the TA, and therefore compensatory interest is owed.

For its part, the TA argues that:

• The amounts paid to a company for the management of the property in a regime of full ownership of which the Claimant is a usufructuary do not form part of the maintenance expenses to which Article 41, paragraph 1 of the PIT Code refers.

• As tax law does not define the concept of maintenance and conservation expenses, one must resort to the civil law notion provided in Article 11 of the Urban Leasing Regime relating to conservation works and determining which are incumbent on the landlord.

• Maintenance and conservation expenses consist of all expenses necessary, made with works of ordinary conservation, repair and general cleaning of the property, works imposed by the Public Administration, and, in general, all those intended to maintain the property in the conditions required by the purpose of the contract and existing at the date of its conclusion; works of extraordinary conservation, repair of construction defects of the property or supervenient or even improvement of the property, but always with impact on it and on its ability to generate income.

• The expenses that the Claimant wishes to have deducted do not consist of expenses for maintenance and conservation of the property of which she is a usufructuary, but of a fee paid to a company for property management services.

• The expenses in question were not made to repair, improve or enhance the property in order to maintain or increase the income of the property from rents received.

• The legislator provided in Article 41, paragraph 2 of the PIT Code, but for units of property in a regime of horizontal division of ownership, the possibility of deducting the charges of conservation, use and others that, under civil law, the co-owner must mandatorily bear, are borne by him and are documentally proven. The provision of the norm excludes properties under full ownership.

• Article 1414 of the Civil Code states that the units that a building comprises, in conditions to constitute independent units, may be owned by various different owners under a regime of horizontal division of ownership.

• Horizontal division of ownership has its own composition, nature and legal regime of administration, distinct from a property constituted under full ownership, in which there is a single building, a sole owner, with all the rights that the law confers on him in the administration and management of the property, whether or not leased.

• It is not transposable to the owner of a property under a regime of full ownership, the set of rights of co-owners of a property constituted under horizontal division of ownership, the limitations on their exercise or the form of representation in the administration of common parts, as well as the responsibility of co-owners for charges of conservation and management of those same parts.

• The Civil Code distinguishes the two realities, defining a detailed regime for one and the other. The tax legislator does not provide for the same treatment for owners of properties under full ownership and for co-owners as regards deductible expenses in Category F income of PIT, as provided in Articles 41, paragraphs 1 and 2 of the PIT Code.

• The Claimant's interpretation violates Article 9, paragraph 2 of the Civil Code which provides that the interpreter cannot consider the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

• The interpreter and applicator cannot depart from the general criteria for interpretation of tax law in accordance with Articles 11, paragraph 1 of the GTL and 9 of the Civil Code.

• The TA's actions did not violate the principle of equality given that it treated differently situations that are different.

• There is no lack of reasoning in the order given that the reason for the non-acceptance of the deduction of charges with property management in category F of PIT is shown in a clear, sufficient and fully coherent manner, not requiring, for its intelligibility, to develop the different treatment of Article 41, paragraph 2 of the PIT Code for charges in horizontal division of ownership.

DECISION

MATTER OF FACT

A.1. Facts established as proven

• The Claimant is a usufructuary of the property registered in the urban property matrix under article U-... of the parish of ..., constituted under full ownership.

• The property was entirely leased and the rents were declared in the PIT Form 3 for the tax year 2012, as income of Category F – real estate income.

• The Claimant entered into a service provision contract for property administration, on a fee basis, for the amount of €738.00 monthly, totaling €8,856.00.

• The amount of services was declared in the PIT Form 3 for the year 2012, as a specific deduction for Category F.

• The services contracted by the Claimant relate to the management of the Property, by the company B..., Lda..

• From the income received resulted an amount payable of €33,208.63, as PIT.

• Subsequently, the TA notified the Claimant to correct the PIT Form 3 that she had submitted in which she included that amount as maintenance and conservation expenses.

• Although she did not agree with the TA's decision, the Claimant submitted a replacement PIT Form 3, in which she excluded those expenses, which resulted in the PIT assessment in the amount of €37,213.81, that is, an additional amount of €4,005.18, where €152.82 is included as compensatory interest.

• Based on the declaration submitted, according to the instructions of the Tax Service, the Claimant additionally paid €4,005.18, but filed an administrative complaint.

• From the decision rejecting the administrative complaint, the Claimant filed a hierarchical appeal which was also rejected by order of the Head of the DSIRS Administration Division/Lisbon Tax Service, maintaining the understanding of the challenged decision.

A.2. Facts established as not proven

• With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Reasoning of the matter of fact proven and not proven

• With regard to the matter of fact, the Tribunal does not have to pronounce itself on everything that was alleged by the parties, but rather it has a duty to select the facts that matter for the decision and discriminate between proven and not proven matters (See Article 123, paragraph 2 of the CTPP and Article 607, paragraph 3 of the Code of Civil Procedure (hereinafter, "CCP"), applicable by force of Article 29, paragraph 1, subparagraphs a) and e) of the LRATM).

• Thus, the facts pertinent to the judgment of the case are chosen and delimited according to their legal relevance, which is established in consideration of the various plausible solutions of the legal questions.

• Thus, taking into account the positions assumed by the parties, in light of Article 110, paragraph 7 of the CTPP, the documentary evidence and the Administrative Process attached to the case, the facts enumerated above were considered proven, with relevance to the decision.

OF LAW

B1. Thema decidendum

• The main legal question in the present case concerns the qualification or non-qualification of the amounts paid to a company for the management of property under full ownership as conservation and maintenance expenses within the terms and for the purposes of Article 41, paragraph 1 of the PITC, or the possibility of attributing the aforementioned amounts to conservation charges, use and others which, under civil law, the co-owner must mandatorily bear, for the purposes of paragraph 2 of the aforementioned article.

B2. On the interpretation of Article 41, paragraph 1 of the PIT Code

• We shall begin, then, with the interpretation of Article 41, paragraph 1 of the PIT Code, since the attribution of the aforementioned amounts to this legal provision makes unnecessary the analysis of the possibility of attributing them to Article 41, paragraph 2 of the same Code.

• Now, during the tax year 2012, as was, moreover, alleged by the parties, the wording of Article 41 of the PIT Code (specific deduction for Category F) was as follows:

"1 - From the gross income referred to in Article 8, there are deducted maintenance and conservation expenses incumbent on the taxpayer, borne by him and documentally proven, as well as the municipal property tax that incides on the value of properties or part of properties whose income has been included.

2 - In the case of an autonomous unit of property under a regime of horizontal division of ownership, charges of conservation, use and others which, under civil law, the co-owner must mandatorily bear, are also deducted, borne by him, and documentally proven.

3 - In the case of subletting, the difference between the rent received by the sub-lessor and the rent paid by him does not benefit from any deduction." (bold and underlining ours).

• It is important, therefore, to confirm the possibility for the Claimant to deduct the amounts paid to a third party to ensure operations related to the management and normal functioning of the property, as maintenance or conservation expenses within the terms of Article 41, paragraph 1 of the PIT Code.

• The possibility of exercising the right to deduction, for the purposes of Article 41, paragraph 1 of the PIT Code, in the present case – and in the opinion of this Tribunal – depends on the cumulative verification of four requirements: (i) that the expenses can be attributed to the concept of maintenance or conservation; (ii) that they are incumbent on the taxpayer; (iii) that they are actually borne by the taxpayer; and (iv) that they are documentally proven.

• With regard to the requirements for it to be possible to apply the specific deduction for Category F (Real Estate Income), the Arbitral Tribunal constituted with the CAAD has already pronounced itself in similar terms in case No. 338/2016-T, when it stated that "[t]he cited legal provision defines, without, however, typifying, the expenses and charges – considered essential for obtaining income, making their deductibility dependent on the following legal presuppositions:

• Being configured as maintenance and conservation expenses;

• Being incumbent on the taxpayer;

• Being actually borne and documentally proven." (Award of the CAAD rendered in case No. 338/2016-T, of 10/03/2017, available at https://caad.org.pt/tributario/decisoes/).

• Now, regarding requirements (iii) and (iv) above, the verification thereof, having been invoked by the Claimant, was not challenged by the TA, so they are considered to be verified, and it is not necessary to make additional remarks in this respect.

• Regarding requirement (i), i.e., whether they are maintenance or conservation expenses, as the TA correctly points out and is, moreover, confirmed by the aforementioned Award, the law does not exactly define what is covered by the aforementioned concepts.

• In any case, these have been developed by case law and legal doctrine.

• Thus, first and foremost, it is important to note that case law, recognizing the lack of a definition of maintenance and conservation expenses, has been defending recourse to the civil law notions contained in the Urban Leasing Regime.

• In this sense, see the Award of the Supreme Administrative Court, rendered in case No. 088/16, of 06/07/2016, in which it was decided that maintenance and conservation expenses can be "as previously defined in the Urban Leasing Regime, Article 11, expenses made with works of ordinary conservation – repair and general cleaning of the property, works imposed by the Public Administration, and, in general, those intended to maintain the property in the conditions required by the purpose of the contract and existing at the date of its conclusion; works of extraordinary conservation – repair of construction defects of the property or supervenient; or even improvement of the property, but always with impact on the property and on its ability to generate income." (bold and underlining ours).

• Now, we agree with state case law in the sense that, in the absence of a concept of conservation works in the PIT Code, we can resort to the concept as it results from civil legislation.

• As results from the aforementioned case law, "conservation works" as defined in the Urban Leasing Regime should be considered as conservation or maintenance costs (depending on the cases), for the purposes of Article 41, paragraph 1 of the PIT Code.

• It is necessary, however, to assess whether, in addition to costs with conservation works, there are other charges that can be attributed to the concept of maintenance or conservation expenses. The answer, according to this Tribunal, cannot fail to be affirmative.

• The possibility of deducting other charges, in addition to conservation works, results, as we will demonstrate: (i) from the literal element of Article 41, paragraph 1 of the PIT Code; and (ii) from the function of specific deductions within the scope of the PIT Code.

• Indeed, the terminology "expenses" provided in Article 41, paragraph 1 of the PIT Code is broader than "works" – as resulted from the now repealed Article 11 of Decree-Law No. 321-B/90 of 15-10-1990 and Article 1074 of the Civil Code – although "works" is understood broadly as encompassing, for example, general cleaning of the property. On the other hand, Article 41, paragraph 1 of the PIT Code provides, in addition to "conservation" expenses, the deductibility of "maintenance" expenses, which also points to a broader scope of deductibility (i.e., conservation and maintenance point to a broader reality than ordinary and extraordinary conservation works).

• Moreover, specific deductions – namely those of Category F – have the function of determining the net income of each category of income so that taxation respects the principle of contributory capacity.

• Thus, in summary, if in densifying the concept of "conservation works" we can resort to the Urban Leasing Regime/Civil Code, it is important not to forget that the terminology used by the tax legislator is broader, encompassing "works" but also other expenditures ("expenses") of maintenance and/or conservation.

• In other words, the concepts used in Article 41, paragraph 1 of the PIT Code, in the wording in force at the date of the facts, are not completely overlapping with civil law concepts.

• It will not, in any case, be surprising that the concepts of "maintenance and conservation expenses" provided for in Article 41 of the PIT Code do not necessarily have a perfect equivalent in civil law.

• Indeed, (i) on the one hand, the concepts of "real estate income" resulting from the PIT Code, and "rents" resulting from civil law, are also not coincident, so it also seems coherent that the maintenance and conservation expenses provided for in Category F are not equal to the "works" provided for in the context of leasing contracts provided by civil law; and (ii) on the other hand, as mentioned, specific deductions serve their own purpose in the PIT Code, that of ensuring taxation in accordance with contributory capacity, so these concepts, in the context of the PIT Code, should not be interpreted restrictively.

• Observe the following:

• The income that can be classified under Article 8 of the PIT Code, relating to real estate income, is not limited to rents resulting from a leasing contract, i.e., the PIT Code adopts a concept of real estate income that encompasses contractual types/sources of generation that go well beyond the leasing contract.

• The same is to say that the concept of "rent," for tax purposes, is broad and not necessarily coincident with the civil concept.

• In this sense, Rui Duarte Morais argues that "[t]he tax law, in paragraph 2 of Article 8, adopts a broad concept of rent, for obvious reasons to prevent forms of tax evasion, namely the conclusion of other transactions of equivalent economic effect typified in law. Thus, rent is everything that is owed to the owner for the ceding of the use of the property, even when accompanied by the provision of some services (provided that these are not encompassed in the exercise of a business activity) (...)". (Rui Duarte Morais, On Personal Income Tax, Coimbra: Almedina, 2006, p. 97) (bold and underlining ours).

• André Salgado Matos also argues that "[t]he PITC calls rents real estate income, but the expression is ambiguous. In civil and commercial law, rent is the typical consideration of the leasing contract. Now from reading paragraph 2 of this article, which contains a typification of rents for tax purposes, it results that the PITC did not limit itself to the taxation of rents in the strict sense in the category F heading, having not even mentioned the word leasing. It is, once again, a concern to reach income as an expression of material contributory capacity, regardless of the qualifications, legal or conventional, legally correct, erroneous or even fraudulent of their legal titles." (André Salgado Matos, Personal Income Tax Code (PIT) annotated, Coimbra: Higher Management Institute, 1999, p. 155).

• Thus, there was, on the part of the legislator, a concern to adopt a broad taxation base, as a way to better reflect contributory capacity.

• For the purposes of taxation under PIT, the legislator adopted an income-accretion conception that "expands the basis of incidence to all increases in purchasing power" and through which it seeks to "take into account all factors to be considered in achieving taxation fundamentally in accordance with contributory capacity" (Rui Duarte Morais, On Personal Income Tax, Coimbra: Almedina, 2006, pp. 30 and 31).

• José Casalta Nabais argues that "(…) the principle of contributory capacity implies, for income tax, the so-called net income principle (Nettoprinzip), according to which only the amount of net income constitutes (true) income for the payment of taxes, that is, that from each category of income be deducted the specific expenses for its obtaining. This means that, in principle, all expenditures necessary for the production or obtaining of a given income (Erwerbraufwendungen), as a negative expression of contributory capacity, should be excluded from that income, an exclusion that, naturally, no longer applies to personal expenses or expenses of the private sphere not related to the lucrative activity, the consideration of which, if to be made in connection with income tax (such as, in particular, those intended to satisfy the minimum existence and family maintenance), does not result from the net income principle (at least in its strict or objective sense)." (José Casalta Nabais, The Fundamental Duty to Pay Taxes, Coimbra: Almedina, 2009, p. 521) (bold and underlining ours).

• Now, as José Guilherme Xavier de Basto states "(…) economically it only makes sense to tax net income, that is, patrimonial increases to which the necessary charges to produce them and to keep intact the productive source have been deducted. (…). Thus, constitute costs to be deducted from the value of rents, from the outset, maintenance and conservation expenses of property. The law uses here a broad definition and does not establish any limitations, regarding the nature of maintenance expenses, such as, expenses for lighting of vestibules and stairs, operation of elevators, etc. They will be, on the other hand, conservation expenses of the most varied nature, intended to conserve the property, to allow it to last and maintain its ability to produce income. The only requirement that the law makes is that the expenses, of maintenance and conservation, are actually borne by the taxpayer, that is, by whoever receives the rent, and are documentally proven." (bold and underlining ours). (José Guilherme Xavier de Basto, PIT – Real incidence and determination of net income, Coimbra: Coimbra Publisher, 2007, p. 350).

• In summary, a broad taxation base must correspond, symmetrically, to a broad conception of specific deductions (i.e., a broad conception of conservation and maintenance expenses), so that it is possible to determine the net income of the taxpayer.

• In the arbitral decision rendered in case No. 435/2014-T, of 10/11/2014, it was held that "[i]ndeed, according to the aforementioned constitutional principle, in the present case, there must be a correspondence between the rents and the contributory capacity of the taxpayer, for which to be achieved, the charges and expenses necessary to obtain a patrimonial increase must be taken into account in its calculation." (bold and underlining ours).

• Following the same line of guidance, the arbitral decision rendered in case No. 338/2016-T, of 10/03/2017, states that "[i]n the taxation of personal income, the legislator of the PIT expressly adopted the principle of taxation of net income increase. Thus, within the scope of the various categories of income covered by the incidence of the PIT, the taxation of income earned by taxpayers resident in Portuguese territory incides, as a rule, on the net income earned in each year by their respective holders. The net income of each category is the value resulting from the deduction from its gross of the expenses considered essential to its obtaining".

• It seems, in fact, that the "maintenance" and "conservation" referred to in Article 41 find a meaning closer to the productive capacity of a property, the ability to generate taxable income in Category F, which goes beyond mere "physical" maintenance and conservation of a given property, carried out through works.

• The most relevant will be, thus, in the opinion of this Tribunal, and retrieving the Award of the Supreme Administrative Court, rendered in case No. 088/16, of 06/07/2016, that the expenses have "impact on the property and on its ability to generate income."

• In the present case, the Claimant understood that, given her age and personal circumstances, she would not have the capacity to ensure the productive source or, at least, to ensure the productive source at the levels desired, if she had to maintain and conserve the property directly.

• Now, in this respect, it will always be important to emphasize that it is for the taxpayer to determine which expenditures are necessary to obtain the income.

• We defend, in fact, the adoption of a broad concept of "maintenance and conservation expenses," as has also been proposed by legal doctrine and case law.

• We recall here, in addition to what is stated above, the words of Manuel Faustino when he argues that "(…) it does not seem legitimate to interpret restrictively the concept of maintenance expenses, namely as relating exclusively or predominantly to charges related to civil construction works or equivalent, as all of these, as we have seen, fall within the concept of conservation expenses, accommodating in our view, all those charges which, being properly documented, have a direct and immediate connection with the property as an economic reality susceptible to producing income, or from which it cannot, without serious violation of the principle of justice of taxation by violation of the principle of contributory capacity, be dissociated.

This includes, for example, expenses of a legal nature (e.g., legal advice, legal representation in eviction actions or others related to leased properties, court expenses), expenses of real estate mediation or advertising in placing properties in the leasing market, expenses of property administration carried out by third parties on behalf of and for the account of the income beneficiary, expenses of valuations (e.g., of the condition of the property as a whole or as to integral parts – plumbing, electrical installations, gas, air conditioning), expenses of an administrative nature, namely those relating to municipal licensing for the execution of works, fire insurance and others that cover risks inherent to the property, etc." (Manuel Faustino, PIT: The category F (Real estate income) revisited, in Review of Public Finances and Tax Law, Year I, No. 3, Coimbra: Almedina, October/2008, p. 102) (bold and underlining ours).

• Also in the Arbitral Award rendered in case No. 435/2014-T, already cited above, it seems a broad notion of "maintenance expenses" has been followed which is not limited only to "works" of conservation (to which case No. 157/2017-T also adhered), where it was argued that those relate "(…) to the day to day of the building, such as, by way of example, energy, water, maintenance of elevators, cleaning, porters, and all current administration expenses. As for conservation expenses, these are those that relate to the state and functioning of the building itself, and which are not included in the concept of maintenance expenses, such as repair works, general ones, periodic ones, and including those that maintain or increase the value of the building, and add new added values, such as swimming pools, gymnasiums, elevators, among others, and in particular those that confer a level of habitability identical to that existing at the date of the conclusion of the leasing contract." (Award of the CAAD rendered in case No. 435/2014-T, of 10/11/2014) (bold and underlining added).

• Thus, without prejudice to concrete data not having been brought to the case on what is included in the "administration of the building" or in "all operations related to the management and normal functioning of the property," as the Claimant describes, or "management of property under full ownership," to use the expression of the Respondent, the functions contracted by the Claimant can, at least, be attributed to "administration of the property" or "current administration" which, according to legal doctrine and case law, are included in the spectrum of expenses deductible under Article 41, paragraph 1 of the PIT Code.

• Once again, the costs necessary to obtain income must be deducted for the purpose of determining the net income on which the tax must be applied.

• The necessity of a cost depends on a judgment that belongs to the taxpayer and not to the Tax Administration.

• In the present case, it being necessary to carry out tasks of management of a property, in order to ensure its conservation and maintenance, it does not seem that Article 41, paragraph 1 of the PIT Code requires that these be carried out directly by the taxpayer. Just as the law does not require that a given work be executed by the taxpayer, the latter being able, under the law, to deduct not only the costs of materials, but the costs of personnel necessary for the execution of the work, under the law, other actions tending to conservation or maintenance may also be executed by third parties provided that they are incumbent on the taxpayer and borne by him.

• We defend, thus, that expenses for hiring an entity that substitutes the taxpayer in defining the expenses necessary for maintenance or maximization of the productive source and in directly coordinating the execution of the necessary interventions, or in other words, that ensures the administration of the building should be considered maintenance expenses.

• It is emphasized, in any case, that expenses with management of the property/administration of the building should not be confused with expenses of management or administration of assets, insofar as the activity first listed relates to the acts necessary for maintenance and conservation of a given property as a productive source and the second, broader activity, implies an activity of maximizing the available income from different productive sources, which may not even be (or may not be solely) generators of Category F income.

• According to the description of services provided, both by the Claimant and by the Respondent, the expenses in question are, indeed, expenses of administration of the building/property, and not expenses of management or administration of assets.

• Regarding the second requirement (ii), i.e., that the expense be incumbent on the taxpayer, it begins by noting, as Rui Duarte Morais states, that "[t]he giving of property for lease requires that the landlord bear, by force of law and/or contract, certain costs, namely those relating to conservation and maintenance expenses of the leased property." (Rui Duarte Morais, On Personal Income Tax, Coimbra: Almedina, 2006, p. 98) (bold and underlining ours).

• Thus, the obligation to bear the cost can stem from law or from a contract.

• In the present case, the fact that it was the Claimant who consistently and continuously bore the expenses of administration of the building points to a contractual obligation to bear the aforementioned costs.

• An obligation that, moreover, was not challenged in the present case.

LACK OF REASONING

• The Claimant considers that the decision of the administrative complaint and the hierarchical appeal incur the defects of lack of reasoning.

• However, the merit of the defects of violation of law prejudices the finding of defects of form and procedures, as results from the order of finding of defects provided in Article 124, paragraph 2 of the CTPP, subsidiarily applicable by force of the provisions of Article 29, paragraph 1, subparagraph a) of the LRATM.

• As results from Award No. 91/2012-T of this Arbitration Center, "the establishment of an order of finding of defects is only justified by the possible merit of the defects of knowledge prioritized making unnecessary the finding of the remainder, as, if it were always necessary to find if all defects would be irrelevant the order of their finding".

• For the foregoing, proceeding the defect of violation of law, the finding of the defect of lack of reasoning is prejudiced.

COMPENSATORY INTEREST

• According to the provisions of Article 24, subparagraph b) of the LRATM, the arbitral decision on the merit of the pretension to which no appeal or judicial challenge is available binds the TA from the end of the deadline provided for appeal or challenge. In this sense, the TA must restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose.

• Now, this interpretation is consistent with Article 100 of the GTL by force of Article 29, paragraph 1, subparagraph a) of the LRATM which determines: "the tax administration is obliged, in case of total or partial merit of complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation which is the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision".

• Although Article 2, paragraph 1 of the LRATM makes reference only to "declaration of illegality" of taxation acts, it should be understood that the competence of arbitral tribunals also encompasses condemnatory decisions.

• The process of judicial challenge, although it is essentially a process of annulment of tax acts, admits the condemnation of the TA in the payment of compensatory interest, as results from Article 43, paragraph 1, of the GTL in which "compensatory interest is owed when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount superior to that legally owed" and from Article 61, paragraph 4 of the CTPP that "if the decision that recognized the right to compensatory interest is judicial, the deadline for payment is counted from the beginning of the deadline for its spontaneous execution".

• The recognition of the right to compensatory interest in arbitral decisions stems directly from Article 24, paragraph 5 of the LRATM from which it results that "payment of interest is owed, regardless of its nature, in terms provided in general tax law and in the Code of Tax Procedure and Process".

• In the case sub judice, with the annulment of the taxation act, there is place for reimbursement of the tax paid, by application of Articles 24, paragraph 1, subparagraph b) of the LRATM and 100 of the GTL, in order to "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been carried out".

• Furthermore, Article 43, paragraphs 1 and 2 of the GTL establishes that "compensatory interest is owed when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount superior to that legally owed".

• In the case at hand, the TA carried out the challenged assessment, by its own initiative, so the defects that affect it are attributable to it.

• In summary, the Claimant is entitled to compensatory interest, at the legal default rate, counted from 1 August 2014, calculated on the sum of €4,005.18, until complete reimbursement, in terms of Articles 43, paragraphs 1 and 4, and 35, paragraph 10, of the GTL, 61, paragraphs 2, 3, 4 and 5 of the CTPP, and Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April which sets at 4% the rate of legal interest.

DECISION

In view of the foregoing, this Arbitral Tribunal decides to uphold the arbitral claim filed and, consequently:

• To annul the act of assessment of PIT No. 2014..., of 26 June 2014, relating to the tax year 2012, in the amount of €4,005.18;

• To condemn the Respondent to pay compensatory interest owed from the date of payment of the tax now annulled, until complete reimbursement of the amount paid;

• To condemn the Respondent for the costs of the process, fixing the amount of €612.00, to be borne by the Respondent.

VALUE OF THE PROCESS

The value of the process is fixed at €4,005.18, in terms of Article 97-A, paragraph 1, subparagraph a), of the CTPP, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29 of the LRATM and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Processes.

F. COSTS

The amount of the arbitration fee is fixed at €612.00 in terms of Table I of the Regulation of Costs in Tax Arbitration Processes, to be paid by the Respondent, in terms of Articles 12, paragraph 2, and 22, paragraph 4, both of the LRATM, and Article 4, paragraph 4, of the aforementioned Regulation.

Notify.

Lisbon, 21 November 2018

The Arbitrator

(Leonardo Marques dos Santos)