Process: 6/2017-T

Date: July 21, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 6/2017-T) addresses whether capital gains from the 2015 sale of a property are exempt from IRS under the transitional regime of Article 5(1) of Decree-Law 442-A/88. The taxpayers claimed they acquired the property through a promissory purchase agreement executed on 01-06-1987, with keys delivered and possession taken at that time, placing the acquisition before the IRS Code entered into force in 1989. However, the formal deed of purchase was only executed on 04-09-1990, after the IRS Code's implementation. The Tax Authority assessed IRS on the capital gains, arguing that the legal acquisition date was 1990 when the public deed was formalized and transfer taxes paid, not 1987. The taxpayers invoked Article 10(3)(a) of the IRS Code, which presumes gains are obtained upon delivery or possession of property in promise contracts, arguing this principle should apply symmetrically to acquisitions under the substance-over-form doctrine. They also mistakenly filed Annex G (for taxable capital gains) instead of Annex G1 (for exempt gains under transitional regimes) in their 2015 IRS return. After their administrative complaint was dismissed, they sought arbitration at CAAD to annul the assessment and recover taxes paid plus 4% compensatory interest. The case turns on the critical determination of the acquisition date: if 1987, the transitional exemption applies; if 1990, the property falls under the IRS regime and capital gains are taxable. The Tax Authority contested the evidence of actual possession in 1987, noting that utility contracts alone don't prove possession and that the provisional registration of the promise contract had expired by 1990, requiring a new definitive registration upon the deed's execution.

Full Decision

ARBITRAL DECISION

1. Report

On 03-01-2017, the Applicants A…, taxpayer no.…, and spouse, B…, taxpayer no.…, both residing at Rua …, …, …, …-… …, hereinafter referred to as Applicants, submitted to the Administrative Arbitration Centre (CAAD) a request for the constitution of an arbitral tribunal with a view to annulling the IRS assessment no. 2016 … for the year 2015.

Position of the Applicants:

The Applicants seek a review of the legality of the 2015 IRS assessment that subjected to IRS a capital gain realized by the Applicants with the disposal of the autonomous fraction AAAAAL, which corresponds to the … floor … of the building located at Rua …, …, in …

This fraction would allegedly have been acquired by the Applicants on 01-06-1987, through a promise to purchase and sell contract, and was disposed of on 06-11-2015.

In the view of the Applicants, this transaction would be exempt from IRS, in accordance with the provisions of article 5º no. 1 of Decree-Law no. 442-A/88 of 30 November, given that this transaction was not subject to the then capital gains tax.

Not agreeing with the assessment that is the subject matter of these proceedings, the Applicants filed a gracious complaint on 26-10-2016. This gracious complaint was subject to a dismissal decision, which decision was notified to the Claimants on 28-11-2016.

The Applicants allege that, on 23-04-1987, the female Applicant, in the capacity of promissory purchaser, entered into a promise to purchase and sell contract for the autonomous fraction AAAAAL, above better identified, with the keys to the property being delivered on that date to the promissory purchaser, who proceeded to inhabit the said property. In the same month, the female Applicant delivered to the promissory seller the amount of two million escudos.

The Applicants refer that they entered into contracts for the supply of water, electricity and gas, and that the promise to purchase and sell contract was registered, on 01-06-1987, with the Land Registry Office of ….

The female Applicant submitted, on 14-05-1987, to the then Tax Office of …, a request to ascertain whether the property in question was still missing from the property register.

The Applicants allege that the property was only registered in the property register in 1989, and that the deed of purchase and sale of the said property took place on 04-09-1990.

The disposal of the property in question occurred on 06-11-2015, as the Applicants allege.

The Applicants refer that they submitted the model 3 income declaration for IRS for the year 2015, and filled in by mistake, annex G, instead of annex G1, given that the capital gain resulting from the sale of the fraction would be exempt from IRS, in the view of the Applicants, under article 5º no. 1 of Decree-Law no. 442-A/88 of 30 November.

The Applicants refer that, on 04-09-2016, they submitted a new income declaration, with annex G, with the amendments raised by the Tax and Customs Authority (AT), namely amending field 401, placing therein the values of actual acquisition and realization, and not values with the currency devaluation coefficient, as the Applicants had done in the previous declaration.

The Applicants allege that the assessment was issued on the basis that the deed of purchase and sale of the property was executed in 1990, that is, after the entry into force of the IRS Code.

The Applicants make reference to article 10º no. 3 paragraph a) of the IRS Code, which provides that in cases of promise to purchase and sell or exchange, it is presumed that the gain is obtained as soon as the delivery or possession of the goods or rights that are the subject matter of the contract is verified. Thus, in the view of the Applicants, also for acquisition purposes it should be considered that the goods are transmitted to the acquirer at the moment of their delivery or taking into possession. And they make reference to the judgment of the Court of Appeal of Coimbra of 17-01-2006, from case no. 2774/05.

The Applicants allege that tax law considers as the relevant moment of acquisition of real property the moment of delivery or possession thereof, which is materialized with the delivery of keys and the use of the property, this in accordance with the principle of substance over form.

Finally, the Applicants refer that they proceeded to payment of the said assessment, and request the condemnation of AT to the return of the tax unduly paid, plus compensatory interest at the rate of 4%, in terms of article 43º of the General Tax Law (LGT).

Position of the Respondent:

The AT, in its response, defending the legality of the assessment that is the subject matter of these proceedings, begins by making reference to article 875º of the Civil Code which, at the time of the facts, provided that "the contract of purchase and sale of immovable property is only valid if executed by public deed". It further refers to article 80º of the Notariat Code which said that "the following shall be executed by public deed (…) the contract of promise of alienation or encumbrance of immovable things subject to registration".

The AT further alleges that the promise contract entered into by the Applicants was subject to registration, of a provisional nature, given that the transfer of ownership of the property is dependent on the execution of a public deed. And in 1990, at the date of the deed of purchase and sale, the said registration had already expired, given that more than six months had already elapsed since the provisional registration.

In fact, for the AT, the transfer of ownership to the Applicants only occurred in 1990, with the execution of the deed of purchase and sale and with the payment of the respective transfer taxes.

The Respondent refers that, as regards the water supply, electricity and gas contracts submitted by the Applicants, these do not constitute proof of the existence of the alleged possession, given that with the promise to purchase and sell contract it is possible to request from the entities the supply of the said services.

In fact, the Respondent understands that there is no evidence that the Applicants, after the execution of the promise contract of the property in question, made use of it, in the sight of all and without opposition from anyone.

The Respondent further states that there is no evidence in the proceedings, fiscally relevant, of payment or request for payment as referred to in article 2º of the SISA Code and of the Tax on Succession and Donations.

Finally, the Respondent understands that compensatory interest is not due, given that there was no error on the part of the services.

A single arbitrator, Suzana Fernandes da Costa, was designated on 27-02-2017.

In accordance with the provisions of article 11º no. 1, paragraph c) of the RJAT, the singular arbitral tribunal was constituted on 17-03-2017.

On 08-05-2017, the Applicants sent a request stating that it would be pointless to hold the meeting provided for in article 18º of the RJAT, and that they would not submit arguments.

A ruling was issued on 10-05-2017, dispensing with the holding of the meeting provided for in article 18º of the RJAT and the submission of arguments, given that there was no need for the production of additional evidence, in view of the fact that the procedural principles of procedural economy and prohibition of the performance of pointless acts applied in the arbitral proceedings. In the same ruling, 14-07-2017 was set as the date for the rendering of the arbitral decision, and the Applicants were warned to proceed with the payment of the subsequent arbitral fee and to prove it to the CAAD.

On 22-06-2017, the Applicants submitted to the proceedings proof of payment of the subsequent arbitral fee.

On 14-07-2017, a ruling was issued extending to 21-07-2017 the date for the rendering of the arbitral decision, taking into account the complexity of the matter.

The parties have legal personality and capacity and are legitimate (articles 4º and 10º no. 1 and 2 of the RJAT and article 1º of Ordinance no. 112-A/2011 of 22 March).

The present request for arbitral pronouncement was submitted in a timely manner, in terms of article 10º no. 1 paragraph a) of Decree-Law no. 10/2011 of 20 January.

The proceedings do not suffer from any nullities and no preliminary questions were raised.

3. Factual Matter

3.1. Proven Facts:

Having analyzed the documentary evidence produced, the following facts are considered proven and relevant for the decision of the case:

1. The female Applicant, while single, on 23-04-1987, in the capacity of promissory purchaser, entered into a promise to purchase contract of the autonomous fraction AAAAAL to which corresponds the … floor … of the building located at Rua …, …, in …, described in card no. …/… of the Land Registry Office of …, as per document 7 attached with the arbitral request.

2. The Applicants entered into contracts for the supply of water, electricity and gas, as per documents 8 attached with the arbitral request.

3. On 04-09-1990, the Applicants executed a public deed of purchase and sale, in the capacity of purchasers, of the property referred to in the previous point, as per document 14 attached with the arbitral request.

4. The payment of SISA corresponding to the transfer was made on 27-08-1990 and 30-08-1990, as per document 14 attached with the arbitral request.

5. On 06-11-2015, the Applicants disposed of the said property, as per document 3 attached to the arbitral request.

6. The Applicants submitted their income declaration for the year 2015, having filled in, by mistake, annex G, instead of annex G1, as per document 15 attached with the arbitral request.

7. The Applicants were notified of the IRS assessment no. 2016 … for the year 2015, with the amount to pay of 6,249.78 €, as per document 1 attached with the arbitral request.

8. The Applicants filed a gracious complaint of the IRS assessment above referred to, which was subject to a dismissal decision notified to the Applicants on 28-11-2016, as per document 2 attached with the arbitral request.

9. The Applicants proceeded to payment of the IRS assessment in question in these proceedings, as per proof of payment attached to the arbitral request as document 17.

No other facts with relevance to the decision of the case were proven.

3.2. Justification of Proven Factual Matter:

With regard to the proven facts, the arbitrator's conviction was based on the documentary evidence attached to the proceedings and on facts admitted by agreement.

3.3. Facts Not Considered Proven:

Facts that would allow concluding for the existence of delivery of the property to the promissory purchaser at the time of the execution of the promise to purchase and sell contract are not considered proven.

4. Legal Matter:

4.1. Subject-Matter and Scope of the Present Proceedings

The question to be decided in these proceedings is whether the acquisition of the property in question occurred on the date of execution of the promise contract (1987), and therefore, before the entry into force of the IRS Code, or whether it occurred on the date of execution of the deed of purchase and sale (1990), that is, after the entry into force of the IRS Code.

Should the acquisition have occurred before the entry into force of the IRS Code, the capital gain resulting from the sale is exempt from IRS. On the other hand, should the acquisition have occurred after the entry into force of the IRS Code, the capital gain resulting from the disposal of the property is subject to IRS taxation.

4.2. The Request for Declaration of Illegality and Annulment of the Disputed Assessment

For the Applicants, the capital gain obtained in 2015, with the disposal of the property, is exempt from taxation at the level of IRS, given that the acquisition of the said property occurred in 1987, with delivery, that is, before the entry into force of the IRS Code.

For the Respondent, the capital gain obtained is subject to IRS, given that the acquisition took place only in 1990, with the deed of purchase and sale, that is, after the entry into force of the IRS Code.

Let us now look at the wording of the law.

The IRS Code was created by Decree-Law no. 442-A/88 of 30 November.

And it entered into force on 01-01-1989, in accordance with article 2º of the said Decree-Law no. 442-A/88 of 30 November.

And article 5º provided the following:

"Article 5º - Transitional Regime of Category G

1 - Gains that were not subject to the capital gains tax, created by the code approved by Decree-Law no. 46373, of 9 June 1965, are only subject to IRS if the acquisition of the goods or rights from whose transfer they derive shall have taken place after the entry into force of this Code.

2 - It is the responsibility of the taxpayer to prove that the goods or values were acquired at a date prior to the entry into force of this Code, and such proof shall be made, as regards securities, by means of registration as legally provided, deposit in a financial institution or other adequate documentary proof and by any means of proof legally accepted in the remaining cases."

Thus, it is now important to verify whether the acquisition of the property took place on the date of the promise to purchase and sell contract, or on the date of the deed of purchase and sale of the property.

Article 875º of the Civil Code provided, at the time of the facts, that "the contract of purchase and sale of immovable property is only valid if executed by public deed".

However, the transfer for tax purposes occurs at the moment of execution of the promise to purchase and sell contract provided that delivery is verified, since upon verification of delivery, transfer tax (SISA) is due, now IMT.

On the other hand, in the legal interpretation of the transitional regime provided for in the said article 5º of Decree-Law no. 442-A/88, one cannot disregard that the moment which, in this case, the current rule of incidence presumes to be that in which the increase in income is verified that gives rise to taxation, is also, precisely, that of delivery or possession: in accordance with paragraph a) of no. 1 of article 10º of the IRS Code, capital gains are considered to be gains obtained with the onerous disposal of real rights over immovable property, and paragraph a) of no. 3 of the same article 10º provides that "In cases of promise to purchase and sell or exchange, it is presumed that the gain is obtained as soon as the delivery or possession of the goods or rights that are the subject matter of the contract is verified".

That is, "[T]he law provides that the verification of delivery of the thing or possession of the goods or rights that are the subject matter of the contract shall be equated to disposal, with such delivery or possession determining the moment of exigibility of the tax" (José Guilherme Xavier Basto, IRS: Real Incidence and Determination of Net Income, Coimbra Editora, 2007, p. 428).

The judgment of the Supreme Administrative Court of 12-04-2012 from case no. 01061/11, states that: "Now, it is fully recognized by doctrine and case law, that the concept of transfer for the purposes of tax law is different from that which flows from the legal system inherent to Civil Law, and it is certain that, for tax purposes, such concept is more comprehensive than that which is rooted in private law. In fact, it is settled in doctrine that, in general terms, in terms of transfer tax, the figure of transfer includes not only civil transfer, but also economic transfer or de facto transfer, even if devoid of legal formalities, or marred by nullities. Consequently, the incidence of the former municipal transfer tax, or the current tax on transfers (IMT), does not stop before the lack or legal insufficiency of the facts required by private law for the validity of acts and contracts, accounting being taken of the economic reality at issue. Such diversity of concepts, between private law and tax law, reaches its apex in the establishment of certain acts as transferring ownership which, as such, are not considered by civil law. It is the paradigmatic case of the promise to purchase and sell contract accompanied by delivery of the good, which, not being an act transferring ownership under civil law, already is under tax law, as is indeed achieved by the provision in the second part of the first paragraph of article two of the CIMSISS".

Thus, where there is a promise to purchase and sell contract with delivery of the property, the transfer for tax purposes occurs on that date, and not on the date of execution of the deed of purchase and sale.

Analyzing the contract to purchase and sell executed on 23-04-1987 and attached to the proceedings, the same does not refer to the existence of delivery or possession of the property by the Applicants, promissory purchasers.

And in terms of article 5º no. 2 of Decree-Law no. 442-A/88 of 30 November, it is the taxpayer who has the burden of proving acquisition of goods at a date prior to the entry into force of the IRS Code.

As to the proof of delivery of the property to the Applicants, these allege that:

a) The promissory sellers delivered to them the keys to the property on the date of execution of the promise to purchase and sell contract;

b) That the Applicants proceeded to inhabit the property;

c) That they entered into contracts for the supply of water, electricity and gas, and they attach the receipts;

d) That the female Applicant paid a deposit and partial payment of two million escudos;

e) That the female Applicant submitted on 14-05-1987, a request to the Tax Office of …, in order to know whether the property was still missing from the property register.

Analyzing this allegation, we must first note that the Applicants allege that they were delivered the keys, but do not present any proof whatsoever of such delivery.

As for the receipts attached relating to contracts for the supply of water, electricity and gas, they do not serve as proof, since it is possible to execute these contracts merely with a promise contract.

Regarding the payment of the deposit, this fact is also not indicative of delivery of the property.

In relation to the request submitted by the female Applicant to the Tax Office of …, on 14-05-1987, attached to the proceedings as document 11, it is declared by her in the request that she is resident at Rua…, … – ..., …. Thus, also with this document, the Applicants do not prove that they proceeded to inhabit the property. Rather, they prove that their address was different.

Thus, we understand as the Respondent does, that is, that the Applicants failed to prove delivery of the property on the date of execution of the promise to purchase and sell contract (1987).

On the other hand, at the time of execution of the promise contract, article 2º of the SISA Code and the Tax on Succession and Donations provided that:

"Transfer tax is levied on transfers, for consideration, of the right of ownership or of parcellary figures of such right, over immovable property.

1. For this purpose, the following are considered transfers of immovable property ownership: (…)

2. Promises to purchase and sell or exchange of immovable property, as soon as delivery to the promissory purchaser or to the promissory exchangers is verified, or when the latter or these are enjoying the goods (…)".

Thus, had there been delivery of the property with the promise contract, transfer tax would have been required to be levied. And as the Respondent refers, there is no evidence in the proceedings, fiscally relevant, that it was paid or that its payment was requested. Rather, it was proven that the transfer tax was paid on 27 and 30 August 1990, as per account of the copy of the deed attached to the proceedings as document 14.

Not having the Applicants succeeded in proving delivery of the property with the execution of the promise contract, it must be considered that the acquisition of the property in question, for tax purposes, only occurred in 1990 with the execution of the deed of purchase and sale.

In fact, the acquisition having occurred in 1990, that is, after the entry into force of the IRS Code, it is not possible to apply to the situation in question the transitional regime provided for in article 5º of Decree-Law no. 442-A/88 of 30 November. Concluding then, that the capital gain obtained is subject to taxation for IRS purposes in the sphere of the Applicants.

In these terms, the learned tribunal understands that the IRS assessment in question in these proceedings does not suffer from any illegality, and should be maintained in the legal order.

4.3. Compensatory Interest

The Applicants refer that they proceeded to payment of the assessment in question in these proceedings, and request reimbursement of the amount paid plus compensatory interest.

The request for declaration of illegality of the assessment that is the subject matter of these proceedings being without merit, the request made by the Applicants for return of the amounts paid and of the respective compensatory interest is rendered moot.

5. Decision

In view of the foregoing, it is determined:

a) to dismiss in its entirety the request formulated by the Applicants, in the present tax arbitral proceedings, as to the illegality of the IRS assessment no. 2016 … for the year 2015, which is the subject matter of the present arbitral request;

b) to dismiss the request for condemnation of the Tax and Customs Authority to reimburse to the Applicant, the amount of the tax unduly paid, plus compensatory interest, given that this request is rendered moot by the lack of merit of the arbitral request referred to in a);

c) to condemn the Applicants to payment of the costs of the proceedings.

6. Value of the Proceedings:

In accordance with the provisions of article 315º, no. 2, of the CPC and 97º-A, no. 1, paragraph a) of the CPPT and 3º, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the action is set at 6,249.78 €.

7. Costs:

In terms of article 22º, no. 4, of the RJAT, and of Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is set at 612.00 €, due by the Applicants.

Notify.

Lisbon, 21 July 2017.

Text prepared by computer, in terms of article 138º, no. 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29º, no. 1, paragraph e) of the Regime of Tax Arbitration, reviewed by me.

The arbitral judge,

Suzana Fernandes da Costa

Frequently Asked Questions

Automatically Created

Are capital gains from the sale of properties acquired before the 1989 IRS Code exempt under the transitional regime of Decree-Law 442-A/88?
Yes, capital gains from properties acquired before the IRS Code entered into force in 1989 are generally exempt under Article 5(1) of Decree-Law 442-A/88, provided the property was not previously subject to capital gains taxation. However, the key issue is establishing the legal acquisition date - if acquired through a promissory purchase agreement before 1989 but the deed was executed after, the Tax Authority may argue the formal deed date controls, making the gain taxable under the IRS regime.
How does the date of a promissory purchase agreement affect the IRS capital gains tax exemption in Portugal?
The date of a promissory purchase agreement can be critical for IRS capital gains exemption. Taxpayers may argue that under Article 10(3)(a) of the IRS Code, which presumes gains are obtained upon delivery or possession in promise contracts, the acquisition date should also be when possession occurs rather than when the formal deed is executed. If the promise date with possession falls before 1989, the transitional exemption under DL 442-A/88 may apply. However, the Tax Authority typically requires proof of actual possession and may insist on the deed date as the legal acquisition moment.
What is the difference between Annex G and Annex G1 for declaring capital gains in the Portuguese IRS return?
Annex G of the Portuguese IRS return (Model 3) is used to declare taxable capital gains that are subject to IRS taxation. Annex G1 is specifically designed for declaring capital gains that are exempt from IRS under transitional regimes, particularly those covered by Article 5 of Decree-Law 442-A/88 for properties acquired before the IRS Code came into force. Filing the wrong annex can trigger an incorrect assessment, though taxpayers can file a replacement declaration to correct the error.
Can a taxpayer challenge an IRS capital gains assessment through CAAD tax arbitration in Portugal?
Yes, taxpayers can challenge IRS capital gains assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration in Portugal. This case demonstrates the procedure: after receiving an assessment, taxpayers must first file an administrative complaint (reclamação graciosa). If the complaint is dismissed, they can then request arbitration at CAAD within the legal deadlines. CAAD arbitration provides an alternative to judicial courts for resolving tax disputes, offering a faster and more specialized forum.
What role does the transitional provision of Article 5 of Decree-Law 442-A/88 play in exempting real estate capital gains from IRS?
Article 5 of Decree-Law 442-A/88 serves as a transitional provision that exempts from IRS taxation capital gains arising from the disposal of assets acquired before the IRS Code entered into force, provided those assets were not subject to the previous capital gains tax regime. For real estate, this means properties genuinely acquired before 1989 benefit from exemption when sold. The provision prevents retroactive taxation and protects taxpayers from being taxed on appreciation that occurred before the IRS system was established. The critical challenge is proving the acquisition date predates 1989.