Process: 615/2015-T

Date: March 17, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 615/2015-T) addresses a critical issue in Portuguese capital gains taxation: which Tax Property Value (VPT) should be used when calculating mais-valias on inherited real estate sold shortly after acquisition. The claimant inherited property from her deceased husband in August 2011 with a registered VPT of €5,856.38 under pre-CIMI rules. She sold the property in November 2011 for €220,000. The Tax Authority assessed capital gains using the low historical VPT of €5,856.38 as the acquisition value, resulting in a tax liability of €31,887.16. The claimant challenged this calculation, arguing that the proper acquisition value should be €99,550—the VPT determined when the property was revalued under CIMI rules in December 2012. The legal dispute centers on interpreting Article 45(1)(a) of the IRS Code, which states that for gratuitous acquisitions, the acquisition value is that considered for Stamp Duty purposes. The Tax Authority contends that pursuant to Articles 5(p) and 26 of the Stamp Duty Code, the relevant VPT is that registered at the date of death (succession opening), regardless of subsequent revaluations. The claimant argues this creates an artificial and excessive capital gain that doesn't reflect economic reality, noting the Tax Authority had already accepted this interpretation in a similar case involving her daughter. This case has significant implications for heirs who sell inherited property during the CIMI transition period, potentially affecting thousands of taxpayers who faced similar situations between 2011-2013 when properties were being revalued under the new municipal property tax framework.

Full Decision

ARBITRAL DECISION

I – REPORT

1 - A… CF[1]…, with tax domicile at Rua…, nº … – 2º Esqº, …-… - AVEIRO, filed on 25/09/2015 a request for constitution of an Arbitral Court with a view to examining the illegality of the capital gains calculation determined for the claimant in the Personal Income Tax[2] (IRS) assessment for the year 2011 and compensatory interest as per collection document note 2015… in the amount of € 31 887,16, pursuant to the provisions of subparagraph a) of no. 1 of article 2, of no. 1 of article 3 and of subparagraph a) of no. 1 of article 10, all of Decree-Law 10/2011 of 20 January (RJAT)[3], with the Tax Authority[4] (AT) being cited as defendant.

2 - The request for constitution of the Arbitral Court was filed without exercing the option to designate an arbitrator, and was accepted by His Excellency the President of CAAD[5] and automatically notified to the AT on 28/09/2015.

3 - Pursuant to the provisions of no. 1 of article 6 of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within applicable legal time limits, Arlindo José Francisco was appointed as arbitrator, who communicated to the Deontological Council and to the Administrative Arbitration Centre his acceptance of the assignment within regularly applicable time limits.

4 - The Court was constituted on 09/12/2015 in accordance with the provisions contained in subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012 of 31 December and, on 10/12/2015, the Order referred to in article 17, no. 1 of the RJAT was issued.

5 – The claimant considers that the calculation of the capital gain determined in the context of Personal Income Tax for the year 2011 is vitiated by illegality, invoking, in summary, the following:

5.1 – The capital gain concerned the real property registered in the urban land register of the parish of … under article …-F, which came into her possession by the death of her husband B…, which occurred on 05/08/2011, who at that time had the Tax Property Value[6] (VPT) registered in the respective register of € 5 856,38 and was sold on 09/11/2011 for € 220 000,00

5.2 – The VPT registered in the land register at the date of death had been determined on the basis of the Code of Real Estate Contribution and Tax on Agricultural Industry and the Code of Municipal Contribution

5.3 – Only on 31/12/2012 was the real property evaluated in accordance with the Municipal Property Tax Code[7] (CIMI) and the VPT of € 99 550,00 was fixed, therefore the capital gains calculation is incorrect as it used the VPT of € 5 856,38 and not the VPT of € 99 550,00, thereby contradicting the provisions of article 45, no. 1 of the Personal Income Tax Code[8] (CIRS).

5.4 – Since the Personal Income Tax assessment here challenged was paid by the claimant, it should be annulled with the addition of legal compensatory interest, further noting that the AT has already acknowledged the error in an identical procedure concerning her daughter.

6 – For its part, the AT, in the response filed pursuant to article 17, no. 1 of the RJAT, considers that the claimant is not correct, stating, in summary, the following:

6.1 – According to article 45 of the CIRS, subparagraph a) no. 1, the value to be considered for acquisition, in the case of acquisition for no consideration is the value that was considered for Stamp Duty[9] purposes

6.2 – In accordance with the provisions contained in subparagraph p) of article 5 and article 26 of the Stamp Duty Tax Code[10] (CIS), the VPT to be considered for purposes of Stamp Duty assessment is that registered in the land register at the date of death (opening of succession article 2031 of the Civil Code[11]).

6.3 – It states that the claimant, although agreeing that the VPT registered in the land register at the date of death was € 5 856,38, claims without legal support that such value cannot be considered because it was not determined in accordance with the CIMI.

6.4 – That if the tribunal should take a different view and consider that the VPT to be considered in the acquisition is that of € 99 550,00, determined in an evaluation carried out for the first transfer occurring after the entry into force of the CIMI, it should be determined that there is a partial annulment of the assessment and not its total annulment, as the claimant claims.

II – CONSOLIDATION

The Court was regularly constituted and has jurisdiction ratione materiae, in accordance with article 2 of the RJAT.

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

On 05/02/2016, the tribunal issued the following order: "Having examined the case file, it is verified that witness evidence was offered by the claimant, with the defendant requesting its waiver on the grounds that only questions of law are at issue. In this regard, there is no need to hold the hearing referred to in article 18 of the RJAT or for there to be oral arguments.

Therefore, if the Parties make no objection within 10 days, in accordance with the principles of autonomy of the Arbitral Court in conducting proceedings, celerity, simplification and informality of proceedings (articles 19, no. 2, and 29, no. 2, of the RJAT), the production of the witness evidence offered, the holding of the hearing provided for in article 18, and oral arguments are dispensed with, and the proceedings move forward to final decision.

The date of 17-03-2016 is set for the issuance of the arbitral decision. By that date, the claimant must furnish proof of payment of the subsequent arbitration fee with CAAD".

After the time limit granted expired, the parties made no statements and, the proceedings not being subject to any nullities, we consider the conditions met for an award to be issued.

III – REASONING

1 – Issues to be decided in these proceedings

1.1 Whether in the calculation of the capital gain the VPT of acquisition to be considered shall be that registered in the land register at the date of death, or the VPT from the evaluation of the real property carried out by the AT, given that we are in the presence of the first transfer of the real property in the validity of the CIMI.

1.2 In case of tax annulment, since its payment occurred, whether or not there shall be payment of compensatory interest in favour of the claimant.

2 – Factual Matters

The relevant factual matters proven on the basis of the elements attached to the case file are as follows:

a) The claimant acquired by inheritance as a consequence of the death, which occurred on five August two thousand and eleven, of her husband B…, the fraction F of the real property registered in the urban land register of the parish of … under article….

b) At the date of death the VPT registered in the land register respecting said fraction was € 5 856,38, which had been determined under the rules prior to the publication of the CIMI.

c) On nine November two thousand and eleven the said fraction was sold for € 220 000,00, as per public deed of purchase and sale of the same date executed in the Cascais Notary Office by Notary C….

d) The said fraction was evaluated by the AT, in accordance with the CIMI, on 31 December 2012, the evaluation resulting in a VPT of € 99 550,00.

e) The acquisition value of the fraction in question, for purposes of determining the capital gain, which is being challenged here, was that registered in the land register at the date of death (€ 5 856,38)

f) The claimant filed on 21 May 2012 the Personal Income Tax return form 3 respecting 2011, in which in annex G she declared the sale of the fraction, stating the sale proceeds value of € 165 000,00, the acquisition value of € 2 493,99 and expenses in the amount of 6 515,00, corresponding to her hereditary share, further stating her intention to reinvest the sale proceeds value, thereby suspending taxation of the capital gain.

g) Not materializing the reinvestment within the legally prescribed time limit (36 months), the AT proceeded to the respective taxation, issuing assessment no. 2015….

3 – Law

3.1 – Regarding the acquisition value to be considered in determining the capital gain

a) The value considered in the assessment here challenged was the one corresponding to the hereditary share, in relation to the VPT registered in the land register at the date of death.

b) Analysing the applicable legal framework, we find that subparagraphs a) and b) of no. 1 of article 45 of the CIRS establish: "that in determining gains subject to Personal Income Tax, the acquisition value is considered, in the case of assets and rights acquired for no consideration, to be the value that was considered for purposes of stamp duty assessment or that would have served it if it were due".

c) For its part article 13 of the Stamp Duty Tax Code states: "that the taxable value of real property is the tax property value registered in the land register in accordance with the CIMI at the date of transfer…"

d) Article 7 of the CIMI in its no. 1 establishes that the VPT of properties is determined in accordance with the provisions therein.

e) Decree-Law[12] 287/2003 of 12 November which carried out the reform of property and which entered into force on 01 December 2003, established in no. 1 of its article 15 that "Until such time as a general evaluation is undertaken, urban properties already registered in the land register shall be evaluated, in accordance with the CIMI, upon the first transfer occurring after its entry into force.

f) From this it results that the value considered for purposes of Stamp Duty can only be that determined in accordance with the CIMI, in the present case the one resulting from the evaluation carried out by the AT, regardless of when it was initiated or completed.

g) Nor can it be said that the claimant correctly considered the value registered in the land register at the date of death, in fact, it would be what was registered there, but the AT well knew that this value had not been determined in accordance with the CIMI and therefore could not serve for the assessment of Stamp Duty, had it been due, and consequently neither could it be considered as the acquisition value in the calculation of capital gains.

h) Nor should invocation be made of the constitution of the tax obligation or the opening of the succession to claim that the value to be considered for purposes of Stamp Duty is that registered in the land register on that date, this would be the case, whenever the same has been determined in accordance with the rules prescribed in the CIMI as article 13 of the Stamp Duty Tax Code prescribes.

i) In the present case the value registered in the land register at the date of death had been determined by the codifications prior to the CIMI and therefore could not serve as the basis for taxation in Stamp Duty and consequently neither could it be considered as the acquisition value for purposes of capital gains calculation.

j) In this regard we conclude that the assessment here challenged, although it may have complied with applicable legal rules, incorrectly used the values, let us say that it is vitiated by an arithmetic error.

k) In fact, capital gains must be determined, but the acquisition value of the real property in question must be that determined in accordance with the CIMI, in this case € 99 550,00 and not that stated in assessment 2015…, therefore it should be corrected.

3.2 – Compensatory Interest

· a) From the foregoing it results that the assessment here challenged will be subject to arithmetic corrections, favourable to the claimant, and the AT is bound to restore the situation that would have existed had the error not been committed that led to the incorrect determination of the capital gains value.

· b) Thus, in compliance with the provisions contained in articles 100 and 43, no. 1, both of the General Tax Law[13] (LGT) and article 61 of the Procedure and Tax Process Code[14] (CPPT), applicable by virtue of no. 1, subparagraphs a), b) and c) of article 29 of the RJAT, with payment proven, the claimant has the right to payment of compensatory interest, with respect to the Personal Income Tax unduly paid.

IV – OPERATIVE PART

In view of the foregoing, the tribunal decides as follows:

a) That the VPT to be considered as the acquisition value for purposes of determining the capital gain is that determined in accordance with the CIMI, namely € 99 550,00 and not that registered in the land register at the date of death, considering, as it is understood, the respective percentage that corresponds to the claimant in the inheritance.

b) That the Personal Income Tax assessment 2015…, for the year 2011, should be corrected with respect to the determination of the capital gain, with the VPT of € 62 218,75 being recorded in item 4 of annex G of said return as the acquisition value of the real property, which corresponds to the right that the claimant has in the same as a consequence of the death of her spouse.

c) To declare the obligation of the AT to reimburse the Personal Income Tax unduly paid by the claimant, with the addition of compensatory interest, calculated at the legal rate, from the date on which the payment occurred until the date on which the reimbursement occurs.

d) To fix the value of the proceedings at € 31 887,16, taking into account the provisions contained in articles 299, no. 1 of the Civil Procedure Code[15] (CPC), 97-A of the Procedure and Tax Process Code and article 3, no. 2 of the Rules of Costs in Tax Arbitration Proceedings[16] (RCPAT).

e) To fix the amount of costs at € 1 836,00, pursuant to no. 4 of article 22 of the RJAT and table I of the RCPAT, which are charged to the defendant, in accordance with the first part of no. 1 of article 527 of the Civil Procedure Code, applicable by virtue of no. 1, subparagraph e) of article 29 of the RJAT.

NOTIFY

Lisbon, 17 March 2016

Text prepared by computer, in accordance with article 131, no. 5 of the Civil Procedure Code, applicable by reference to article 29, no. 1, subparagraph e) of the RJAT, with blank lines, and reviewed by me.

The Arbitrator,

Arlindo José Francisco

[1] Acronym for Taxpayer
[2] Acronym for Personal Income Tax
[3] Acronym for Legal Regime of Tax Arbitration
[4] Acronym for Tax Authority and Customs Authority
[5] Acronym for Administrative Arbitration Centre
[6] Acronym for Tax Property Value
[7] Acronym for Municipal Property Tax Code
[8] Acronym for Personal Income Tax Code
[9] Acronym for Stamp Duty
[10] Acronym for Stamp Duty Tax Code
[11] Acronym for Civil Code
[12] Acronym for Decree-Law
[13] Acronym for General Tax Law
[14] Acronym for Procedure and Tax Process Code
[15] Acronym for Civil Procedure Code
[16] Acronym for Rules of Costs in Tax Arbitration Proceedings

Frequently Asked Questions

Automatically Created

How is the capital gains tax (mais-valias) calculated on inherited property sold shortly after acquisition under Portuguese IRS?
Capital gains tax on inherited property in Portugal is calculated by subtracting the acquisition value from the sale price. For inherited property, Article 45(1)(a) of the IRS Code establishes that the acquisition value is the value considered for Stamp Duty purposes at the moment of inheritance. This is typically the Tax Property Value (VPT) registered in the land registry at the date of death. In this case, the property was inherited in August 2011 with a VPT of €5,856.38, sold in November 2011 for €220,000, creating a substantial taxable gain. The calculation becomes contentious when the property undergoes revaluation shortly after inheritance under new assessment rules.
Which property tax value (VPT) should be used for capital gains purposes when a property was inherited before CIMI revaluation?
The dispute centers on whether to use the VPT of €5,856.38 registered at the date of death (August 2011) or the updated VPT of €99,550 from the subsequent CIMI revaluation (December 2012). The Tax Authority argues that Article 45 CIRS combined with Articles 5(p) and 26 of the Stamp Duty Code mandates using the VPT registered at the date of succession opening, regardless of when or how the property was valued. The claimant contends that using the pre-CIMI historical value creates an artificial capital gain disconnected from economic reality, especially since the property was sold during the first transfer after CIMI implementation, triggering mandatory revaluation.
What does Article 45 of the Portuguese IRS Code establish regarding the acquisition value for gratuitous transfers?
Article 45 of the Portuguese IRS Code establishes specific rules for determining acquisition value in gratuitous transfers (inheritances and gifts). Under Article 45(1)(a), the acquisition value for property received through inheritance is the value that was considered for Stamp Duty assessment purposes. This creates a legal chain: the Stamp Duty Code (Articles 5(p) and 26 CIS) specifies that for inheritances, the applicable value is the Tax Property Value registered in the land registry at the date of death, which under Civil Code Article 2031 is when succession opens. This mechanism prevents taxpayers from choosing favorable valuation dates but can create inequities during property tax reform transitions.
Can a taxpayer challenge the IRS capital gains calculation through CAAD tax arbitration and claim compensatory interest?
Yes, taxpayers can challenge IRS capital gains calculations through the Administrative Arbitration Centre (CAAD) under Decree-Law 10/2011 (RJAT). This case demonstrates the process: the claimant filed her arbitration request in September 2015, the court was constituted in December 2015, and parties presented written arguments without requiring oral hearing. If the taxpayer has already paid the contested tax assessment, successful annulment triggers the right to compensatory interest under Portuguese tax law. The claimant specifically requested reimbursement of €31,887.16 plus legal compensatory interest. The AT acknowledged potential partial annulment if the tribunal adopted the claimant's interpretation, though disputing total annulment.
How does the timing of property revaluation under CIMI affect the capital gains tax base for inherited real estate in Portugal?
The timing of CIMI revaluation critically affects capital gains calculations for inherited property. CIMI (Municipal Property Tax Code) replaced older valuation systems, triggering mandatory revaluations upon first transfer. In this case, the property had a pre-CIMI VPT of €5,856.38 but was revalued to €99,550 in December 2012 following the November 2011 sale. The central legal question is whether the capital gains base should reflect the historical pre-CIMI value (creating a gain of approximately €214,000) or the post-CIMI value (reducing the gain to approximately €120,000). This issue particularly affected properties sold during 2011-2013 when CIMI implementation was phased in, creating thousands of similar disputes between taxpayers and the Tax Authority.