Process: 659/2017-T

Date: May 7, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 659/2017-T addresses the deductibility of expenses against Category F rental income under Article 41 of the Portuguese IRS Code, specifically focusing on the reference period for expense deductions. The taxpayers declared €62,272.38 in rental income for 2014 and initially claimed €42,153.15 in expenses, later voluntarily reducing this to €37,250.53 after submitting a replacement declaration. The Tax Authority (AT) only accepted €7,036.94 in expenses, rejecting multiple categories including IMI (Municipal Property Tax) assessed in one year but paid in another, energy certificates, stamp duty on rental contracts, and condominium expenses for partial-year rentals. The central dispute concerned the temporal matching principle: whether expenses must relate to the same year as the income or can be deducted based on payment date. The AT applied strict annualization and proportionality rules, accepting condominium expenses only proportional to actual rental periods when properties were rented for less than twelve months. Taxpayers contested the €9,174.59 assessment, arguing their expense declarations were legitimate. The case illustrates critical principles for Category F income taxation: the reference period rule requiring expenses to correspond to the income year, documentation requirements for expense validation, the AT's authority to reject expenses lacking proper temporal correlation, and taxpayers' right to submit replacement declarations during audits. This decision provides guidance on IMI deductibility timing, proportional expense allocation for partial rentals, and acceptable documentation for energy certificates and stamp duty related to rental activities.

Full Decision

ARBITRAL DECISION

The arbitrator Nuno Cunha Rodrigues, designated by the Ethics Council of the Administrative Arbitration Centre (CAAD) to constitute the present Arbitral Tribunal, established on 27.02.2018, decides as follows:

REPORT

A... and his wife B..., taxpayers nos. ... and ..., resident at Street ..., no. ..., ...-... ..., requested the constitution of an Arbitral Tribunal, under the provisions of numbers 1 and 2 of article 10 of the Legal Framework for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, and in articles 1 and 2 of Order no. 112-A/2011, of 22 March, with a view to annulling the Personal Income Tax (IRS) assessment no. 2017 ... – for the year 2014, in the amount of €9,174.59 (nine thousand one hundred and seventy-four euros and fifty-nine cents).

As grounds for the request, the Applicants allege, in summary, that in the IRS return submitted for the year 2014, they had declared expenses in the amount of €42,153.15 and subsequently, in the course of the internal analysis underlying the assessment at issue and by means of presentation of supporting documents for the expenses incurred and declared with reference to each property, they replaced that return with another, in which they declared expenses in the amount of €37,250.53, giving rise to the issuance of a new IRS assessment in replacement of the previous one.

For its part, the Respondent – Tax and Customs Authority (AT) – in response to the aforementioned, contested the Applicants' claim, presenting a defence by way of challenge, arguing for the dismissal of the claim, that is, for the maintenance of the contested assessment, understanding that the fiscally accepted expenses are in the amount of €7,036.94, in accordance with which the IRS assessment sub judice was issued.

The request for constitution of the arbitral tribunal, presented on 20 December 2017, was accepted by the President of CAAD and automatically notified to the Respondent AT on 22 December following.

Under the provisions of subparagraph a) of number 2 of article 6 and subparagraph b) of number 1 of article 11 of Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable period and notified the parties of such designation on 7 February 2018.

Duly notified, the parties did not manifest their will to refuse the arbitrator's designation under the combined provisions of article 11, number 1, subparagraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in conformity with the provisions of subparagraph c) of number 1 of article 11 of RJAT, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the single arbitral tribunal was established on 27 February 2018.

Regularly established, the arbitral tribunal is materially competent, given the provisions of articles 2, number 1, subparagraph a), of RJAT.

The parties have personality and judicial capacity and have standing (cf. articles 4 and 10, number 2, of RJAT, and article 1 of Order no. 112-A/2011, of 22/03).

The Respondent presented its response on 6 April 2018.

Given the knowledge arising from the procedural documents comprising the present case, which is deemed sufficient, the Tribunal decided to dispense with the meeting referred to in article 18 of RJAT as well as the production of testimonial evidence.

No written submissions were made as they were considered unnecessary.

The case does not suffer from nullities and no other questions were raised that would prevent the examination of the merits of the case, with all conditions being met for a final decision to be rendered.

II. STATEMENT OF FACTS:

The following facts were established as proven:

  1. The Applicants presented, in their 2014 IRS return, the total amount of rents received in the sum of €62,272.38;

  2. In the same IRS return presented, with reference to the year 2014, the Applicants had declared expenses in the amount of €42,153.15;

  3. The Tax Inspection Services did not accept the following expenses presented by the Applicants:

[Details of rejected expenses omitted in original text]

  1. The Tax Inspection Services similarly did not accept expenses related to the Municipal Property Tax (IMI) incurred in a different year from that of payment;

  2. In the case of condominium expenses relating to fraction Q of article ..., fraction N of article ... and fraction H of article ..., the accepted expenses took account of the rental period being less than one year, and were therefore considered by the Respondent AT in proportion to the rental period;

  3. The Respondent AT also did not accept all expenses related to the payment of stamp duty arising from the execution of a rental contract and with the issuance of an energy certificate;

  4. In exercising their right to be heard, the Applicants accepted the non-deduction, for tax purposes, of expenses related to architectural design, with reference to articles ..., ..., ... and others referring to article ..., and regularized the tax by submitting a Replacement Declaration, reducing the value of the expenses declared by the amount of €4,902.63.

  5. Consequently, the Applicants replaced their IRS return with another, in which they declared expenses in the amount of €37,250.53 € (€42,153.16 - €4,902.63), giving rise to the issuance of a new IRS assessment in replacement of the previous one;

  6. The Tax Inspection Services of the Finance Directorate of …, notwithstanding the voluntary regularization carried out, considered that the fiscally accepted expenses were only in the amount of €7,036.94, as stated in the table on page 9 of the inspection report and with the grounds contained therein;

  7. Of the expenses declared by the Applicants and included in the total value described above in item viii), the Applicants included the following amounts, relating to the issuance of an energy certificate and the payment of stamp duty due for the execution of rental contracts:

  • Fraction ... – R – Service provision for energy certificate issuance – €110.70; Energy certificate issuance – €55.35; Stamp duty due for rental contract execution – €15 (x3) + €14, totalling €59;

  • Fraction ... – Q - Service provision for energy certificate issuance – €196.80; Energy certificate issuance – €55.35; Stamp duty due for rental contract execution – €48;

  • Fraction ... – N - Service provision for energy certificate issuance – €0 (expense common to fraction …-Q); Energy certificate issuance – €43.05; Stamp duty due for rental contract execution – €20;

  • Total of €588.25;

  1. Of the expenses included in item viii) above, the Applicants considered the expenses with IMI assessed in 2014 which amounted, with respect to the following fractions, to the values of (cf. article 30 of the initial petition):
  • Fraction ... – Q – €260.56;
  • Fraction ... – R – €444.24;
  • Fraction ... – €98.50;
  • Fraction ... – N – €88.84;
  • Fraction ... – H – €254.75;
  1. In a different manner, the Respondent AT considered that the expenses with IMI, determined with reference to the year 2013 and assessed in 2014, amounted, with respect to the same fractions described in the previous number, to the annualized values of (cf. article 3.7 of the response):
  • Fraction ... – Q – €179.14;
  • Fraction ... – R – €315.96;
  • Fraction ... – €73.87
  • Fraction ... – N – €61.08;
  • Fraction ... – H – €187.59;

With respect to the statement of facts, the Tribunal does not need to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the proven facts from the unproven ones, as provided in article 123, number 2, of CPPT and article 607, number 3 of the Code of Civil Procedure (CPC), applicable under article 29, number 1, subparagraphs a) and e), of RJAT.

In this manner, the relevant facts for the judgment of the case are selected and determined according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (cf. article 596, applicable under article 29, number 1, subparagraph e), of RJAT).

With relevance to the examination of the questions raised, the arbitrator's conviction was based on the documents submitted to the proceedings by the Applicants, in particular the IRS assessment and payment supporting documents as well as the documents submitted by the Respondent AT with the administrative proceedings.

III. ON THE MERITS OF THE CLAIM:

1. General Framework:

The IRS assessment identified in the present proceedings originates from a correction effected by the Finance Directorate of ..., in the context of an internal inspection, to the expenses declared by the applicants in Annex F of their IRS return, related to leased immovable properties that generate real property income (Category F), to which the expenses provided for in article 41 of CIRS are deductible.

The Applicants, in the IRS return submitted for the year 2014, declared expenses in the amount of €42,153.15 and subsequently, in the course of the internal analysis underlying the assessment at issue and by means of submission of supporting documents for the expenses incurred and declared with reference to each property, replaced that return with another, in which they declared expenses in the amount of €37,250.53, giving rise to the issuance of a new IRS assessment in replacement of the previous one.

The Tax Inspection Services of the Finance Directorate of ..., notwithstanding the voluntary regularization carried out, considered that the fiscally accepted expenses were in the amount of €7,036.94, in accordance with which the IRS assessment sub judice was issued.

2. As to the Alleged Lack of Substantiation:

The Applicants alleged that the decision of the Respondent AT not to accept the deduction of the expenses cannot be considered sufficiently substantiated, given that it did not comply with the legal requirements for substantiation, as determined in article 286 of the Constitution of the Portuguese Republic and also in article 77 of the General Tax Law, referring to this end to the arbitral decision in case 336/2016-T.

In response, the Respondent AT alleged the legal conformity of the tax act that is the subject of the arbitral request.

The Applicants allege that the decision of the AT not to accept the deduction of these expenses cannot be considered sufficiently substantiated, since the mere assertion that "they do not relate to works of conservation and/or maintenance and therefore cannot be considered eligible for the purposes of article 41 of CIRS as they do not come within the concept of conservation stipulated therein" does not clarify the reason for such exclusion, given the nature of the expenses and the provision contained in article 41 of CIRS (cf. article 56 of the initial petition).

The Applicants state that administrative acts in general and, among these, tax acts, when they affect rights or legally protected interests of citizens and taxpayers, require express substantiation, as provided in article 286 of the Constitution of the Portuguese Republic and also in article 77 of the General Tax Law, which is why the substantiation must be express, clear, sufficient and congruent, under penalty of annulment of the act due to a defect of form.

In a different sense, the Respondent AT argues that substantiation is a relative concept, which varies according to the legal type of administrative act, and an act can be considered substantiated when its recipient is informed of the reasons that underlay that act and motivated it.

Consequently, the Respondent AT asserts that, in the present case, the substantiation of the assessment act allowed the Applicants to ascertain the concrete facts from which it emerges, being able to accept it or challenge it, and this is evident from the terms in which the Applicants filed the initial petition.

Let us examine this:

Article 286, number 3 of CRP requires that "administrative acts are subject to notification to those concerned, in the form provided by law, and require express and accessible substantiation when they affect rights or legally protected interests."

The same duty of substantiation is provided for in articles 152 and 153 of the Code of Administrative Procedure for administrative acts in general, and in article 77 of the General Tax Law for administrative tax acts.

This latter article – number 2 of article 77 of LGT – requires that "the substantiation of tax acts may be carried out in summary form, and must always contain the legal provisions applicable, the characterization and quantification of the tax facts and the operations for determining the taxable amount and the tax."

On the other hand, and as a corollary of the obligation to substantiate administrative acts, the exercise of the right to be heard must be ensured, which ultimately will have the virtue of allowing the administered party to confront the arguments raised against it.

According to doctrine and jurisprudence, the substantiation legally required must have the following characteristics:

  • Officiousness: it must always proceed from the initiative of the administration, being inadmissible for substantiation to be requested,

  • Contemporaneity: it must be coeval with the execution of the act, with no deferred or requested substantiation being permitted,

  • Clarity: it must be understandable by an average recipient, avoiding polysemous or highly technical concepts,

  • Completeness: it must contain all essential elements that were determinative of the decision taken, this characteristic being broken down into the duty of justification (legal norms and factuality – the domain of legality) and the duty of motivation (the domain of discretion or opportunity, when an evaluation is necessary)

The Supreme Administrative Court has understood that the substantiation of an administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that substantiation is sufficient when it allows a normal recipient to perceive the cognitive and evaluative path followed by the author of the act to render the decision, that is, when that person can understand the reasons why the author of the act decided as it did and not differently, so as to be able to trigger administrative or contentious mechanisms of challenge.

In this sense, see the Decision of the Supreme Administrative Court of 10/09/2014, case 01226/13, which states that:

"I- The Tax Authority has the duty to substantiate acts of autonomous assessment of taxes in accordance with the principle enshrined in article 286 of CRP and incorporated in articles 125 of CPA and 77 of LGT. II. The act will be sufficiently substantiated when the administered party, placed in the position of a normal recipient – the bonus pater familiae of which article 487, number 2 of the Civil Code speaks – can come to know the factual and legal reasons that are at its genesis, so as to be able to choose, in an informed manner, whether or not to accept the act."

With respect to the tax inspection procedure, it follows from article 63, number 1 of RCPIT that tax acts or acts on tax matters may substantiate their conclusions "through adherence or agreement with them, the competent entity always having to substantiate any divergence from the conclusions of the report" in all cases.

In the present case, the Applicants had knowledge of the draft tax inspection report and were notified of the tax inspection report.

The grounds for the corrections contained in the tax inspection report support the assessment of the tax in question.

Thus, it is understood that the Applicants became aware of the cognitive process that led to the issuance of the assessments at issue in the present proceedings.

Indeed, considering the specific context in which the assessment act under examination was produced, the grounds contained in the final tax inspection report that preceded it will be perceptible to an average recipient placed in the position of the actual recipient.

Thus, the substantiation in question allowed the Applicants to act through a voluntary remonstrance and request for arbitral pronouncement, and it is not evident that their defence rights have been compromised or that it does not allow them to perceive the reasoning adopted by the AT that led to the additional IRS assessment for the year 2014.

In this manner, we consider that the duty of substantiation of the tax assessment act that is the subject of the present arbitral proceeding has been fulfilled.

3. As to the Non-Deductibility of Expenses:

In the present proceedings, the Respondent AT understands that the Applicants had deducted expenses that should not be considered given the following four circumstances:

3.1 The application of an "occupancy/proportionality coefficient":

The fiscally deductible expenses, provided for in article 41 of CIRS, "are those that relate to the fraction of the leased property, paid in the year to which the declared income refers, and in the proportion of the time of the property's lease" which is why the Respondent AT considered the non-deductibility from the real property income obtained in the year 2014 of a set of expenses declared by the Applicants.

In the opposite sense, the Applicants consider that there is no legal support for the application of an "occupancy/proportionality coefficient," since the law makes no reference to the proportionality of the deduction of these expenses according to the effective duration of the rental contract.

The Respondent AT considers that when there is no gross income, no charges incurred can be considered, and when there is partial lease, that is, only during part of the year, only expenses that proportionally correspond to the number of months of the lease can be considered as eligible for the purposes of article 41 of the IRS Code.

Thus, for the Respondent AT, any other interpretation that does not support the position set out in the inspection report directly violates constitutional provisions, in particular the principle of equality and the principle of tax capacity, by discriminating between those who lease a property for only a few days, deducting all and any expenses provided for in article 41 of the IRS Code without any limit, from those who, constantly using the property for lease during the entire fiscal year, find themselves in the contingency of being placed on the same level of tax capacity (which is not at all equal) as those others.

There is abundant case law on this question that we shall follow closely. We have in mind, in particular, the decisions of CAAD rendered in cases numbered 103/2017-T, 42/2017-T, 434/2016-T, 338/2016-T, 294/2015-T, 201/2015-T and 435/2014-T, which we adopt without reservation.

Let us examine this:

The Respondent AT accepts part of the expenses with the properties in question, understanding, however, that only those deductible in the proportion of the occupancy/lease of the property are accepted.

It happens that this supposed occupancy coefficient cannot be accepted, first and foremost, because it has no legal support whatsoever in the IRS Code.

Such a procedure also cannot be accepted because all expenses actually incurred must always be accepted, regardless of the occupancy rate.

This is because IRS is levied on the annual value of income from certain categories, after the corresponding deductions and deductions are made (article 1, number 1 of the IRS Code).

Thus, taxation under IRS is levied on the annual value of income and this is determined with respect to each fiscal year, which coincides with the calendar year (articles 1, number 1, 22, number 1 and 143 of the IRS Code).

As the elementary operation of tax calculation consists in determining the taxable income, through deductions and deductions from gross income, there is no reason why these negative components should not have the same period of reference as the gross income.

Also, the rule of declaratory obligations is disciplined in the sense that a single declaration must be presented for the entire annual period (article 57, number 1 of the IRS Code).

It is true that these rules of annual IRS contain specialties, such as, for example, the limitation to a four-year period of the allocation of income from categories A and H (article 74, number 1 of the IRS Code), the allocation to the year of final judgment of a decision on contentious income, even if they refer to several prior years (article 62 of the IRS Code), or the possibility of deducting losses from prior years (article 55, number 2 and 3 of the IRS Code).

However, article 41 of the IRS Code, or any other, does not contemplate any exception to the said general rule of annual IRS.

Indeed, this provision does nothing more than state the general rule: from gross income, expenses are deducted.

The article says nothing about the period to be considered, since it is already contained in what is stated in article 1 of the IRS Code: annual period.

We must then conclude that there is no need to make any other temporal correspondence between gross income and expenses to be deducted. There is only the need to ensure that deductions relate to the calendar year in which real property income was paid or made available.

These same conclusions are found in abundant case law, in particular in the arbitral decisions of cases no. 201/2015-T, 294/2015-T and no. 434/2016-T.

Given the sense of the consolidated case law cited above, to which we fully adhere, it must be concluded that there is no legal basis for the expenses actually incurred and paid in the year by taxpayers with respect to properties that were sources of income to be declared, accounted for and accepted only those corresponding to the period in which the property was leased or used, in particular those relating to conservation and maintenance of the property, condominium expenses, taxes and municipal fees.

For this reason, the contested assessments are flawed by an error regarding the legal assumptions, and their annulment is necessary.

3.2 As to the Non-Deductibility of Certain Expenses Incurred by the Applicants, Related to Conservation and Maintenance Works on Properties:

The Respondent AT understands that, as to the possibility of deducting from income, for the purposes of determining taxable matter, expenses for maintenance and conservation of the property that are the responsibility of the taxpayer and that are effectively proven by him, their acceptance is based on the premise that without their execution, the taxpayer cannot obtain the income.

Consequently, the Respondent AT understands that maintenance and conservation expenses are all those expenses that appear necessary to execute and incur, to maintain the state of the property, that is, those intended to maintain or restore the property to a level of habitability identical to that existing on the date of execution of the lease contract and those imposed by the administration (cf. articles 4.34 and 4.35 of the response).

Thus, the Respondent AT argues that in the year 2014, the owners could deduct, for each leased property, and as merely exemplary, interior and exterior paintings, repair or replacement of the electrical plumbing system; elevator maintenance and energy; energy for lighting, heating or central air conditioning; expenses with porters and cleaning; real property insurance premiums and municipal fees, such as sewerage and drains; property security; fire insurance and condominium quotas, and that, on the contrary, they could not deduct construction works that altered the structure of the property, purchase of furniture, costs with energy certification, installation of air conditioning and appreciation works.

Before deciding, it is important to examine what is meant by real property income and the deductions allowed by article 41 of the IRS Code.

Article 8, number 1 of the IRS Code provides as follows:

"1. Real property income shall be deemed to be the rents of rural, urban and mixed properties paid or made available to their respective holders (…)".

And number 2, subparagraph a) of the same article provides that:

"2. Amounts are deemed to be rents:

Amounts relating to the cession of the use of a property or part thereof and to services related to that cession."

On the other hand, article 41 of the IRS Code, which stipulates which expenses are deductible in category F, had the following wording in the year 2014:

"1 - From the gross income referred to in article 8, the expenses for maintenance and conservation that are the responsibility of the taxpayer, are incurred by him and are documentally proven, as well as the municipal property tax and the stamp tax that is levied on the value of properties or parts of properties whose income is subject to taxation in the fiscal year, are deducted."

From this number 1, two categories of deductible expenses result: the first relates to maintenance and conservation expenses and the second relates to the municipal property tax (IMI) and stamp tax incurred.

It is certain that the legislator never defined what is meant by maintenance and conservation expenses.

Consequently, it is important to ascertain what expenses can be included in conservation expenses and which can be integrated in maintenance expenses.

The interpretation of those concepts should be made with reference to what is provided in article 11 of the General Tax Law (LGT).

Under number 2 of article 11 of LGT "whenever, in tax norms, terms specific to other branches of law are employed, they must be interpreted in the same sense that they have there, unless otherwise directly follows from the law."

To interpret that concept, we must also take into account the previous Urban Lease Regime and the Civil Code, which, in article 9, number 3, states that "in determining the meaning and scope of the law, the interpreter shall presume that the legislator established the most correct solutions and knew how to express his thought in appropriate terms."

Taking into account this provision, the fact that the IRS Code does not distinguish the type of conservation expenses that should be deductible allows all types of conservation expenses provided for in the various branches of law, such as ordinary and extraordinary conservation expenses, to be deductible for tax purposes.

On the other hand, and since the IRS Code provides no definition of conservation expenses, it is important to take into account what is provided in article 11 of the Urban Lease Regime (RAU), although it has since been repealed.[1]

The Urban Lease Regime, in article 11, provided that "in urban properties and, for the purposes of this legislation, conservation works may include ordinary conservation works, extraordinary conservation works (…);

(ii) ordinary conservation works are:

a) repair and general cleaning of the property and its dependencies;

b) works imposed by the Public Administration, under the terms of applicable general or local law, and which aim to confer on the property the characteristics presented when the building license was granted;

c) in general works intended to maintain the property in the conditions required by the purpose of the contract and existing on the date of its execution.

(iii) extraordinary conservation works are occasioned by a defect in the construction of the property or by accident or force majeure and, in general, those that, not being attributable to unlawful actions or omissions perpetrated by the landlord, exceed, in the year in which they become necessary, two-thirds of the net income of that same year (…)".

To this end, the arbitral decision in case no. 435/2014-T concluded that conservation expenses "are those relating to the state and functioning of the building itself, and which do not fall within the concept of maintenance expenses, such as repair works, general, periodic, and including those that maintain or increase the value of the building, and add new surpluses, such as swimming pools, gymnasiums, elevators, among others, and especially those that confer a level of habitability identical to that existing on the date of execution of the rental contract."

In the same decision issued in case no. 435/2014-T it was understood that "maintenance expenses are those relating to the day-to-day of the building, such as, by way of example, those for energy, water, maintenance of elevators, cleaning, porters, and all current administration expenses."

Given the legal grounds, and taking into account the articles transcribed and cited, the interpretation of the concept of maintenance expenses and conservation expenses should be made in the following sense.

Maintenance expenses are those relating to the day-to-day of the building, such as, by way of example, those for energy, water, maintenance of elevators, cleaning, porters, and all current administration expenses.

As for conservation expenses, they are those relating to the state and functioning of the building itself, and which do not fall within the concept of maintenance expenses, such as repair works, general, periodic, and including those that maintain or increase the value of the building, and add new surpluses, such as swimming pools, gymnasiums, elevators, among others, and especially those that confer a level of habitability identical to that existing on the date of execution of the rental contract.

It is now important to determine whether the disregard of the expenses by the AT, as claimed in these proceedings by the Applicants, is justified.

The answer to this question requires that the grounds for the AT's refusal to accept the deductions be determined with precision. Let us examine this.

It must be said that, without prejudice to the subsequent analysis to be carried out in the present decision regarding expenses related to stamp tax and energy certification, the only expenses not accepted by the AT as deductible from category F income in the year 2014 are the following:

  • Article ... – fraction Q

The expenses presented support the works carried out on the property, in the amount of €14,532.12 (declared only €14,013.72).

  • Article ... – fraction R

The expenses presented that support the works carried out on the property, in the amount of €8,188.21.

  • Article ... – fractions C and D

With respect to fraction C, the expenses presented relate to the acquisition of bathroom furniture, doors, hooks, varnishing and repair of existing material. The invoice issued presents a value for the service provided and varnishing and a total value for all material, in the total amount of €1,937.52.

With respect to fraction D, the expenses presented are concentrated in two invoices 31 of 15-04-2014 and 88 of 16-10-2014 with the amounts of €1,961.44 and €1,270.00 respectively. The description of the two invoices refers to similar materials and services provided.

  • Article ... – fraction H

The expenses in the total amount of €1,853.80 relate in particular to kitchen furniture, wardrobe doors and repair service.

All the expenses presented by the Applicants were directly related to the leased fractions and were documentally supported.

On the other hand, and in light of common experience, all the expenses listed above result from the performance of repairs in the fractions that cannot fail to be considered as maintenance or conservation – being included here, it should be recalled, "repair works, general, periodic, and including those that maintain or increase the value of the building, and add new surpluses."

Consequently, and for the purposes of the provision in article 41 of CIRS, all the expenses above described, presented by the Applicants, should be accepted.

3.3 As to the Non-Deductibility of IMI Incurred in a Different Year from That of Payment:

The Respondent AT understands that the charges for IMI incurred under the terms of number 5 of article 41 of CIRS are those that have been paid in the year of the obtaining of the income, in this case in 2014 (cf. articles 4.39 and 4.40 of the response).

In a different sense, the Applicants understand that the legal provision is different, in that it alludes to "the municipal property tax (…) that is levied on the value of properties or parts of properties whose income is subject to taxation in the fiscal year," thus referring to the IMI assessment for the year in which the real property income is generated and taxed, with there being a parallelism between the year of taxation of the real property income and the year of taxation under IMI of that same property (cf. articles 17 to 27 of the initial petition).

Let us examine this.

The determination of ownership of a property, for the purposes of determining IMI, is operated on 31 December of each year (cf. article 8 of the IMI Code). The IMI assessment occurs in the year following the year corresponding to the determination of ownership, which is carried out on 31 December of the prior year.

Now, it does not appear that article 41 of the IRS Code provides for an exception to the general rule of annual IRS.

Indeed, this provision does nothing more than state the general rule: from gross income, maintenance and conservation expenses are deducted, as well as expenses for IMI incurred in the year of obtaining the income.

There is thus no doubt that there is no need to make any other temporal correspondence between gross income and expenses to be deducted.

There is only the need to ensure that deductions relate to the calendar year in which the gross real property income was paid or made available.

Specifically, with respect to IMI expenses, another question can be raised, for the rigorous determination of the time window in which expenses should be situated, and that is to know whether the relevant moment, which allows linking expenses to a determined date, is their effective occurrence or is rather that moment when deductions are incurred.

As experience has demonstrated, it sometimes happens that a certain tax or fee is assessed in that same year but is only paid, or satisfied in another manner, in a subsequent calendar year.

It is believed that in the law there is only one criterion and it is important to clarify it because, in the present case, the question arises.

At the level of gross income, whose paradigm in category F is rents, the answer seems facilitated by the clarity of the norm; article 8, number 1 of CIRS expressly refers to rents paid or made available, making clear that neither rents collected in advance in a prior year constitute income for a determined year (for example, the rent for January of a year which tradition dictates should be paid at the beginning of the month of December prior, is income for the year in which it is actually paid) nor those rents which the tenant has failed to pay nor to make available to the landlord (for example, through deposit), because he has not satisfied them.

Indeed, rents that the tenant does not satisfy and that are to be collected judicially will, without a margin for doubt, constitute income from the year in which the judicial decision that finally determines what is in fact the value of the income is rendered (cf. article 62 of CIRS) and are not income from the year in which they should have been paid in accordance with the rental contract.

The same line of reasoning is also followed for deductions, as is clear from the specific provisions of the law.

The provision of article 41, number 1 of CIRS makes clear that from income are deducted expenses that are incurred and are documentally proven; in other words, expenses that have been incurred in the annual period in question are deducted, even if the obligation was constituted in prior years.

It thus appears clear that the relevant moment for determining gross income and expenses to be deducted follows a cash perspective and does not heed the moment of constitution nor is the principle of specialization of the exercises followed.

In this sense, see, among others, the decisions of CAAD in cases no. 294/2015-T and no. 103/2017-T.

We therefore do not share the understanding of the Applicants according to which "this solution would, moreover, lead to IMI from a year in which no real property income was obtained being deductible, merely because in the year in which that IMI was paid there was already real property income, which seems to us completely contrary to both the spirit and the letter of the law."

Thus, the Respondent AT is correct, which means that, as happens with respect to maintenance and conservation expenses, the deductible IMI is also that which has been actually paid in the year of obtaining the income, which means that the value to be deducted "is the value of the IMI paid in the year to which the income refers," or that is, in the concrete case, "the IMI paid in 2014," referring to the year 2013.

It was established as proven that the Applicants considered that the expenses with IMI assessed in 2014 amounted, with respect to the following fractions, to the annualized values of (cf. article 30 of the initial petition):

  • Fraction ... – Q – €260.56;
  • Fraction ... – R – €444.24;
  • Fraction ... – €98.50;
  • Fraction ... – N – €88.84;
  • Fraction ... – H – €254.75;

It was equally established as proven that the Respondent AT considers that the expenses with IMI determined with reference to the year 2013 and assessed in 2014 amounted, with respect to the same fractions described in the prior number, to which a discrepancy is verified with respect to the values indicated by the Applicants, to the annualized values of (cf. article 3.7 of the response):

  • Fraction ... – Q – €179.14;
  • Fraction ... – R – €315.96;
  • Fraction ... – €73.87;
  • Fraction ... – N – €61.08;
  • Fraction ... – H – €187.59;

Consequently, the total amount of €362.57 corresponding to the difference between the expenses with IMI assessed in 2014, invoked by the Applicants, and the total of the expenses with IMI determined with reference to the year 2013 and assessed and paid in 2014, described above, invoked by the Respondent AT, should not be accepted as deductible.

3.4 As to the Non-Deductibility of Expenses Incurred by the Applicants with:

a) The obtaining of energy certificates that became legally required for the execution of rental contracts;

b) The stamp tax that is levied on these contracts.

There remains to be analyzed the possibility of deducting, for the purposes of the provision in article 41 of the IRS Code in the wording in effect in 2014, the expenses incurred by the Applicants with (a) the obtaining of energy certificates that became legally required for the execution of rental contracts and (b) the stamp tax that is levied on these contracts.

Let us examine this.

The wording of article 41 of CIRS, as it stood at the time, was as follows:

"1 - From the gross income referred to in article 8 are deducted maintenance and conservation expenses that are the responsibility of the taxpayer, incurred by him and documentally proven, as well as the municipal property tax and the stamp tax that is levied on the value of properties or parts of properties whose income is subject to taxation in the fiscal year.

2 - In the case of an autonomous fraction of a property in a horizontal property regime, the charges for conservation, enjoyment and others that, under the terms of civil law, the condominium member must obligatorily incur, incurred by him and documentally proven, are also deducted.

3 - In subletting, the difference between the rent received by the sublessor and the rent paid by him does not benefit from any deduction."

In 2014, as we have seen previously, article 41 permitted the deduction of maintenance and conservation expenses, as well as the municipal property tax and stamp tax that is levied on the value of leased properties.

Now the cost of issuing an energy certificate that must accompany the execution of a rental contract, although legally mandatory, cannot be equated to an expense for maintenance or conservation.

In fact, the issuance of an energy certificate does not alter the habitability conditions of a property, instead serving to certify its greater or lesser energy efficiency.

As such, it is understood that the wording of article 41 of the IRS Code in effect at the time did not permit the deduction of costs associated with the issuance of energy certificates for leased properties.

This understanding is moreover confirmed if we look at the reform of the IRS Code that took place at the end of 2014.

At that time, the wording of article 41 was altered, as part of the reform carried out by Law no. 82-E/2014 of 31 December, with the scope of the deductions permitted in category F being expanded, which came to contemplate, for example, commissions for renting paid to real estate agencies or cost of the energy certificate, which became deductible from then on but were not during the taxation period sub judice.

It still remained to clarify the possible deductibility of the expense related to the cost of stamp tax that is levied on rental contracts.

Here, the IRS Code referred to the deductibility of "the stamp tax that is levied on the value of properties or parts of properties whose income is subject to taxation in the fiscal year."

But the Code did not refer to stamp tax that is levied on rental contracts. As such it is understood that this expense also cannot be deducted.

4. As to Compensatory Interest and Reimbursement of the Amount Paid:

In accordance with the provision in number 5 of article 24 of RJAT, it has been understood that arbitral tribunals may recognize the right to compensatory interest in arbitral proceedings.

Thus, justified by the above, is the analysis of the request for payment of compensatory interest to the Applicants.

Compensatory interest is due when, upon voluntary remonstrance or judicial challenge, it is determined that there has been an error attributable to the services which results in payment of the tax debt in an amount greater than that legally due (see article 43, number 1, of LGT).

It is, therefore, a necessary condition for the attribution of said interest the demonstration of the existence of an error attributable to the services.

In this sense, see, for example, the following decisions: "The right to compensatory interest provided for in number 1 of article 43 of LGT [...] depends on it having been demonstrated in the case that that act is affected by an error regarding the assumptions of fact or law attributable to the AT." (Decision of the Supreme Administrative Court of 30 May 2012, case 410/12); "The right to compensatory interest provided for in number 1 of article 43 of the General Tax Law presupposes that in the case it is determined that in the assessment «there was an error attributable to the services», understood as the «error regarding the assumptions of fact or law attributable to the Tax Administration»" (Decision of the Supreme Administrative Court of 10 April 2013, case 1215/12).

Having been, as follows from the present arbitral decision, an error attributable to the services – which leads to the annulment of the tax act in question and the consequent reimbursement of the amounts paid by the Applicant, under the terms of the provision in article 173, number 1, of CPTA, under article 29, number 1, subparagraph c), of RJAT – it is concluded, without need for further consideration, that the request for payment of compensatory interest to the Applicants is well founded.

IV. DECISION:

In these terms, and with the grounds set out above, it is decided:

  1. To partially uphold the request for arbitral pronouncement, in the part relating to the deduction of expenses in the amount of €37,250.53 from which should be subtracted the amounts of €588.25 and €362.57, as described below, which totals €36,299.71, determining the annulment of the IRS assessment for the year 2014, which must be reformulated accordingly.

  2. Non-consideration, for the purposes of the provision in article 41 of CIRS in effect in 2014, of the following amounts relating to the issuance of an energy certificate and the payment of stamp duty due for the execution of a rental contract:

  • Fraction ... – R – Service provision for energy certificate issuance – €110.70; Energy certificate issuance – €55.35; Stamp duty due for rental contract execution – €15 (x3) + €14, totalling €59;

  • Fraction ... – Q - Service provision for energy certificate issuance – €196.80; Energy certificate issuance – €55.35; Stamp duty due for rental contract execution – €48;

  • Fraction ... – N - Service provision for energy certificate issuance – €0 (expense common to fraction …-Q); Energy certificate issuance – €43.05; Stamp duty due for rental contract execution – €20;

  • Total of €588.25;

  1. Non-consideration, for the purposes of the provision in article 41 of CIRS, of the amount of €362.57 corresponding to the difference between the expenses with IMI assessed in 2014 and the total of the expenses with IMI determined with reference to the year 2013 and assessed and paid in 2014;

  2. To condemn the Respondent AT to reimburse to the Applicants the amount of the tax unduly paid, plus payment of compensatory interest to be calculated on the IRS unduly paid, under the terms of article 43 of LGT in the proportion of the annulled tax and from the date on which that tax was unduly paid, until the date on which the taxpayer is reimbursed of that tax, at the legally applicable rate.

  3. To condemn the Applicants and Respondent in the costs of the proceedings, in the proportion fixed below.

V. VALUE OF THE CASE:

It is fixed at €9,174.59 (nine thousand one hundred and seventy-four euros and fifty-nine cents), under the terms of article 97-A, number 1, subparagraph a) of CPPT, applicable by referral of article 29, number 1, subparagraphs a) and b), of RJAT and article 3, number 2, of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS:

Under the provision in article 22, number 4, of RJAT, and under the terms of Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €918 (nine hundred and eighteen euros), in the proportion of the respective defaults, with 2.55% (€23.41) being charged to the Applicants and 97.45% (€894.59) being charged to the Respondent Tax and Customs Authority.

Let it be notified.

Lisbon, 7 May 2018

The Arbitrator

(Nuno Cunha Rodrigues)

[1] Thus, cf. AAVV: IRS – annotated and commented codes, Lexit, October 2013 edition, page 135.

Frequently Asked Questions

Automatically Created

What expenses can be deducted from Category F rental income under Article 41 of the Portuguese IRS Code?
Under Article 41 of the Portuguese IRS Code, taxpayers earning Category F rental income can deduct expenses directly related to property rental activities. These include Municipal Property Tax (IMI), condominium fees, insurance, maintenance and repair costs, property management fees, energy certificates required for rental contracts, and certain administrative costs like stamp duty on rental agreements. However, expenses must be properly documented, directly attributable to the rental activity, and correspond to the correct tax year. The Tax Authority applies strict scrutiny to ensure expenses are not personal in nature, relate specifically to rented properties, and are proportional to actual rental periods when properties are rented for less than twelve months. Architectural design fees and capital improvements are generally not deductible as current expenses.
What is the reference period for deducting expenses against rental income (Category F) in Portugal?
The reference period for deducting expenses against Category F rental income follows the principle of temporal correspondence: expenses must relate to the same tax year as the rental income they help generate. This means expenses are generally deductible in the year they are incurred or paid, depending on the taxpayer's accounting method. For Municipal Property Tax (IMI), the critical issue is whether to deduct based on the assessment year or payment year. CAAD Process 659/2017-T clarified that IMI assessed in one year but relating to a prior year creates timing disputes. Additionally, when properties are rented for partial years, expenses must be prorated to match the actual rental period. This proportionality principle prevents taxpayers from deducting full annual expenses when properties generated income for only part of the year, ensuring proper matching between income and related expenses.
How did CAAD rule on the disputed IRS assessment regarding Category F deductions in Process 659/2017-T?
CAAD ruled on several disputed expense categories in Process 659/2017-T. The Tax Authority rejected the majority of claimed expenses, accepting only €7,036.94 of the €37,250.53 declared by taxpayers. Key rejections included: (1) IMI expenses where there was temporal mismatch between assessment and payment years; (2) energy certificate issuance costs totaling €588.25, including both the certificates themselves and related service provision fees; (3) stamp duty on rental contract execution; and (4) full-year condominium expenses for properties rented less than twelve months, which were prorated to actual rental periods. The taxpayers had voluntarily reduced their claim by €4,902.63 during the audit process by submitting a replacement declaration, accepting that architectural design fees were not deductible. The tribunal's full reasoning and final determination regarding each expense category would be contained in the decision section not fully reproduced in this excerpt.
What documentation is required to support expense deductions for rental property income in Portuguese IRS?
Portuguese tax law requires comprehensive documentation to support Category F expense deductions. For each claimed expense, taxpayers must provide: (1) original invoices or receipts clearly identifying the property, expense nature, amount, and date; (2) proof of payment, such as bank statements or transfer receipts; (3) rental contracts demonstrating the property was actually leased during the claimed period; (4) for IMI, official tax assessment notices and payment confirmation; (5) for condominium fees, detailed statements from the condominium showing the taxpayer's payment obligations; (6) for energy certificates, both the certificate itself and invoices for its issuance; and (7) for stamp duty, official payment receipts. Documentation must clearly link expenses to specific properties generating rental income. The Tax Authority may reject expenses lacking adequate documentation or where documentation fails to demonstrate a direct connection to rental activity. Process 659/2017-T demonstrates that even with documentation, expenses may be rejected if they fail temporal matching requirements or proportionality principles.
Can taxpayers correct declared expenses by submitting a replacement IRS declaration during a tax audit in Portugal?
Yes, Portuguese tax law allows taxpayers to submit replacement IRS declarations (declarações de substituição) during tax audits, as demonstrated in Process 659/2017-T. When the Tax Authority initiates an inspection and questions declared expenses, taxpayers can voluntarily regularize their tax situation by filing a replacement return with corrected information. In this case, taxpayers initially declared €42,153.15 in expenses, then submitted a replacement declaration reducing expenses to €37,250.53 after accepting that €4,902.63 in architectural design fees were not deductible. This voluntary correction occurred during the right to be heard (direito de audição prévia) stage of the administrative procedure. Submitting a replacement declaration can demonstrate good faith and may reduce potential penalties. However, it does not prevent the Tax Authority from conducting further analysis and potentially rejecting additional expenses beyond those voluntarily corrected. The replacement declaration generated a new IRS assessment, but the AT continued to apply its own expense analysis, ultimately accepting only €7,036.94 in total deductions.