IRS Category G Income: Compensation for Lease Termination and Tax Legality Principle (CAAD 67/2016-T)

ARBITRAL DECISION

A - Report

A..., taxpayer no. ..., resident at Street ..., ..., ... Floor, ...-... ..., within the geographical competence area of the Financial Services Office of ... -..., came, pursuant to the provisions of subparagraph a) of no. 1 of article 2, subparagraph b) of no. 2 of article 5 and no. 1 of article 6, all of Decree-Law no. 10/2011, of 20 January, to request the CONSTITUTION OF AN ARBITRAL TRIBUNAL WITH A SOLE ARBITRATOR with a view to obtaining an arbitral decision declaring the illegality and consequent (partial) annulment of the tax act imposing Personal Income Tax (IRS) corresponding to IRS Assessment no. 2015 ... of 23.10.2015, with an amount to pay of EUR 18,691.04 (eighteen thousand six hundred and ninety-one euros and four cents).

This request was submitted to the Administrative Arbitration Center (CAAD) on 3 February 2016.

The Tax and Customs Authority (AT) is the Respondent.

The Claimant did not designate an Arbitrator. For this purpose, the President of the Deontological Council of the Administrative Arbitration Center designated the undersigned, who expressly accepted this appointment. The parties were duly notified thereof, having manifested no intention to refuse it.

The arbitral tribunal was thus constituted on 20 April 2016.

The AT attached the administrative file and timely submitted its response, therein raising the exception of unamendability of the tax act in question and, subsidiarily, contested the same claim, sustaining the legality of the tax act in crisis, with the corresponding total lack of merit of the claim and the consequent dismissal of the Respondent.

The Claimant responded in writing to this exception.

The meeting referred to in article 18 of the RJAT was timely dispensed with, as well as the production of arguments.

The Tribunal was regularly constituted and is materially competent.

The parties have legal personality, capacity to litigate and are legitimated.

The proceeding is not subject to any nullities.

Claim

The Claimant contests the legal-fiscal qualification and corresponding taxation, concerning income earned in 2014 as consideration for the termination of a lease contract, in the amount of € 60,000.00, declaring acceptance of the taxation of the remaining income in the amount of € 41,176.33.

To this end it invokes:

a) Lack of reasoning of the assessment;

b) Violation of the principle of tax legality, in the aspect of the principle of tax typicality, provided for in number 2 of article 103 of the CRP and number 1 of article 8 of the General Tax Law (hereinafter LGT).

The Claimant paid the contested tax, thus petitioning for its reimbursement, plus indemnificatory interest.

Given that the exception raised is exclusively one of law and within the prior knowledge of the Arbitral Tribunal, that the Claimant expressed itself in the exercise of the right to be heard, that the position of the parties is fully defined in the case file and supported by the means of proof presented by them, not contested, and that the Respondent, without opposition, came to request and subsequently reiterate the dispensing of holding the meeting referred to in article 18 of the RJAT, in accordance with the principles of cooperation, procedural good faith and free conduct of the proceeding (subparagraph f) of article 16, and article 19 of the RJAT), as well as with the principle of limitation of useless acts (article 130 of the CPC), the dispensing of holding this referred meeting was decided.

B - Factual Matter

In the present case, the following described factual matter has been proven, with relevance to the decision of the case.

Until 22.12.2014 the Claimant was the tenant of the ... floor of the urban property located at ..., no. ..., of the parish of ..., municipality of Lisbon, registered in the urban property matrix under article ... of the said parish and described in the Land Registry of Lisbon under number ..., within the scope of an urban lease contract for residential purposes.

On 01.12.2014, the Claimant entered into an agreement for revocation of the lease contract with the property owner, the company B..., S.A., Tax ID ..., (hereinafter B...) with effect from 22.12.2014.

Pursuant to the referred agreement, the Claimant agreed to an indemnity in the amount of € 60,000.00 (sixty thousand euros), as "compensation for the revocation of the lease contract in force and for the improvements made to the property during its term", to be paid by B... to the Claimant "on the date when the latter delivers the property vacant of persons and goods".

On 19.12.2014, the Claimant delivered the autonomous fraction to the Lessor and, as consideration, received a check for the amount of € 50,100.00 (fifty thousand and one hundred euros), whereby the difference between the gross agreed amount and the net amount paid, € 9,900.00 (nine thousand and nine hundred euros), corresponds to the withholding at source on Personal Income Tax carried out.

On 31.05.2015 the Claimant proceeded to submit the annual income statement IRS form 3 for the year 2014, having presented Annex G in which he included the indemnity received, in the amount (gross) of € 60,000.00.

From this declaration resulted the issuance of Assessment no. 2015..., dated 03.07.2015, with tax to pay in the amount of € 18,691.04.

In July 2015, the Claimant was notified of this IRS assessment.

The taxation results from the following amounts:

a) Net tax in the amount of € 37,354.84 (thirty-seven thousand three hundred and fifty-four euros and eighty-four cents);

b) Extraordinary surtax of € 2,501.20 (two thousand five hundred and one euros and twenty cents);

c) Final amount to pay (deducting amounts previously withheld at source) of € 18,691.04 (eighteen thousand six hundred and ninety-one euros and four cents).

On 31.08.2015 the Claimant proceeded to pay the tax assessed under this first declaration.

However, on 09.07.2015, the Claimant submitted a substitute IRS form 3 declaration, also relating to the year 2014, which did not include Annex G, and did not include the referred amount in the declared taxable income.

This because of disagreement with the legal-fiscal qualification of the indemnity paid by B... and contained in the first income statement.

When the Claimant submitted this new income statement for 2014, through the computer application of the Finance Portal, the same appeared not to have been successful.

The Claimant assumed that the new declaration had not been accepted and, therefore, filed a Gracious Complaint against the first IRS assessment, with the no. 2015 ... and dated 03.07.2015.

In presenting the first declaration as he did and in proceeding to the consequent payment, the Claimant did not intend to waive the right to react graciously and contentiously against the taxation of that amount.

The said gracious complaint was presented on 14.08.2015 to the Financial Services Office of ... ..., having been assigned the number ...2015....

The same came to be denied by order of the Head of the Financial Services Office of 21.10.2015.

On 20.08.2015 the Claimant had informed the AT that "The periodic substitute declaration submitted on 09.07.2015 and which generated the present divergence had the purpose of correcting the qualification of one of the income earned by the taxpayer. Considering that the first income statement triggered an IRS assessment and the taxpayer intends to contest the qualification of the income through a gracious complaint already filed, the taxpayer makes use of this means to withdraw from the submission of the income statement presented on 09.07.2015".

Through office no. GI –... of 18/08/2015, the AT informed the taxpayer that the IRS declaration (substitute) presented irregularities, and should therefore submit a new substitute declaration with Annex G completed, for having earned income of category G (in the amount of € 60,000.00, to which corresponded a withholding of € 9,900.00) from the entity with Tax ID –..., (B... SA).

The Claimant was further warned by the AT that if he did not do so, the Services would prepare an ex officio declaration.

He was also informed that he could exercise the right to prior hearing in accordance with article 60 of the LGT within 15 days.

The taxpayer was notified of this office by registered mail (registration no. RD ... PT), which was returned to the Financial Services Office, because it was not claimed.

On 21.09.2015 a new office was sent (no. ...) with the same content, equally registered – registration no. RD ... PT, which was also returned to the Financial Services Office, for not having been claimed.

The Claimant submitted no documents, did not exercise the corresponding right to prior hearing, nor submitted an IRS substitute declaration.

An ex officio notice was thus issued in the sense of converting the denial into definitive.

It referred, summarily, to the steps taken in the sense of the taxpayer delivering a substitute declaration, in order to add the amounts communicated in Form 10 by the company B..., SA, Tax ID ..., that is, € 60,000.00 of gross income and € 9,900.00 of Personal Income Tax withholding at source. It was also mentioned that the taxpayer had contacted the Financial Services Office, through email of 20.08.2015, informing that he submitted a substitute declaration on 09.07.2015 which "had the purpose of correcting the qualification of one of the income earned by the taxpayer. Considering that the first income statement triggered an IRS assessment and the taxpayer intends to contest the qualification of the income through a gracious complaint already filed, the taxpayer makes use of this means to withdraw from the submission of the income statement presented on 09.07.2015".

There was a concordant order from the Head of the Financial Services Office of 21/10/2015.

From this results the tax act which includes the ex officio "completion" of an Annex G with the elements known to the AT, considering in table 10, field 1002 - amounts received by virtue of the assumption of non-compete obligations – the referred amount of € 60,000.00 and the said withholding in the amount of € 9,900.00.

The Claimant was notified of this decision through office no. ... of 19/10/2015 (registration no. RD ... PT), which was returned.

For this reason a second notification was made by registered mail with receipt confirmation (registration no. RD ... PT), received by the taxpayer on 11/11/2015.

The Tax Authority thus issued a new IRS assessment relating to the Claimant's income earned in 2014, to which was assigned the number 2015 ... with an amount to pay of EUR 18,691.04 (eighteen thousand six hundred and ninety-one euros and four cents).

This assessment is the subject of the present Claim.

This ex officio assessment – with no. 2015 ... – gave rise to a null collection note, by compensation with the amount assessed and paid with the previous assessment (issued following the taxpayer's annual declaration).

On 30.10.2015 the AT issued the statement of account settlement with the number 2015..., from which the following table appears:

This decision was notified to the Claimant by office of 05.11.2015 sent by ordinary registered mail.

It stated that: "You are hereby notified that, with the reasoning expressed in the attached information, which is an integral part of this notification, the following alterations were made to the Income Statement of Personal Income Tax for the year 2014 - Annex G".

Adding that "from this decision, you may: - File a Gracious Complaint within 120 days or Judicial Challenge within three months, counted from the 30 days following the notification of the assessment (which appears from the respective notification that will be timely made to you), in accordance with article 140 of the CIRS and article 70 and 102 of the Code of Tax Procedure and Process."

From the reasoning of the decision the following excerpt appeared: "On 2015.07.27 office no. GIC-... was issued, to submit a substitute income declaration in order to add the amounts communicated in Form 10 by the company B... SA.

ANNEX G – TABLE 10

(...)

Within the time allowed to him, no clarifications/documents were submitted to this Financial Services Office, the right to prior hearing was not exercised nor was an IRS substitute declaration delivered, so it is proposed the ex officio correction of the IRS declaration in accordance with no. 4 of article 65 of the CIRS, in accordance with the available elements, proceeding to the following correction: Annex G completed with the elements known to the AT".

The present request for constitution of an arbitral tribunal and the request for declaration of illegality was submitted on 03.02.2016.

There are no other facts with relevance to the appreciation of the merit of the case that are not proven.

The proven facts are based on documents provided by the parties, on their statements and on the administrative file, whose correspondence to reality is not disputed.

C - On the Law

Position of the Parties - Claimant

The Claimant comes to invoke, in summary that:

i) He entered into an agreement for revocation of the lease contract with the property owner – the company B..., SA, having earned in 2014 an indemnity in the amount of € 60,000.00;

ii) On 31/05/2015, the Claimant submitted his periodic IRS form 3 declaration, having received the assessment note no. 2015 ... of 03/07/2015 in the amount of € 18,691.04, given that the amount received as an indemnity was considered for the determination of taxable income and determination of the tax rate;

iii) On 31/08/2015, the Claimant proceeded to pay the assessed tax;

iv) On 14/08/2015, the Claimant filed a gracious complaint against the IRS assessment no. 2015 ... (case no. ...2015...), which was denied;

v) On 09/07/2015, the Claimant had attempted to submit a new income statement for 2014, which appeared not to have been successful, and having therefore assumed, erroneously, that that declaration had not been accepted;

vi) The AT ex officio corrected the income statement presented on 09/07/2015, which resulted in a new IRS assessment – no. 2015 ... – in the amount of € 18,691.04.

For this reason he comes to request the annulment of this assessment for lack of proper reasoning, violation of the principle of tax legality, in the aspect of the principle of tax typicality (article 103/2 of the CRP and article 8/1 of the LGT) and further the reimbursement of the amount assessed and paid, as well as the payment of indemnificatory interest on the amount incorrectly paid.

It is important to clarify that having the Claimant submitted two IRS declarations for 2014, the second intended to substitute the first, the Claimant does not contest the assessment that resulted from the first declaration, which is therefore not the subject of the present claim. The Claimant contests instead the IRS assessment with no. 2015..., which results from the second declaration (substitute) presented and which corresponds to the object of the claim.

Position of the Parties – Respondent

Exception

The Respondent comes to defend itself by exception, sustaining the unamendability of the act, in this case the referred second assessment, for this being merely confirmatory of the first tax act and not representing a true assessment.

For the Respondent "it can be stated ... that we are before a corrective/confirmatory assessment, in that the confirmatory administrative act is the one that adds nothing to a prior administrative act, said confirmed act. It does not produce new legal effects. The effects have already been generated by the confirmed act". Adding further that "from a procedural point of view, the objective of the confirmatory act regime is to justify its unamendability ensuring the stability of the confirmed act for being this that should have been challenged and was not. An identical administrative act subsequently practiced cannot be challenged. Thus a stability effect of the first administrative act is obtained. If not so, the latter would be at any time subject to being challenged in the guise of a new administrative act but identical subsequently practiced by which the legal regulation by the confirmed act would not be consolidated ... with all the inconveniences resulting therefrom. The situation of instability of the first administrative act would remain perpetuated and at the disposal of the will of the private party which, by means of gracious procedures, would raise the practice of administrative acts subsequent to the confirmed act despite being endowed with the same content for the sole purpose of being able to challenge them contentiously. The consequence would be to circumvent non-compliance with the legal deadlines for challenge of the confirmed act. For this reason, the confirmatory act cannot be used to reopen a dispute".

In this context the Respondent refers that "the second assessment statement did nothing more than concretize the situation that was in effect at the time of the first IRS declaration of 2014 presented by the herein Claimant. Moreover, it maintained the act unchanged, so it is not challengeable except with its own defects. Regarding the assessment proper, this second statement does not represent an innovative harmful act".

From this the Respondent concludes that "also for purposes of the deadline for exercise of the right to challenge before the Arbitral Tribunal the same doctrine should be used", so that "having the Claimant allowed to lapse the right to judicially challenge the assessment, it is not the new statement of the assessment (or confirmatory assessment) that reopens the possibility for him to challenge that tax act", verifying itself, in the Respondent's understanding, "dilatory exception of unamendability of the act that prejudices knowledge of the merit of the case, in accordance with articles 87/7 and 89/4, subparagraph i) of the CPA".

Exception – Response

The Claimant responded in writing to the exception, sustaining that "the Respondent's argument ... is fallacious" by starting "from the premise that the first assessment would be (still) subject to challenge" when "the second IRS assessment proceeded to revoke the first IRS assessment". For this reason, it sustains that "only the new IRS assessment no. 2015..., of 23.10.2015 is subject to challenge".

The Claimant adds that it is settled case law that "assessments annulled/substituted and any administrative acts subsequent to those assessments (including the decision on the Gracious Complaint) are not subject to challenge due to initial or supervening futility" (judgments of the Central Administrative Court of the South of 05.12.2006, in Case no. 00777/05 and of 09.01.2007, in Case no. 00848/05).

And emphasizes having timely informed the AT that "The periodic substitute declaration submitted on 09.07.2015 and which generated the present divergence had the purpose of correcting the qualification of one of the income earned by the taxpayer. Considering that the first income statement triggered an IRS assessment and the taxpayer intends to contest the qualification of the income through a gracious complaint already filed, the taxpayer makes use of this means to withdraw from the submission of the income statement presented on 09.07.2015". Further adds that even disregarding the Claimant's withdrawal, it is certain that the AT notified him to "complete" the new income declaration, so the IRS assessment subject of the claim "only exists by fact attributable, exclusively, to the Respondent".

Thus concludes that only the new IRS assessment no. 2015..., of 23.10.2015 is subject to challenge, being this the reason why this assessment is the subject of the present claim.

The Claimant alleges, without dispute, that this assessment was sent to him by registered mail on 03.11.2015, with presumption of notification on 06.11.2015, by force of number 1 of article 39 of the CPPT. Thus, because the deadline for challenge would end on 04.02.2016 and the Request for Constitution of Arbitral Tribunal and Request for Declaration of Illegality was submitted on 03.02.2016, it must be concluded that the request is timely, and consequently, the exception of lapse should be denied.

The Respondent maintained everything it alleged in the Response concerning the dilatory exception of unamendability of the act, considering that consequently, knowledge of the merit of the case is prejudiced.

On Challenge - Reasoning

The Claimant invokes lack of reasoning of the decision of the Financial Services Office of ... ... which classified the income earned by the Claimant in category G.

The Respondent understands that the decision in question is sufficiently reasoned, supported by the motivation contained in the referred information, which explain the reasons of fact and law that determined the correction of the IRS income declaration for the year 2014, having allowed the Claimant the perception of the content of the act and the reconstruction of the cognitive and valuative path followed by its author.

On Challenge – Principle of Legality

The Claimant further sustains the violation of the principle of legality in its material aspect, but the Respondent again disagrees with the Claimant, for understanding that the indemnity received was at that time typified in subparagraph b) of article 9 of the CIRS, being taxed as income of category G and subject to withholding at source.

The AT does not follow the Claimant's thesis which considers that an indemnity owed for the onerous waiver of contractual positions relating to immovable property was typified in subparagraph e) of no. 1 of article 9 of the CIRS, which was only added by Law no. 82-E/2014 of 31/12 (Budget Law for 2015), and will only be taxable if corresponding to facts occurring in the year 2015 or subsequent years. This because the Claimant, unlike the Respondent, understands that the said Law no. 82-E/2014 of 31/12 proceeded to an extension of the scope to indemnities owed for the onerous waiver of contractual positions or other rights inherent to immovable property. The Respondent thus argues that the factuality of a tenant who receives an indemnity to leave the house he inhabits was already typified in subparagraph b) of the same rule, specifically in the concept of "unproven emergent damages", since the amount received by a tenant as an indemnity so that he vacates the property constitutes, for the one who receives it, ... an indemnity for emergent damages.

In summary for the Respondent this type of indemnity constitutes an income of category G of IRS, in accordance with subparagraph b) of no. 1 of article 9 of the Personal Income Tax Code, if the damages suffered are not proven, which is why there would be no violation of the principle of tax legality, in the aspect of the principle of tax typicality, since in the year 2014 there already existed a rule of incidence in the CIRS that determined the taxation of indemnities for onerous waiver of contractual positions relating to immovable property – subparagraph b) of no. 1 of article 9 of the CIRS.

Indemnificatory Interest

For the Claimant the assessment results from error attributable to the services, so its reimbursement should be increased by indemnificatory interest.

As for this request the Respondent sustains that the submission of a substitute declaration on 09.07.2015 occurred already outside the legal deadline (article 60/2 of the CIRS) and in terms different from those in which the Services of the AT notified the Claimant to do it, in that it did not proceed to the submission of Annex G, as it (the AT) understands was due.

It adds that for this reason the Services prepared an ex officio declaration in accordance with articles 65 and 75 of the CIRS, and that in these cases the assessment is based on the elements available to the AT. As in accordance with the provisions of articles 43 of the LGT and 61 of the CPPT "indemnificatory interest in favor of the taxpayer is only due when, in gracious complaint or judicial challenge, it is verified that there was error attributable to the services, and a tax debt superior to the legal amount was assessed, such error being independent of proof of the existence of concrete blame of any of its bodies, officials or agents, or even proof of global blame of the services, so that blame of the services is necessary in this action in the sense that they did not guide their action in the sense in which they were obliged and as they could and should", whereby the requested interest would not be due.

D – On the Law - Decision and its Reasoning

Everything considered it is necessary to decide.

In summary, it is necessary to decide on the exception of lapse of the right to challenge, on the reasoning, on the inclusion of the gains in question within the scope of incidence of IRS in the year in question and, if applicable, on the possible right to indemnificatory interest.

On the Exception

It emerges from the case file that the amount earned by the Claimant was subject to withholding at source, having been given to taxation at the time of the first annual IRS income declaration of 2014.

Subsequently, but a few months after the submission of that declaration and soon after receipt of the corresponding assessment note, the Claimant submitted a substitute declaration which the AT processed. In this, the amount referred to above was not included as taxable income, which met with opposition from the AT. The correction of this alleged failure occurred through a new tax act, with the corresponding assessment being extinguished by compensation with the initial assessment.

The Claimant came to contest this second act and submitted the present request in time, if the deadline is counted from the notification of this second assessment. Indeed, even if there is contradiction between the 3rd and 5th of November as the date of notification, the fact is that if the deadline is counted from the 3rd, as the Claimant did, the request is in time. Thus, it will also be, and by reason of greater force, if the deadline is counted from the 5th following.

On the other hand, if it is true that the second assessment corresponds to an act, so to speak, confirmatory of the first assessment, the fact is that it corresponds to a true (new) assessment, subject to challenge and judicial protection, as indeed appears expressly from its notification (besides which it was also preceded by an invitation to the right to be heard, although not exercised).

Moreover, no abuse of right is discernible from the case file on the part of the Claimant, either by the very short space of time in which everything occurs, or by the consistency of the claim and arguments, or by the express information provided to the AT of the succession of various procedural acts, their justification and withdrawal of preceding procedural acts.

So, should there be abuse of right, it would result from the procedural position of the AT. If a tax fact occurs in 2014, with the deadlines for lapse and ex officio revision of the IRS assessment running in 2015 and the Claimant having sustained the illegality of the same in that year, the AT should always consider the material arguments put forward by the Claimant, so as to make material truth prevail. Thus, that which occurs in that process will obviously be subject to judicial protection, even for observance of the constitutional principle of effective judicial protection. Moreover, the AT proceeded to a true additional tax assessment, taking position and even informing the Claimant that he could complain about it or challenge it.

And it is clear that this act cannot fail to be subject to scrutiny through challenge.

Moreover, only this new act is subject to being challenged, for the preceding act was the subject of revocation by the AT, as well emphasized by the Claimant. In truth, the first IRS assessment, the IRS Assessment no. 2015..., of 03.07.2015, was revoked, this assessment and any administrative acts subsequent thereto (including the decision on the Gracious Complaint) not being subject to challenge due to supervening futility.

In that sense, the Claimant cites the Judgment of the Central Administrative Court of the South (hereinafter TCAS) of 05.12.2006, Case no. 00777/05, reported by the then judge Casimiro Gonçalves, and in which it was agreed in the following terms:

"Having the appellant been notified to pay 5,476,439$00 (additional IRC assessment no. [number] relating to the fiscal year of 1992, with annulment of the prior collection note, the new assessment is constituted as an additional assessment that substitutes and revokes the prior additional assessment; and, having, by means of such annulment/substitution, the object of the process disappeared from the legal order, a cause of supervening futility of the present dispute occurs, generating extinction of the respective instance (subparagraph e) of article 287 of the CPC)." – Judgment available at http://www.dgsi.pt/jtca.nsf/170589492546a7fb802575c3004c6d7d/f3ab35986e3bf8098025723d003bafa3?OpenDocument

And cites likewise the Judgment TCAS of 09.01.2007, Case no. 00848/05, reported by judge Eugénio Sequeira, and in which it was agreed in the following terms:

"...having the AT proceeded as set out above, with annulment/substitution of the prior additional/corrective assessment by the following, in this view, only of the latest additional/corrective assessment may the respective means of challenge be utilized, namely the gracious complaint, which in this case, although it was attached to these case files, in this light it is revealed that it was improperly attached, since it is directed against assessment no. ..., the latest of the assessments made in the same fiscal year, it not even being able to be considered that it had an identical object to that of the present judicial challenge, and should be separated from them and remitted to the AT for the due purposes, as indeed the appellant himself expressly requested in his submission at pages 568 et seq, which should thus be granted."

Thus it becomes clear that only the new IRS assessment no. 2015..., of 23.10.2015 is subject to challenge, being this the reason why this assessment is the object of the present claim.

Moreover, having the AT disregarded the Claimant's intention to analyze the material legality of the tax act under the protection of the first assessment and having the AT proceeded to the inclusion of the income in question in the second declaration, having even invited the Claimant to do so, to now disregard this procedure and intend to make definitive in the legal order the first assessment act, besides denying the right to material justice and effective protection thereof, would constitute an abuse of right in the modality of venire contra factum proprium.

The alleged exception of unamendability of the tax act censured thus fails, as not proven (lack of timeliness, consolidation of the first tax act or unamendability of the second act, said confirmatory).

Reasoning

The Claimant understands that there is no proper reasoning of the tax act, which thus could not be considered complete and should be annulled for a defect of form.

It is certain that in accordance with number 1 of article 77 of the General Tax Law (hereinafter LGT), "The decision of the procedure is always reasoned by means of a brief exposition of the reasons of fact and law that motivated it, the reasoning being able to consist of mere declaration of agreement with the grounds of prior opinions, information or proposals, including those that form part of the tax inspection report." It is also certain that in accordance with number 2 of article 153 of the Code of Administrative Procedure, "It is equivalent to lack of reasoning the adoption of grounds which, by obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act."

And it is certain that, based on the declaration of the Claimant himself (first IRS declaration) and of the substitute taxpayer (withholding at source realized), the AT classified the income earned by the Claimant and now in question in Category G, having in this context mentioned that it did so "...in accordance with the available elements...".

And it is manifest that in the referred reasoning the available elements are not expressly indicated. But from it results that they consist in the communication of the substitute taxpayer and that its legal-fiscal classification is situated in category G, which enabled the Claimant to understand the cognitive path of the AT for the decision taken and did not prevent him from precisely and expressly rebutting the grounds that were at the basis of the legal-fiscal classification concretely contested and in the terms raised by him.

That is, although succinct, the reasoning is clarifying, particularly because the entire procedure results from initiative of the Claimant, who well knows the causes and reasons of the dispute. There is thus no cause of annulability based on a defect of reasoning.

The request thus also fails on this ground.

Principle of Legality

The Claimant understands that in the year 2014 the CIRS did not contain a rule of incidence that would determine the taxation of indemnities for the onerous waiver of contractual positions or other rights relating to immovable property.

Without prejudice to the negative delimitation rule contained in no. 1 of article 12 of the CIRS, which is not relevant here, it then provided in subparagraph b) of no. 2 of its article 9, in the wording given by Law no. 67-A/2007, of 31/12 (in force during the year 2014, the year to which the facts refer) that:

1- "Constitute capital increases, provided they are not considered income of other categories: (...)

b) Indemnities that aim at reparation of non-patrimonial damages, excepted those fixed by judicial or arbitral decision or resulting from judicially approved agreement, of unproven emergent damages and of lost profits, considering in this latter case as such only those intended to compensate for the net benefits left uncollected as a consequence of the injury;"

Under the terms of the law were included, then, within the scope of taxation indemnities for:

a) "non-patrimonial damages, excepted those fixed by judicial or arbitral decision or resulting from judicially approved agreement",

b) "unproven emergent damages",

c) "lost profits", but "considering in this latter case as such only those intended to compensate for the net benefits left uncollected as a consequence of the injury".

It should be noted that having the AT configured the assessment within the framework of Category G, it is useless to try to inquire whether it would be included in another category of IRS income.

It is thus important to analyze only the said normative provision in force in the year 2014, to conclude whether it included the present manifestation of contributory capacity.

The Respondent seeks a broad interpretation of the provision. It recognizes that from the principle of legality results that fiscal law must be sufficiently dense and precise as to the essential elements of taxes: incidence, the rate of the tax, fiscal benefits and taxpayer guarantees (article 103/2, second part of the CRP). However, it emphasizes that "to the rules of 'closed legal hypothesis' (principle of fiscal typicality), which guarantee taxpayer security, are added the rules of 'open legal hypothesis' (anti-abuse rules), whose objective is the taxation of facts that escape the former as a result of situations of fraud, evasion and abusive tax avoidance (article 38/2 of the LGT), being necessary to tread a path where the two dimensions can complement each other, so as to guarantee justice of the fiscal system".

For the Claimant the reform of the CIRS of 2014 assumes special relevance, as it has application to income of the years 2015 and subsequent. And as is known, it altered precisely article 9 of the CIRS. Thus, Law no. 82-E/2014, of 31 December, added to number 1 of article 9 of the Personal Income Tax Code a new rule of incidence, subparagraph e), in the following manner:

"Article 9

Income of category G

1 – […]:

a) […];

b) […];

c) […];

d) […];

e) Indemnities owed for the onerous waiver of contractual positions or other rights inherent to contracts relating to immovable property."

And for the Claimant this addition is related to the calculation of gain subject to taxation in IRS as capital gain by the transfer of immovable property. Thus it emphasizes that the Commission For The Reform Of Personal Income Tax refers that "With the objective of ensuring fairer taxation, which takes into account the real contributory capacity, it is understood that the range of expenses to be considered in the determination of capital gains and losses should be enlarged, to include indemnities proven to be paid for the onerous waiver of contractual positions or other rights relating to immovable property. In return, it is expressly provided that those indemnities constitute capital increases subject to taxation in the sphere of their respective beneficiaries." (See Draft Reform of Personal Income Tax, July 2014, point 4.1.12.10 Expenses and charges, cited by the Claimant).

This means that for the Respondent the Law came to densify "expressly" the incidence of taxation, independently of the other conditions of taxation required in the prior subparagraphs, extending the field of incidence of the provision to new realities, until then not taxed, in them being included the compensation as earned by the Claimant.

There is thus, for the legislator, a new expense relevant for purposes of calculating capital gains on immovable property and, in return, given the principle of symmetry, the extension of the norm of tax incidence, the new subparagraph e) of number 1 of article 9 of the Personal Income Tax Code, cited above, which is innovative.

Manuel Faustino (The taxation of personal income) in Lessons in Fiscal Law, João Ricardo Catarino and Vasco Branco Guimarães (coord.) Almedina, 2012, p. 17 refers that category G of the CIRS corresponds to "an accentuatedly residual category, where heterogeneous realities are agglomerated both as to their nature and as to their source, but unified in their characteristic of income subject to taxation". However, it clarifies that it does not "provide … a generic residual rule of incidence that permits the inclusion within the perimeter of taxation of any other income not provided for in the other rules of incidence", concluding that its "residuality" is an "enumerative residuality", although it be a "dependent category".

Nevertheless, José Luís Saldanha Sanches (Manual of Tax Law, 3rd edition, Coimbra Publisher, 2007, p. 322 clarifies that "the possibility of giving the form of indemnities (not taxed) to payments of any kind ... gave rise to a rule intended to prevent this type of abuse" (precisely the subparagraph here in question).

In the same line seems to follow Xavier de Bastos (Real Incidence and Determination of Net Income, 2007, p. 362), cited by the Respondent, when referring that "however, the law could not fail to require that such indemnities, not taxable, corresponded to proven emergent damages. The lack of proof thus entails the full taxation of the indemnity, classifying itself in this category G of income. The door is thus closed to evasion, which would be too easy, consisting in invoking that a given capital increase corresponded to an indemnity for emergent damage. Without proof that it was so, there will be no exclusion of incidence".

It is for this reason that the Respondent concludes that the amounts earned by a tenant as indemnity to leave the house he inhabits was already typified in subparagraph b) of the rule in question, as unproven emergent damages. Such amounts received by a tenant as an indemnity so that he vacates the property would constitute, for the one who receives them, an indemnity for emergent damages. This type of indemnity would thus constitute an income of category G of IRS, in accordance with subparagraph b) of no. 1 of article 9 of the Personal Income Tax Code, if the damages suffered are not proven. That is, if the one who receives the compensation does not make proof of the costs/expenses incurred by the fact of leaving the property vacant (which the Claimant manifestly did not do).

However, for good demarcation of the scope of the provision, it is important to return to the Manual of Saldanha Sanches. There it is referred, on the same page, that indemnities for non-compete covenants are taxed in category G of IRS for being specifically provided for in an autonomous subparagraph of article 9, being that "before non-compete obligations appeared in the rules of incidence of the Personal Income Tax Code, its taxation was questioned".

And well it is understood that it should be so, given the sinalagmatic character of the negative obligation assumed and of the compensation agreed upon.

Now, the amount paid to the Claimant results from "compensation for the revocation of the lease contract in force and for the improvements made to the property during its term". It thus has the nature of incentive to the revocatory agreement and consideration thereof and of the improvements made. There is thus consideration for the waiver of a right and not necessarily the reparation of a damage. The question is, therefore, whether these compensations had or did not have legal provision up to 2014, precisely because they correspond to a "compensation", or better a "consideration", having a manifest sinalagmatic character (will to voluntarily dispose of a right in return for consideration), which brings them closer to non-compete compensations than to typical "indemnities" for reparation of damages. And one should not say that the rule has an anti-evasion character, for if it were so, it should admit proof to the contrary, which does not occur. Moreover, the combat against abuse cannot be reconciled with tax types that are totally open, as a "catch all provision", against the principle of legality as regards incidence.

That is why the legislator had the care, in the reform of the Code of 2014, of including the new subparagraph e which up to 2014 did not appear in the Code. Indeed the reform of the CIRS of 2014 (Law no. 82-E/2014, of 31 December), altered article 9 of the CIRS adding to number 1 of article 9 of the Personal Income Tax Code a new rule of incidence, subparagraph e), in the following manner:

"Article 9

Income of category G

1 – […]:

f) […];

g) […];

h) […];

i) […];

j) Indemnities owed for the onerous waiver of contractual positions or other rights inherent to contracts relating to immovable property."

And this addition is related to the calculation of gain subject to taxation in IRS as capital gain by the transfer of immovable property, destined at the quickening of the immovable rental market, having foreseen its symmetric taxation. Thus it is understood the cited text of the Commission For The Reform Of Personal Income Tax refers that "With the objective of ensuring fairer taxation, which takes into account the real contributory capacity, it is understood that the range of expenses to be considered in the determination of capital gains and losses should be enlarged, to include indemnities proven to be paid for the onerous waiver of contractual positions or other rights relating to immovable property. In return, it is expressly provided that those indemnities constitute capital increases subject to taxation in the sphere of their respective beneficiaries." (See Draft Reform of Personal Income Tax, July 2014, point 4.1.12.10 Expenses and charges, cited by the Claimant).

This means that the Law comes to include "expressly" these compensations in the rule of incidence, from which they did not appear. Now the phrase "expressly", together with the absence of interpretative character of this addition, well demonstrate its innovative character, as what resulted from the inclusion of non-compete obligations referred to by Saldanha Sanches.

In truth, if the primitive wording already intended to embrace these gains, it would be natural that interpretative character be attributed to the new wording, similarly to what is customary to do in budgetary laws, when it is intended that the new wordings (clarifying) apply to situations potentially covered by the prior wordings. For this reason, the fact that interpretative character was not attributed to the new subparagraph in the sense of intending to enlarge the scope of incidence of the said rule and not maintain it, clarifies it.

There is thus, for the legislator, a new expense relevant for purposes of calculating capital gains on immovable property (in respect for the principle of contributory capacity and also with the referred extra-fiscal purpose) and, in return, given the principle of symmetry, the densification (innovative and expansionist) of the rule of tax incidence, corresponding to the new subparagraph e) of number 1 of article 9 of the Personal Income Tax Code, which is thus innovative. Innovative by including within the scope of incidence a new reality, not included in the prior wording, as it could do with other gains resulting from the transfer of certain assets, which today escape the rules of incidence of Category G of IRS.

It is not, therefore, a question of accoding absolute value to the old principle of closed typicality, but rather of according due weight to the principle of legality and an interpretation thereof in accordance with the Constitution.

It is thus recognized that the principle of legality has been violated, for the compensation earned by the Claimant in 2014 was not included within the scope of incidence of the rule applied, thus existing a defect of violation of law, which makes the tax act, in that part, subject to annulment, which should be declared, with the consequent obligation of restitution to the Claimant of the amount improperly paid.

Indemnificatory Interest

As verified, the Claimant initially considered the income as taxable, including it in his annual income declaration for 2014, following even the withholding at source suffered, having subsequently proceeded to the submission of a substitute declaration on 09.07.2015, already outside the legal deadline (article 60/2 of the CIRS).

In accordance with the provisions of articles 43 of the LGT and 61 of the CPPT, indemnificatory interest in favor of the taxpayer is only due when, in gracious complaint or judicial challenge, it is verified that there was error attributable to the services, and a tax debt superior to the legal amount was assessed, being necessary the verification of blame of the services in this action in the sense that they did not guide their action in the sense in which they were obliged and as they could and should.

As is known the error of the substitute taxpayer is attributable to the AT.

In that measure blame may be attributed to the AT, being the error attributable to it, aggravated by the reiteration of the act.

It is thus considered that there exists an obligation to pay indemnificatory interest in favor of the Claimant, being the present claim also judged to have merit, in that part.

Conclusion

For these reasons, it is judged that the exception of unamendability of the tax act has no merit as not proven and the present claim for annulment of the same has merit as proven, based on a defect of violation of law, with the obligation to proceed to the return of the amount of IRS paid in excess, increased by indemnificatory interest counted in accordance with the legal terms.

E - Operative Part

As a result of the foregoing, it is decided to judge totally without merit the exception of lack of timeliness of the petition, as not proven and with merit, as proven, the claim for annulment of the tax act imposing Personal Income Tax, based on a defect of violation of law, with the Claimant to be reimbursed of the tax improperly paid, increased with the corresponding indemnificatory interest counted in accordance with the Law from payment until the processing of the corresponding credit note.

F - Value

The value of the collection disputed and object of the claim (Personal Income Tax) amounts to the total value of € 18,691.04 (eighteen thousand six hundred and ninety-one euros and four cents), and thus this is the value of the action and the claim.

Thus and in accordance with the provisions of articles 306, nos. 1 and 2, of the CPC and 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Fees in Tax Arbitration Proceedings, the value of € 18,691.04 is set for the proceeding.

G - Costs

In accordance with article 22, no. 4, of the RJAT, the amount of costs is set at € 1,224.00 (one thousand two hundred and twenty-four euros), in accordance with Table I attached to the Regulation of Fees in Tax Arbitration Proceedings, entirely at the charge of the Respondent.

Lisbon, 5 August 2016

Text prepared by computer, in accordance with the Code of Civil Procedure (CPC), applicable by referral of article 29, no. 1, subparagraph e) of the RJAT, with blank verses, reviewed and signed by the undersigned arbitrator.

The Arbitrator

(Jaime Carvalho Esteves)