IRS Capital Gains Reinvestment of Sale Proceeds – CAAD Arbitration 745/2016-T

ARBITRATION DECISION

The Arbitrator, Dr. Sílvia Oliveira, appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Singular Arbitral Tribunal, constituted on 27 February 2017, with respect to the case identified above, decided as follows:

1. REPORT

1.1

A…, taxpayer no… and B…, taxpayer no…, married under a regime of separation of property and both resident at Rua do…, no…, in Porto (hereinafter referred to as "Claimants"), submitted a request for arbitration and constitution of a Singular Arbitral Tribunal, on 16 December 2016, under the terms set forth in article 4 and no. 2 of article 10 of Decree-Law no. 10/2011, of 20 January (RJAT), in which the Tax and Customs Authority (hereinafter referred to as "Respondent") is the Respondent.

1.2

The Claimants, having been notified of the settlement of accounts no. 2016… for payment, until 23/11/2016, of the amount of EUR 19,843.24 corresponding to the assessment of Personal Income Tax (IRS) no. 2016… (relating to IRS for the year 2012) and the respective assessment of interest no. 2016…, but not accepting the said assessments, presented this request for arbitration with a view to the declaration of "(…) illegality and annulment of the tax acts in dispute, with all legal consequences, namely reimbursement of the amount paid plus indemnity interest, as well as court costs and the fees of the Claimants' mandatary".

1.3

The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 19 December 2016 and notified to the Respondent on the same date.

1.4

The Claimant did not proceed to appoint an arbitrator, whereby, under the terms set forth in article 6, no. 2, paragraph a) of the RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of CAAD, on 10 February 2017, the appointment having been accepted within the legal timeframe and terms provided.

1.5

On the same date the parties were duly notified of such appointment, and did not manifest their will to refuse the arbitrator's appointment, in accordance with article 11, no. 1, paragraphs a) and b) of the RJAT, in conjunction with articles 6 and 7 of the Deontological Code.

1.6

Thus, in accordance with the provision of paragraph c), no. 1, of article 11 of the RJAT, the Arbitral Tribunal was constituted on 27 February 2017, and an arbitral ruling was issued on the same date, to notify the Respondent to "(…) within 30 days, respond, attach a copy of the administrative file and request, if it so wishes, the production of additional evidence".

1.7

On 23 March 2017 the Respondent attached to the records a copy of the administrative file and presented its Response, having defended itself by way of objection and concluded that "in light of the foregoing (…) the total lack of merit of the claim should be declared, due to complete lack of legal support".

1.8

By arbitral ruling of 23 March 2016, the Arbitral Tribunal ordered notification to:

1.8.1

"The Claimants to, within the said period of 5 days, pronounce themselves on the possibility of waiving the interrogation of the two witnesses indicated in the claim and, should they not waive the interrogation of such witnesses, they are hereby also notified that, within the same period, they should indicate the facts on which they intend the witness evidence to focus";

1.8.2

"Both Parties to pronounce themselves, within the said period of 5 days, on the possibility of waiving the holding of the meeting referred to in article 18 of the RJAT and on the possibility of waiving the presentation of written arguments".

1.9

The Respondent presented a petition on 27 March 2017, to the effect that it considered "(…) that the documentary evidence attached to the records is necessary and sufficient for the decision of the case, having nothing to object to waiving the holding of the meeting provided for in art. 18 of the RJAT, as well as waiving the production of arguments".

1.10

The Claimants presented a petition on 28 March 2017, to the effect that they considered "(…) that there was no longer any utility in the production of the witness evidence which (…) they waive", and that they "(…) have nothing to object to waiving the holding of the meeting referred to in article 18 of the RJAT and (…) waiving the production of arguments".

1.11

In these terms, by ruling of this Arbitral Tribunal, dated 29 March 2017, it was decided:

1.11.1

To waive the holding referred to in article 18 of the RJAT;

1.11.2

To waive the presentation of arguments;

1.11.3

To set 27 April 2017 for the purpose of rendering the arbitral decision.

1.12

Finally, the Claimants were also warned that "until the date of rendering of the arbitral decision they should proceed to payment of the subsequent arbitration fee, in accordance with no. 3 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and communicate such payment to CAAD" (which they proceeded to do on 11 April 2017).

2. CAUSE OF ACTION

The Claimants support their claim, in summary, as follows:

2.1

"On 10/12/2003, (…) they acquired the autonomous fraction designated by the letters EV, intended for housing, and the autonomous fraction designated by the letters AI intended for parking, both of the urban property in horizontal common ownership located at Rua…, no… and…, parish and municipality of…, respectively, for the prices of € 139,663.41 and € 9,975.96 (…)", being that "the said fraction EV was intended for the Claimants' own permanent housing, where they lived for almost 6 years, (…) and to where they changed their fiscal residence (…)".

2.2

The Claimants further state that "on 17/07/2009, (…) they acquired the urban property (…) located at Rua do… no°…, parish of…, municipality of Porto, described in the… Registry Office of Real Property of Porto under number… and registered in the respective urban property matrix under article… [today article… of the Union of parishes of…,… and… (…)]" and "as stated in the public deed of sale and purchase, the property in Porto was acquired for the Claimants' own permanent housing, where they came to reside and to where in August 2009 they changed their fiscal residence (…)".

2.3

The Claimants continue stating that "not having (…) been able to sell the property in Matosinhos before acquiring the property in Porto, the latter remained awaiting the sale of the former so that improvement works could be carried out on it".

2.4

"On 27/02/2012, the Claimants alienated the property in Matosinhos for the total price of € 250,000.00 of which € 241,900.00 related to the autonomous fraction designated by the letters EV and € 8,100 related to the autonomous fraction designated by the letters AI (…)", having incurred "in real estate mediation for the sale of the property in Matosinhos (…) an expense of € 15,375.00 (…)".

2.5

The Claimants further allege that, by reference to the year 2012, "(…) in their IRS declaration no…… -… (…) they declared the realization of a capital gain with the sale of the property in Matosinhos and, (…) manifested the intention to proceed with the reinvestment of the realization value of fraction EV, deducted from the amortization of the loan they had contracted for its acquisition, in the improvement of the property in Porto (…)", being that "in the improvement of the property in Porto, the Claimants reinvested the following amounts:

a) In 2012, € 6,950.00;
b) In 2013, € 118,998.41; and
c) In 2014, € 341,830.90 (…)".

2.6

The Claimants further clarify that "at the time of its acquisition (…) they requested the exemption from IMI (…) relating to acquisition for own permanent housing of the property in Porto, which was granted to them (…)".

2.7

Thus, the Claimants do not agree with the Respondent's position ([2]) in that they understand that it "(…) completely excludes what is provided for in paragraph b) of no. 5 of art. 10° of the IRS Code which provides that reinvestment (….) shall be made between the 24 months preceding and the 36 months following the date of realization", "in other words, if the ATA's position were correct, taxpayers would never be able to acquire a property intended for own permanent housing before having alienated the property that constitutes their own permanent housing".

2.8

In reality, for the Claimants, "(…) such reasoning does not hold and, in addition to gravely violating the fundamental law, the letter and spirit of the IRS Code, it causes an insoluble twist in the unity of the fiscal legal system that requires that, in order to benefit from the exclusion of taxation of capital gains on property, taxpayers devote the new property to their own permanent housing, a requirement that is also required in order for them to enjoy the IMI exemption (…)".

2.9

And they add that "in fact it is not sustainable nor is it appropriate that the Claimants, having acquired the property in Porto before they managed to sell the property in Matosinhos, in the latter they would have to remain not changing their life to the property in Porto which precisely they had acquired to meet their everyday needs (…)", all the more so that "(…) if they had not changed their own permanent housing to the property in Porto they would not have the possibility of enjoying the tax benefit in respect of IMI".

2.10

Now, according to the Claimants, invoking the applicable legislation, by virtue of the fact that "(…) in their respective IRS declarations (…)" they "(…) manifested the purpose of proceeding with the reinvestment of the realization value of the sale of the property in Matosinhos in the improvement of the property in Porto (…)" and carried out such reinvestment "(…) within the deadline that the law grants them, there is no place for taxation of the capital gains generated and, as such, the assessments in dispute are illegal".

2.11

Thus, according to the Claimants, "(…) as the realization value obtained with the alienation of the property in Matosinhos was reinvested in the improvement of the property in Porto (…) the capital gain is excluded from taxation, there being no place for any correction of the values recorded in the declaration (…) nor for any taxation relating to them and being, consequently, illegal the additional official assessment in dispute".

Regarding fees

2.12

Additionally, the Claimants further petition that "by virtue of the illegalities that caused the assessment in dispute (…)" "(…) they had to pronounce themselves several times in the administrative proceedings and had to resort to the present Request for Arbitration, which translates into an expense equivalent to the expenses and fees of their mandatary", "expenses and costs (…) which, given that it was the Tax Administration that caused them, should be condemned to pay, as they are considered damages arising from the unlawfulness of the annulled acts, therefore indemnifiable by the losing party (…)" "and which provisionally amount (…) to € 2,500.00".

2.13

In these terms, the Claimants conclude their claim requesting that there be declared "(…) the illegality and annulment of the assessment acts in dispute, with all legal consequences, namely reimbursement of the amount paid plus indemnity interest, as well as court costs and the fees incurred by the Claimants with their mandatary".

3. RESPONSE OF THE RESPONDENT

3.1

The Respondent responded, defending itself by way of objection and sustaining that "at issue is the additional assessment of IRS (…) relating to the year 2012 and the taxation of real estate capital gains, arising from the alienation, in 2012, of two fractions (…) located at Rua… (…)", being that "the respective correction was based on the fact that the Claimants did not meet the requirements provided for in no. 5 of art. 10° of the IRS Code for exclusion from taxation of real estate capital gains".

3.2

Indeed, according to the Respondent, "the divergence proceedings, which focused on the income declaration Model 3/IRS, relating to the year 2012, was opened because the declared reinvestment exceeded the 24-month period provided for in paragraph b) of no. 5 of art. 10° of the IRS Code".

3.3

In reality, the Respondent states that the Claimants "came (…) to state that the declared reinvestment was intended for improvement works on a property they had acquired in 2009".

3.4

But, according to the Respondent, "the taxable fact that is the basis of the right to the tax is the existence of capital gains on the occasion of the onerous alienation, with no. 5 of art. 10° of the IRS Code establishing a negative delimitation of the tax base, namely to the extent that gains resulting from the onerous transfer of property intended for the taxpayer's own permanent housing and/or his or her family unit are at issue".

3.5

In these terms, "as the realization value was obtained by the alienation of a property that did not constitute the Claimants' own permanent housing since 2009", concludes the Respondent that, in the case under analysis, no legal defect can be attributed to the additional assessment in question, thus defending that "(…) the total lack of merit of the claim should be declared, due to complete lack of legal support".

3.6

Finally, the Respondent requested waiver of the production of witness evidence "given that the disputed issue is exclusively one of law (…)".

4. PRELIMINARY RULING

4.1

The request for arbitration is timely since it was presented within the deadline provided for in paragraph a) of no. 1 of article 10 of the RJAT.[3]

4.2

The parties have standing and legal capacity, are legitimate as to the request for arbitration and are duly represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

4.3

With regard to the competence of this Tribunal to examine the request for arbitration formulated by the Claimants, it will be necessary to analyze, individually, the nature of the various claims that form part of it.

4.4

Indeed, as stated in point 1.2., above, the Claimants presented this request for arbitration with a view to the declaration of "(…) illegality and annulment of the tax acts in dispute, with all legal consequences, namely reimbursement of the amount paid plus indemnity interest, as well as court costs and the fees incurred by the Claimants with their mandatary" (emphasis ours).

4.5

In general terms, in accordance with article 2 of the RJAT, "the competence of arbitral tribunals comprises the examination of the following claims":

"a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of determination of patrimonial values;

c) (Repealed)" (emphasis ours).

4.6

Thus, with regard to the claim for annulment of the tax acts in dispute, there is no doubt that this Tribunal is competent to examine the Claimants' claim.

4.7

With regard to the claim for payment of indemnity interest (to accrue on the tax paid by the Claimants), in accordance with no. 5, of article 24 of the RJAT "payment of interest is due, regardless of its nature, under the terms provided for in the general tax law and in the Code of Tax Procedure and Process", from which it follows that an arbitral decision is not limited to examining the legality of the tax act.

4.8

Similarly, in accordance with article 24, no. 1, paragraph b) of the RJAT, it should be understood that the claim for indemnity interest is a claim relating to tax acts (e.g. of assessment), which aims to clarify/specify the content of the duty to "restore the situation that would have existed if the tax act which is the subject of the arbitral decision had not been taken, adopting the acts and operations necessary for that purpose".

4.9

As Jorge Lopes de Sousa states, "the determination of the effects of the arbitral decision, which can be defined in a process of judicial review, namely, the annulment of the acts whose declaration of illegality is requested, the condemnation of the Tax and Customs Authority to payment of indemnity interest (…)" falls within the competences of arbitral tribunals functioning at CAAD (emphasis ours).[4] [5]

4.10

In these terms, in tax arbitration proceedings there may be payment of indemnity interest, under the terms provided for in articles 43, nos. 1 and 2, and 100 of the General Tax Law (LGT), when it is determined that there was error attributable to the services from which resulted payment of the tax debt in an amount greater than legally due, being that the right to indemnity interest will always depend on the verification of an error attributable to the services of the Respondent, from which resulted such payment of tax debt in an amount greater than legally due.

4.11

Thus, with regard to the claim for payment of indemnity interest there is also no doubt that this Tribunal is competent to examine this claim of the Claimants.

4.12

As regards court costs, interpreting this Tribunal the claim formulated by the Claimants as relating to responsibility for payment of arbitration costs, in accordance with article 22, no. 4, of the RJAT, "the arbitral decision issued by the arbitral tribunal includes the fixing of the amount and the apportionment among the parties of the costs directly resulting from the arbitration proceedings", whereby this Tribunal is also competent to determine which party(ies) may be held responsible for the same, reference being made here to the analysis, in this matter, to be carried out in Chapter 6 of this Decision.

4.13

Finally, the Claimants further request that the Respondent be condemned to bear the amounts of expenses resulting from the present judicial proceedings, namely "(…) an expense equivalent to the expenses and fees of their mandatary", which they understand "(…) given that it was the Tax Administration that caused them, should be condemned to pay, as they are considered damages arising from the unlawfulness of the annulled acts, therefore indemnifiable by the losing party (…)", "and which provisionally amount (…) to € 2,500.00".

4.14

Now, in this regard, it is reiterated that the competence of arbitral tribunals functioning at CAAD is limited, under the terms provided for in article 2 of the RJAT (transcribed above in point 4.5.), to the declaration of illegality of acts of the types indicated therein and acts that know of the legality of acts of those types.

4.15

Furthermore, and as referred to above in points 4.7. to 4.11., it is possible to recognize the right and render condemnations in respect of indemnity interest, as well as to recognize (with support in the article provided for in article 171 of the CPPT) that the arbitration proceedings are also the appropriate means to render condemnations for indemnification for undue guarantee.

4.16

However, there is no legal support for including in the competences of arbitral tribunals functioning at CAAD condemnations for debts of mandatary fees, as already analyzed and concluded in several Arbitral Decisions, whereby this part of the claim is not admitted.[6]

4.17

No exceptions were raised that merit examination.

4.18

No nullities are verified, whereby it is now necessary to examine the merits of the claim.

5. FACTS

5.1 Facts Proven

5.2

The following facts are considered proven (based on the documents identified below, attached by the Claimants, as well as the documents that form part of the administrative file attached by the Respondent):

5.2.1

The Claimants acquired, on 10 December 2003, by public deed of sale and purchase, with loan and mortgage, two fractions ("EV" and "AI"), for the price, respectively, of EUR 139,663.41 and EUR 9,975.96, of an urban property located at Rua… nos… and…, in Matosinhos (property described in the CRP of Matosinhos under no… and registered in the property matrix under article… of the Union of Parishes of… and…) (as per copy of the public deed of sale and purchase, attached to the records with the claim – doc. no. 7).

5.2.2

The Claimants acquired, on 17 July 2009, by public deed of sale and purchase, with loan and mortgage, for the price of EUR 725,000.00, an urban property located at Rua do…, no°…, in Porto (property described in the… CRP of Porto under no… and registered in the property matrix under article… of the Union of Parishes of…,… and…) (as per copy of the public deed of sale and purchase, attached to the records with the claim – doc. no. 9).

5.2.3

The Claimants submitted a request for the benefit of an exemption from Municipal Property Tax (IMI) relating to the urban property located at Rua do… in Porto, having been granted the exemption for the years 2009 to 2012 (as per copy of the respective exemption, attached to the records with the claim – doc. no. 18).

5.2.4

The Claimants changed, on 5 August 2009, their fiscal residence to the address referred to in the previous point (as appears in the administrative file attached by the Respondent)

5.2.5

The Claimants alienated, on 27 February 2012, by public deed of sale and purchase, for the price of EUR 241,900.00 and EUR 8,100.00, respectively, the fractions "EV" (apartment) and "AI" (garage), relating to the property described above in point 5.2.1. (as per copy of the public deed of sale and purchase, attached to the records with the claim – doc. no. 12).

5.2.6

The Claimants presented, on 26 August 2013, a replacement income declaration Model 3 of IRS, relating to the income of the year 2012, in which they declared the alienation of the property described in point 5.2.1., above, as well as:

5.2.6.1

In field 506, of Table 5, of Annex G, the intention to reinvest part of the realization value of fraction "EV" (in the amount of EUR 241,900.00) and,

5.2.6.2

In field 508, of Table 5, of Annex G, to have concretized, in 2012, part of such reinvestment, in the amount of EUR 6,950.00,

(as per copy of the respective income declaration attached to the records with the claim – doc. no. 14).

5.2.7

On 29 August 2013, the IRS declaration referred to in the previous point gave rise to divergence proceedings on the grounds of "sale of property not declared or need for proof of the values of expenses, the realization value, the date of acquisition of the properties or the allocation and professional activity" (as per copy of the document in the administrative file attached by the Respondent).

5.2.8

The Finance Services of Porto…, issued an opinion, on 16 September 2013, after examining the elements sent by the Claimants (copies of the deeds of sale and purchase and invoice of real estate mediation), to the effect that "in the case at hand there is no reinvestment because the deadline provided for in paragraph b) no. 5 article 10, given that the deed was made in …/2009" (as per copy of the document in the administrative file attached by the Respondent).

5.2.9

By letter of 10 January 2014, the Finance Services of Porto…, notified the Claimants for purposes of exercising the right to prior hearing, in that "as (…) informed in September/2013, they filled in incorrectly the Table 5/Annex G whereby they should send a replacement income declaration (…)" under penalty of proceeding "(…) officially (…)", indicating the intention to correct the values declared in fields 506 (EUR 241,900.00) and 508 (EUR 6,950.00) of Table 5, of the said Annex G of model 3 of the year 2012 (as per copy of the document in the administrative file attached by the Respondent).

5.2.10

On 19 January 2014, the Claimants exercised the right to prior hearing referred to in the previous point, having stated that the reinvestment was intended for "construction, expansion and improvement of another property, exclusively intended for their own permanent housing (…) which for these purposes had been acquired on 17 July 2009" (as per copy of the document in the administrative file attached by the Respondent).

5.2.11

The Finance Service of Porto… notified the Claimants, by registered letter, dated 7 February 2014, to present the "documents proving the value indicated in field 508 of table 5 of Annex G – Capital Gains (6,950.00€)" (as per copy of the document in the administrative file attached by the Respondent).

5.2.12

On 29 February 2014, the Claimants presented copies of the documents proving the value indicated in field 508, of Table 5 of Annex G of the income declaration of the year 2012 (green receipt from architect, in the amount of EUR 2,152.50, invoice and respective receipt from the engineering company C…, S.A., in the amount of EUR 2,706.00 and invoice from a single-person engineering services company, in the amount of EUR 3,690.00, as per copies in the administrative file attached by the Respondent).

5.2.13

The Claimants presented, on 22 July 2014, a replacement income declaration Model 3 of IRS, relating to the income of the year 2013, in which they declared in field 509, of Table 5, of Annex G (Realization of reinvestment after alienation) the amount of EUR 118,998.41, relating to the "value reinvested in the first year following (without recourse to credit" (as per copy of the respective income declaration attached to the records with the claim – doc. no. 16).

5.2.14

On 26 May 2015, the Finance Service of Porto… issued Letter no… / …-…, addressed to the Finance Director of Porto, to try to clarify whether "the documents presented to justify the value of 6,950.00 euros declared in Field 508 of Table 5 of Annex G that makes up the (…) declaration may fit into the concept of reinvestment (…)" (as per copy of the respective Letter in the administrative file attached to the records by the Respondent).

5.2.15

The Claimants presented, on 29 May 2015, a replacement income declaration Model 3 of IRS, relating to the income of the year 2014, in which they declared in field 510, of Table 5, of Annex G (Realization of reinvestment after alienation) the amount of EUR 341,830.90, relating to the "value reinvested in the second year following (without recourse to credit" (as per copy of the respective income declaration attached to the records with the claim – doc. no. 17).

5.2.16

Internal order of the Finance Directorate of Porto, dated 20 July 2015, to the effect of arguing that the reinvestment declared by the Claimants had no legal basis in no. 5 of art. 10 of the IRS Code (as per copy of the respective order in the administrative file attached by the Respondent).

5.2.17

The Claimants were notified, by Letter no. 2016…, of 26 August 2016, issued by the Finance Service of Porto…, to, within 15 days, present a replacement income declaration for the years 2012, 2013 and 2014, taking into account the divergence proceedings identified with respect to the income declaration for the year 2012, "(…) to the effect that the declared reinvestment does not fit within no. 5 of article 10 of the IRS Code because the property sold in 2012 (…) was not the (…) Permanent Residence since August 2009" (as per copy of document no. 4 attached with the claim and administrative file attached by the Respondent).

5.2.18

The Claimants were also by the same Letter notified to, within 15 days, exercise the right to hearing on the draft decision referred to in the previous point, having exercised that right to hearing on 9 September 2016, alleging that "(…) they could not sell the property located at Rua de…, Matosinhos, before the acquisition of the new property at Rua do…, Porto, and that they had to (…) allocate the latter to their Permanent Own Housing for purposes of IMI exemption and, hence, the change of fiscal residence", thus reiterating the exclusion from taxation of the capital gains generated with the alienation of the property located in Matosinhos (described in point 5.2.1., above), as per copy in the administrative file attached by the Respondent.

5.2.19

The Claimants were notified of Letter no. 2016…, of 14 September 2016, issued by the Finance Service of Porto…, to the effect of maintaining the notification contained in Letter no. 2016…, identified above in point 5.2.17. (as per copy of the Letter in the administrative file attached by the Respondent).

5.2.20

The Claimants were notified of the decision to proceed with the change of taxable income for the year 2012, dated 27 September 2016, issued by the Finance Service of Porto… (as per copy of document in the administrative file attached by the Respondent).

5.2.21

On the same date, the record of notice relating to the official correction made in the IRS declaration for the year 2012 was drawn up (as per copy of document in the administrative file attached by the Respondent).

5.2.22

The Claimants were notified of Letter no. 2016…, of 29 September 2016, issued by the Finance Service of Porto…, to the effect that the taxable income of the IRS income declaration for the year 2012 had been changed and that the respective IRS assessment would be carried out shortly and notified (as per copy of document no. 5, attached with the claim and administrative file attached by the Respondent).

5.2.23

On 14 October 2016 the additional assessment of IRS no. 2016… was issued, as well as the assessment of interest no. 2016…, in the amount of, respectively, EUR 17,481.65 and EUR 2,362.59, the deadline for voluntary payment of which was "23/11/2016" (as per copy of document no. 1, attached with the claim).

5.2.24

The Claimants paid the total amount assessed in accordance with the previous point (EUR 19,843.24) on 21 November 2016 (as per copy of document no. 6, attached with the claim).

5.3

No other facts capable of affecting the decision on the merits of the claim were proven.

5.4 Facts Not Proven

5.5

No facts were determined as not proven with relevance to the arbitral decision.

6. LEGAL GROUNDS

6.1

In the proceedings, for the purpose of granting or not the claim formulated by the Claimants, for declaration of illegality and annulment of the assessment acts in dispute, with all legal consequences, it is necessary to analyze and decide whether the prerequisites were verified which legitimized, in the year 2012, the right to exclusion from taxation of capital gains realized with the alienation of the urban property located in Matosinhos, on the grounds that, as of the date of the taxable event (2012), the requirements associated with the reinvestment of the realization values generated with the sale of that property located in Matosinhos were considered to be met.

6.2

In this matter, according to the Claimants, having been manifested "(…) in their respective IRS declarations (…)" "(…) the purpose of proceeding with the reinvestment of the realization value of the sale of the property in Matosinhos in the improvement of the property in Porto (…)" and by the fact that they carried out such reinvestment "(…) within the deadline that the law grants them, there is no place for taxation of the capital gains generated and, as such, the assessments in dispute are illegal" (emphasis ours).

6.3

On the other hand, in the Respondent's view, "the divergence proceedings, which focused on the income declaration Model 3/IRS, relating to the year 2012, was opened because the declared reinvestment exceeded the 24-month period provided for in paragraph b) of no. 5 of art. 10° of the IRS Code", because the Claimants "came (…) to state that the declared reinvestment was intended for improvement works on a property they had acquired in 2009" but, "in the concrete case, the realization value was obtained by the alienation of a property that did not constitute the Claimants' own permanent housing since 2009" (emphasis ours).

6.4

In these terms, in order to decide the disputed issue, it is necessary to analyze first and foremost the legal provision, as of the date to which the taxable event applies (2012), in order to proceed with the legal classification of the arbitration claim and assess whether the Claimants' position is correct or, if on the contrary, the Respondent's position is correct, as to the illegality/legality of the assessments in dispute (tax and interest).

6.5

In this regard, in accordance with article 10, no. 1, paragraph a) of the IRS Code, "capital gains are gains obtained which, not being considered business and professional income, capital income or real property income, result from (…) onerous alienation of real rights over immovable property (…)" being that, in accordance with no. 3 of the same article 10, "gains are considered to be obtained at the time of the practice (…)" of such act of onerous alienation (emphasis ours).

6.6

Under the terms provided for in paragraph a), of no. 4, of the said article 10 of the IRS Code, "the gain subject to IRS is constituted (…) by the difference between the realization value and the acquisition value, net of the part qualified as capital income (…)".

6.7

In accordance with no. 5 of the said article 10 of the IRS Code, as amended by Law no. 109-B/2001, of 27/12, "the following gains are excluded from taxation: gains resulting from the onerous transfer of property intended for the taxpayer's own permanent housing or that of his or her family unit, in the following conditions (…)":

a) "If, within 36 months counted from the date of realization, the realization value, deducted from the amortization of any loan contracted for the acquisition of the property, is reinvested in the acquisition of ownership of another property, of land for construction of property, or in the construction, expansion or improvement of another property exclusively for the same purpose located in Portuguese territory or in the territory of another Member State of the European Union or the European Economic Area, provided that, in the latter case, there is exchange of information on tax matters" (as amended by Law no. 66-A/2008, of 31 December, in force since 1 January 2009) (emphasis ours);

b) "If the realization value, deducted from the amortization of any loan contracted for the acquisition of the property, is used in payment for the acquisition referred to in the previous paragraph provided that it is carried out in the 24 months preceding" (as amended by Law no. 66-A/2008, of 31 December, in force since 1 January 2009) (emphasis ours).

6.8

That is, the IRS Code provides, in paragraphs a) and b), of no. 5, of its article 10 (transcribed above), an exclusion from taxation of gains resulting from the onerous transfer of property intended for the taxpayer's own permanent housing or that of his or her family unit, provided that the values received in the transfer are used either for the acquisition, or for the construction, or for the expansion or else for the improvement of another property for the same purpose (provided it is located in national territory, in the territory of another Member State of the European Union or the European Economic Area).

6.9

In accordance with paragraph c), of no. 5 of article 10 of the IRS Code, "for the purposes of the provision in paragraph a), the taxpayer should manifest the intention to proceed with the reinvestment, even if partial, mentioned, in the income declaration relating to the year of alienation, the value that he or she intends to reinvest" (emphasis ours).

6.10

Under the terms of no. 6 of the same article 10, there shall be no exclusion from taxation in the cases where:

a) "In the case of reinvestment in the acquisition of another property, the acquirer does not allocate it to his or her housing or that of his or her family unit, within six months after the end of the deadline in which the reinvestment should be made" (emphasis ours);

b) "In the case of reinvestment in the acquisition of land for construction, the acquirer does not begin, except for reason attributable to public entities, the construction within six months after the end of the deadline in which the reinvestment should be made or does not request the registration of the property in the matrix within 24 months from the date of commencement of the works, and in any case, should allocate the property to his or her housing or that of his or her family unit by the end of the fifth year following the year of realization";

c) "In the case of reinvestment in the construction, expansion or improvement of property, works are not begun within six months after the end of the deadline in which the reinvestment should be made or the registration of the property or alterations in the matrix is not requested within 24 months from the date of commencement of the works, and in any case, should allocate the property to his or her housing or that of his or her family unit by the end of the fifth year following the year of realization" (emphasis ours).

6.11

Thus, in light of the above, it is apparent that the first (and essential) condition for considering, in a given situation, that there may be reinvestment is that it is, indeed, the alienation of the housing of the taxpayer or his or her family unit, this exclusion from taxation not being applicable to any other alienated property that does not meet this requirement.

6.12

However, although this is the essential condition of reinvestment, it is not the only condition that the law provides for the reinvestment regime referred to above to apply.

6.13

Indeed, there are other conditions in the Law that need to be met for the aforesaid exclusion from taxation of capital gains obtained with the onerous transfer of property intended for the taxpayer's own permanent housing or that of his or her family unit to be verified, conditions which we analyze below.

6.14

In the first place, for there to be the possibility of not taxing (or partially taxing) the capital gain obtained in the sale of the property intended for own permanent housing, it will be necessary to proceed with the reinvestment of the realization value (or part of it), which means that the value obtained in the sale (or part of it) must be used for the same purpose, that is, must be used either for the acquisition, or for the construction, or for the expansion or else for the improvement of a property allocated to the own permanent housing of the taxpayer (or his or her family unit).[7]

6.15

Another of the conditions for considering that there is reinvestment of the realization value concerns the deadline for being able to reinvest that value and be able to benefit from the exclusion from taxation provided for in the IRS Code (transcribed above in point 6.7.).

6.16

In this regard, as regards the deadline for carrying out the reinvestment, in light of the legal text (no. 5 of article 10 of the IRS Code), it will be necessary to consider which situation occurred first, the acquisition of the new housing or the sale of the previous housing.

6.17

In the case where the acquisition of the new housing occurs after the sale of the old housing, the applicable deadline for carrying out the reinvestment shall be 36 months from [as referred to in paragraph a) of no. 5 of article 10 of the IRS Code)] the date of realization, that is, from the date of the sale of the old housing (taxable event of the capital gain eventually taxable), so that it can be legitimately stated that it is intended to reinvest in new housing, whether through the acquisition of ownership of another property, whether through the acquisition of land for the construction of a new property, whether through the expansion or improvement of another property exclusively for the same purpose (and provided it is located in national territory, in the territory of another Member State of the European Union or the European Economic Area).

6.18

As it follows from the text of the Law, paragraph a), of no. 5 of article 10 of the IRS Code establishes conditions of future reinvestment, temporally delimited (within 36 months), to be carried out in own permanent housing (to be implemented in the forms provided for in the law) and to be allocated for that purpose, at a time after the taxable event (alienation of the old housing, also own permanent housing, until the date it is alienated).

6.19

In the case where the acquisition of the new housing occurs before the sale of the old housing (as occurs in the situation underlying the case at hand), the value to be reinvested, obtained in the sale of the old housing (taxable event of the capital gain), must be used in payment for the acquisition of new housing, an acquisition that cannot have been carried out more than 24 months before, because, if that has occurred, the value will no longer be considered reinvested for purposes of the exclusion from taxation in IRS.

6.20

In this case, it also follows from the text of the Law [paragraph b), of no. 5 of article 10 of the IRS Code] that it establishes conditions of past reinvestment, temporally delimited (in the 24 months preceding), to be carried out in payment for the acquisition of property (own permanent housing), at a time prior to the taxable event (alienation of the old housing, also own permanent housing, until the date it is alienated).

6.21

In these terms, in light of the above points, note the differences that exist in the possibility of reinvestment within 36 months (deadline counted for reinvestment carried out after the date of alienation of the old own permanent housing) and within 24 months (deadline counted for reinvestment carried out before the date of alienation of the old own permanent housing).

6.22

Thus, in summary, when reinvestment occurs in the 36 months following the sale of the old housing, provided all other required conditions are met, it can be implemented in the various situations listed in paragraph a), of no. 5° of article 10 of the IRS Code, being that when reinvestment occurs in the 24 months before the alienation of the old housing, provided all other required conditions are met, it can only be implemented exclusively in the acquisition of new housing, as provided for in paragraph b), of no. 5 of article 10 of the IRS Code.

6.23

Now, from all of the above transcribed, it follows, first and foremost, that the first and indispensable prerequisite for the exclusion from taxation of gains resulting from the onerous transfer of property is that concerning the fact that both properties are intended for the taxpayer's own permanent housing or that of his or her family unit, because, if this prerequisite is not met, the remaining conditions referred to above cease to be relevant for the exclusion from taxation to be verified.

6.24

Indeed, in the case under analysis, it is also this requirement (relating to the need for the alienated property to be the "own permanent housing of the taxpayer or his or her family unit") that is put into question by the Respondent (and which gives rise to the divergence proceedings that focused on the income declaration Model 3/IRS, relating to the year 2012, with the consequences arising therefrom), in that "(…) the declared reinvestment exceeded the 24-month period provided (…)".

6.25

Now, in truth, taking into account both the facts determined as proven (because documentally supported and/or accepted by the Parties) and the regime legally provided for in the IRS Code, given that the new housing was acquired (17/07/2009), before the alienation of the old housing (27/02/2012), the reinvestment could only have been legitimately effected in accordance with paragraph b), of no. 5 of article 10 of the IRS Code (that is, in the 24 months preceding, but, in 2012, year of alienation of the old housing, the 24-month period had already ended, given that the new housing had been acquired in 2009) and not in accordance with the provision of paragraph a), of no. 5 of the said article 10 of the IRS Code (as the Claimants argue) because, as explained above, not all the necessary conditions were met (namely, the fact that the old housing was no longer, as of the date of alienation in 2012, the own permanent housing of the Claimants since 2009, given that they had considered, as being their own permanent housing, the housing acquired on 17/07/2009, to which they had moved in August of that year).[8]

6.26

Indeed, the amendment made to article 10, no. 5 of the IRS Code, by Law no. 109-B/2001, of 27 December (in force as of the date to which the facts apply, that is, in the year 2012), came to require, for purposes of exclusion from taxation of capital gains generated with the alienation of property, not only that the acquired property be allocated to own permanent housing (of the taxpayer or his or her family unit), until six months after the end of the deadline in which reinvestment should be carried out, but also came to require that the alienated property should have been, until the date of alienation, the own permanent housing of the taxpayer or his or her family unit.

6.27

In this regard, the tax legislator used a technique known as "roll over" that makes capital gains non-taxable as long as realization values are reinvested in properties, also intended for own permanent housing, being that this exclusion is only valid for capital gains from property intended for own permanent housing when reinvestment is made in property with the same purpose.[9]

6.28

Thus, "it is apparent from the foregoing that it is especially relevant that the capital gain whose exclusion from taxation is sought must be, insisting, necessarily generated within the scope of transfers of property always intended for housing allocation on a principal and permanent basis, one on the date of alienation (…) and another until six months from the date of acquisition (…). That is: provided the other requirements are met, the property being sold and the property being purchased must have as their purpose the principal and permanent housing of the taxpayer" (emphasis ours).[10]

6.29

In these terms, it is apparent that, in the case under analysis, in 2012, the necessary conditions were not met for the Claimants to be able to benefit from the regime of exclusion from taxation of capital gains generated with the alienation of the property located in Matosinhos, because, in accordance with the contours of the entire situation determined as proven (see Chapter 5. of this decision), the only possible deadline for carrying out the reinvestment of the realization value generated with the alienation had already ended [24 months in accordance with the provision of paragraph b), of no. 5 of article 10 of the IRS Code)] and, even if that period had not elapsed, as of the date of alienation of the property located in Matosinhos, it was no longer allocated to the own permanent housing of the Claimants.

6.30

Thus, the Arbitral Tribunal finds that the Claimants' position is not correct regarding the claim formulated in the request for arbitration, for declaration of illegality and annulment of the assessment acts in dispute, with all legal consequences (identified in point 6.1., above), whereby, being the said additional assessments (IRS and interest) of the year 2012 considered legal, in consequence, they shall be upheld as they do not suffer from any legal defect.

Regarding reimbursement of the amount paid plus indemnity interest

6.31

Taking into account the conclusion referred to in the previous point, the examination of the claim for reimbursement of the amount paid (tax and interest), plus indemnity interest, is prejudiced, because, as the right to indemnity interest is dependent on the verification of an error attributable to the services of the Respondent (from which resulted payment of tax debt in an amount greater than legally due), it was concluded, in the case under analysis, that the assessments in dispute were legal and, therefore, valid.

Regarding the claim for reimbursement of expenses for mandatary fees

6.32

In this regard, taking into account the conclusions of the analysis carried out in Chapter 4. of this Decision (and to which reference is made herein), regarding the assessment of the competence of this Arbitral Tribunal to examine this claim of the Claimants, this part of the claim is not admitted.

Regarding responsibility for payment of arbitration costs

6.33

In accordance with article 22, no. 4, of the RJAT, "the arbitral decision issued by the arbitral tribunal includes the fixing of the amount and the apportionment among the parties of the costs directly resulting from the arbitration proceedings".

6.34

Thus, under the terms provided for in article 527, no. 1 of the CPC (by reference to article 29, no. 1, paragraph e) of the RJAT), it should be established that the party which caused them shall be condemned in costs or, in the absence of a judgment in favor of a party, whoever benefited from the proceedings.

6.35

In this regard, no. 2 of the said article specifies the expression "which caused them", in accordance with the principle of bearing of costs, understanding that the losing party causes the costs of the proceedings, in the proportion in which it is defeated.

6.36

In the case under analysis, taking into account the above, in accordance with article 12, no. 2 of the RJAT and article 4, no. 4 of the Regulation of Costs in Tax Arbitration Proceedings, it is necessary that full responsibility for costs be attributed to the Claimants.

7. DECISION

7.1

Thus, in light of all of the above, this Arbitral Tribunal decides:

7.1.1

To judge the request for arbitration presented by the Claimants regarding the claim for declaration of illegality and annulment of the additional assessments in dispute (IRS and interest for the year 2012) to lack merit, thus maintaining the same as they do not suffer from the legal defect raised;

7.1.2

To judge, in consequence, the claim for reimbursement of the amounts paid plus indemnity interest to lack merit;

7.1.3

Not to admit the claim for condemnation of the Respondent regarding the reimbursement of the Claimants for expenses with mandatary fees, because this Arbitral Tribunal was found to be incompetent (as to the matter) to examine the said claim;

7.1.4

To condemn the Claimants to payment of the costs of the present proceedings.

Value of the proceedings: Taking into account the provision of articles 306, no. 2 of the CPC, article 97-A, no. 1 of the CPPT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at EUR 22,343.24.

Costs of the proceedings: Under the terms provided for in Table I of the Regulation of Costs in Tax Arbitration Proceedings, the value of the costs of the Arbitration Proceedings is fixed at EUR 1,224.00, to be borne by the Claimants, in accordance with article 22, no. 4 of the RJAT.

Let notice be given.

Lisbon, 27 April 2017

Sílvia Oliveira

[1] Text prepared by computer, under the terms of article 138, no. 5, of the Code of Civil Procedure (CPC), applicable by reference to article 29, no. 1, paragraph e), of the Legal Regime of Tax Arbitration (RJAT), and respecting the spelling prior to the Orthographic Agreement of 1990, except regarding the transcriptions made, in which the spelling of the original was maintained.

[2] Position which was at the origin of the divergence proceedings, which focused on the income declaration Model 3/IRS, relating to the year 2012, filed by the Claimants, in that the Respondent understood that "(…) the declared reinvestment exceeded the 24-month period provided for in paragraph b) of no. 5 of art. 10° of the IRS Code".

[3] In this regard, taking into account the provision of no. 1 of article 102 of the Code of Tax Procedure and Process (CPPT), the deadline for filing judicial review is three months from the facts enumerated in that article, namely, from the "end of the deadline for voluntary payment of the tax payments legally notified to the taxpayer" [paragraph a) of no. 1], as well as that provided for in article 10, no. 1, paragraph a) of the RJAT which establishes that the request for establishment of an arbitral tribunal must be presented "within a period of 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the CPPT, regarding the acts susceptible to independent challenge (...)", whereby, taking into account that the deadline for voluntary payment of the assessments in dispute was "23/11/2016" and the date of filing of the request for arbitration is "16/12/2016", the request is timely.

[4] See Leite de Campos, Diogo, Silva Rodrigues, Benjamim, Sousa, Jorge Lopes, in "General Tax Law - Annotated and Commented", 4th ed., 2012, page 116).

[5] On the subject of indemnity interest see from the same author (Sousa, Jorge Lopes), Interest in tax relationships, in "Fundamental Problems of Tax Law", Lisbon, 1999, page 155 et seq).

[6] In this sense, see notably Arbitral Decision no. 117/2013-T, of 6 December and Arbitral Decision no. 406/2016-T, of 28 December.

[7] In fact, if that realization value is not used in full (with only partial reinvestment occurring), the capital gain generated will be taxed proportionally to the value reinvested, as provided for in article 10, no. 7 of the IRS Code.

[8] In this regard, it should be noted that, in accordance with the provision of article 19 of the LGT, "the fiscal residence of the taxpayer is, unless otherwise provided, for natural persons, the place of habitual residence (…)" and that, under the terms of nos. 3, 4 and 8, of article 19 of the LGT (as amended in force as of the date to which the facts apply), "it is mandatory (…) to communicate the residence of the taxpayer to the tax administration", being "ineffective the change of residence as long as it is not communicated to the tax administration" and the "tax administration (…) may rectify the fiscal residence of taxpayers if such is apparent from the elements at its disposal" (emphasis ours).

Now, the concept of "own permanent housing" is not the subject of a special definition enshrined in tax law provisions, so it will be necessary, in this matter, to resort to subsidiarily applicable norms for the integration of the respective prerequisites.

Indeed, in the area of taxation of real estate capital gains, the legislator delimited negatively, as seen, the field of application of the IRS, through the express provisions of tax exclusion enshrined in nos. 5 and 6 of article 10 of the IRS Code.

At the conceptual level, we can verify the divergence between habitual residence and own permanent residence, just as fiscal residence does not always coincide with residence in the sense of the place where a person has his or her housing, and such conclusion can even be inferred from the wording of article 82 of the Civil Code, which allows the possibility of residence or domicile in different places.

On the other hand, there is no identity between "fiscal residence" and "permanent residence", admitting that the taxpayer prove his or her permanent residence by presenting "justifying facts" that he or she has fixed there habitually and permanently the center of his or her personal life.

In this sense, see Judgment of the Central Administrative Court of the South (TCAS) (no. 04550/11), in accordance with which "the concept of fiscal residence established in the provision of article 19° of the LGT, namely in its no. 1 is a special residence that refers to a determined place for the exercise of rights and the fulfillment of the duties provided for in tax law provisions, which, being special, (…) although, ideologically and in its essence the provision of that first legal provision is connected with the need for the taxpayer and the Tax Administration to be in contact whenever necessary for the exercise of their respective rights and duties, in homage to the principle of collaboration inherent to article 59 of the LGT".

Article 46, no. 9 of the Statute of Tax Benefits (EBF) does not exclude the understanding adopted to the effect of the non-necessary correspondence between permanent residence and fiscal residence, because, in such provision, the legislator prescribed that "(…) for purposes of the provision in the present article, it is considered that there has been allocation of the properties or parts of properties to the own permanent housing of the taxpayer or his or her family unit if there is fixed the respective fiscal residence" (emphasis ours).

The circumstance of verifying parallelism between the provision of article 46, no. 1 of the EBF and that of the said article 10, no. 5 of the IRS Code, confirms that, in the absence of a provision analogous to no. 9 of article 46 of the EBF, the reference to "own permanent housing" does not require the identity of this with the fiscal residence, that is, if the legislator felt the need to, in view of the provision of no. 1 of article 46 of the EBF, introduce the provision of no. 9, it is because he understood that the wording of that, without this, did not require the establishment of fiscal residence by the taxpayer in the acquired property. Combining this circumstance with the fact that the current wording of the provision of the EBF in question (article 46, no. 9), was introduced by Law no. 109-B/2001, of 27 December, when article 10, no. 5 of the IRS Code already had its current wording reinforces, once more, the idea that, indeed, the content of no. 9 of article 46 of the EBF limits itself, as the provision itself states, to the article it integrates.

[9] In this sense, see Arbitral Decision no. 146/2015-T, of 16 December 2015.

[10] In this sense, see Arbitral Decision no. 146/2015-T, of 16 December 2015, when it states that "(…) the properties of "departure" and "arrival" must be intended for own permanent housing, the first one must be so on the date of alienation and the second until six months from the acquisition. Any other allocation of both, or of only one of them (…), destroys the conditions of application of the exclusion of tax base and the capital gain realized on the property of "departure" will be taxable (Cf., in this sense, José Guilherme Xavier de Basto, IRS, Real Tax Base and Determination of Net Income, Coimbra Publisher, pages 413/414) and also in the Case Law, (…) the Judgments of the STA of 9-7-2014 – Case 01146 (Justice Dulce Neto), of 25-3-2015 – Case 0158/13 (Justice Pedro Delgado) and of 17-9-2014 – Case 0250/14 (Justice Casimiro Gonçalves)" (emphasis ours).