Process: 753/2015-T

Date: September 22, 2016

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision addresses a procedural challenge in a case where an insolvent taxpayer contested a 2014 IRS assessment regarding rental income from properties seized by an insolvency administrator. The claimant, declared insolvent in February 2014, argued that rental income received by the insolvency administrator from August 2014 onward should not be taxed as his personal income, citing Article 81 of the Portuguese Insolvency Code (CIRE) which provides for dispossession of seized assets. The Tax Authority raised a preliminary exception of lack of standing (interesse em agir), arguing that the IRS assessment resulted in zero net tax due to deductions, with the taxpayer already entitled to a refund of €32.08 regardless of the action's outcome. The tribunal analyzed the procedural requirement of 'interesse em agir' - an unnamed procedural requirement distinct from legitimacy - which assesses whether judicial protection provides direct legal utility or advantage to the claimant. Standing requires that resort to courts be indispensable and that success would result in concrete benefit. The tribunal examined whether annulling the assessment would change the refund amount, finding that the €32.08 refund would remain unchanged whether the action succeeded or failed. The decision emphasized that standing requires direct legal advantage, not merely theoretical vindication of rights. While the substantive tax issue involved whether statutory tax obligations override insolvency law dispossession rules, the tribunal focused on the procedural barrier, appearing to conclude that absent any practical benefit from success, the claimant lacked standing to proceed with the arbitration.

Full Decision

ARBITRAL DECISION

The Arbitrator Catarina Gonçalves, designated by the Ethical Council of the Center for Administrative Arbitration to constitute an Arbitral Tribunal, hereby decides:

I. REPORT

  1. On 17 December 2015, A…, holder of Tax Identification Number n.º … (Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the joint provisions of Articles 2 and 10 of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law n.º 66-B/2012, of 31 December (hereinafter, briefly referred to as RJAT), seeking the declaration of illegality of the Personal Income Tax assessment act for the year 2014 bearing n.º 2015….

  2. To substantiate its claim, the Claimant alleges, in summary, that:

A. ERROR REGARDING FACTUAL ASSUMPTIONS (INCORRECT QUANTIFICATION OF REAL ESTATE INCOME)

a. The Claimant rented out two properties, corresponding to registry numbers n.ºs …-… and …-…, in the parish of …, of which he is the owner, having set a total rent of € 250.

b. The claimant was declared insolvent on 26 February 2014, his real property having been seized for the benefit of the insolvent estate, including the properties aforementioned.

c. As of August 2014, inclusive, the rents from the said properties came to be paid to the insolvency administrator.

d. The claimant was granted the legal benefit of discharge of remaining liabilities.

e. By virtue of Article 81 of the CIRE (Insolvency and Business Recovery Code), the seizure of assets for the benefit of the insolvency administrator means their dispossession.

f. Therefore, the rents that were not declared do not constitute real estate income earned by the Claimant, but rather income of the insolvent estate.

g. And consequently, the Personal Income Tax assessment for 2014 is vitiated by illegality due to an error by the Tax Authority in quantifying the taxable base.

  1. On 22 December 2015, the request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority (TA).

  2. The Claimant did not proceed with the appointment of an arbitrator, therefore, pursuant to the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of the RJAT, the President of the Ethical Council designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the designation within the time limit.

  3. On 5 February 2016, the parties were notified of the arbitrator's designation and raised no objections.

  4. In accordance with the provisions of paragraph c) of no. 11 of the RJAT, the single arbitral tribunal was constituted on 22 February 2016.

  5. On 4 April 2016, the Respondent, duly notified for this purpose, filed its response, invoking, in summary:

BY WAY OF EXCEPTION

i. Lack of standing, given that the tax assessed for 2014 is consumed/cancelled by deductions from the tax, resulting in a net tax of €0, the success of the action not being capable of leading to a refund greater than that which has already been determined.

BY WAY OF OBJECTION

i. As regards substantive law, the statutory nature of the tax obligation determines that the elements of the tax legal relationship established by law are not affected by the special regime of the CIRE.

ii. As regards procedural law, the inalienable nature of the tax credit prevails over any special provision of the CIRE.

iii. Thus, the disputed rents constitute income of which the Claimant is the owner, even though by virtue of the bankruptcy regime the actual receipt and management falls to the insolvency administrator.

iv. The income accrues to the legal sphere of the Claimant, who, although deprived of the powers of administration and disposal, retains ownership of the properties.

v. In fact, the Claimant retains the status of beneficiary of the income, which is intended to settle his liabilities.

  1. On 18 May 2015, the meeting referred to in Article 18 of the RJAT was held.

  2. In view of the exception raised by the parties, the tribunal decided to issue an interlocutory decision.

  3. Pursuant to Article 21, no. 2 of the RJAT, an order was issued extending the time limit for a period of two months, which was notified to the parties on 29 August 2016.

II. CLARIFICATION

11.1. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

11.2. The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order n.º 112-A/2011, of 22 March.

11.3. However, prior to examination of the merits, it is necessary to determine whether the Claimant has standing to act, as invoked by the Respondent.

Thus, let us proceed.

  1. Both doctrine and case law consider standing an unnamed procedural requirement, given that it is not expressly enshrined in law (Article 30 of the CPC).

  2. Reference should be made in this regard to M. Teixeira de Sousa, in "Reflections on the legitimacy of parties in civil proceedings", CDO, n.º 1, 2003, who states that "The determination of interest in protection serves to define the subjects who have standing to be parties in a given proceeding, since from this determination results the attribution of standing only to subjects with an interest in bringing or in defending an action (…); procedural interest, on the other hand, is not intended to determine the subjects who may be parties in a particular case, but to assess the utility of granting the judicial protection requested in an action."

  3. In the same sense, among others, the Decision of the Court of Appeal of 6 October 1992: "Standing constitutes an autonomous and unnamed procedural requirement separate from lack of legitimacy, not clearly required by law", as well as the Decision of the Court of Appeal of 7 November 2002: "Legitimacy, based on the (subjective) position of the person before the disputed relationship, is distinguished from standing, reflected in the objectively justified need to resort to judicial action."

  4. Standing has come to be defined as "the interest of the active party in obtaining judicial protection of a subjective right through a particular procedural means and the corresponding interest of the passive party in preventing the granting of that protection[1]."

  5. That is to say, standing is configured as an autonomous procedural requirement by which the utility or advantage that the procedural subject seeking to settle the dispute can obtain from the judgment to be rendered is assessed (Decision TCAS 11 April 2013, case 5815/10).

  6. Thus, "Standing consists in the necessity of appealing to the courts for the protection of a threatened right that requires protection and can only be obtained by resort to the courts[2]", therefore, for it to exist, resort to judicial protection must be indispensable.

  7. In this sense, standing should be assessed in relation to the prejudice or benefit that granting the claim avoids or provides (Decision 1348/14 STA, of 12 December 2014).

  8. It should also be noted that arbitral decision 336/2014, when it recalls that, pursuant to Article 30 of the CPC, the interest must be direct (and not indirect or derived), expressed by the legal advantage to be obtained from judicial protection.

  9. In the present case, what direct legal advantage will result for the claimant if the action succeeds?

  10. We consider that none, for the success of the action does not alter the value of the Personal Income Tax assessment for the fiscal year 2014, since, as is evident from the documentation submitted by the parties, namely the assessment note, the Claimant, whether or not the action succeeds, will be entitled to a Personal Income Tax refund in the same amount (€ 32.08).

  11. That is to say, it is not found that judicial protection is necessary to safeguard a right of the Claimant, since the situation of the Claimant does not change whether or not the action succeeds, there being therefore no prejudice or benefit that granting the claim avoids or provides.

  12. Therefore, pursuant to Article 278, no. 1 of the CPC, by virtue of Article 29, no. 1, e) of the RJAT, the judge must refrain from examining the claim and dismiss the defendant from the instance when he finds any dilatory exception to be well-founded.

  13. As referred to above, it is well settled that standing "is configured as a dilatory exception that may lead to the dismissal of the instance" (Decision 1477/14 of the STA), "it being necessary to be verified at the moment of the exercise of the right of action and whose absence prevents the judicial body from admitting the action and consequently from examining the merits of the issue, its absence leading to a pronouncement of dismissal of the instance" (Decision STA 1348/14).

C. DECISION

Having regard to all of the foregoing, the present Arbitral Tribunal decides:

a) To find the exception raised by the Tax and Customs Authority well-founded, and consequently, to dismiss the Respondent from the instance;

b) To declare, consequently, that consideration of the substantive question is rendered moot.

D. VALUE OF THE PROCEEDINGS

The value of the proceedings is set at € 1,250, pursuant to Article 97-A, no. 1, a), of the Code of Procedural and Tax Procedure, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Rules on Costs in Tax Arbitration Proceedings.

E. COSTS

The arbitration fee is set at € 306, pursuant to Table I of the Rules on Costs in Tax Arbitration Proceedings, to be paid by the Claimant, pursuant to Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the aforementioned Regulation.

Lisbon, 22 September 2016.

The Arbitrator

(Catarina Gonçalves)

[1] M. Teixeira de Sousa, "The parties, the object and evidence in declaratory action", Lisbon, 1995

[2] Decision of the Court of Appeal of 30 June 2009

Frequently Asked Questions

Automatically Created

Is rental income from properties seized for an insolvent estate taxable under IRS for the insolvent individual?
Under Portuguese tax law, rental income from properties seized for an insolvent estate presents a conflict between tax and insolvency legislation. The taxpayer argued that under Article 81 of the Insolvency Code (CIRE), seizure by the insolvency administrator constitutes dispossession, making rental income property of the insolvent estate rather than personal income subject to IRS. However, the Tax Authority maintained that the statutory nature of tax obligations prevails over insolvency provisions. According to this position, the insolvent individual retains ownership of the properties despite loss of administration and disposal powers, and rental income continues to accrue to their legal sphere even when physically received by the insolvency administrator. The tax obligation attaches to the taxpayer as legal owner, with the income intended to settle their liabilities through the insolvency proceedings.
What is the legal exception of lack of standing (interesse em agir) in Portuguese tax arbitration?
The legal exception of lack of standing (interesse em agir) is an unnamed procedural requirement in Portuguese tax arbitration that assesses whether the claimant has sufficient interest to justify judicial intervention. Distinct from legitimacy (which concerns the party's relationship to the disputed legal relationship), standing evaluates the objective utility or advantage that the judgment would provide. For standing to exist, three elements must be present: (1) direct legal interest, not indirect or derived; (2) indispensability of judicial protection; and (3) concrete benefit or avoidance of prejudice from the court's decision. In tax arbitration, this means the claimant must demonstrate that success would result in a different outcome - typically a tax refund, reduction, or cancellation that would not otherwise occur. If the contested assessment already results in the same practical outcome regardless of the action's success, standing is lacking.
How does Article 81 of the Portuguese Insolvency Code (CIRE) affect tax liability on rental income?
Article 81 of the Portuguese Insolvency Code (CIRE) provides that seizure of assets for the insolvent estate results in dispossession of the debtor. In the tax context, this creates tension between insolvency and tax law. The insolvent taxpayer's position is that dispossession under CIRE means rental income received by the insolvency administrator after seizure belongs to the insolvent estate, not the individual, and therefore should not be taxed as personal income under IRS. The Tax Authority's counter-argument is that the statutory nature of tax obligations is not affected by CIRE's special regime, and the inalienable character of tax credits prevails. According to this view, the taxpayer retains ownership of the properties despite dispossession of administration powers, and tax liability follows legal ownership rather than physical receipt or management of income. The substantive resolution of this conflict was not reached in this decision due to the procedural dismissal.
Can a taxpayer declared insolvent challenge IRS tax assessments through CAAD arbitration?
Yes, a taxpayer declared insolvent can challenge IRS tax assessments through CAAD (Centro de Arbitragem Administrativa) arbitration, as insolvency does not eliminate tax personality or procedural capacity. The insolvent taxpayer retains legitimacy to contest tax acts that affect their legal sphere. However, they must satisfy all procedural requirements, including standing (interesse em agir). In this case, while the insolvent claimant had the right to file the arbitration request and was considered to have legal personality, capacity, and legitimacy, the action faced a procedural barrier. The Tax Authority successfully argued lack of standing because the contested assessment resulted in zero net tax with a refund of €32.08 - an amount that would not change regardless of whether the challenge succeeded. This illustrates that insolvency does not bar access to tax arbitration, but the claimant must demonstrate concrete utility from judicial intervention.
What happens to rental income tax obligations when property is transferred to the insolvency administrator?
When property is transferred to the insolvency administrator under Portuguese law, the tax treatment of rental income becomes contentious. From a tax law perspective, as argued by the Tax Authority, rental income tax obligations remain with the insolvent individual as legal owner of the properties. The statutory nature of IRS means the tax attaches to the person entitled to the income by law, regardless of who physically receives it. The insolvent taxpayer retains ownership despite losing administration and disposal powers, and the income - though managed by the administrator - still accrues to their legal sphere for tax purposes. The rationale is that this income serves to settle the taxpayer's own liabilities through the insolvency proceedings. Conversely, from an insolvency law perspective, Article 81 of CIRE provides that seizure constitutes dispossession, which the taxpayer interprets as transferring the income's tax character to the insolvent estate. This substantive conflict between tax law's statutory approach and insolvency law's dispossession doctrine remains a complex area where statutory tax principles generally prevail over special insolvency regimes.