Process: 766/2016-T

Date: August 17, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitral decision 766/2016-T addresses a significant IRS dispute concerning the deductibility of real estate improvement costs when calculating capital gains tax. The taxpayers sold a property in 2004 and claimed they incurred improvement expenses of €118,387.79 in 2000, but mistakenly only declared €7,500 in Annex G of their tax return. This error resulted in a tax assessment of €17,388.62. The core legal dispute centers on whether this constitutes an error attributable to tax services under Article 78 of the LGT, which would permit official revision even outside normal time limits. The taxpayers argued that IRS assessments are not true self-assessments, making the Tax Authority responsible for verifying and correcting declaration errors. They invoked Article 51(a) of the CIRS Code, which allows deduction of improvement costs incurred within five years prior to sale. The Tax Authority raised procedural exceptions, arguing the revision request was untimely and that the taxpayers admitted the oversight was their own, thus precluding attribution to tax services. Additionally, the TA noted that tax was being paid in installments through enforcement proceedings, potentially affecting revision eligibility. The case highlights critical distinctions between taxpayer error and administrative error in Portuguese tax law, the burden of proof under Article 74 LGT for claiming deductions, and procedural requirements for accessing official revision mechanisms. This decision has important implications for taxpayers seeking to correct omissions in real estate capital gains declarations, particularly regarding the temporal limits and attribution requirements for official tax revision under the LGT framework.

Full Decision

ARBITRAL DECISION

1. REPORT

On December 29, 2016, A… and B…, respectively, Taxpayers nos. … and …, submitted a request for constitution of an arbitral tribunal, under the combined provisions of articles 2nd and 10th of Decree-Law no. 10/2011, of January 20, which approved the Legal Regime of Arbitration in Tax Matters, with the wording introduced by article 228th of Law no. 66-B/2012, of December 31 (hereinafter, in abbreviated form, designated RJAT), in which they requested the declaration of illegality of the tax assessment act for Personal Income Tax (IRS) no. 2005 … (…), issued by His Excellency the Director-General of the (then so designated) Directorate-General of Taxes, by reference to the year 2004, in the amount of € 17,388.62 and, consequently its annulment.

The Requesters further request the declaration of illegality, and consequent annulment, of the decision of tacit dismissal of the request for official revision, presented against that assessment act.

The Requesters did not proceed to appoint an arbitrator, wherefore, under the provisions of subparagraph a) of no. 2 of article 6th and subparagraph b) of no. 1 of article 11th of the RJAT, the President of the Deontological Council of the CAAD designated the undersigned as arbitrator, who communicated acceptance of the appointment within the applicable period.

The parties were notified of this appointment and did not manifest any intention to refuse it.

In conformity with the provision in subparagraph c) of no. 1 of article 11th of the RJAT, the Arbitral Tribunal was constituted on 19-01-2017.

On 18-04-2017, the Tax Authority, hereinafter designated as Respondent or TA, duly notified for this purpose, submitted its response defending itself by exception and by impugnation.

The Tribunal notified the Requesters to attach to the proceedings a power of attorney executed by both Requesters, which they did by request of 05-06-2017.

The Requesters pronounced themselves on the lack of merit of the exceptions, on 03-05-2017.

The Tribunal scheduled the holding of the meeting referred to in article 18th of the RJAT, in which the questioning of the witness listed by the Requesters would take place, for June 20, 2017, at 10:30 hours.

The requesters waived the hearing of the witness listed, wherefore, by order of 12-06-2017, the Tribunal rendered the aforementioned meeting without effect and granted the Parties the option to present written submissions, within a period of 7 days, successively, beginning with those of the Requesters.

The Respondent presented its submissions on 28-06-2017 and the Requesters on 04-07-2017, since they were notified via postal on 26-06-2017.

In their submissions the Requesters maintain their initial position adding, however, that the TA, in the decision that was rendered on the Hierarchical Appeal presented against the decision of dismissal of the first revision request, the Respondent attested in respect of proven facts relevant for the decision of the case that: "(…) In Annex G, only the amount of 7,500.00€ was recorded and considered in the contested assessment, when, in reality, the expenses incurred amounted to € 118,387.00 as evidenced by documents at the taxpayers' disposal (…)".

On 12-07-2017, the Tribunal issued an order for the TA to pronounce itself on the submissions of the Requesters, under the principle of adversarial proceedings, and extended the period for issuance of the award by 2 (two) months, in accordance with article 21st no. 2 of the RJAT.

In its submissions, presented on 24-07-2017, the Respondent maintains its position, and alleges that, in the course of the arbitral procedure, the Requesters did not produce evidence capable of supporting the success of the request.

2. Subject Matter of the Proceedings

2.1 Position of the Requesters

The Requesters allege, in summary, the following:

a) In the year 2004 they alienated the autonomous fraction designated by the letter "E" of the property described in the Land Registry Office under no. …, having incurred expenses with the enhancement of the property, between the months of April and August of the year 2000, in the amount of € 118,387.79;

b) The act of assessment of IRS no. 2005 … (…), referring to the year 2004 is illegal because the TA did not consider the expenses incurred with the enhancement of the property, in the 5 (five) years prior to the sale;

c) Such expenses should have been considered for purposes of determining real estate capital gains, in accordance with article 51st, subparagraph a) of the CIRS Code, in the version in force at the date of the facts;

d) That the assessment of the tax, in an amount greater than the tax to be paid, is tainted by error attributable to the services, with the TA being obliged to promote its revocation under articles 55th of the LGT and 262nd no. 2 of the Constitution of the Portuguese Republic (CRP).

e) For, in truth, although the IRS assessment is based on the declaration of the taxpayer, it is not a self-assessment, with it being incumbent on the TA to confirm or correct the elements contained in the declaration and to assess the tax, wherefore, any error in the assessment is an error of the services, attributable to the TA, for purposes of article 78th of the LGT;

f) Moreover, being a matter of an illegal assessment act, because practiced in error regarding the legal prerequisites, from which resulted an amount of tax to be paid greater than that which would be due, the TA is obliged to promote its revocation;

g) Finally, the verification of the prerequisites for admissibility of the request for official revision report to the moment of presentation of this means of defense, and not only is the tax not yet fully paid as, at the date of presentation of the revision request, May 31, 2016, there was no installment payment whatsoever.

2.2. Position of the Respondent

In response to the request of the Requester the TA:

  1. By way of exception, it invokes the untimeliness of the request for arbitral pronouncement, on the grounds of the untimeliness of the request for official revision, given that the procedural prerequisites of this gracious means are not met, alleging, in summary, for this purpose;

a) That, the Requesters allowed the period provided in the first part of article 78th no. 1 of the LGT to preclude, within which, they could on their initiative, request the revision on the grounds of any illegality;

b) For there to be a ground for the revision procedure of the tax act, by initiative of the TA, even at the request of the Taxpayer[1], within the period of four years after the assessment, or at any time if the tax has not yet been paid, the same would have to be necessarily based on error attributable to the services, and the tax would not yet be paid, which is not the case, since both requirements are not met;

c) In fact, the TA defends, if error exists it is exclusively attributable to the Requesters who admit, in the gracious claim presented, that: "By oversight, in Annex G of the Declaration mod. 3 the expenses of the year 2000 were not mentioned.", which prevents the Requesters from accessing the mechanism for revision of tax acts on this basis;

d) Moreover, the tax is being paid in installments in the context of the tax enforcement process.

  1. By way of impugnation, it further alleges the following:

a) The assessment no. 2005…, resulted from a self-declaration presented by the Requesters, having resulted in a value to be paid of € 17,388.62;

b) The Requesters requested the annulment of the assessment in the Administrative Claim, since, by oversight, they did not mention the expenses in the amount of € 118,387.79, in Annex G of the Declaration Form 3, having attached two invoices and two receipts;

c) The Requesters did not prove the expenses incurred with the property in the year 2000, as was incumbent upon them, under article 74th of the LGT;

d) Notified to present additional evidence, in particular, proof of the means of payment of the invoices and photocopy of the budget of the work carried out, the Requesters never presented such evidence, thus breaching the duties of clarification of their tax situation and of collaboration and discovery of material truth, lack of evidence which leads to the lack of merit of the request.

3. Disposition

The Arbitral Tribunal is materially competent and is duly constituted, in accordance with articles 2nd, no. 1, subparagraph a), 5th and 6th, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4th and 10th of the RJAT and article 1st of Ordinance no. 112-A/2011 of March 22.

Save for the question of lapse of the right of action, which constitutes an exception whose merit prevents knowledge of the case, and which will be decided after the selection of the factual matter, there are no other exceptions or preliminary matters that preclude knowledge of the merits of the action that needs to be decided.

Everything considered, it is necessary to render

4. Decision

4.1 Factual Matter

4.1.a. Facts Found to be Proven

With relevance for the substantive decision, the Tribunal considers the following facts to be proven:

  1. On June 24, 1999 the Requesters acquired the autonomous fraction designated by the Letter "E" of the property located on Rua …, no. … –…, in Lisbon, described in the Land Registry Office of Lisbon under no. … .

  2. The aforementioned property was alienated by the Requesters in 2004. (cf. Submissions of the Requesters)

  3. As a result of the sale of the fraction in question the Requesters realized a real estate capital gain. (cf. Submissions of the Requesters)

  4. The Requesters entrusted a Chartered Accountant (TOC) with the completion and submission of the Declaration of Income Form 3, referring to the year 2004. (cf. Submissions of the Requesters)

  5. The Chartered Accountant completed and submitted the IRS declaration, as well as the substitute declaration, received by the TA on 09-06-2017. (cf. Submissions of the Requesters)

  6. In that declaration the amount of € 7,500.00 was considered relating to expenses inherent to the alienation of the property. (cf. fls. 29 and 30)

  7. On 31-08-2005 the IRS assessment no. 2005… was issued, relating to the year 2004, with tax to be paid determined in the amount of € 17,388.62, with payment deadline of 12-10-2005. (cf. fls. 3 of the PA and submissions of the Requesters)

  8. On 04-05-2006, there was filed with the Tax Office of … an administrative claim presented by the Requesters, requesting the annulment of the assessment no. 2005…, invoking "(…) By oversight, in Annex G of the Declaration mod. 3 the expenses of the year 2000 were not mentioned:

· Invoice no. ...-2000 15,795,000.00 escudos

· Invoice no. ...-2000 7,939,620.00 escudos

Total in euros_ 111,387.97 (…)" (Cf. fls. 2 of the PA)

  1. With the Administrative Claim there were attached receipts nos. ...-2000 and ...-2000 (Cf. fls. 4 and 5 of the PA).

  2. Through official communication no. …, of 31-03-2008, the Tax Office of Lisbon, requested from the Requesters the attachment of the following documents; "(…)1- Documents proving expenses and charges in the amount of € 7,500.00 declared in Annex G of their income declaration as well as the documents of payment relating to the same.

2- With respect to the works carried out in the year 2000, on the property located on Rua…, no….., please send: a) Documentary proof of the means of payment of the invoices you attached, issued by C… S.A., in the amounts of 17,795,000$00/€78,785.13 and 7,939,620$00/€39,602.66. b) Photocopy of the budget of the works invoiced. 4 – The document relating to the change in patrimonial value after the carrying out of the works performed." ) (Cf. page 168 of the PA)

  1. The Requesters did not attach the documents that were requested from them. (Cf. PA attached to the proceedings)

  2. The Administrative Claim was dismissed on the grounds of untimeliness of the request. (Cf. fls 178 of the PA)

  3. On 23-06-2008 there was filed with the Tax Office of … a request for issuance of a certificate with the factual and legal grounds, as well as the documents submitted in the context of the administrative claim procedure, which was satisfied by the TA. (Cf. fls 181 of the PA)

  4. On 09-09-2008, the requesters filed a request for revision of the tax act in accordance with no. 4 of article 78th of the General Tax Law (LGT) and 103rd and 266th of the Constitution of the Portuguese Republic (CRP), on the grounds of error attributable to the services and serious and notorious injustice. (Cf. fls. 193 of the PA)

  5. After exercise of the right of prior hearing by the Requesters, on 11-02-2009, the Head of Division of the IRS Services Directorate, in the exercise of subdelegated competence, dismissed the revision request, sustaining, in summary:"(…) 8 - that in accordance with art. 78th of the LGT only encompasses the revision of acts of fixing the taxable matter, and not the revision of assessment acts, for the revision of the latter, at the request of the taxpayer, is only possible on the basis of illegality; 10- (…) and for situations that can only be discovered or can only occur after the period of administrative claim or revision under no. 1 of this article, which immediately rules out the possibility of the requesters being able to resort to this legal mechanism; 12- (…) since the Taxpayer had all the elements at his disposal for a correct completion of the income declaration, as well as to react against the assessment within the period of administrative claim (…) the conduct of the taxpayer should be qualified as negligent (…)15- Thus, in the case under consideration we are not faced with a situation of serious or notorious injustice (…)".(cf. pages 183 to 192 of the PA).

  6. Notified of the decision on the revision request by official communication no. … of 21.05-2009, the Requesters appealed hierarchically by submission presented on 29.06.2009. (Cf. Response of the Respondent and Submissions of the Requesters)

  7. The hierarchical appeal was dismissed and notified to the Requesters. (Cf. Response of the Respondent and submissions of the Requesters)

  8. On 31-05-2016 there was filed with the TA Services a request for revision of the tax act, in accordance with no. 1 of article 78th of the LGT and 93rd of the CIRS. [(Cf. fls 30 of the PA) PA 5]

  9. The TA did not pronounce itself within the 4-month period on this request, and the Requesters filed a request for arbitral pronouncement of the presumption of tacit dismissal. (Cf. Request of the Requesters not contested by the TA)

  10. The IRS assessment proceedings in question gave rise to tax enforcement proceedings no. …2005…, with a payment plan in installments having been made. (Cf. Response of the Respondent and submissions of the Requesters)

4.1.b. Facts Found to be Not Proven

With relevance for the decision, there are no facts that should be considered as not proven.

4.2. Justification of the Proven and Not Proven Factual Matter

With respect to the factual matter the Tribunal does not have to pronounce itself on everything that was alleged by the parties, with the duty incumbent upon it being to select the facts that matter for the decision and to discriminate the proven from the not proven factual matter (cfr. art. 123rd, no. 2, of the CPPT and article 607th, no. 3 of the CPC, applicable ex vi article 29th, no. 1, subparagraphs a) and e), of the RJAT).

In this manner, the facts pertinent for the judgment of the case are chosen and delimited according to their legal relevance, which is established in consideration of the various plausible solutions of the question(s) of Law (cfr. previous article 511th, no. 1, of the CPC, corresponding to the current article 596th, applicable ex vi article 29th, no. 1, subparagraph e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties and the documentary evidence attached to the proceedings, it was considered proven, with relevance for the decision, the facts listed above, which were moreover not disputed by the parties.

5. Question to be Decided

The questions to be decided in the present proceedings are the following:

i. Lapse of the request for arbitral pronouncement due to untimeliness of the official revision procedure;

ii. To determine whether there is a violation of law regarding the expenses with the enhancement of the property.

6. On the Law

i. Lapse of the request for arbitral pronouncement

From the perspective of the Respondent the Requesters allowed the period provided in the first part of article 78th no. 1 of the LGT to preclude, within which, they could on their initiative, request the revision on the grounds of any illegality.

It further adds that, for the Requesters to be able to resort to the revision procedure of the tax act at any time, by initiative of the TA, even at the request of the Taxpayer, the tax could not be paid, and the request would have to be necessarily based on error attributable to the services, which is not the case, since both requirements are not met, consequently, the request for arbitral pronouncement is untimely.

In response to the exception, the Requesters sustain that the prerequisites for admissibility of the request for revision should report to the date of entry of this request, and it is certain that neither the tax debt was paid, nor was there any installment payment on that date.

With respect to the non-existence of error attributable to the Services, since the IRS assessment is at the initiative and authorship of the tax administration, any error contained in that same assessment does not cease to be an error of the services, for purposes of the provision in article 78th of the LGT.

They further advance that, being a matter of an illegal assessment act, because practiced with error regarding the legal prerequisites, from which resulted an amount of tax greater than that which would be due in light of the law in force, the tax administration could not fail to promote its revocation, not only in respect of the principle of legality, but also in respect of the principles of justice and equality.

Now, with respect to the error attributable to the services to which no. 1 of art. 78th of the LGT alludes, the Supreme Administrative Court has decided that the error attributable to the services to which the latter part of no. 1 of article 78th of the LGT refers, embodies any illegality, not attributable to the taxpayer but to the administration, comprising material error or error of fact, as well as error of law, with the exception of error in self-assessment which, for this purpose, is equated to those of the first kind (article 78th no. 2 of the same statute[2].

Being certain that, both in the request for arbitral pronouncement and in the gracious means that preceded it, in particular, in the request for revision of the tax act of 31.05.2016, the Requesters invoke the existence of defects and errors allegedly committed in the assessment procedure, equally ground for impugnation in light of article 99th of the CPPT, capable of leading to the annulment of the IRS assessment act, with which the Requesters never agreed.

And, in proper rigor, the system of revision of the tax act provided for in article 78th, embodies one of the possibilities of Taxpayers to react against an assessment that they deem to be illegal, it being certain that, beyond the period of no. 1 of article 78th, the Taxpayer still has two other periods: the period of 4 years after the assessment and, at any time provided that the assessment of the tax in an amount greater than that due is due to error of the Services and the tax has not yet been paid.

In truth, we are faced with successive periods for the exercise of a right by the Taxpayer, wherefore, not only could the Requesters resort to the request for revision, in accordance with article 78th, no. 1 of the LGT, as the presumption of dismissal that applies to the same is subject to judicial review in accordance with article 95th of the LGT, and consequently before the arbitral tribunal.

In accordance with the judgment of the Supreme Administrative Court, rendered within the scope of proceedings no. 01950/13[3]: " I - Not only the request for revision presented within the period of administrative claim, but also the request for official revision of the assessment on the grounds of error attributable to the services presented within the period of 4 years, benefit the taxpayer for purposes of resorting to judicial impugnation in case of tacit dismissal.

II - In that, there being no legal establishment of a distinction between the two situations for purposes of use of the presumption of tacit dismissal, it is not incumbent on the judge to distinguish between them in the attempt to obviate that the periods of administrative and contentious impugnation may be "circumvented", rather it is imposed upon him the knowledge of the claims of the taxpayers made effective through the means that the legislator places at his disposal for protection of his rights."

In fact, it follows from the law and constitutes settled jurisprudence of the Supreme Administrative Court that, the official revision of tax acts to which the latter part of no. 1, of art. 78th of the LGT refers "by initiative of tax administration" can be carried out at the request of the taxpayer (art. 78th no. 7 of the LGT)[4], however the grounds of that request, when compared with those that can be invoked when the request for revision is formulated within the period of administrative claim are more limited: official revision of assessment acts can only be carried out "on the grounds of error attributable to the services" and if the "tax has not yet been paid (…)"

In view of everything set forth above, constituting the procedural prerequisites the conditions under which the subjective right alleged by the plaintiff can obtain jurisdictional protection granted through a decision of merit, it is necessary to conclude that in the situation under scrutiny the same were met on the date of the revision request.

Moreover, it further follows from the law and the jurisprudence of our superior courts that, the dismissal, express or tacit, of that revision request is subject to contentious impugnation, in accordance with art. 95th no. 1 and 2, subparagraph d) of the LGT and art. 97th, no. 1, subparagraph d) of the CPPT, when the legality of the assessment act is in question, not prejudicing this possibility, without prejudice to a better understanding, the circumstance that the request for official revision was presented long after the periods of administrative impugnation have been exhausted, but within the periods of article 78th of the LGT for the revision of the assessment act "by initiative of tax administration".

Now, in accordance with the provision in art. 57th, no. 1, of the LGT the period for the formation of tacit dismissal is 4 months, therefore, having the revision request been formulated on 31-05-2016, it is necessary to conclude that the tacit dismissal was formed on 30-09-2016, date from which the Requesters had 90 days to present the request for arbitral pronouncement, in accordance with the combined provisions of articles 102nd, no. 1, subparagraph d) of the CPPT and 10th no. 1 subparagraph a) of the RJAT, which they did in a timely manner.

Moreover, the discussion on the legality of the assessment act (subject matter of the request for arbitral pronouncement) can occur both with the contentious impugnation or request for arbitral pronouncement subsequent to a decision of dismissal of a request for revision of the tax act, this because the subject matter of the proceedings and the request for annulment are directed to the discussion of the legality of the act.

Furthermore, it is well established that, the arbitral tribunal has competence to declare the illegality of tax assessment acts in accordance with the provision in subparagraph a) of article 2nd of the RJAT (…), and that article 90th of the CPPT, applicable by virtue of article 29th of the RJAT, provides: "Constitutes ground for impugnation any illegality (…)".

In this regard, it is necessary to point out that, despite the untimeliness of the administrative claim the TA not only was obliged to evaluate the existence of error attributable to the services but, in case of affirmative finding, to proceed with its revocation[5].

Considering everything set forth above, it is necessary to conclude that the invoked exception of lapse of the arbitral request is without merit, and consequently, the request for arbitral pronouncement is timely (also because presented within the legal period conferred for this purpose).

ii. On the defect of violation of law regarding the expenses with the enhancement of the property

The question to be examined is whether the costs invoked by the challenger, relating to the acquisition and alienation of the property to which the present proceedings refer, should or should not be taken into account in determining the amount of capital gains subject to taxation.

The Requesters consider that, despite the oversight in the submission of Form 3, in light of the evidence produced – attachment of the invoices and receipts – in the calculation of capital gains the TA should have taken into account the expenses incurred by the Requesters with the enhancement of the property, in the 5 years prior to the sale, in the amount of € 118,387.79.

In this measure, the calculation of the tax to be paid, resulting from the IRS assessment act, with reference to the year 2004, is in an amount greater than that due, reason for which, the assessment act is illegal and should be annulled on the grounds of error attributable to the services.

For its part, the TA rejects this understanding alleging that the assessment was carried out on the basis of the income declaration of the Requesters, who, by oversight, as admitted by them in the context of the administrative claim, did not refer to the expenses incurred in the year 2000.

The TA further defends that, in accordance with article 78th of the LGT, revision of the tax act is permitted in cases where the error is attributable objectively to the services, even though without any element of fault and, given the factual framework in question, it is easily concluded that there is no error attributable to the services, precisely because such error is exclusively attributable to the Requesters.

Moreover, the TA sustains that article 74th of the LGT establishes its own rules on the allocation of the burden of proof in the tax procedure, and the presumption of veracity of the declarations of Taxpayers does not apply if they do not fulfill the duties of clarification of their tax situation in accordance with subparagraph b) of no. 2 of article 75th of the LGT, wherefore, as the Requesters did not present the documentary evidence requested by the Respondent (proof of payment and photocopies of the work invoiced), they failed to prove the costs incurred.

In fact, it is today doctrinal and jurisprudentially agreed that, where there is an error of law in an assessment carried out by the services of the tax administration, and that erroneous application of the law does not derive from any information or declaration of the taxpayer, the error in question is attributable to the services, for both no. 2 of article 266° of the Constitution as well as article 55° of the General Tax Law establish the general obligation of the tax administration to act in full conformity with the law, reason for which any illegality not resulting from an action of the taxpayer will be attributable to the Administration itself.

Currently, it is equally settled that the TA has the duty to carry out the revision of tax acts in favor of the taxpayer, when it detects a situation of illegality, with respect to all taxes, given the principles of justice, equality and legality that the TA must observe in its activities, derived from articles 266th, no. 2 of the Constitution of the Portuguese Republic (CRP) and 55th of the General Tax Law (LGT)[6].

It happens that, in the present proceedings, the Requesters admit not having declared the alleged amount of the expenses incurred with the improvement works, neither with the Form 3 referring to the year 2004, nor with the substitute Form 3, wherefore, having the assessment of the tax due been carried out on the basis of erroneous declarations of the Taxpayers, it cannot be considered to have been based on error regarding the legal prerequisites attributable to the TA.

Nevertheless, and despite such error being the exclusive responsibility of the Taxpayers the TA, after the presentation of the Administrative Claim by the Requesters, and at a date prior to its dismissal, notified them to attach the additional probative documents, notification which the Requesters ignored remaining outstanding.

With respect to the allocation of the burden of proof it can be read in the LGT commented and annotated[7] the following: "Notwithstanding the inquisitorial principle, which places upon the tax administration the duty to seek material truth, individuals continue (when the burden of proof is attributed to them) with the duty to demonstrate certain facts. The non-existence or insufficiency of that demonstration will have as a consequence (in case they are not supplied by the inquisitorial activity of the administration) the disregard of the fact, which will be considered as not verified."

Furthermore, presumed in accordance with articles 59th and 75th of the LGT that the declarations of taxpayers are in good faith and, reflexively, true, under article 74th of the LGT, the assessment based on the declarations of the taxpayer does not require the preparation of evidence by the TA.

On the other hand, in accordance with what is provided in subparagraph b) of no. 2 of article 75th of the LGT, the presumption of veracity of the declaration of the Taxpayer ceases when he does not fulfill the duties of clarification of his tax situation, in particular when the Taxpayer does not comply with his duties of provision of information[8].

Wherefore, it is necessary to conclude that in the failure to comply, by the Requesters, with the duties of collaboration and clarification that rest upon them, the presumption of veracity of their declarations ceased, in particular of the Forms 3, as well as of the documents presented, with the burden of proof falling upon them that the amount of € 118,387.79 was effectively spent with the carrying out of works for the enhancement of the property to which the present proceedings refer.

Finally, it is important to analyze the legal framework of the taxation of capital gains, with reference to the year 2004.

In accordance with the provision in subparagraph a) of no. 1 of art. 10th of the CIRS capital gains are constituted by gains obtained that, not being considered business and professional income, capital income or real estate income, result from the onerous alienation of real rights over real property.

The gain subject to IRS is constituted by the difference between the value of realization and the value of acquisition, net of the part qualified as capital income, if applicable (subparagraph a) of no. 4 of the same article 10th of the CIRS).

For its part, art. 43rd of the CIRS determines that "1 - The value of income qualified as capital gains is the corresponding balance determined between capital gains and losses realized in the same year, determined in accordance with the following articles.

2 – (…)."

With respect to the value of realization subparagraph f) of article 44th of the same statute, here applicable, provides that for the determination of gains subject to IRS, "(…) the value of realization is considered to be the value of the respective consideration (…) ".

Article 51st provides that: "For the determination of capital gains subject to tax, the following accrue to the value of acquisition:

a) The expenses with the enhancement of the property, proven to have been incurred in the last five years, and the necessary and effectively incurred expenses, inherent to the acquisition and alienation, in the situations provided in subparagraph a) of no. 1 of article 10th;

b) The necessary and effectively incurred expenses, inherent to the alienation, in the situations provided in subparagraphs b) and c) of no. 1 of article 10th."

Summarizing, the gain subject to IRS is constituted by the difference between the value of realization and the value of acquisition [subparagraph a) of no. 4 of art. 10th) of the CIRS], this calculated in accordance with the provision in articles 46th et seq. of the CIRS.

Accruing to the value of acquisition, by virtue of art. 51st of the CIRS the expenses with the enhancement of the property, proven to have been incurred in the last five years, and the necessary and effectively incurred expenses, inherent to the acquisition and alienation, in the situations provided in subparagraph a) of no. 1 of article 10th.

However, as referred to in the Judgment of the STA no. 0585/09 of 18.11.2009 "(…) This concept of «expenses with the enhancement of the property» contains some margin of indeterminacy and needs to be filled.(…)"

But, in truth, paying attention to the letter of the law (expenses with the enhancement of the property, proven to have been incurred in the last five years) it cannot fail to be concluded, from the start, that the expense must be linked to the enhancement of the alienated property. That specific property and not any other.

Thus, with respect to the question under scrutiny it was incumbent upon the Requesters to prove, relating to the alienated property, not only that they incurred costs but that the amounts were effectively spent on enhancement works carried out on that real property, with it not being sufficient for this purpose that the costs and expenses be properly evidenced.

In fact, considering that capital gains are the balance determined by the difference between the value of realization and the value of acquisition of the property it cannot fail to be concluded that the expense must be linked to the enhancement of the alienated property.

It is not sufficient to fulfill such burden the mere attachment of invoices or receipts, it was imperative to have proven that those works were effectively executed on the 3rd floor of no. … of the property located on Rua … . Being that, it is not possible to extract such conclusion from the documents attached to the proceedings, in which there is no reference to the location/property where the works would have been performed, not being considered sufficient for purposes of evidence the fact that the documents are addressed to the Taxpayers at the address of the property subject to the proceedings.

It should be noted that the invoice and receipt no. …/2000 relate to construction works of an annex, a work that appears to us to be unusual on a 3rd floor, although not improbable.

In this particular aspect, (proof of the execution of the works on the property and annex) the production of testimonial evidence, which the Requesters waived, could have played a crucial role in clarifying the Tribunal as to this essential prerequisite in the consideration of the expenses alleged by them.

The same can be said of the budget requested by the TA in the context of the gracious procedure.

With respect to the evidence produced, the argument of the Requesters, invoked in the context of submissions, in which they refer that, in the context of the decision that was rendered on the Hierarchical Appeal presented against the decision of dismissal of the first request for official revision presented, in mid-2008, against the tax act now contested, the Respondent expressly attested, in respect of proven facts relevant for the decision, the reality of the aforementioned expenses: "In fact, in Annex G, with respect to expenses only the amount of 7,500.00€ was recorded and considered in the contested assessment, when, in reality, the expenses incurred amounted to 118,387.00, as evidenced by documents at the taxpayers' disposal and which are attached to the proceedings."

In fact, neither the TA nor the Arbitral Tribunal can ignore that the Requesters incurred costs in the amount of € 118,387.00, but, in proper rigor the Tribunal cannot conclude, without any margin for doubt, that such amount was intended to defray the works on the property above better identified.

Thus, even if it is admitted that the TA is obliged to revise an illegal act, resulting that illegality from an error attributable to the TA, in light of the insufficiency of the documentary evidence and the absence of testimonial evidence, it is not possible to establish a connection between the works performed and materials supplied for the work and the alienated property, wherefore, such expenses cannot be considered in the determination of the real estate capital gain and, consequently, the request for declaration of illegality of the assessment formulated by the Requesters is without merit.[9]

7. Fixation of the Value of the Cause

The Requesters indicated as the value of the cause € 7,500.00 (seven thousand five hundred euros), however, article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of subparagraphs a) and b) of no. 1 of article 29th of the RJAT provides that:

"1. The values to be considered, for purposes of costs or others provided in law, for actions that proceed in the tax courts, are the following:

a) When the assessment is impugned, the amount whose annulment is sought;"

In accordance with JORGE LOPES DE SOUSA, in Tax Procedure Code annotated and commented, 6th Edition, 2011, In subparagraph a) of article 97-A fall all situations in which the assessment is impugned, which include not only direct impugnations of assessment acts, but also impugnations of acts of dismissal of administrative claims or hierarchical appeals in which the legality of the assessment act is examined (…). "

Considering that the basic rule regarding the fixation of the value of the action is that the value of the proceedings should coincide with the value of the benefit that it is sought to obtain.

It is, therefore, manifest that, in the case at hand, subparagraph a) of no. 1 of article 97-A of the CPPT applies prima facie and, consequently, the value of the cause is not that indicated by the Requester, but rather that of the amount of the assessment whose annulment is sought, which amounts to € 17,388.62.

In the terms set forth, the value of the action is thus fixed at € 17,388.62.

8. Decision

In these terms, in conformity with the above, it is decided:

a) To judge completely without merit the request for arbitral pronouncement and, in consequence, to maintain the tax act impugned;

b) To condemn the Requesters to the costs of the proceedings.

9. Value of the Action

It is fixed at € 17,388.62 in accordance with the provision in articles 315th of the CPC, article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29th of the RJAT as well as no. 2 of article 3rd of the Regulation of Costs in Tax Arbitration Proceedings.

10. Costs

The value of the arbitration fee is fixed at € 1,224.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Requesters, since the request was entirely without merit, in accordance with articles 12th, no. 2, and 22nd, no. 4, both of the RJAT, and article 4th, no. 4, of the cited Regulation.

Notify.

Lisbon, August 17, 2017

The Arbitrator

(Cristina Coisinha)

Text prepared on computer in accordance with the provision in article 131st, no. 5 of the CPC, applicable by reference in article 29th of the RJAT.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Article 78th no. 1 of the LGT, second part

[2] See Judgment of the STA no. 01474/11, of 05-11-2014, available at http://www.dgsi.pt/

[3] Available at: http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/c349445a1a25275480257d0f0056a073?OpenDocument

[4] Judgment of the STA no. 0407/15, delivered on 04-05-2016.

[5] In this sense see General Tax Law, Commented and Annotated, Dr. José Maria Fernandes Pires, Gonçalo Bulcão, José Ramos Vidal, Maria João Menezes, Edition of 2015, pages 841 to 855.

[6] Doctrine has defended the duty of revocation of illegal acts, and on this subject may be seen: Robin de Andrade, The Revocation of Administrative Acts, 2nd edition, pages 255-268; Maria da Glória Ferreira Pinto, Considerations on the Prior Administrative Claim to Contentious Appeal, pages 12 to 14; Mário Esteves de Oliveira, Administrative Law, Volume I, pages 613-614.

[7] General Tax Law, Commented and Annotated, Dr. José Maria Fernandes Pires, Gonçalo Bulcão, José Ramos Vidal, Maria João Menezes, Edition of 2015, pages 841 to 855

[8] Article 59th, no. 3 subparagraph d) of the LGT

[9] See Judgment of the TCAN, of 03-03-2017, rendered within the scope of proceedings no. 00543/04 BEPNF

Frequently Asked Questions

Automatically Created

What are deductible improvement costs for IRS capital gains on real estate in Portugal?
Under Article 51(a) of the CIRS Code applicable to this case, deductible improvement costs for real estate capital gains include expenses that enhance property value incurred within the five years preceding the sale. These expenses must be properly documented and declared in Annex G of the IRS declaration (Model 3). The taxpayer bears the burden of proof under Article 74 LGT to substantiate such expenses with invoices, receipts, and other supporting documentation.
How does CAAD arbitration handle disputes over real estate capital gains tax?
CAAD arbitration handles real estate capital gains disputes through a formal arbitral procedure under the RJAT (Legal Regime of Arbitration in Tax Matters). Taxpayers can challenge IRS assessments by filing a request within the statutory deadline. The tribunal examines both procedural exceptions (such as timeliness) and substantive issues (such as correct application of capital gains calculation rules under the CIRS Code). The process includes written submissions, optional hearings, and culminates in a binding arbitral decision.
Can property improvement expenses reduce IRS capital gains tax liability?
Yes, properly documented property improvement expenses can significantly reduce IRS capital gains tax liability under Article 51(a) CIRS. Enhancement costs incurred within five years before sale are deductible from the capital gain calculation. However, taxpayers must declare these expenses in Annex G of their tax return and maintain supporting documentation. Failure to declare such costs, even by oversight, creates difficulties in later claiming revision, particularly if the error is attributable to the taxpayer rather than tax services.
What is the procedure for filing a tax arbitration request with CAAD for IRS disputes?
To file a CAAD arbitration request for IRS disputes, taxpayers must submit a request under Articles 2 and 10 of the RJAT within the applicable deadline (generally within 90 days after tacit dismissal or explicit rejection of administrative claims). The request must identify the contested tax assessment, state the grounds for illegality, and pay the required fee. Taxpayers may appoint an arbitrator or have one designated by the CAAD President. Prior exhaustion of administrative remedies (such as hierarchical appeal) may be required depending on the case.
What was the outcome of CAAD decision 766/2016-T on real estate capital gains and improvement costs?
While the complete decision is not provided in the excerpt, the case addresses whether taxpayers who failed to declare €118,387.79 in improvement costs (declaring only €7,500) can obtain revision of their 2004 IRS assessment. The central issues were: (1) whether the error was attributable to tax services under Article 78 LGT, enabling official revision; (2) whether the revision request was timely given that tax was being paid in installments; and (3) whether taxpayers sufficiently proved the improvement expenses. The Tax Authority argued the taxpayers' admitted oversight precluded revision for service-attributable error.