1. Introductory Note
According to no. 1 of Law no. 168/99, of September 18 (Expropriation Code) “Immovable property and the rights attached to them may be expropriated for reasons of public utility within the remit, purpose or object of the expropriating entity, upon contemporaneous payment of fair compensation under the terms of this Code”.
In view of the (dis)conformity of wills, we could be facing a Friendly Expropriation process (see articles 33 ss of Law 168/99, of September 18), or a Litigious Expropriation process (see articles 38 ss of Law 168/99, of September 18).
With regard to the taxation of this reality, which is of interest to this text, as property increases subject to taxation under the I.R.S. (Article 9(1)(a) of the C.I.R.S.) we have Capital Gains, with the interpretation of which is the subject of this text being al. a) of no. 1 of art. 10, according to which “Capital gains are gains which, not being considered business and professional income, capital income or property income, result from: a) The onerous sale of real rights over immovable property (...)”.
2. The Tax Authority's understanding
According to the Tax Authority, gains from compensation for expropriation must be declared in Annex G of the I.R.S. Form 3, when they are not considered business, professional, capital or property income.
The Tax Authority takes this view, based on the assumption that expropriation constitutes “the onerous alienation of rights in rem that may generate capital gains”.
To this end, it is based on the interpretation of Article 10(1)(a) of the CIRS, in the sense that the onerous alienation of assets includes, among others, expropriations, in such a way that this provision encompasses, in the concept of “alienation”, both original and derivative acquisitions.
In this regard, see et al, Binding Information issued in the context of case 1737/207, with the concurring order of the Deputy Director General of IR of 11/12/2017.
3. The understanding of the Higher Courts and CAAD
Despite this position taken by the A.T., the Higher Courts have, in our opinion, taken a different view, leading to the annulment of I.R.S. assessments.
Indeed,
The recent case law of the Supreme Administrative Court has concluded that “expropriation for public utility is a form of original acquisition” and is not “subsumed under the concept of transfer, which is relevant for the purposes of article 10 of the IRS Code”, bearing in mind that article 10 corresponds to a set of exhaustive situations and that, in this context, interpretation by analogy is prohibited.
This is because Article 10(1)(a) of the IRS Code, when referring to “onerous alienation”, encompasses derivative (translative) acquisitions, and not original acquisitions, even if the consideration is the payment of compensation,
Therefore, since it cannot be included in Article 10(1)(a) of the CIRS, the compensation paid in the context of public expropriation for public utility should not be taxed as a capital gain, namely by being included in category G.
(Accordingly, and for the most part, since there is no actual taxation rule in the terms mentioned above, this reality will also not be taken into account when determining the taxable amount, under the terms of article 44 of the C.I.R.S. (v.g. article 44(1)(b)).
In this regard, see et al. Judgments handed down by the Supreme Administrative Court in cases 0813/16.1BEAVR, dated 07/04/2021, and 01260/11.7BEPRT, dated 10/11/2021, as well as the CAAD decision handed down in case no. 803/2019-T.
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