Sale of Inherited Share and IRS: When Case Law Challenges the Tax Administration

Conflict Between the Tax Authority’s Administrative Doctrine and the Supreme Administrative Court's Jurisprudence on the Taxation of the Sale of Inherited Shares Highlights the Tension Between Legal Certainty and Fiscal Coherence

The taxation of capital gains arising from the sale of inherited shares has recently returned to the forefront of legal and tax debate, due to relevant court rulings that contradict the position still upheld by the Portuguese Tax and Customs Authority (AT). Binding Information No. 27683, dated May 12, 2025, is a clear example: it reaffirms the taxation under the Personal Income Tax (IRS) of capital gains realized through the transfer of inherited shares, even prior to the division of the estate.

The AT’s Position

In the aforementioned binding information, the AT reiterates that the sale of a fractional share of the real estate assets included in an undivided inheritance constitutes a burdensome transfer of real rights over immovable property. Therefore, it considers that the gains obtained from such a transaction are subject to IRS under Article 10(1)(a) of the IRS Code (CIRS).

According to the AT:

• The heir holds, albeit ideally, a fractional share of the inheritance's assets;

• The sale of that position implies the burdensome transfer of a fraction of the right over the inherited real estate;

• This transfer, in addition to being subject to IMT (under Article 2(5)(c) of the Municipal Property Transfer Tax Code – CIMT), also constitutes a taxable event under IRS.

Jurisprudence in Opposition

However, this interpretation clashes with the position increasingly consolidated in administrative and arbitral case law. The turning point came with the judgment of the Supreme Administrative Court (STA) of April 29, 2025 (Case No. 01204/22.7BALSB), which standardizes jurisprudence to exclude IRS taxation on the sale of undivided inherited shares.

The STA considers that:

• The inherited share constitutes an ideal and abstract right over the total inheritance, not a concrete real right over specific immovable property;

• The transfer of this right does not amount to a burdensome sale of real rights over real estate;

• Therefore, the operation does not fall within the concept of “real estate capital gain” as defined in Article 10 of the CIRS.

Interpretative Conflict: AT vs. STA

This clash between administrative interpretation and jurisprudence has significant practical consequences:

• Legal Certainty: The AT’s divergent stance creates uncertainty for taxpayers, even after a unifying jurisprudential decision.

• Litigation Risk: The continued adherence to the AT’s doctrine increases the likelihood of tax litigation, especially when the AT issues assessments based on its restrictive interpretation.

• Possibility of Appeal or Objection: Heirs who sell their inherited share may invoke the STA’s jurisprudence to challenge IRS assessments based on the AT’s administrative interpretation.

Final Considerations

The conflict between the administrative doctrine of the AT and the jurisprudence of the Supreme Administrative Court regarding the taxation of the sale of inherited shares underscores the tension between legal certainty and fiscal coherence. Until there is either legislative reform or clear institutional alignment, special caution is advised when preparing and formalizing transactions involving inherited shares, as well as in their tax analysis.

In cases of divergence with the AT, current jurisprudence offers strong arguments to effectively defend the taxpayer’s interests.