Process: 103/2019-T

Date: October 14, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral case (103/2019-T) addresses whether a non-habitual resident (NHR) taxpayer can challenge an IRS assessment that applied general progressive tax rates instead of the special 20% flat rate for high value-added activities. The claimants, residents who moved to Portugal from Denmark, contested the 2013 IRS assessment arguing that income earned by claimant A as Director of Logistics Services should qualify for NHR benefits under Article 72 of the IRS Code and Portaria 12/2010. The Tax Authority raised preliminary objections claiming the arbitral tribunal lacked jurisdiction, arguing the dispute concerned a 'presupposed act' (registration data) rather than the assessment itself, since the taxpayer had not declared NHR status in their original tax return. The case highlights critical procedural issues: the tribunal must first determine whether it has subject-matter jurisdiction before examining the substantive question of whether logistics director qualifies as a high value-added activity under the NHR regime. The decision addresses the intersection of taxpayer registration obligations, the scope of tax arbitration, and the application of special tax regimes. This case is significant for tax professionals advising non-habitual residents, as it clarifies whether omissions in initial tax declarations can be corrected through assessment challenges and whether CAAD has competence to review classification decisions affecting NHR status, establishing important precedent for the procedural pathway available to taxpayers seeking to invoke NHR benefits retrospectively.

Full Decision

ARBITRAL TAX JURISPRUDENCE

Case No. 103/2019-T

Decision Date: 2019-10-14

Personal Income Tax (IRS)

Value of Claim: € 52,564.40

Subject Matter: IRS - Non-Habitual Resident. High Value-Added Activities.

ARBITRAL DECISION

I. Report

  1. A..., holder of tax identification number ... and B..., holder of tax identification number ..., domiciled in ..., ..., in Denmark, having been notified of the express dismissal decision of the hierarchical appeal procedure filed against the dismissal of the administrative appeal concerning the personal income tax assessment No. 2014..., relating to the year 2013, hereby submit, pursuant to Articles 2, No. 1, subparagraph a), and 10, No. 1, subparagraph a), of the Legal Framework for Tax Arbitration (RJAT) approved by Decree-Law No. 10/2011, of January 20, a request for constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (AT) is the Respondent.

  2. The request for arbitral pronouncement, presented on February 15, 2019, seeks a declaration of illegality of the aforementioned act dismissing the hierarchical appeal and, mediately, a declaration of illegality of the personal income tax assessment above identified.

  3. As the basis for their request, the Claimants argue that the questioned assessment should have been made under the special regime applicable to income from Category A of the Personal Income Tax (dependent work income) earned by a non-habitual resident.

  4. This claim is based on the fact that Claimant A..., holder of that status, earned such income in the said year as remuneration for the exercise in Portuguese territory of high value-added activity, framed within the scope of Administrative Order 12/2010, of January 7, that is, that the taxation of the said income should have been made based on the special rate of 20% provided for in Article 72, No. 6 (current No. 10), of the Personal Income Tax Code, and not based on the general progressive rate to which they were subjected.

  5. In response to what was requested, the Tax and Customs Authority (AT) pronounced itself in the sense of the inadmissibility of the present request for arbitral pronouncement, invoking two dilatory exceptions: the inappropriateness of the means used in the present procedure and the incompetence of the Arbitral Tribunal by reason of the subject matter, both based on the understanding that the matter to be decided does not truly involve any assessment of the legality of the assessment, but rather of an autonomous act prior to the same, the "presupposed act."

  6. In support of what it alleges, the Respondent maintains that the assessment in question was made considering the elements contained in the AT's register, resulting from a prior declaration by the Claimant, which was omissive regarding the high value-added activity. Hence it holds that what is truly intended here is to contest an item of information contained in the AT's register, that is, the claim thus aims at an autonomous administrative act prior to the assessment, whereby the judicial means of reaction available to the taxpayer would be an administrative action and not judicial challenge.

  7. 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 (AT).

  8. The Claimants did not proceed with the appointment of an arbitrator.

  9. Pursuant to subparagraph a) of No. 2 of Article 6 and subparagraph b) of No. 1 of Article 11 of Decree-Law No. 10/2011, of January 20, as amended by Article 228 of Law No. 66-B/2012, of December 31, the Deontological Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline and timely notified the parties.

  10. Being duly notified of this appointment, the parties did not express their intention to refuse the appointment of the arbitrator, pursuant to the combined provisions of Article 11, No. 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

  11. Therefore, in accordance with the provision in subparagraph c) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of December 31, the collective arbitral tribunal was constituted on April 26, 2019.

  12. The arbitral request is timely, pursuant to Article 10, No. 1, subparagraph a), of Decree-Law No. 10/2011, of January 20, and Article 102, No. 1, subparagraph a), of the Code of Tax Procedure and Process.

  13. In view of the knowledge arising from the procedural documents submitted by the Parties, which is deemed sufficient for the decision, the Tribunal decided to dispense with the meeting referred to in Article 18 of the RJAT.

  14. Thus, by order of September 7, 2019, subject to timely notification, it was decided, barring objection from the Parties, to dispense with the said meeting, and a period of 10 days was granted for the presentation of written submissions.

  15. Only the Claimant submitted written submissions, essentially reaffirming the position already previously expressed in her petition and response to the dilatory exceptions raised by the Respondent.

II. Case Management

  1. The Arbitral Tribunal is regularly constituted and is materially competent, pursuant to subparagraph a) of No. 1 of Article 2 of Decree-Law No. 10/2011, of January 20.

  2. The Parties have legal personality and capacity, are legitimate and are legally represented (see Article 4 and No. 2 of Article 10 of Decree-Law No. 10/2011 and Article 1 of Administrative Order No. 112/2011, of March 22).

III. Factual Matter

  1. Based on the documentary evidence that comprises the present case, the following factual elements are highlighted which, not being contested by the Parties, are considered entirely proven:

18.1. On August 3, 2012, Claimant A..., then resident at Street ..., No. ..., ...-... Porto, entered into a fixed-term employment contract with company C..., Ltd., with headquarters at Street ..., No. ..., ...–..., with effect from September 1, 2012 and ending on August 31, 2015 (Doc. 3).

18.2. According to the said contract and a declaration by the employer, the Claimant A... contracted with the company for the provision of services with the position and functions of Director of Logistics Services, recognized as involving services of high technical requirement and responsibility (Docs. 3 and 4).

18.3. On March 5, 2014, the Claimant sent to the Director of the Taxpayer Registration Service of the Tax and Customs Authority (AT) a request for registration as a non-habitual resident (Doc. 5).

18.4. On the 30th of the following month, the Claimants submitted, through the Tax Portal, the Periodic Income Declaration relating to the year 2013 (Doc. 6).

18.5. The said declaration includes annexes A and H relating, respectively, to income from Category A – Dependent Work – and Tax Benefits and Deductions.

18.6. Residence in Continental Portuguese territory is declared, and that annex A contains dependent work income earned by the Claimant in that year in the amount of € 225,569.67, on which withholdings made by the employer in the amount of € 95,102.00 were levied.

18.7. Based on the elements declared, considering in particular the status of residents in Portuguese territory with the consequent application of the general rates provided for in Article 68 of the Personal Income Tax Code, personal income tax assessment No. 2014... was made relating to that year, with a net collection of € 98,728.66, from which, deducting withholding tax in the amount of € 98,690.00 and adding the collection of € 3,084.24 from the extraordinary surtax, resulted in the amount of tax payable of € 3,122.91 (Doc. 8).

18.8. The corresponding Tax Notice No. 2014... was timely issued for payment by August 31, which was made on the 29th of the same month (Doc. 8 and information contained in the administrative file).

18.9. On September 8, 2014, the Claimant was notified, through Official Letter No. ..., from the Director of the Taxpayer Registration Service of the decision regarding the request for registration as a non-habitual resident, whose content is as follows (Doc. 9):

"From the analysis of the request for registration as a non-habitual resident, made on March 14, 2014, I hereby inform Your Excellency that the same was granted, by order of the Service Director dated September 4, 2014, whereupon the respective registration in the register was carried out, with effect from the year 2013.

Given that you have already submitted the income declaration for Personal Income Tax for the year 2013, you may submit within 30 days the respective substitute declaration, without any penalty.

After submission of the above-mentioned declaration, you should notify your Tax Service (Porto ...) through the address "sf...2...)"

18.10. Following the said communication, the Claimants, on October 2, 2014, submitted a substitute Personal Income Tax declaration, Model 3, notifying the Porto ... Tax Service of this fact by email dated the 7th of the same month (Docs. 10 and 11).

18.11. The substitute declaration submitted, in addition to annexes A ("Dependent Work") and H ("Tax Benefits and Deductions"), also includes annex L ("Non-habitual Resident").

18.12. In the said annex L, the income earned by the Claimant was declared in Box 4A, in the amount of € 225,569.67, for which a code was indicated for high value-added activity "802," referring to "senior management personnel of companies," in accordance with the provisions of Administrative Order No. 12/2010, of January 7, and No. 6 (current No. 10) of Article 72 of the Personal Income Tax Code.

18.13. According to information contained in the administrative file, the submitted declaration did not produce the intended effects by the Claimants, and, pursuant to Article 59, No. 5, of the Code of Tax Procedure and Process (CPPT), the same was converted into an administrative appeal procedure, which was conducted at the Porto ... Tax Service under number ...2017....

18.14. On July 3, 2017, the Claimants were notified, for the purpose of exercising the right to a prior hearing, of the draft decision to dismiss the said administrative appeal, based on the following grounds:

"15. Having consulted the DSRC, it is found that the applicant submitted in March 2014 a request for registration as a RNH, this request having been granted in September 2014 (...), that is, effectively the applicant obtained the status of RNH in Portuguese territory for tax purposes with a validity period from 2013 to 2022, with code 888 (other activities) listed as the high value-added activity.

  1. However, from the said request it is inferred that the applicant requested his/her registration as RNH, but did not specify which activity would be developed as well as the respective activity code, whereby the applicant was registered as RNH with the activity code – 888 (other activities).

  2. This activity does not appear in the table of high value-added activities attached to Administrative Order No. 12/2010, of January 7, whereby the applicant cannot be taxed at the special rate of 20%. (…).

  3. Thus, it should be noted that it is for the applicant to request the change of the activity code with the Taxpayer Registration Service for the intended activity (activity code – 802, activity description – senior management personnel of companies) (…)."

18.15. In exercising the respective right to a prior hearing, the Claimants presented, as documentary evidence of the alleged exercise of high value-added activity, the employment contract and a declaration by the employer certifying that the Claimant performed the function of Director of Logistics Services in the company, an activity that involved high technical expertise and responsibility, in particular in the management of budgets of high value.

18.16. By order of September 27, 2017, the Head of the Porto ... Tax Service, in the exercise of delegated authority, issued an order dismissing the administrative appeal into which the substitute declaration submitted by the Claimants had been converted, with the following grounds (Doc. 2 and administrative file):

"In compliance with the provision of subparagraph b) of No. 1 of Article 60 of the General Tax Law, the appellant exercised the right to a prior hearing, which is hereby fully reproduced, alleging essentially that they should not be penalized for a mere accessory and formal error regarding registration as a non-habitual resident in relation to the spouse. Now, at the time of the registration request, the DSRC registered the appellant with the residual code (888) because she had not indicated in the request that she was engaged in activity listed in the table of high value-added activities (Administrative Order 12/2010, of January 7), registration made in accordance with what was requested and proven by the applicant, the appellant having indicated code 802 in the Personal Income Tax declaration. It is concluded that at this stage no new elements were brought to the process and as the AT has already ruled on what is now alleged, I am of the opinion that the request should be dismissed."

18.17. Being notified of this decision on October 6, 2017, through Official Letter No. 2017..., from the Porto ... Tax Service, the Claimants filed a hierarchical appeal requesting its revocation with the consequent recognition of the validity of the substitute declaration timely submitted, with the inherent effects in particular the application of the special rate of 20% to the dependent work income earned by the Claimant in the year 2013 and the consequent reimbursement of the tax unlawfully levied (Doc. 16).

18.18. By order of November 13, 2018, from the Deputy Director of Finance, in the exercise of delegated authority, the appeal was dismissed, with the decision being based on adherence to the following information (Doc. 1):

"1. In the request submitted to request his/her registration as a non-habitual resident, the activity to be developed was not specified, nor was the activity code, whereby the registrant was registered with code 888 – other activities.

  1. It was not demonstrated unequivocally that he/she was engaged in a high value-added activity listed in the Table, already duly identified.

  2. In light of the foregoing, we are of the opinion that the arguments invoked by the appellants do not lead to a change in the decision rendered in the administrative appeal process, and the request should be dismissed."

18.19. This decision was notified to the Claimants on November 14, 2018, through Official Letter No. 2018..., from the Porto ... Tax Service.

  1. The proven facts are based on the documents attached to the case, with no facts relevant to the decision that should be considered as unproven.

II. Matters of Law

  1. With regard to the merits and as a matter of law, the essential question raised in the present request for arbitral pronouncement is whether or not the Claimant has the right to be taxed, in the context of the Personal Income Tax for the year 2013, in the capacity of a non-habitual resident, considering that the activity carried out by her in the said year – senior management personnel of a company – falls within the scope of Administrative Order No. 12/2010, and whether the prior recognition of that fact constitutes or does not constitute a prerequisite for the application of the special rate provided for in Article 72, No. 6 (current No. 10), of the Personal Income Tax Code.

  2. However, in view of the provisions of Articles 13 of the Code of Procedure in Administrative Courts (CPTA) and 278, No. 1, subparagraph a), of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, No. 1, subparagraphs d) and e) of the RJAT, it is incumbent on the Tribunal to make a prior assessment of the exceptions invoked by the Respondent.

Preliminary Issues

  1. In the Response submitted by the Respondent, two dilatory exceptions are invoked, namely: the inappropriateness of the means used in the present procedure and the incompetence of the Arbitral Tribunal by reason of the subject matter, both on the ground that the Claimants' claim is centered on the contestation of an autonomous administrative act prior to the assessment, that is, of a presupposed act.

  2. Thus, considering that the assessment impugned "was made in accordance with the declaration of the Claimants, when compared with the elements known to the AT regarding the activity of the female Claimant, elements which also result from the (prior) declaration of the Claimant (which was omissive regarding the exercise of a 'high value-added activity')" the Respondent concludes in its response that "... what is truly intended here is to contest an item of information contained in the AT's register, informing that the Claimant exercises a 'high value-added activity,' which will later have effects when such information is invoked by matters of fact or law (such as, for example, to effect a Personal Income Tax assessment)."

  3. From this perspective, the Respondent understands that "the act previously performed (of taxpayer register classification) does not have a preparatory character of the assessment, being rather a 'presupposed act,' as the assessment will consider it, but this act remains beyond that assessment," therefore "the means of judicial reaction available to the taxpayer for those purposes is administrative action, not challenge."

  4. With this reasoning, the Respondent concludes from the said circumstances (...result, umbilically linked to each other, two dilatory exceptions: the inappropriateness of the means used in the present procedure and the incompetence of the Arbitral Tribunal by reason of the subject matter, as the matter to be decided does not truly involve any assessment of the legality of the assessment, but rather of an autonomous act prior to the same, the mentioned "presupposed act." Therefore, in light of the invoked dilatory exceptions, which pursuant to Article 577 of the CPC entail the discharge from the instance, in compliance with No. 2 of Article 576 of the same statute, the same should be judged to be procedurally sound, and accordingly the Respondent should be discharged from the instance.

  5. In support of the position it sustains, the Respondent invokes Judgment No. 718/2017 of the Constitutional Court, which, in an appeal filed by the Tax and Customs Authority against an arbitral decision, decided not to find unconstitutional "the normative interpretation drawn from Article 54 of the Code of Tax Procedure and Process, to the effect that the failure to judicially challenge acts of dismissal of requests for recognition of the status of non-habitual resident prevents judicial challenge of final tax assessment decisions on the ground of defects in those."

  6. Having been notified of the response submitted by the Tax and Customs Authority, the Claimants came to pronounce themselves on the invoked exceptions, in the following terms and with the following grounds: "9. In the present case and by reference to the matter of non-habitual residence, the act that was notified to the Claimants was the act granting their request for recognition of the non-habitual resident (RNH) status of the female Claimant, as further appears from the official letter attached as Document No. 9 with the petition that gives rise to the present case.

  7. Being that this act granting status, notified to the Claimants, did not contain any limitation or indication regarding the high value-added activity exercised,

  8. In particular, it did not contain any mention that the female Claimant had been registered with the activity code '888'

  9. In that sense, the Claimants here were not notified of this registration with activity code '888' promoted by the DSRC,

  10. It being true that, in view of the tenor of the act performed that was notified to them (which, recall, granted their request for recognition of RNH status and invited them to submit a substitute Personal Income Tax return in accordance), the Claimants lacked the necessary interest in acting against the same."

  11. The Claimants further emphasize that, not having been notified of the decision of register classification of Claimant A... with activity code "888," they did not have the opportunity to react against it, thus ".17. on the one hand, it is known that acts in tax matters that affect the rights and legitimate interests of taxpayers only have effects in relation to them when validly notified to them – and only if notified to them can taxpayers have the burden (or, in our view, the right) – to react against the same.

  12. And, on the other hand, it is settled that, as the Constitutional Court Judgment No. 718/2017 invoked by the AT in its response reminds us, 'what matters to determine, from the perspective of the right to action, is whether the taxpayer was afforded an effective possibility of contentious reaction against the act (...) – that is, whether, with respect to that act, he was ensured effective judicial protection.'

  13. That is, the prerequisites for the judgment of non-unconstitutionality rendered in the said Judgment and other conclusions pointed out there, which the AT inappropriately seeks to transpose to the present case to support its understanding, are: (i) the existence of an act which, in the concrete case, being the act of dismissal of the recognition of RNH status, was characterized by the Constitutional Court as autonomous and prior; and (ii) the taxpayer, having been notified thereof, had an effective possibility of reacting against it.

  14. For that reason, the Constitutional Court expressly enshrines in that Judgment No. 718/2017 the dependence between its judgment of non-unconstitutionality and the possibility of taxpayers having reacted to the act: 'in so far as the party now respondent had an effective possibility of reacting contenciously against the act (...), the rule whose application was refused does not intolerably restrict the guarantee of defense, before the courts, of its rights and legitimate interests.'

  15. Now, as has already been noted, in the case of the present case, and from the outset, the fundamental prerequisite that the Claimants had an effective possibility of reacting contenciously against the purported prior and autonomous act is not met.

  16. Not having been afforded the possibility of reaction against the purported 'autonomous administrative act prior to the assessment,' the prerequisites on which the AT grounds the invocation of the two exceptions or its understanding set forth in the response fall away,

  17. Which, for that reason and from the outset, should be dismissed as without merit."

  18. Indeed, it is extracted from the documents that comprise the present case, in particular from the administrative file, that Claimant A... was granted the status of non-habitual resident, with effect from 2013, a fact that was timely notified with an indication that, from that fact, there arose the legal possibility of submitting, without penalty, a substitute Personal Income Tax return from the one that had been previously submitted.

  19. From the same elements and information that comprise the administrative file, it is also extracted that no clarification or proof was requested regarding the alleged exercise of a high value-added activity framed within the scope of Administrative Order No. 12/2010, of January 7.

  20. Indeed, what is evident from those elements is that, as alleged by the Claimants, the AT, of its own volition, classified Claimant A... under code "888" – that is, it did not assign the code 802 "senior management personnel of companies" – without bothering to carry out notification of the act.

  21. Thus, the Claimants were not afforded any possibility of reaction by any means, administrative or judicial, against an act that, in its Response, the Respondent considers a "presupposed act," and which was not brought to their knowledge in the proper legal manner.

  22. In other words, the facts evident in the present case do not minimally correspond to the situation referred to in the Constitutional Court judgment invoked by the AT: in the case to which it referred, the right to access the tax relief regime enjoyed by non-habitual residents was at issue, it being considered there that, as the effectiveness of that regime depended on prior recognition, the act refusing such recognition could only be subject to administrative action, with no possibility of judicial reaction against the consequent tax assessment act.

  23. In conclusive terms, the Constitutional Court decided, in the cited judgment, "not to find unconstitutional the normative interpretation drawn from Article 54 of the Code of Tax Procedure and Process, to the effect that the failure to judicially challenge acts of dismissal of requests for recognition of the status of non-habitual resident prevents judicial challenge of final tax assessment decisions on the ground of defects in those."

  24. Manifestly, this is not the case: Claimant A... was, by decision of the competent entity, granted the status of non-habitual resident, and by the same decision, the substitution, without any penalty, of the income declaration for the year 2013 previously submitted was determined.

  25. On the other hand, it cannot fail to be taken into account the fact that the subject matter of the present request for arbitral pronouncement is, on the immediate plane, the illegality of the act of dismissal of the hierarchical appeal filed against the dismissal of the administrative appeal and, mediately, the illegality of the personal income tax assessment for the year 2013.

  26. Indeed, the Claimants challenge the personal income tax assessment and not the illegality of any act of dismissal of a request for classification in high value-added activity. Moreover, no such request even existed, because Claimant A... was granted the status of non-habitual resident but, by an official decision, she was not given the classification of her activity as high value-added, and instead, in an arbitrary manner and without any grounds, she was assigned a residual code that would be, in the AT's view, the one corresponding to other activities.

  27. As seen, such decision was not subject to notification to the Claimants, who, faced with a decision to dismiss an administrative appeal resulting from the conversion of the substitute declaration submitted, filed a hierarchical appeal against it.

  28. In analyzing the challenged decisions, both regarding the administrative appeal and the hierarchical appeal filed against it, it is found that, in both cases, the subject matter under review is not the decision regarding the non-classification of the Claimant within the scope of the high value-added activities listed in Administrative Order 12/2010, but rather the tax act itself.

  29. And in both cases, the decisions to dismiss pronounce on the merits of the matter, regarding the legality of the assessment act, on the ground that the Claimant cannot be classified within those activities because she did not declare it in a timely manner. The legality or illegality of the official classification under other activities (code 888) is thus not assessed, but rather the assessment itself.

  30. Therefore, without need for further explanation and with the grounds set forth, the Tribunal has no doubt in accompanying the Claimants' argument, understanding that there is no impropriateness of the procedural means used to react against an assessment deemed to be illegal, the exception invoked by the Respondent thus being unfounded.

  31. Given that, as the Respondent itself understands, the exception of incompetence of the Tribunal would necessarily follow as a consequence of the impropriateness of the procedural means used, it is considered, for the reasons set forth, that the exception of incompetence of the arbitral tribunal raised by the Respondent is equally unfounded, declaring the Tribunal competent to assess and pronounce on the challenged assessment.

On the Merits of the Request

  1. The matter of merit to be decided is thus to determine whether or not the personal income tax assessment for the year 2013 notified to the Claimants is affected by illegality, that is, whether or not the Claimants have the right to be taxed, regarding the income earned by Claimant A... in that year, at the special rate of 20%, considering the activity she exercised as a non-habitual resident.

  2. It is thus important, first of all, to analyze the regulatory framework relating to this matter in force at the time of occurrence of the tax event in question in the present case.

  3. The tax regime for non-habitual residents was established by Decree-Law No. 249/2009, of September 23, which approved the Tax Code for Investment, of which it constituted Articles 23 to 25. Subsequently, through Law No. 20/2012, of May 14, those provisions were repealed, this regime now appearing in Articles 16, 22, 72, and 81 of the Personal Income Tax Code, complemented by Administrative Order No. 12/2010, of January 7, which approved the table of high value-added activities.

  4. In the year 2013, in which the tax event in question in the present case is situated, Article 16 of the Personal Income Tax Code defined the status of non-habitual resident in the following terms:

"6 - Individuals who, becoming fiscally resident under Nos. 1 or 2, have not been residents in Portuguese territory in any of the five preceding years are considered non-habitual residents in Portuguese territory.

7 - A taxpayer considered a non-habitual resident acquires the right to be taxed as such for a period of 10 consecutive years from the year, inclusive, of his/her registration as a resident in Portuguese territory.

8 - The taxpayer must request registration as a non-habitual resident at the time of registration as a resident in Portuguese territory or, subsequently, by March 31, inclusive, of the year following the one in which he/she becomes a resident in that territory.

9 - The enjoyment of the right to be taxed as a non-habitual resident in each year of the period referred to in No. 7 is dependent on the taxpayer being, in that year, considered a resident in Portuguese territory.

10 - The taxpayer who has not enjoyed the right referred to in the preceding number in one or more years of the period referred to in No. 7 may resume the enjoyment of the same in any of the remaining years of that period, from the year, inclusive, in which he/she again becomes a resident in Portuguese territory."

  1. With regard to the taxation of income derived from the exercise of high value-added activities, Article 72, No. 6, as then worded, established that:

"6 - Net income from categories A and B earned in high value-added activities, with scientific, artistic or technical character, to be defined by order of the Government member responsible for the area of finance, by non-habitual residents in Portuguese territory, are taxed at the rate of 20%."

  1. For the purposes of the provision above transcribed, the table of high value-added activities was approved through Administrative Order No. 12/2010, of January 7, which includes:

"8 – Investors, administrators and managers:

...

802 – Senior management personnel of companies."

  1. By order of the Secretary of State for Tax Affairs, dated April 26, 2010, disclosed through Circular No. 2/2010 of the AT, of May 6, an understanding was established to the effect that, for the purposes of application of that table, "senior management personnel of companies (Code 802) are persons with management positions and power to bind the legal entity."

  2. It is thus within the framework of this regulatory regime that Claimant A..., considering that the activity exercised by her in that year of 2013 is included in that table as senior management personnel of a company, challenges the personal income tax assessment of which she was the recipient in the measure that she saw the application of the said regime refused.

  3. As follows from the administrative decisions challenged, the grounds for this refusal did not lie in the qualification of the activity concretely exercised by the Claimant but in the fact that it had not been declared in a timely manner at the moment of her registration as a non-habitual resident.

  4. As is extracted from No. 7 of Article 16 of the Personal Income Tax Code, "A taxpayer considered a non-habitual resident acquires the right to be taxed as such for a period of 10 consecutive years from the year, inclusive, of his/her registration as a resident in Portuguese territory."

  5. During the period to which the assessment now challenged relates, the understanding of the Tax and Customs Authority, disclosed through the Circular referred to, was oriented to the effect that access to the tax relief measures for non-habitual residents was dependent not only on the attribution of the respective status but also on the prior recognition, in this case, of the exercise of a high value-added activity.

  6. It is thus based on this understanding that the Respondent alleges that the administrative act recognizing the benefit constitutes a "presupposed act," hence maintaining that, from the dismissal of the respective request, administrative action would lie, autonomous in relation to the tax assessment act.

  7. Such understanding is not accompanied, since from the text of the law it is clear that a taxpayer considered a non-habitual resident automatically acquires the right to be taxed as such.

  8. The Tribunal thus understands that, in the case under analysis, the notification made to the Claimants to the effect that they deliver a substitute tax return following the recognition of the quality of non-habitual resident of Claimant A... shows itself to be a decision in conformity with the applicable legislation, and likewise in conformity with the legislation invoked is the submission of that return with the invocation of the exercise of high value-added activity. Without prejudice to the fact that the AT could demand proof of the declared elements, if it so wished.

  9. It is noted, moreover, that this is the current position of the AT which, recognizing the error of the position sustained by it until then, has now, by order of the Director-General, dated June 26, 2019 – disclosed through Circular No. 4/2019 – stated the following understanding: "1 - The norms contained in No. 10 of Article 72 and No. 5 of Article 81, both of the Personal Income Tax Code, constitute exceptional measures of automatic tax relief, as their effects result directly and immediately from the law by the mere verification of their respective prerequisites and conditions, their application not being dependent on any act of recognition by the AT, as determined by Article 5 of the Tax Benefits Statute (EBF)."

  10. Regarding the application of the regime in question, the following procedure is defined in the cited Circular: "2 - Thus, it should be understood that, with the act of registration as a non-habitual resident, the taxpayer acquires the right to be taxed under the terms of the respective tax regime.

Consequently, if the taxpayer in some year of the 10 years of entitlement to the regime, earns income from categories A and/or B of activities that are listed in Administrative Order No. 12/2010, of January 7, as amended by Administrative Order No. 230/2019, of July 23 – income from high value-added activities – the right to be taxed in accordance with the exceptional regime applicable to income arising from those activities is acquired at the moment of verification of the respective prerequisites.

3 - And, being Personal Income Tax an annual periodicity tax, this observance of legal prerequisites must be maintained for the purposes of annual renewal of the respective acquisition of the right.

Exercise of this right in each year: annex L of model 3

4 - Consequently, to exercise the right to the tax regime for income derived from high value-added activities, it will suffice for the taxpayer to invoke it in the annual income declaration by entering the appropriate high value-added activity code in annex L of declaration model 3, without need for obtaining prior recognition by the AT of the exercise of the invoked activity.

Proof elements

5 - Nevertheless, the taxpayer must be equipped with the evidentiary elements of the effective exercise of that/those activity(ies) and of the corresponding earning of income, as well as of the other legal prerequisites of the right invoked in any one of the years of the maximum period of ten years during which he/she may enjoy the status of RNH, and proceed with the respective presentation whenever requested by the AT services, pursuant to Article 128 of the Personal Income Tax Code.

6 - In this manner, the verification of the facts/prerequisites of the right invoked in the declaration occurs through the proofs to be presented by the taxpayers in the phase subsequent to the submission of the income declaration, and not through the entry of the respective code in the register application (SGRC), as has occurred to date.

Proof elements – High Value-Added Activities under Administrative Order No. 12/2010, of January 7

7 - In the case of high value-added activities under Administrative Order No. 12/2010, of January 7, in conjunction with points 7 and 8 of Circular No. 2/2010, of May 6, the following constitute proof elements, in particular:

a) Employment or service provision contract that objectively identifies the functions performed, accompanied by documentation evidencing registration with a Professional Association, in the case of exercising an activity that requires such registration;

b) Documentation evidencing the exercise of a management position (for example employment contract) and a power of attorney showing that the applicant has power to bind the legal entity, in the case of "Senior Management Personnel of Company" activity (point 7 of Circular No. 2/2010, of May 6), with joint powers being considered sufficient proof;..."

  1. However, the current guidance maintains the notion of senior management personnel of a company already previously disclosed through Circular No. 2/2010, to the effect that "senior management personnel of companies (Code 802) are persons with management positions and power to bind the legal entity."

  2. It is understood, however, that the notion of senior management personnel of a company cannot be interpreted in the sense set forth in the circulars above referred to.

  3. Indeed, this matter was already subject to analysis in an arbitral decision of June 18, 2019, rendered in case No. 505/2018-T, in which an understanding was expressed that is transcribed below, "4.4. On the notion of senior management personnel. In relation to the activity developed by the Claimant, the notion of senior management personnel is not confused with the notion of manager or administrator. And it cannot be interpreted in the sense set forth in the Circular of the AT.

Senior management personnel of a company is a concept typical of Labor Law.

Pursuant to Article 11, No. 2 of the General Tax Law, 'whenever in tax norms terms proper to other branches of law are employed, they must be interpreted in the same sense they have there, unless otherwise directly follows from the law.'

Thus, it is in Labor Law that we must seek what constitutes senior management personnel.

According to the judgment of the Supreme Court of Justice in case No. 0851540 of September 24, 2008, what is relevant for someone to qualify as senior management personnel is not only the exercise of functions of greater technical complexity, but also what presupposes high trust, a higher degree of responsibility or more special qualification.

In the same sense, see NETO, Abílio, in 'Labor Code and Complementary Legislation Annotated,' Ediforum, 3rd Edition, p. 246, which considers to be part of the functional core of senior management personnel, that worker who exercises functions that presuppose high trust, high degree of responsibility or more special qualification, it not being required, however, for the fulfillment of the concept of senior management personnel, that this worker necessarily direct or supervise other workers or be inserted in an organization within which he/she holds, in hierarchical terms, a position superior to other members of the same.

  1. Adhering without reservation to the understanding transcribed above, the Tribunal considers that, being the Claimant director of logistics services, an activity that required high technical capacity and responsibility, as well as the management of high company budgets, as appears from the employment contract and the declaration of the employer, she should be considered as senior management personnel of the company.

  2. Consequently, the Tribunal considers that the income earned in the year 2013 by Claimant A... in the employ of company C... are derived from the exercise of a high value-added activity classifiable under code 802 – senior management personnel of companies – of the table attached to Administrative Order 12/2010, of January 7.

  3. To the said income should thus be applied the special rate of 20% provided for in No. 6 (current No. 10) of Article 72 of the Personal Income Tax Code, concluding therefore that the assessment and administrative decision challenged are illegal, for violation of the law, whereby the latter should be revoked and the former annulled.

On the Right to Compensatory Interest

  1. Alongside the annulment of the assessment acts and the consequent reimbursement of the amounts unlawfully levied, the Claimants also request that they be granted the right to compensatory interest, pursuant to Article 43 of the General Tax Law.

  2. Indeed, pursuant to the provision of No. 1 of the said article, compensatory interest will be due "when it is determined, in administrative appeal or judicial challenge, that there was error attributable to the AT services from which results payment of the tax debt in an amount greater than legally due." Beyond the means referred to in the provision transcribed, we understand that, as follows from No. 5 of Article 24 of the RJAT, the right to the mentioned interest can be recognized in the arbitral process and thus the request is addressed.

  3. The right to compensatory interest referred to in the General Tax Law provision above presupposes that tax was paid in an amount greater than due and that such derives from error, of fact or law, attributable to the AT.

  4. In the present case, it is manifest that, following the illegality of the assessment, for the reasons pointed out previously, the Claimant made payment of an amount manifestly not due.

  5. It also results from the case that the illegality of the assessment at issue in the present process is directly attributable to the Respondent, which, on its own initiative, performed it without legal support, suffering from wrong application of the legal norms to the concrete case.

  6. Thus, the Claimants are granted the right to the compensatory interest requested, calculated, at the legal rate, on the amount unlawfully levied, from the date of the respective payment until the moment of actual reimbursement (see General Tax Law, Article 43, No. 1 and Code of Tax Procedure and Process, Article 61).

IV. Decision

On these grounds and with the grounds set forth, the Arbitral Tribunal decides:

a) To judge as unfounded the exception of impropriateness of the procedural means used;

b) To judge unfounded the exception of incompetence of the Arbitral Tribunal to address the present request;

c) To judge the request for arbitral pronouncement as well-founded, determining the revocation of the administrative decision and declaring the illegality of the challenged assessment, with the consequent annulment and reimbursement of the amounts unlawfully levied, together with the corresponding compensatory interest, calculated pursuant to the legal terms.

Value of the Case: The value of the case is fixed at € 52,564.40, pursuant to Article 97-A, No. 1, subparagraph a) of the Code of Tax Procedure and Process, applicable by reference from Article 29, No. 1, subparagraphs a) and b) of the RJAT, and Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs: Pursuant to Article 22, No. 4, of the RJAT, and in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, I fix the amount of costs at € 2,142.00, charged to the Respondent (AT).

Lisbon, October 14, 2019,

The Arbitrator,

Álvaro Caneira

Frequently Asked Questions

Automatically Created

What is the special 20% IRS tax rate for non-habitual residents in Portugal and how does it apply to high value-added activities?
The special 20% IRS tax rate for non-habitual residents in Portugal applies to employment income (Category A) derived from high value-added activities as defined in Portaria 12/2010. Under Article 72(6) (now Article 72(10)) of the IRS Code, qualifying NHR taxpayers pay a flat 20% rate instead of the general progressive rates that can reach significantly higher levels. To benefit, taxpayers must hold registered NHR status and perform activities of high technical requirement listed in the ministerial order, such as specialized technical services, scientific research, or senior management positions requiring advanced qualifications.
Can a non-habitual resident challenge an IRS tax assessment if their income was taxed at the general progressive rate instead of the special 20% rate?
Yes, a non-habitual resident can challenge an IRS assessment through administrative appeals (reclamação graciosa and recurso hierárquico) followed by tax arbitration at CAAD, as demonstrated in Case 103/2019-T. However, the Tax Authority may raise jurisdictional objections if the taxpayer failed to declare NHR status or qualifying activities in their original tax return, arguing the dispute concerns registration data rather than assessment legality. The success of such challenges depends on whether the tribunal accepts jurisdiction over what the AT characterizes as a 'presupposed act' preceding the assessment, and whether the taxpayer's activity genuinely qualifies under Portaria 12/2010 as high value-added.
What role does Portaria 12/2010 play in determining eligibility for the non-habitual resident tax regime in Portugal?
Portaria 12/2010 of January 7 serves as the definitive legal instrument listing which professional activities qualify as 'high value-added' for NHR tax benefits. It establishes specific categories including architects, engineers, auditors, doctors, university professors, artists, and senior executives in technical fields. Tax authorities use this ministerial order to determine eligibility for the 20% special rate. In Case 103/2019-T, the dispute centered on whether a Director of Logistics Services constituted a qualifying high value-added activity under this regulation, demonstrating that Portaria 12/2010 is the critical reference document for classification decisions affecting thousands of euros in tax liability.
Does the CAAD arbitral tribunal have jurisdiction to review IRS assessments related to non-habitual resident status classification?
The CAAD arbitral tribunal's jurisdiction over NHR-related IRS assessments was contested in Case 103/2019-T. The Tax Authority argued that disputes over NHR classification involve 'presupposed acts' (registration decisions) rather than assessment legality, potentially falling outside arbitral competence under Article 2 of the RJAT (Regime Jurídico da Arbitragem Tributária). However, CAAD tribunals generally have jurisdiction under Article 2(1)(a) and Article 10(1)(a) of Decree-Law 10/2011 to review the legality of IRS assessments, including those involving special regimes. The key issue is whether challenging the tax rate applied constitutes challenging the assessment itself (within CAAD jurisdiction) or an anterior administrative act requiring different judicial remedies through administrative courts.
What procedural steps must a taxpayer follow to contest an IRS assessment under the non-habitual resident regime, including reclamação graciosa and recurso hierárquico?
To contest an IRS assessment under the non-habitual resident regime, taxpayers must follow a structured process: (1) file a reclamação graciosa (administrative appeal) within 120 days of notification under Article 68 of the CPPT (Código de Procedimento e Processo Tributário); (2) if dismissed, file a recurso hierárquico (hierarchical appeal) to a superior tax authority; (3) upon final administrative rejection, submit a tax arbitration request to CAAD within 90 days under Article 10(1)(a) of the RJAT, as demonstrated in Case 103/2019-T filed February 15, 2019. Taxpayers should ensure NHR status registration and declare qualifying activities in original tax returns, as omissions may create jurisdictional challenges. Payment of contested amounts is typically required before proceeding, though suspension may be requested with guarantee.