Process: 109/2018-T

Date: October 29, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 109/2018-T) concerns capital gains tax (IRS) reinvestment relief for permanent residence properties. The taxpayer sold a property in 2007 and reinvested the proceeds in another property, claiming capital gains tax exemption. The Tax Authority (AT) denied this relief, asserting the sold property was not the taxpayer's permanent residence because she had changed her fiscal domicile to a different Lisbon address in August 2005. The taxpayer challenged the additional IRS assessment through administrative complaint, hierarchical appeal, and judicial challenge, all of which were dismissed. In 2016, she obtained evidence that the 2005 fiscal domicile change was made without her knowledge or intervention, prompting a request for official review (revisão oficiosa) under Article 78 of the General Tax Law (LGT). The AT rejected this request, arguing there was no administrative error and that the three-year period under Article 78(4) LGT had expired. The central legal issues are: (1) whether the unauthorized fiscal domicile change constitutes an error by the services justifying official review; (2) when the three-year period for official review begins—from the initial assessment notification or from when the judicial challenge becomes final; and (3) whether res judicata from the prior judicial proceedings bars this new arbitration claim. The case highlights the critical distinction between fiscal domicile registration and actual permanent residence for capital gains reinvestment purposes, and the temporal limits for challenging tax assessments through official review mechanisms.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

REPORT

On 13 March 2018, A..., resident at ..., no. ..., ..., ...-..., Lisbon, with Tax Identification Number ... (hereinafter referred to as the Claimant), came forward, pursuant to the provisions of article 2, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT) and articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March (Binding Ordinance), to request the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority is respondent (hereinafter AT or Respondent), informing that it does not intend to exercise the faculty to designate an arbitrator.

The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to AT, and, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated the undersigned as arbitrator of the single arbitral tribunal, a duty accepted within the applicable timeframe, without opposition from the Parties.

Object of the Request:

The Claimant seeks to challenge the act dismissing the request for official review of the additional IRS assessment for the year 2007, with no. 2009..., in the amount of € 6,050.74, seeking the declaration of illegality and the consequent annulment of both acts, secondary and primary, previously identified.

B. Summary of the Parties' Positions:

1. Of the Claimant:

To substantiate the request for annulment of the identified tax assessment act, the Claimant invokes the following facts and legal grounds:

The additional IRS assessment for the year 2007 resulted from capital gains arising from the sale of the real property located at ..., ..., ..., ..., in July 2007, whose sale value was reinvested in the acquisition of the real property located at ..., no. ..., ..., ...-... Lisbon;

The AT understood that A. could not carry out the reinvestment because at the time she had sold the real property located in ... she no longer resided therein, and therefore it was not her primary and permanent residence;

This was established by the fact that A. had changed her tax domicile on 24.08.2005 with the Tax Administration services to Rua..., no. ..., ... Left side, in Lisbon;

Not agreeing with such additional assessment, A. filed an administrative complaint and, following its dismissal, filed a hierarchical appeal, and following the dismissal thereof, filed a judicial challenge with the provision of a bank guarantee to suspend the initiated tax execution;

The judicial challenge was judged to lack merit, the judgment being confirmed by a Court of Appeal of the Central Administrative Court South issued on 05.11.2015;

Both judicial decisions state that, as the Claimant had tax domicile at Rua..., according to her declaration of 24.08.2005, she would have to demonstrate that she effectively resided at ..., ..., ..., ..., which she failed to do;

In 2016, A. obtained a document proving that the declaration of change of tax domicile to Rua ..., presented on 24.08.2005, was made without her intervention and/or knowledge;

In August 2016, the Claimant submitted a request for official review of the act of additional IRS assessment for 2007, pursuant to the provisions of article 78, no. 1, of the General Tax Law;

The Claimant was notified of the dismissal of the request, in which decision the Tax Administration understood that there was no error on the part of the services and, further, that the situation alleged by A., in theory, could be framed in article 78, no. 4, of the General Tax Law (LGT), this could not occur because the 3-year period provided therein had already elapsed;

The Claimant understands that the act dismissing the request for official review suffers from illegality, as there was effectively an error on the part of the services that led to the issuance of the additional IRS assessment for the year 2007;

And that, even if this were not the case, the period for official review based on the provisions of article 78, no. 4, of the LGT had not yet been exhausted;

Error on the part of the services, because the change of the Claimant's tax domicile on 24.08.2005 to Rua ..., no. ..., ..., in Lisbon, occurred without her intervention and/or knowledge or that of any tax representative, whom the Claimant only appointed in 2009;

There was thus an error on the part of the services regarding the factual prerequisites of the act of additional IRS assessment, which affects its validity and constitutes grounds for its annulment through official review;

The AT considers there was no error on the part of the services and that the 3-year period referred to in no. 4 of article 78 of the LGT would commence from the notification of the additional assessment, namely in 2009;

However, the Claimant understands that such period for official review will only commence with the definitive consolidation of the additional assessment in the legal order, that is, after the judgment of the dismissal decision of the judicial challenge process becomes final;

As the provision in article 78, no. 4, of the LGT must be interpreted systematically with the other legal provisions, taking into account the various means of reaction, administrative and judicial, aiming to be the safety valve for situations of illegality or serious injustice not previously corrected;

This is the interpretation to be followed, as it is the only one compatible with the provisions of article 268, no. 4, of the Constitution of the Portuguese Republic;

The decision on the appeal in the judicial challenge process was only issued in November 2015, with less than one year having passed between the finality of that decision and the submission of the request for official review, which proves to be timely.

The Claimant concludes by formulating the following requests: (a) Annulment of the dismissal of the request for official review and, as a consequence, annulment of the additional assessment for the year 2007 and, if this is not upheld, (b) Annulment of the act dismissing the request for official review, by violation of the provisions of article 78, no. 4, of the LGT, with the condemnation of the Tax Administration to reconsider the official review, on the grounds of grave or manifest injustice.

The Claimant provides documentary evidence and proof of the grant of legal aid, in the form of exemption from court fees and other procedural costs, requesting the production of witness testimony.

2. Of the Respondent:

Following the dispatch of notification in accordance with the terms and for the purposes provided in article 17 of RJAT, AT submitted a Reply, in which it defended itself by exception and by challenge, attached the administrative file (PA) and argued for the legality and maintenance of the impugned assessment, with the following grounds:

- By Exception:

The Claimant filed an administrative complaint against the additional IRS assessment for the year 2007, subject of these proceedings, a hierarchical appeal, and a judicial challenge judged to lack merit, which was confirmed by a Court of Appeal of the Central Administrative Court South, which became final on 14.12.2015;

On 11.08.2016, A. submitted a request for official review of the same assessment, arguing that she resided with her family unit in the alienated real property on the date of the aforementioned sale, attaching a new document;

Following the dismissal thereof, A. submitted the request for arbitral pronouncement that gave rise to these proceedings;

Now, "Res judicata aims fundamentally to guarantee the value of legal certainty (cf. Miranda, Jorge, in Manual de direito Constitucional, t.II, 3rd ed., reprint., Coimbra, 1966, p. 494), with the protection of this legal certainty, in relation to judicial acts, being based on the principle of the Rule of Law, whereby it is a value constitutionally protected (Canotilho, Gomes, in Direito Constitucional e Teoria da Constituição, Coimbra, 1998, p. 257)";

"Pursuant to articles 580 and 581 of the Code of Civil Procedure, applicable ex vi article 2, paragraph e) of the Code of Tax Procedure and Process, the exception of res judicata presupposes the repetition of a cause, which exists when the subjects, the claim and the cause of action are identical in the two actions, and aims to prevent the Court from being placed in the situation of contradicting or reproducing a previous decision (See Court of Appeal of the Supreme Court of Justice decision of 1997/07/03, case 359/96, 2nd Section and of 1999/04/29, 2nd Section)";

"The guiding principle that allows the removal of doubts as to whether a particular action is identical to another is the existence or non-existence of the possibility of two or more judicial decisions being able to contradict each other in practice: 'actions shall be considered identical if the decision of the second would place the Court at risk of contradicting or reproducing the decision rendered in the first', (Court of Appeal decision of 00.5.25, Appeal no. 970/2000, at http://www.trc.pt/trc09015.html)";

"In both proceedings, the subjects are here A and here AT";

"(...) it is said that there is identity of cause of action when the claim presented in more than one action proceeds from the same concrete juridical fact, simple or complex, from which the right of A emerges, and thus legally substantiates his claim, constituting a defining element of the object of the action (cf. article 498, no. 4, of the Code of Civil Procedure), ( Court of Appeal of the Supreme Court of Justice decision of 17/1/75, BMJ, 243rd, p. 206; Court of Appeal of the Supreme Court of Justice decision of 18/2/88, BMJ, 374th, p. 423 and Varela, A., RLJ, 121st, p. 147. )";

"It is not necessary that the claims presented be identical, but rather that the fundamental issue raised in the two actions be identical, (Court of Appeal of the Supreme Court of Justice decision of 26/10/89, BMJ, 390th, p. 379.)";

"In the present case, the cause of action in both actions constitutes the allegation that on the date of the sale of the fraction in question, A and her family unit resided therein (although, in these proceedings, one intends to prove the fact of residence in a document not attached to the judicial challenge proceedings);

"Being unequivocal the identity of the claims, since one seeks in both proceedings to obtain the same legal effect – the annulment of the additional IRS assessment for 2007";

"Therefore it is evident the repetition of the cause which, as the first is already decided, constitutes res judicata, in the precise terms of articles 580 and 581 of the Code of Civil Procedure";

"(...) the purported document that A now brings to court, if it were to have the virtue of proving the intended residence in the alienated fraction on the date of the respective sale, should moreover have impelled A to file a revision appeal based on paragraph c) of article 696 of the Code of Civil Procedure";

(ii) - By Challenge:

a. The Respondent challenges the allegations of the Claimant regarding her residence in 2007, the year of the alienation of the real property that was at the origin of the additional IRS assessment for that year, in light of what was decided on the matter in judicial proceedings;

b. The AT further challenges what is alleged in article 35 of the Claim, that "it was the Tax Administration that decided to establish an additional IRS assessment based on facts as it saw fit", as the assessment was made based on elements declared by the Claimant;

c. The AT considers that if an error exists in the assessment, such error is not attributable to the services, but rather to the negligent conduct of the Claimant, who received notifications from the AT at the address contained in the register, who in the IRS model 3 declaration at the origin of the additional IRS assessment for 2007 declared herself to be "non-resident" in Portugal and who, neither in administrative proceedings nor in the judicial challenge, fulfilled the burden of alleging and proving that she resided in the fraction she sold;

d. Therefore, unable to invoke grave or manifest injustice, obvious or unequivocal, nor resulting from manifestly excessive or disproportionate taxation;

e. The Claimant's interpretation regarding the initial date of the official review period does not hold, and has no basis in law, since the impugned assessment is valid and effective, having given rise to the initiation of a tax execution, which is only suspended through the provision of a guarantee;

f. Thus, "In the precise terms of nos. 2 and 3 of article 574 of the Code of Civil Procedure, all the matter set forth in the Claim that supports the Claimant's claim is challenged, insofar as it is in opposition to the defense taken as a whole";

g. With regard to the request for evidence, the AT considers that it should be entirely rejected, since the facts that one intends to prove with it (residence in the alienated fraction on the date of its respective sale) have already been subject to a final judicial decision.

The AT concludes by stating that it waives the meeting referred to in article 18 of RJAT, as well as the production of further arguments.

*

Having been notified to respond to the exception and to indicate which articles of the Claim it wished witness testimony to cover, the Claimant came forward to state:

Regarding the Exception:

There is no res judicata, nor even identity of object between the two actions, as the judicial challenge process was directed at the act of additional assessment and in these proceedings the act dismissing the request for official review is being challenged;

Nor are the same substantive issues at stake in both actions: official review is based on the fact that the change of the Claimant's tax domicile to Rua..., no. ..., ... was made without her intervention and/or knowledge, which was not the object of the judicial action as it was unknown at the time, as the Claimant only became aware of it when she obtained document no. 4 attached to the Initial Request on 26 July 2016;

In the grounds for the dismissal of the request for official review, it is the Tax Authority itself that invokes new grounds that were not part of the assessment or the judicial proceedings referred to and which it invokes again in its Reply;

The Claimant further invoked an intrinsic illegality of the decision in question, which, contrary to what was stated in the decision on the request for official review, the period provided in article 78, no. 4, of the LGT had not been exceeded;

As decided by a Court of Appeal of the Supreme Administrative Court decision of 07.12.2011 in case no. 0419/11, in which the question was considered of when res judicata exists between the judicial decision impugning the assessment act and the challenge of the decision dismissing the request for official review of that same assessment act, "res judicata exists only when in the challenge of the official review decision the same defects attributed to the assessment act in the judicial challenge process are at issue and not another factual situation that constitutes an error on the part of the services";

As there is no identity of the substantive issues (particularly as the factual situation invoked here constituting the error of the services was not examined in the judicial challenge), res judicata does not exist, and such exception should be judged to lack merit.

The Claimant challenges the remaining matter of exception which, although not identified as such, may be contained in the Respondent's Reply;

Regarding the Production of Evidence:

The Claimant requests that the AT be notified to attach to the proceedings the documents relating to the appointment of a tax representative, indicating the date on which the appointment was made;

Although admitting that the main factual question under discussion in these proceedings is proven by document no. 4 attached to the Claim (that the change of the Claimant's tax domicile to Rua ..., no. ..., ... was made without the intervention and/or knowledge of the Claimant), the Claimant, in the event that the arbitral tribunal considers that matter as not proven, reiterated the request for production of witness testimony and formulated a request for the provision of party statements on the same matter.

*

By arbitral dispatch of 4 September 2018, the Tax and Customs Authority was notified to, within 10 days, attach to the proceedings a copy of the document evidencing the appointment of a tax representative by the Claimant, indicating the date of such presentation.

The aforementioned document was attached to the proceedings under cover of a Request from the Respondent dated 12 September 2018.

On 14 September 2018 an arbitral dispatch was issued, in which, taking into account the documentary evidence produced by the Parties and the Claimant's response to the exception, the holding of the meeting referred to in article 18 of RJAT was dispensed with, determining that the proceedings would continue with successive written arguments for a period of 10 days, commencing with the Claimant, and fixing 29 October 2018 as the date for issuance of the arbitral decision.

Both Parties produced written arguments, in which they reiterated the positions defended in their respective pleadings.

II. CASE MANAGEMENT

1. The Arbitral Tribunal is competent and was regularly constituted on 24 May 2018, in conformity with the provisions of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December;

2. The parties have legal standing and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

3. The proceedings are not affected by defects that would invalidate them.

III. REASONING

III.1 FACTUAL MATTER

In the decision, the judge shall distinguish the proven matter from the unproven, substantiating his decisions (article 123, no. 2, of the Code of Tax Procedure and Process [CPPT], subsidiarily applicable to tax arbitral proceedings, pursuant to article 29, no. 1, paragraph a) of RJAT), under penalty of nullity, provided for in no. 1 of article 125 of the same CPPT.

Proven Facts:

On 29 July 2009, the IRS model 3 declaration was filed regarding income obtained by the Claimant in the year 2007, integrating an Annex G – Capital Gains and Other Patrimonial Increases, in which the following was declared (cf. copy attached to the Claim):

In the face of the declaration – box 5, field B, that it is a non-resident taxpayer, fiscally represented by the taxpayer with Tax Identification Number...;

In Annex G – box 4, the alienation in July 2007 of fraction J of the urban real property registered under article ... of the parish with code ..., acquired in April 1995, in box 5 – the intention to carry out reinvestment of the value of realization of the same real property and in box 5-A, that the reinvestment was realized in the acquisition of another real property in Portuguese territory, without the new real property having been identified in box 5-B;

Based on the declared elements, the AT issued in the name of the Claimant the IRS assessment no. 2009..., of 21-09-2009, in the amount of € 6,050.74, with due date for payment on 02-11-2009 (cf. copy attached to the Claim);

On 19-11-2009, the Claimant filed an administrative complaint of the IRS assessment for 2007 (case no. ...2010...), in which the following information was provided (cf. copy attached to the PA):

[Text partially redacted in original]

Following the exercise of the right to be heard (cf. copy attached to the PA), the following complementary information was provided:

[Text partially redacted in original]

The decision dismissing the administrative complaint was notified to the Claimant by office no. ... of the Lisbon Tax Office..., of 25.03.2010 (Postal Registry Record RC...PT), with copy attached to the PA;

On 21 May 2010, the Claimant filed a hierarchical appeal against the decision dismissing the administrative complaint, the dismissal of which was notified to her by office no. ... of the Administrative Justice Division of the Lisbon Tax Authority, of 10.11.2010 (Postal Registry Record RC...PT), with copy attached to the PA;

On 5 January 2010, the Claimant filed opposition in the context of the tax execution proceedings no. ...2009..., initiated for coercive collection of the assessment now being challenged (cf. PA);

The opposition, registered at the Lisbon Tax Court under no. .../10...BELRS, would be converted into a judicial challenge, judged to lack merit by judgment of 22 January 2014 (copy attached to the Claim and to the PA), in which the following factual matter was established:

[Text partially redacted in original]

And, in the context of legal grounds, the Esteemed Judge considered, in particular, the following:

[Text partially redacted in original]

(...) [Text partially redacted in original]

(...) [Text partially redacted in original]

The Claimant appealed the Judgment rendered in case no. .../10...BELRS (Case no. .../14 – 2nd Court, 2nd Section (Tax Contention), of the Central Administrative Court South), whose Court of Appeal decision of 05.11.2015 denied the appeal, adhering to the grounds of the appealed Judgment and concluding that "As the conditions for application of the exclusion from taxation have not been proven, the present appeal must be dismissed (...)";

In 2016, the Claimant obtained a copy of the declaration of change of her tax domicile to Rua ..., no. ..., in Lisbon, submitted on 24.08.2005, without her intervention or that of her tax representative (cf. Doc. 4, attached to the Claim);

The Claimant's tax representative was only appointed on 05.05.2009 (cf. Doc. attached by the AT, upon request of 12.09.2018);

On 11 August 2016, the Claimant submitted a request for official review of the IRS assessment for the year 2007, pursuant to article 78, no. 1, of the LGT, on the grounds of error attributable to the services in changing her tax domicile to the address indicated in 11, from which would result the error regarding the factual prerequisites of said assessment (cf. copy of the official review request no. .../16, attached to the PA);

Pursuant to information no. .../17 of the IRS Services Department, on which the draft dismissal notified to the Claimant for prior hearing purposes was based, the request for official review could not be framed under no. 1 of article 78 of the LGT, as there was no error attributable to the services in the issuance of the IRS assessment for the year 2007, nor could it be reviewed pursuant to no. 4 of the same article, because (...):

[Text partially redacted in original]

(...);

The decision dismissing the request for official review was notified to the Claimant through an office from the Administrative Justice Division of the Lisbon Tax Authority, sent under cover of postal registry record no. RD...PT of 12 December 2017 (cf. copy attached to the PA);

The grounds for the decision dismissing the request for official review of the IRS assessment for the year 2007 include, in particular, the following (cf. copies attached to the Claim and to the PA):

(...) [Text partially redacted in original]

(...) [Text partially redacted in original]

(...) [Text partially redacted in original]

Unproven Facts:

There are no facts of interest for the decision of the case that should be considered unproven.

Substantiation of the Factual Matter:

With respect to the factual matter, the Tribunal need not pronounce on everything that was alleged by the parties; rather it has the duty to select the facts that matter for the decision and to distinguish the proven matter from the unproven.

Thus, the relevant facts for the judgment of the case are chosen and defined based on their legal relevance, which is established in consideration of the various plausible solutions of the legal issue(s) (cf. article 596, applicable ex vi of article 29, no. 1, paragraph e) of RJAT).

The factual matter set out above is what results from the critical analysis of the documentary evidence attached to the proceedings, in accordance with the documents identified in each of the paragraphs above.

III.2 ON THE LAW

Regarding the Exception of Res Judicata:

Pursuant to no. 1 of article 608 of the Code of Civil Procedure (CPC), subsidiarily applicable to tax arbitral proceedings by virtue of the provision in article 29, no. 1, paragraph e) of RJAT, the decision must know, as a matter of priority, the procedural questions that may determine the dismissal of the instance, enumerated in article 577 of the CPC, among which the exception of res judicata (paragraph i), invoked by the Respondent, in light of the finality of the Court of Appeal decision rendered by the TCA South in Case no. 07615/14 – 2nd Court, 2nd Section, on 5.11.2015, which decided by denying the appeal filed by the Claimant against the Judgment rendered in the judicial challenge case no. .../10...BELRS, which proceeded before the 1st Instance Lisbon Tax Court.

For its part, the Claimant denies the existence of res judicata, as the requirements referred to in article 581 of the CPC are not met: that the present arbitral action is identical to that in the judicial challenge case no. .../10...BELRS, as although identity of the Parties is verified, identity of the object of the proceedings is not verified, since in the present arbitral action an intrinsic illegality of the decision on the request for official review of the IRS assessment for the year 2007 is invoked, embodied in an error on the part of the services, which was not actually discussed in the judicial challenge, given the subsequent obtaining by the Claimant of the declaration of change of her tax domicile to Rua ..., no. ..., in Lisbon, submitted on 24.08.2005, without her intervention.

In support of her thesis, the Claimant cites the Supreme Administrative Court (STA) decision rendered on 07.12.2011 in case no. 0419/11, in which, considering a question identical to that in these proceedings, it was decided that "res judicata exists only when the challenge of the official review decision concerns the same defects attributed to the assessment act in the judicial challenge process and not another factual situation constituting an error on the part of the services".

In the aforementioned Court of Appeal decision, however, it was an appeal filed by the Public Exchequer against a dispatch rendered in a judicial challenge process in which the legality of additional VAT assessments was discussed, which judged the dilatory exception of res judicata invoked by the AT to lack merit, and to which merit was granted.

The summary of the aforementioned STA decision rendered in case no. 0419/11 states, regarding the objective limits of res judicata:

"Summary: I - The objective limits of res judicata are defined by reference to the object of the proceedings.

II - In the proceedings for annulment of tax acts, the object of the proceedings is necessarily defined by reference to an invalid act: the plaintiff's immediate claim corresponds to the elimination of the impugned act from the legal order, and with it, the cessation of the injurious situation caused by it; and the cause of action corresponds to the specific grounds of invalidity invoked.

III - But the fact that the act is an essential element of the impugnatory action does not allow the conclusion that the object of the proceedings is identified with it, as underlying the annulment claim there is always a material relationship constituted by the definition introduced by the act in the legal order and by the injury it causes to the subjective legal position of the plaintiff.

IV - Material res judicata thus extends to the judgment that the court makes regarding the prerequisites on which the exercise of the power embodied in the act depends or regarding the occurrence of facts preventing or extinguishing that exercise.

V - Therefore, there is identity of object if there already exists a judgment with final force that considered the specific factual and legal grounds on which the claim for annulment of the impugned act is based."

The situation analyzed in the cited Court of Appeal decision consisted in determining whether, faced with the formation of the implied dismissal of the request for official review of the assessments, submitted after the finality of a judicial judgment that judged the judicial challenge that had them as object to lack merit, the Court should reconsider the legality of those tax acts on the ground of violation of the duty of decision that rests on the Tax Administration.

In the situation under analysis in these proceedings, tacit dismissal of the request for official review of the IRS assessment for the year 2007 did not occur; rather an express decision dismissing the request was rendered on the ground that error on the part of the services in issuing the assessment was not considered to exist (article 78, no. 1, of the LGT) and on the ground of untimeliness of the request, abstractly capable of being framed in the provision of nos. 4 and 5 of the same article 78 of the LGT.

In accordance with the provision of article 96 of the Code of Tax Procedure and Process (CPPT), the tax judicial process, which includes "the challenge of tax assessments" (article 97, no. 1, paragraph a) of the CPPT), "has the function of ensuring full, effective and timely protection of rights and legally protected interests in tax matters", thereby implementing the command contained in no. 4 of article 268 of the CRP.

In the words of Rui Duarte Morais, "Thus it was affirmed, in the specific domain of tax law, that the prerequisite for the granting of judicial protection is not the invocation of defects in an act committed by the administration (or "validated" by it, even if merely implicitly). Judicial protection now has, as its function, the safeguarding of rights or legitimate interests and has as its prerequisite their injury. This concerns the overcoming of the traditional objective conception of administrative contention, directed at achieving that the administration complies with the law – at the defense of legality – with respect to a particular act.

(...)

It is therefore a matter of challenges to acts.

But, even in the contention for mere annulment, the judgment that concludes the challenge proceedings is not limited to the recognition of the invalidity of the annulled or declared void act; it also extends to the definition, to a greater or lesser extent, of the terms in which the future exercise of the power manifested through those acts should proceed (...)[1]."

We thus have that, also in tax proceedings, material res judicata implies that once a judgment deciding the merits of the case becomes final, the decision on the contested material relationship becomes binding within and outside the proceedings (cf. no. 1 of article 619 of the CPC), preventing "the questions covered by res judicata from being raised again among the same parties in future action (...)" – cf. the Supreme Court of Justice decision of 30.03.2017, case no. 1375/06.3TBSTR.E1.S1., available at www.dgsi.pt.

The exception of res judicata has as its objective to prevent the court from being placed in the alternative of contradicting or reproducing a previous judicial decision (cf. article 580, no. 2, of the CPC) and occurs pursuant to article 581 of the same Code whenever there is identity of subjects (when the parties are the same in both actions), of claim (when the same legal effect sought in both actions is the same) and of cause of action (when the claim presented in the two actions proceeds from the same juridical fact).

In the specific case of this arbitral action, it is possible to conclude identity of the parties (the Claimant and the Respondent) and of claim (both in these proceedings and in the judicial challenge case no. .../10...BELRS the Claimant seeks to obtain the annulment of the IRS assessment for the year 2007).

As to the cause of action, it is concluded that in both actions the Claimant's claim or pretension proceeds from the same juridical fact, that is, the failure to exclude from taxation the capital gains obtained from the alienation of a real property, as it was not proven that the same, on the date of its respective sale, was intended for the Claimant's own primary and permanent residence or that of her family unit, as required by no. 5 of article 10 of the IRS Code.

Since the concepts of "tax domicile" and "primary and permanent residence of the taxpayer and his family unit" do not coincide, as was analyzed in the Judgment rendered in the judicial challenge and confirmed by the Court of Appeal of the TCA South that judged the appeal thereof to lack merit, the error on the part of the services in changing the Claimant's tax domicile without her intervention or knowledge, or that of her tax representative, appointed well after that change was made, becomes irrelevant.

In light of the above, given that the Claimant's material tax situation was defined by a judicial decision with final force, there is no way not to consider the invoked exception of res judicata as verified.

IV. DECISION

Based on the factual and legal grounds set out above, decision is rendered, judging the exception of res judicata to be verified, dismissing the Tax and Customs Authority from the instance, with all legal consequences.

VALUE OF THE PROCEEDINGS: In accordance with the provision of article 306, nos. 1 and 2 of the CPC, article 97-A, no. 1, paragraph a) of the CPPT and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 6,050.74 (six thousand and fifty euros and seventy-four cents).

COSTS: The costs of the proceedings, calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I appended thereto, in the amount of € 612.00 (six hundred and twelve euros), would be borne by the Claimant, were it not for the fact that she benefits from legal protection in the form of "Exemption from court fees and other procedural costs", pursuant to Law no. 34/2004, of 29.07, as indicated by the dispatch of the ISS, EP – Lisbon District Center, which was communicated to her by an office of that Service on 15.02.2018, with copy attached to the proceedings.

Notify accordingly.

Lisbon, 29 October 2018.

The Arbitrator,

/Mariana Vargas/

[1] Rui Duarte Morais, "Manual de Procedimento e Processo Tributário", Almedina, Coimbra, 2012, pp. 241 and 242.

Frequently Asked Questions

Automatically Created

What are the IRS capital gains reinvestment requirements for permanent residence properties in Portugal?
To qualify for IRS capital gains reinvestment relief on permanent residence properties in Portugal, the taxpayer must: (1) sell a property that constitutes their 'habitação própria e permanente' (own and permanent residence); (2) reinvest the sale proceeds in acquiring, constructing, or improving another property for permanent residence within specific timeframes; and (3) demonstrate actual permanent residence through evidence beyond mere fiscal domicile registration. The property must be where the taxpayer and their household unit actually reside, not simply where their tax domicile is registered. Portuguese tax law requires substantive residence, meaning physical occupation as the primary dwelling, which may differ from the formally declared fiscal address for tax purposes.
How does fiscal domicile affect the eligibility for capital gains tax reinvestment exclusion under Portuguese IRS law?
Fiscal domicile registration creates a strong presumption regarding a taxpayer's residence but is not conclusive for IRS capital gains reinvestment purposes. While the Tax Authority relies on fiscal domicile records to determine permanent residence status, taxpayers can rebut this presumption with evidence of actual residence elsewhere. If fiscal domicile differs from actual permanent residence at the time of property sale, the taxpayer bears the burden of proving they genuinely resided in the sold property despite the divergent fiscal registration. This may include utility bills, correspondence, witness testimony, and other documentation establishing continuous habitation. A fiscal domicile change before property sale significantly complicates claiming reinvestment relief, as it contradicts the permanent residence requirement.
Can a taxpayer claim capital gains reinvestment relief if they changed their tax domicile before selling the property?
Generally, changing tax domicile before selling a property severely undermines capital gains reinvestment relief claims, as it suggests the property was no longer the permanent residence. However, if the domicile change was unauthorized—made without the taxpayer's knowledge, intervention, or consent—this may constitute grounds for challenging the Tax Authority's denial. The taxpayer must prove: (1) the fiscal domicile change was fraudulent or erroneous; (2) they continued actually residing in the sold property despite the registration change; and (3) they meet all other reinvestment requirements. Such cases may justify official review (revisão oficiosa) under Article 78 LGT if the unauthorized change constitutes an administrative error affecting the assessment's factual basis. The burden of proof remains heavy, requiring comprehensive evidence of both the unauthorized nature of the domicile change and continued actual residence.
What is the role of official review (revisão oficiosa) in challenging IRS capital gains tax assessments at CAAD?
Official review (revisão oficiosa) under Article 78 of the General Tax Law (LGT) allows the Tax Authority to annul or modify tax acts containing errors, even after administrative and judicial proceedings conclude. At CAAD, taxpayers can request arbitration challenging the AT's dismissal of official review requests. Article 78(1) permits review for errors by the services in the act's legal or factual prerequisites. Article 78(4) allows review within three years when maintaining the act would constitute 'grave or manifest injustice.' Key interpretative issues include: when the three-year period begins (from initial assessment notification or from final judicial decision), whether res judicata from prior proceedings bars official review claims, and what constitutes sufficient 'new evidence' to justify reconsideration. The interaction between official review procedures and res judicata principles significantly affects taxpayers' ability to challenge IRS capital gains assessments at CAAD after unsuccessful judicial challenges.
What evidence is required to prove a property was used as permanent residence for IRS reinvestment purposes despite a different registered fiscal domicile?
To prove permanent residence for IRS reinvestment purposes despite different registered fiscal domicile, taxpayers must present comprehensive evidence including: (1) utility bills (electricity, water, gas) in the taxpayer's name showing continuous consumption at the property; (2) official correspondence and bank statements addressed to the property; (3) municipal tax (IMI) payments and condominium fees; (4) witness testimony from neighbors, employers, or community members confirming habitual residence; (5) school enrollment records for children at local institutions; (6) employment contracts or payslips indicating proximity to workplace; (7) healthcare registration at local facilities; and (8) evidence explaining why fiscal domicile differed (e.g., unauthorized change, fraud, administrative error). Documentary evidence must cover the period before, during, and after the property sale. When fiscal domicile registration contradicts the claimed permanent residence, courts and CAAD arbitrators apply heightened scrutiny, requiring robust, consistent evidence demonstrating the property was genuinely the taxpayer's primary dwelling where their household unit lived permanently.