Process: 11/2017-T

Date: August 24, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 11/2017-T addressed a disputed IRS assessment of €62,707.44 for the 2012 tax year, centered on whether the claimant qualified for joint taxation under união de facto (common-law union) status. The claimant and her partner B had lived together in France during 2010-2011 as non-residents, then relocated to Portugal in 2012 with their two children. The claimant changed her Portuguese tax residence status on June 8, 2012, while B maintained non-resident status until December 11, 2012, when both registered the same Lisbon address. The claimant filed her 2012 IRS return declaring união de facto status under Article 14 of the Personal Income Tax Code (CIRS). The Tax Authority rejected this classification, arguing that as of December 31, 2012, the couple had not maintained the same registered tax domicile in Portugal for the required two-year period. The Authority issued a corrective assessment replacing the original €57,159.23 with €62,707.44 plus compensatory interest. The claimant challenged this decision through administrative appeal, which was denied, leading to CAAD arbitration. The central legal question concerned whether the two-year cohabitation requirement under Article 14 CIRS must be satisfied through formal tax registration at the same Portuguese address, or whether actual cohabitation and prior foreign residence should be considered. The arbitral tribunal, constituted in March 2017, heard witness testimony and evaluated evidence of the family's living arrangements, lease agreements, and children's school enrollment to determine the legitimacy of the união de facto claim for tax purposes.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Leonardo Marques dos Santos and Rui Ferreira Rodrigues, designated by the Ethics Committee of the Administrative Arbitration Centre to form an Arbitral Tribunal:

I – REPORT

On 4 January 2017, A…, holder of TIN …, resident at Rua …, …, …-… Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the personal income tax (IRS) assessment act No. 2014…, relating to the period of 2012, in the amount of € 62,707.44.

To support her request, the Claimant argues, in summary, that there is error regarding the factual and legal premises, insofar as at that date she was in a de facto union with B…, and the consequent violation of Article 14 of the Personal Income Tax Code (CIRS).

On 6 January 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed with the appointment of an arbitrator, whereby, pursuant to paragraph 2(a) of Article 6 and paragraph 1(a) of Article 11 of the RJAT, the President of the Ethics Committee of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the assignment within the applicable period.

On 27 February 2017, the parties were notified of these designations and manifested no intention to refuse any of them.

In accordance with the provisions of paragraph 1(c) of Article 11 of the RJAT, the collective arbitral tribunal was constituted on 14 March 2017.

On 21 April 2017, the Respondent, duly notified for this purpose, presented its response, defending itself by exception and by counterclaim.

Notified for this purpose, the Claimant exercised his right of reply with respect to the matter of exception contained in the Respondent's Response.

On 14 June 2017, the hearing referred to in Article 18 of the RJAT took place, where witnesses presented by the Claimant were examined.

Having been granted a period for the submission of written arguments, these were presented by the parties, discussing the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the rendering of a final decision, after submission of arguments by the Respondent.

The Arbitral Tribunal is substantively competent and is regularly constituted, pursuant to paragraph 1(a) of Article 2, Article 5, and paragraph 1 of Article 6 of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceedings are not subject to any nullity.

Thus, there is no obstacle to the examination of the case.

Having considered all matters, it is appropriate to decide as follows:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

  1. During the years 2010 and 2011, the Claimant and B… lived in de facto union and had tax residence in France, and were registered in the Portuguese tax register as non-resident taxpayers, as they did not meet the requirements for tax residence under Article 16 of the Personal Income Tax Code.

  2. In 2012, the Claimant and his family, composed of B… and their two children, children of their de facto union, C…, taxpayer identification number …, and D…, taxpayer identification number …, began to reside in Portugal with the intention of permanence.

  3. At the beginning of 2012, the natural persons referred to in the previous point lived in an apartment located at Rua …, No. …, Lisbon.

  4. On 8 June 2012, the Claimant changed his tax status to a tax resident in Portugal.

  5. On this date he was already residing together with his family at Rua …, No. …, …, Lisbon, this becoming the address appearing in the tax register and the family's address.

  6. On the said date there was no change to the tax status and domicile of B….

  7. The said B… did not receive any income during the year 2012.

  8. On that date, the Claimant and B… intended to change their family home address on Rua… to new accommodation.

  9. On 6 July 2012, the Claimant signed the deed of sale and purchase of the property located at Rua …, No. …, …, Lisbon.

  10. By lease agreement (for a period of 5 years, renewable every three years) signed on 25 August 2012 and taking effect from 1 September 2012, the Claimant and his aforementioned family transferred their residence to Rua…, No. …, Lisbon.

  11. In Clause Five of the said agreement it is stated that "the leased property is intended for permanent and exclusive residence of the Second Grantor and his respective family unit".

  12. The Claimant and the said B… proceeded with the change of tax address to Rua …, No. …, Lisbon, on 11 December 2012.

  13. In 2012, the children of the Claimant and B… studied at the French lyceum in Lisbon.

  14. On 30 July 2013, the Claimant submitted his IRS return for the year 2012, in which he declared himself in de facto union with B…, taxpayer identification number ….

  15. On 27 August 2013, the Claimant received the assessment notice No. 2013…, which resulted in tax payable in the amount of € 57,159.23.

  16. On 16 September 2013 (during the voluntary payment period), the Claimant paid the aforementioned assessment notice.

  17. On 12 August 2013 the Claimant was notified by the Tax Authority that a "failure by taxpayers to meet legal requirements of de facto union" had been detected.

  18. On 27 August 2013, the Claimant replied to the said notification, indicating that he was residing with B… at the same domicile for a period exceeding two years.

  19. On 17 March 2014, the Claimant received notification from the Tax Authority to exercise his right of hearing.

  20. In the said notification, the Tax Authority informed that it intended to disregard the submission of the IRS return for 2012 since the Claimant had declared himself in de facto union with B…, but was not living together with her at the same tax domicile in Portugal for a period exceeding two years, whereby they should have submitted their 2012 IRS return separately.

  21. The Claimant timely exercised his prior right of hearing on 31 March 2014.

  22. Following this reply, the Tax Authority issued a new assessment notice "at nil" and proceeded with reimbursement of the amount previously paid, in the amount of € 57,159.23.

  23. The Tax Authority also issued assessment notice No. 2014…, which shows a tax amount payable of € 64,817.15, of which € 62,707.44 corresponds to the assessed tax and € 2,109.71 to the amount of compensatory interest, calculated on the basis of the period from 2013/06/01 to 2014/04/03.

  24. The Claimant paid the said assessment.

  25. On 2 September 2014, the Claimant filed an Administrative Appeal against the same assessment.

  26. On 12 December 2014, the Claimant was notified of the rejection of the Administrative Appeal.

  27. From that decision it results that the Tax Authority considered the issue of the territoriality of the de facto union to be resolved, but understands that on 31 December 2012, the Claimant and B… did not have the same address registered in the Portuguese tax register for at least two years.

  28. It further results that the Tax Authority understood that B… had registered in the Portuguese tax register as a non-resident taxpayer on 19 August 2011, only from 11 December 2012 being a joint address with the Claimant, the date on which both changed their tax address to Rua …, No. …-…, in Lisbon, and on which both began to be registered in the register as tax residents in Portugal.

  29. Given the above, the Tax Authority decided not to revoke the assessment notice subject to the Administrative Appeal.

  30. The Claimant, in due course, filed a Hierarchical Appeal from the rejection of the Administrative Appeal.

  31. The said Appeal was rejected by a decision of which the Claimant was notified on 4 October 2016.

A.2. Facts Established as Not Proven

  1. The Claimant attempted to change his Portuguese tax status to tax resident shortly after his arrival in Portugal, however he was informed by the Tax Authority that he could only make such a change after the sixth month in Portugal, whereby he maintained his tax address in France.

  2. In the year 2012 the Claimant and family had to make several trips to handle family and professional matters of the transfer of residence to Portugal, and traveled together and as a family.

  3. In airline reservations only one address in France appears because the reservations were made through an intermediary in France.

A.3. Reasoning for Proven and Not Proven Factual Matters

With respect to the factual matters, the Tribunal does not need to 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 discriminate between proven and not proven matters (cf. paragraph 2 of Article 123 of the Tax Procedure Code (CPPT) and paragraph 3 of Article 607 of the Civil Procedure Code (CPC), applicable by virtue of sub-paragraphs a) and e) of paragraph 1 of Article 29 of the RJAT).

In this manner, the facts relevant to the judgment of the case are chosen and delineated according to their legal relevance, which is established with regard to the various plausible solutions of the legal question(s) (cf. former paragraph 1 of Article 511 of the CPC, corresponding to current Article 596, applicable by virtue of sub-paragraph e) of paragraph 1 of Article 29 of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110.7 of the CPPT, the documentary evidence and the administrative file attached to the case, the facts listed above were considered proven, with relevance for the decision.

In particular, regarding the facts established as proven in points 1, 2, 3, 5, 8, 10, and 13, account was taken of the testimony given by the witnesses examined, which revealed direct knowledge of the facts as they were considered proven, and who testified in a logical and coherent manner, with each other and with the available documentary evidence, demonstrating credibility.

Indeed, the available documentary evidence, in particular the certificate from the French authorities regarding the existence of a de facto union between the Claimant and B… since 2005, as well as the presentation, in the years prior to 2012, of tax returns in conformity with such status, combined with the existence of children of the couple and the statements of the witnesses that they lived as husband and wife, leave no doubt in the mind of this Tribunal regarding the existence of an actual de facto union relationship between the Claimant and the said B….

The facts established as not proven result from the absence or insufficiency of evidence in that regard.

Allegations made by the parties and presented as facts, consisting of purely conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matters above established, were neither established as proven nor as not proven.

B. ON THE LAW

a. on the matter of exception

The Respondent begins by questioning whether the claim formulated by the Claimant can be heard as formulated, with the scope given by the Claimant, since, in its view, even if the Claimant were to prevail in this arbitral proceeding, such success could never result in the total annulment of the IRS assessment No. 2014-…, in the amount of € 64,817.15, but could only result in a partial annulment of that assessment, with the consequent recalculation of compensatory interest, given that the issue is only the application or non-application of the joint quotient in relation to income declared, and not the legality of the taxation of all its income, whereby, should it be concluded that the non-application of that quotient is illegal, obviously there would only be a need to reintroduce it in the calculation of the tax.

With due respect, it is submitted that the Respondent is not correct.

Indeed, as results from the facts established as proven and as the Respondent itself expressly acknowledges, the Tax Authority proceeded with the annulment of assessment No. 2013…, from which resulted tax payable in the amount of € 57,159.23, rendering it without effect and issuing a new assessment at nil, and subsequently issued a new assessment, assessment No. 2014-…, in the amount of € 64,817.15.

That is, the Tax Authority did not merely correct the original assessment, but annulled it, issuing a new one, which itself indicates that the Tax Authority itself considers that the said tax act is not divisible and, as such, susceptible to partial corrections.

Indeed, and in the wake of what has been understood by the Supreme Administrative Court (STA), the consideration or non-consideration of the joint quotient is capable of affecting the rate of tax applicable, whereby, should it be concluded that such application is required, it would be impracticable to have merely a partial annulment because the tribunal cannot substitute itself for the tax administration in applying the tax rate to the taxable income that remains.

As was written in the STA judgment of 30 January 2007, rendered in case No. 040201A:

"The annulling judgment of an administrative act has a constitutive effect, which, as a rule, consists in the invalidation of the disputed act, causing it to disappear from the legal world from its inception. It also has another effect, inherent in any judgment of a tribunal, regardless of its nature, which stems from the force of res judicata, called the conformative effect (also referred to as preclusive or inhibitory), which excludes, at a minimum, the possibility of the Administration reproducing the act with the same defects identified and condemned by the administrative judge. Furthermore, another effect exists which is the reconstitution of the hypothetical current situation (also called the repristinatory effect, reconstitutive or reconstructive effect of the judgment). According to this principle, the Administration has the duty to reconstitute the situation that would have existed if the illegal act had not been committed or if the act had been committed without the illegality."

Hence, following the total annulment that may be given, recognizing the imperativeness of the consideration of the joint quotient, assessment No. 2013… shall be repristinated, unless, in carrying out its "duty to reconstitute the situation that would have existed if the illegal act had not been committed or if the act had been committed without the illegality", the Tax Authority commits a new act that again revokes that assessment.

What has just been stated already resolves another preliminary issue raised by the Respondent, regarding the value of the case.

Indeed, as stated, what is at issue in the case is the total annulment, and not merely partial, of the assessment act No. 2014-…, in the amount of € 64,817.15, whereby this is the value of the case to be considered, pursuant to sub-paragraph a) of paragraph 1 of Article 97-A of the CPPT.

The Respondent further raises the partial incompetence of the Collective Arbitral Tribunal with respect to the following claims formulated by the Claimant:

  • consideration that in the year 2012 the Claimant was in de facto union with B… for more than 2 years; and

  • consideration, as correct, of assessment No. 2013-5…, relating to the period 2012, in the amount of € 56,785.85.

On this matter, it must be considered that the Respondent is correct insofar as, without prejudice to the competence of the arbitral tribunal to judge and assess the question of the verification or non-verification of the existence of de facto union for more than 2 years, as of 2012, to the extent necessary to assess the alleged illegality of the assessment act No. 2014-…, in the amount of € 64,817.15, which constitutes the object of the arbitral pronouncement, it exceeds its jurisdiction to issue a pronouncement that is declarative in general terms, as petitioned.

On the other hand, given that the assessment act No. 2013-…, relating to the period 2012, in the amount of € 56,785.85, does not itself constitute the object of the present arbitral action, it is equally not incumbent upon this arbitral tribunal to pronounce on the legality or illegality of such an assessment act.

It must therefore, on this point, uphold the exception raised by the Respondent.

b. on the merits

As the Respondent itself expressly acknowledges, what is at issue in the present arbitral proceedings is solely to assess the application or non-application of the joint quotient in relation to income declared by the Claimant in the year 2012.

In this regard, Article 14 of the CIRS, in the applicable version, provides:

"1 - Natural persons living in de facto union who meet the conditions laid down in the respective law may opt for the taxation regime of married taxpayers not judicially separated in respect of persons and assets.

2 - The application of the regime referred to in the preceding number depends on the identity of tax domicile of the taxpayers during the period required by law for verification of the conditions of de facto union and during the taxation period, as well as on the signature, by both, of the respective tax return."

The Respondent argues in this regard that "the tax status of de facto union incorporates in its acquisition requirements the formal requirement of timely compliance with the obligation to declare the registration or update of domicile in the taxpayer register, a requirement which adds to the identity of habitual residence, it being not sufficient with this alone," and that "The data communicated to the Respondent for inclusion in the taxpayer register management system acquire, by this means, a qualified value in the acquisition requirements of the tax status of de facto union, since this status has as its basis, both the conformity of material facts with the law that protects de facto unions, pursuant to Article 14.1 of the CIRS, and the obligation to declare in a timely manner the domicile for tax purposes, pursuant to its paragraph 2, in compliance with a legal obligation which, notwithstanding its formal nature, constitutes an essential instrument in more effective combating of tax fraud and evasion, in pursuit of the principles of tax justice and equity," concluding that "Article 14.2 of the CIRS presupposes that the tax domicile of taxpayers in de facto union under the respective law be identical, communicated to the Respondent, to be included in the taxpayer register management system, for more than two years counting from the 31st of December of the year of taxation in question."

This, however, has not been the understanding of the case law that has pronounced on this issue, as can be seen from the judgments of the Supreme Administrative Court of 16 November 2016 (Case No. 0761/15), the Regional Administrative Court of 8 October 2015 (Case No. 06685/13), and of 7 April 2011 (Case No. 04550/11), as well as from decisions in arbitral proceedings of CAAD in cases No. 547/2016, 413/2016, 773/2015, 713/2015, 564/2015, 304/2015, 497/2014, and it has been considered unequivocally, in the first of the cases referred to, that "The failure to comply with Article 14, paragraph 2 of the CIRS, in the version in force at the time of the facts, did not prevent the interested parties from opting for the taxation regime specific to taxpayers united by marriage."

Finding no reason to dissent from the said case law, it must be concluded that the Respondent is not correct in the understanding it sustains.

As was written in the said Supreme Administrative Court judgment, "The requirements set out in Article 14, paragraph 2 of the CIRS, indication of a common address and joint signature of the tax return, can only be seen as formal requirements that facilitate proof before the Tax Authority of the said de facto union and, should the interested parties fail to comply with such requirements, it is incumbent upon them to prove, by any means, that they can effectively benefit from the regime specific to de facto unions. And the penalties and burdens legally provided for by the failure to update, with the Tax Authority, their personal and family situation fall upon them."

Now, in the case at hand, as results from the factual matters established above and corresponding reasoning, conclusive proof was made of the existence of de facto union in the two years preceding the tax fact, whereby, as argued by the Claimant, the tax act subject to the present arbitral action is indeed defective due to error in the factual premises, and consequent error of law, and must, as such, be annulled.

As for the claim for indemnifying interest formulated by the Claimant, paragraph 1 of Article 43 of the General Tax Law (LGT) provides that indemnifying interest is due when it is determined that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due.

In the case at hand, the errors affecting the assessment are attributable to the Tax and Customs Authority, which committed the illegal assessment act on its own initiative.

The Claimant thus has the right to be reimbursed of the sum that he paid wrongfully (pursuant to the provisions of Article 100 of the LGT and paragraph 1 of Article 24 of the RJAT) and, furthermore, to be indemnified for the wrongful payment through payment of indemnifying interest by the Respondent, from the date of payment of the sum, until reimbursement, at the legal default rate, pursuant to paragraphs 1 and 4 of Article 43 and paragraph 10 of Article 35 of the LGT, Article 559 of the Civil Code and Administrative Order No. 291/2003, of 8 April.

C. DECISION

In view of the foregoing, this Arbitral Tribunal decides to uphold the arbitral claim formulated and, in consequence,

a) Annul the personal income tax (IRS) assessment act No. 2014…, relating to the period 2012, in the amount of € 62,707.44, plus compensatory interest in the amount of € 2,109.71;

b) Determine the restitution to the Claimant of the claimed amounts of assessed and paid tax, in the amount of € 5,921.59, and of assessed and paid compensatory interest, in the amount of € 1,736.33;

c) Condemn the Respondent to pay indemnifying interest, in the manner discriminated above;

d) Condemn the Respondent to pay the costs of the proceedings, in the amount of € 2,448.00.

D. Value of the Proceedings

The value of the proceedings is set at € 64,817.15, pursuant to Article 97-A, paragraph 1, a), of the Tax Procedure Code, applicable by force of sub-paragraphs a) and b) of paragraph 1 of Article 29 of the RJAT and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at € 2,448.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely upheld, pursuant to Article 12, paragraph 2, and Article 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the cited Regulation.

Let notice be given.

Lisbon, 24 August 2017

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Leonardo Marques dos Santos)

The Arbitrator Member

(Rui Ferreira Rodrigues)

Frequently Asked Questions

Automatically Created

What is the tax treatment of common-law unions (união de facto) under the Portuguese IRS Code?
Under Portuguese IRS law, união de facto (common-law union) allows couples to file joint tax returns under Article 14 of the Personal Income Tax Code (CIRS). To qualify, couples must cohabit at the same tax domicile for at least two years as of December 31 of the relevant tax year. The Tax Authority interprets this requirement strictly, requiring formal registration at the same Portuguese address for the two-year period, rather than accepting evidence of actual cohabitation or prior joint residence abroad. Joint taxation under união de facto status can significantly impact tax liability compared to separate filing, making proper classification crucial for taxpayers.
Can a taxpayer challenge an IRS tax assessment based on união de facto status under Article 14 of the CIRS?
Yes, taxpayers can challenge IRS assessments based on união de facto status disputes under Article 14 of the CIRS through the CAAD (Centro de Arbitragem Administrativa) arbitration system established by Decree-Law 10/2011. In process 11/2017-T, the claimant contested an assessment of €62,707.44, arguing the Tax Authority erroneously rejected her união de facto status despite actual cohabitation with her partner and their children. Taxpayers must first exhaust administrative remedies (such as filing an administrative appeal) before requesting arbitration. The challenge typically involves proving continuous cohabitation for two years and compliance with formal registration requirements.
What was the outcome of CAAD arbitration process 11/2017-T regarding the IRS liquidation of €62,707.44?
Process 11/2017-T involved a €62,707.44 IRS assessment for the 2012 tax year, where the Tax Authority rejected the claimant's união de facto status. The dispute centered on whether the claimant and her partner B met the two-year cohabitation requirement under Article 14 CIRS. The Tax Authority argued that since both only registered the same Portuguese address on December 11, 2012, they failed to meet the two-year threshold by December 31, 2012. The claimant argued they had lived together in France previously and continuously in Portugal from early 2012. The arbitral tribunal heard witness testimony and examined evidence including lease agreements, property purchases, and children's school enrollment to evaluate the união de facto claim.
How does the CAAD tax arbitration procedure work for disputing IRS assessments in Portugal?
The CAAD tax arbitration procedure for disputing IRS assessments begins with filing a request for constitution of an arbitral tribunal under Articles 2 and 10 of the RJAT (Legal Regime for Arbitration in Tax Matters, Decree-Law 10/2011). Taxpayers must first exhaust administrative remedies before requesting arbitration. Once accepted, the request is notified to the Tax Authority, and arbitrators are designated either by party appointment or by the CAAD Ethics Committee. The tribunal is constituted once arbitrators accept their designation, typically within 30-45 days. The Tax Authority submits a response, followed by a hearing phase where evidence and witnesses are presented. Parties submit written arguments before the tribunal issues a final decision within the statutory timeframe.
What evidence is required to prove a common-law union (união de facto) for Portuguese tax purposes?
To prove união de facto for Portuguese tax purposes under Article 14 CIRS, taxpayers must demonstrate cohabitation at the same tax domicile for at least two years as of December 31 of the relevant year. Evidence typically includes: (1) formal registration of both partners at the same address in the Portuguese tax register for the required period; (2) lease or property purchase agreements showing joint residence; (3) utility bills and correspondence establishing the shared household; (4) witness testimony from neighbors, family, or friends confirming cohabitation; (5) evidence of shared family life such as children's school enrollment at the residence address; and (6) documentation of joint financial arrangements. In process 11/2017-T, the claimant presented lease agreements, property deeds, and witness testimony, though the Tax Authority emphasized the formal two-year registration requirement over evidence of actual cohabitation.