Process: 128/2018-T

Date: September 28, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 128/2018-T addressed whether the IRS surtax (sobretaxa extraordinária) applies to non-habitual residents in Portugal earning income from high added value activities. The claimants, a married couple with non-habitual resident status, challenged an IRS assessment of €25,140.05 for the 2016 tax year, arguing that the surtax should not apply to their income taxed at the special 20% rate under Article 72(6) of the IRS Code. The core dispute centered on the methodology for calculating the surtax: the claimants contended that since their collectible income was €0 (as their income was taxed separately under the non-habitual resident regime), the applicable surtax rate should be 0%, resulting in no surtax liability. The Tax Authority argued that the surtax applies to all Portuguese tax residents, including non-habitual residents, and that the tax base includes income subject to special rates under Article 72. The arbitral tribunal had to interpret Law 159-D/2015 and determine whether income taxed under the non-habitual resident regime's special rates should be included in the surtax calculation, and if so, how the rate should be determined when collectible income is zero. This case highlights critical issues in Portuguese tax law regarding the interaction between special tax regimes and extraordinary levies, with significant implications for tax planning and compliance for non-habitual residents in Portugal.

Full Decision

ARBITRAL DECISION

I - Report

  1. A..., taxpayer no. ..., and B..., taxpayer no. ..., married, both with tax residence at Rua ..., ..., ..., ...-... Lisbon (hereinafter referred to as "Claimants") submitted, on 21-03-2018, under Article 2, no. 1, paragraph a) and Article 10, nos. 1 and 2 of the Legal Framework for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LFTA") and Articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, a request for arbitral determination in which they request the annulment of the tax assessment act no. 2017..., for IRS (Personal Income Tax) relating to the tax period of 2016, and consequently the reimbursement of the amount unduly paid, in the amount of €25,140.05, plus compensatory interest calculated at the legal rate.

  2. The Tax and Customs Authority is the Respondent (hereinafter referred to as "Respondent").

  3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 21-03-2018.

  4. Pursuant to paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of the LFTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of CAAD appointed as arbitrator of the singular arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable period, communicated acceptance of the appointment.

  5. The parties were notified, on 11-05-2018, of the appointment of the arbitrator, and did not manifest their will to refuse the arbitrator's appointment, in accordance with the combined provisions of Article 11, no. 1, paragraphs a) and b), of the LFTA and Articles 6 and 7 of the Code of Ethics.

  6. In accordance with the provisions of paragraph c) of no. 1 of Article 11 of the LFTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 01-06-2018.

  7. The Respondent, duly notified through the arbitral order of 12-06-2018, submitted its Response on 27-07-2018 and forwarded the Administrative File on 30-07-2018.

  8. The Arbitral Tribunal, by order of 23-08-2018, determined: (i) to dispense with the holding of the meeting provided for in Article 18 of the LFTA, in accordance with the principle of the Tribunal's autonomy in conducting the proceedings and in order to promote the speed, simplification and informality thereof (Articles 19 and 29, no. 2, of the LFTA), given that no exception was raised and no questions were raised that would prevent the examination of the merits of the claim; (ii) to set a simultaneous period of 10 days for the parties, if they wish, to present written submissions; (iii) to set 27 September as the final deadline for delivery of the arbitral decision.

  9. The Claimants presented their submissions on 10-09-2018. The Respondent did not present any submissions.

  10. The position of the Claimants, in accordance with the provisions of the request for constitution of the Arbitral Tribunal and in the written submissions, is, in summary, as follows:

10.1. The Claimants do not agree with the understanding contained in the assessment statement identified above with regard to the method of applying the IRS surtax to dependent work income earned by the Claimant for the exercise of activity of high added value.

10.2. In accordance with no. 1 of Article 3 of Law no. 159-D/2015, of 30 December, the surtax applicable to income earned in 2016 applies "(…) to the part of collectible IRS income that results from the aggregation under Article 22 of the IRS Code, approved by Decree-Law no. 442-A/88, of 30 November, plus income subject to the special rates provided in nos. 3, 6, 11 and 12 of Article 72 of the same Code, earned by taxpayers resident in Portuguese territory, which exceeds, per taxpayer, the annual value of the guaranteed minimum monthly wage".

10.3. Once the value to which the surtax rate should be applied is determined (i.e., the taxable base), it is necessary to determine the concrete surtax rate applicable. It is clear from the provisions of no. 2 of Article 2 of Law no. 159-D/2015, of 30 December, that the surtax rate applicable varies according to the amount of collectible income, this being the only variable to consider for the purposes of determining the applicable surtax rate.

10.4. There is a difference between, on the one hand, the income on which the surtax applies (i.e., collectible income plus income to which certain special rates apply) and, on the other hand, the income relevant for the purposes of determining the applicable surtax rate (i.e., collectible income).

10.5. Given that the applicable surtax rate is entirely dependent on the amount of collectible income and this, in the case at issue, is €0.00, there can be no other conclusion than that the applicable surtax rate is 0%.

10.6. Thus, with a rate of 0% being applicable, regardless of the tax base, no amount will be due as IRS surtax, by virtue of the rule of multiplication absorption.

10.7. It appears that the calculation statement in question is based on an error concerning the factual and legal assumptions, in particular as regards the method of determining the extraordinary surtax on dependent work income obtained within the framework of high added value activity. Accordingly, the Respondent should proceed to pay the remaining reimbursement, since this amount was reimbursed by mistake.

10.8. The Respondent should also be ordered to pay the compensatory interest that may be due under Article 43 of the General Tax Code and Article 61 of the Tax Procedure Code.

  1. The position of the Respondent, expressed in the Response, can be summarized as follows:

11.1. As of 31/12/2016, the Claimant had the status of non-habitual resident in Portugal, that is, for income tax purposes, regarding the year 2016, the Claimant was subject to the special rate provided in no. 6 of Article 72 of the IRS Code (hereinafter "IRSC").

11.2. However, the fact that the Claimant had the status of non-habitual resident in Portugal does not mean – as provided in Article 16 of the IRSC – that he is not resident in Portugal. Indeed, the status of non-habitual resident allows respective taxpayers a tax treatment different from that which follows from the status of resident, which treatment, in the case of income from activities of high added value, of a scientific, artistic or technical nature, results from the application of a special rate provided in Article 72, no. 6, of the IRSC (rate of 20%).

11.3. For its part, the extraordinary surtax, under IRS, was approved, on a temporary basis, by Law no. 49/2011.

11.4. As regards the year 2016, the surtax remained in force, and by virtue of Law no. 159-D/2015, and given the legislator's purpose of abolishing the surtax, the income to be taxed was limited to income below €7,070.00, maintaining the rate of 3.50% for income exceeding €80,000.00.

11.5. However, the reality of the income on which the surtax applies was not altered by Law no. 159-D/2015, which, moreover, made this clear in its Article 3 (as it had done in Article 72-A of the IRSC) – collectible income plus income subject to the special rates provided in nos. 3, 6, 11 and 12 of Article 72 of the IRSC.

11.6. The surtax applies, or rather, applied, to collectible income plus income subject to the special rates provided in nos. 3, 6, 11 and 12 of Article 72 of the IRSC – this was the regime at the date of entry into force of the Law that approved the surtax (Law no. 49/2011) and this was the regime applicable to income earned in 2016 (Law no. 159-D/2015).

11.7. In the concrete case, and within the legal framework defined by the aforementioned rules (since collectible income is "€0.00", to the income of the Claimants subject to the special rate of 20%, pursuant to no. 6 of Article 72 of the IRSC, after deduction of social security contributions and the annual values of the guaranteed minimum monthly wage, as the Claimants filed a joint return, the amount is multiplied by two), the surtax was applied, in accordance with Article 2 of Law no. 159-D/2015 – which is due and was correctly applied.

11.8. For which reason there is no occasion for the AT to pay any compensatory interest.

II - Procedural Assessment

  1. The parties have legal personality and capacity, are properly represented and have standing (Articles 4 and 10, no. 2, of the LFTA and Article 1 of Ordinance no. 112-A/2011, of 22 March).

The tribunal is competent and is properly constituted.

The proceedings have no defects.

No exceptions were raised.

There are no other circumstances that prevent examination of the merits of the case.

Under these circumstances, the Arbitral Tribunal is properly constituted to examine and decide the subject matter of the proceedings.

III - Merits

III.1. Factual Matters

  1. Facts Established

13.1. With relevance for examining and deciding the issues raised, the following facts are given as established and proven:

  • The Claimant is registered as a Non-Habitual Resident, for the period 2013 to 2022; Country of Foreign Residence: Brazil; Proof of Foreign Residence: Certificate of Residence (as per Current Registration Status, of 23-04-2018, Taxpayer Registration and Management System, at page 24 of the Administrative File and Document no. 2 attached to the request for arbitral determination, documents which are hereby fully reproduced for all legal purposes).

  • The Claimant is registered in the following high added value activities: (i) Engineers (Activity Code 102), since 28-11-2016; (ii) Senior Company Executives (Activity Code 802), since 01-01-2013 (as per Current Registration Status, of 23-04-2018, Taxpayer Registration and Management System, at page 24 of the Administrative File and Document no. 2 attached to the request for arbitral determination. See Ordinance no. 12/2010 of 7 January, which approved the table of high added value activities).

  • The Claimant in the year 2016 carried out a high added value activity as a Senior Company Executive at C... S.A., taxpayer identification no. ..., and earned income of €773,858.10 (as per Declaration of C... S.A., of 20-01-2017, relating to the year 2016, issued under Article 119, no. 1, paragraph b), of the IRSC, which is Document no. 3 attached to the request for arbitral determination and which is hereby fully reproduced for all legal purposes).

  • The Claimants, in their capacity as tax residents in Portugal, filed on 17-08-2017, the Income Declaration – IRS – Form 3 relating to the year 2016 (as per Document no. 4 attached to the request for arbitral determination, and which is hereby fully reproduced for all legal purposes).

  • In the Income Declaration identified in the preceding paragraph, the Claimants entered the following amounts: (i) €773,858.10 dependent work income obtained in national territory – activity code 102 - Engineers; (ii) €263,669.00 withholding tax, as IRS; (iii) €27,198.74 social security contributions; (iv) €16,689.00 Surtax withholding (see Annex A – Table 4 A and Annex L – Table 4 A of the Income Declaration – IRS – Form 3 which is Document no. 4 attached to the request for arbitral determination).

  • The Claimants were notified of the IRS assessment act no. 2017..., of 2017-08-18, relating to the period of 2016-01-01 to 2016-12-31, through Document no. 2017... (as per Document no. 1 attached to the request for arbitral determination, and which is hereby fully reproduced for all legal purposes).

  • In the IRS Assessment Demonstration Document referred to in the preceding paragraph, the following values appear (as per Document no. 1 attached to the request for arbitral determination).

Item Amount
1 - Gross income 0.00
2 - Specific deductions 0.00
3 - Losses to recover 0.00
4 - Deductions 0.00
5 - Deductions from income 0.00
6 - Collectible income 0.00
7 - Income quotient prior years/Intellectual property 0.00
8 - Exempt income aggregated for rate determination 0.00
9 - Total income for rate determination 0.00
10 - Family quotient -----------------------------------------
11 - Amount determined 0.00
12 - Portion to deduct 0.00
13 - Tax prior years/Intellectual property 0.00
14 - Tax corresponding to exempt income 0.00
15 - Additional rate 0.00
16 - Excess in relation to family quotient limit
17 - Tax relating to autonomous taxation 149,331.87
18 - Total collection 149,331.87
19 - Deductions from collection 0.00
20 - Municipal benefit 0.00
21 - Increases to collection 0.00
22 - Net collection 149,331.87
23 - Payments on account 0.00
24 - Withholding tax 263,669.00
25 - Tax determined 114,337.13
26 - Savings retention interest 0.00
27 - Surtax result 8,924.68
28 - Compensatory interest 0.00
29 - Compensatory interest 473.63
Amount to Reimburse 105,886.08
  • In the Document identified in paragraph F) the following values appear relating to the surtax (as per Document no. 1 attached to the request for arbitral determination):
Item Amount
Base €731,819.36 Rate of 3.5% = €25,613.68
Deductions 0.00
Withholding Tax €16,689.00
Result €8,924.68

  • The amount of €105,886.08, relating to the reimbursement of IRS for 2016, was transferred to the Claimants on 15-12-2017 (see Document no. 1 attached to the request for arbitral determination).

  • The Claimants did not file a gracious claim against the assessment (see Information from the Finance Service of Lisbon..., of 23-04-2018, at page 30 of the Administrative File).

13.2. There are no other facts with relevance for examining the merits of the case that have not been proven.

13.3. Reasoning of the Factual Matters

Regarding the facts given as proven, the conviction of the Arbitral Tribunal was based on the free assessment of the documentary evidence attached to the proceedings, whose authenticity was not questioned, as well as on the analysis of the administrative file submitted by the Respondent.

III.2. Legal Matters

  1. The issue raised in these arbitral proceedings consists of determining how the IRS surtax should be calculated in relation to non-habitual residents who carry out high added value activity.

The Claimants consider that the income relevant for the purposes of determining the IRS surtax rate is only collectible income. Conversely, the Respondent contends that it is collectible income plus income subject to the special rates provided in nos. 3, 6, 11 and 12 of Article 72 of the IRSC.

This merits examination.

  1. It is important to begin by establishing the legal framework of the IRS surtax.

15.1. Law no. 49/2011, of 7 September, created the extraordinary surtax on income subject to IRS earned in the year 2011. Said Law added Articles 72-A and 99-A to the IRSC.

Nos. 1 and 2 of Article 72-A of the IRSC have the following content:

"1 — On the part of collectible IRS income that results from aggregation under Article 22, plus income subject to the special rates provided in nos. 3, 4, 6 and 10 of Article 72, earned by taxpayers resident in Portuguese territory, which exceeds, per taxpayer, the annual value of the guaranteed minimum monthly wage, the extraordinary surtax of 3.5% applies.

2 — To the collection of the extraordinary surtax are deducted only:

a) 2.5% of the value of the guaranteed minimum monthly wage for each dependent or civil godchild who is not an IRS taxpayer;

b) The amounts withheld under Article 99-A, which, when exceeding the surtax due, confer the right to reimbursement of the difference.

(…)"

15.2. According to Article 2, no. 3, of Law no. 49/2011, of 7 September, the surtax was created to apply only in the year 2011.

The State Budget Law for 2013, Law no. 66-B/2012, of 31 December, in Article 187 provided for the surtax under IRS not as an addition to the IRSC, but as a provision of the budget law itself. The same occurred in the year 2014, through Article 176 of Law no. 82-C/2013, of 31 December, State Budget Law for 2014, and in the year 2015, through Article 191 of Law 83-B/2014, of 31 December, State Budget Law for 2015.

15.3. Law no. 159-D/2015, of 30 December, determines the abolition of the surtax in the following terms:

"Article 2

Abolition of the surtax

1 — The surtax provided for in the preceding article ceases to apply to income earned as of 1 January 2017.

2 — For income earned in 2016, the applicable surtax follows the provision in the following table:

Collectible Income (euros) Rate (percentage)
Up to 7,070 0
More than 7,070 up to 20,000 1
More than 20,000 up to 40,000 1.75
More than 40,000 up to 80,000 3
More than 80,000 3.5

Article 3

Applicable Regime

1 — The rates provided for in the preceding article apply to the part of collectible IRS income that results from aggregation under Article 22 of the IRS Code, approved by Decree-Law no. 442-A/88, of 30 November, plus income subject to the special rates provided in nos. 3, 6, 11 and 12 of Article 72 of the same Code, earned by taxpayers resident in Portuguese territory, which exceeds, per taxpayer, the annual value of the guaranteed minimum monthly wage.

2 — From the collection of the surtax are deducted only, up to their respective amount:

a) 2.5% of the value of the guaranteed minimum monthly wage for each dependent or civil godchild who is not an IRS taxpayer;

b) The amounts withheld under nos. 8 to 10, which, when exceeding the surtax due, after the deduction provided for in the preceding paragraph, confer the right to reimbursement of the difference.

(…)"

  1. It follows from the facts proven that the Claimant, in the year 2016, had the status of non-habitual resident, was registered in a high added value activity (Senior Company Executive) and earned income from that activity (see paragraphs A), B) and C) of no. 13.1. below). It is important to note the respective legal framework.

16.1. The tax regime of non-habitual resident, under IRS, was introduced into Portuguese law by Decree-Law no. 249/2009, of 23 September.

16.2. Article 16 of the IRSC, under the heading "Tax Residence", with the wording in force at the date of the conduct in question, established the following:

"8 - Non-habitual residents in Portuguese territory are considered those taxpayers who, becoming fiscally resident under nos. 1 or 2, have not been residents in Portuguese territory in any of the five preceding years.

9 - The taxpayer who is 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 registration as a resident in Portuguese territory."

16.3. Article 72 of the IRSC, under the heading "Special Rates", in no. 6, with the wording in force at the date of the conduct in question, provided the following:

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

16.4. In addition to the regime established by the IRSC, Ordinance 12/2010, of 7 January, was published, which approved the table of high added value activities, for the purposes of the provision in Article 72, no. 6, and Article 81, no. 4, of the IRSC. According to the table attached to the Ordinance, the same applies to "Senior Company Executives", being assigned the code 802 to said activity.

  1. The income declared by the Claimant in 2016, resulting from the exercise of a high added value activity, is subject to IRS taxation at the special rate provided in no. 6 of Article 72 of the IRSC.

No. 1 of Article 3 of Law no. 159-D/2015, of 30 December, expressly establishes that the rates provided for in its Article 2, that is, the surtax rates set forth in the table applicable to income earned in 2016, apply not only to the part of collectible IRS income that results from aggregation, but also to income subject to special rates, in particular that provided in no. 6 of Article 72 of the IRSC.

Thus, the legislator was very clear in determining that the rates of the IRS surtax also apply to income subject to special rates. Consequently, the surtax rates apply to collectible income resulting from aggregation, "plus", in the terminology used by the legislator, income subject to special rates. This meaning, which results from the aforementioned legal norms, fully complies with the provision in Article 11, no. 1, of the General Tax Code, regarding the interpretation of tax law.

  1. In view of the facts that are the subject of these arbitral proceedings (see paragraphs E), F), G) and H) of no. 13.1. above), collectible income is €0.00, but there was income subject to the special rate of 20%, provided in no. 6 of Article 72 of the IRSC, to which the surtax rate should apply, in accordance with Articles 3, no. 1, and 2, no. 2, of Law no. 159-D/2015, of 30 December.

  2. It is important to add that the creation of the surtax is based on the requirements of compliance with the budget deficit, within the scope of the PAP (Program of Economic and Financial Adjustment), agreed with European institutions and the IMF and continues due to the context of national public finances, marked by the need to obtain additional tax revenue[1]. The surtax was a tax measure inserted in a wider set of measures to combat budget deficit with the concern of strengthening the so-called principle of social equity in the adjustment program.

In this context, it would be highly questionable that the Claimants, already beneficiaries of a very favorable tax regime, due to the status of non-habitual resident and the exercise of high added value activity, when compared with other taxpayers, would obtain a further expansion of tax advantages at the level of the surtax. Moreover, the position defended by the Claimants is susceptible to violating constitutional principles by deepening a differentiation of treatment with other taxpayers that is not reasonable and objectively founded[2].

  1. According to the foregoing, the Claimants were subject to taxation on the IRS surtax in the exact terms of the law and there was no breach of the constitutional principle of tax legality.

In summary, the surtax relating to the year 2016 was applied by the AT in accordance with the provisions of the law and did not rest on an error concerning the factual and legal assumptions.

  1. Based on the foregoing, the request for arbitral determination is rejected as to the issue of illegality of the assessment. Given that reimbursement and compensatory interest depend on the existence of an error by the Tax Authority that determines the payment that was not due, as results from the provision in Article 43, no. 1, of the General Tax Code, the dismissal of the principal claim relating to the annulment of the assessment implies the dismissal of the consequential claims.

IV - Decision

Given the foregoing, the Arbitral Tribunal decides to dismiss the request for arbitral determination and, consequently, absolves the Respondent of the claim, with the due legal consequences.

V - Value of the Case

Having regard to the provisions of Articles 32 of the Code of Administrative Procedure, 306, no. 2, of the Code of Civil Procedure and 97-A of the Tax Procedure Code, applicable by virtue of the provision in Article 29, no. 1, paragraphs a) and b), of the LFTA, and Article 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at €25,140.05 (twenty-five thousand, one hundred and forty euros and five cents).

VI - Costs

Costs charged to the Claimants, in the amount of €1,530.00 (one thousand five hundred and thirty euros), in accordance with Table I of the Regulation on Costs in Tax Arbitration Proceedings, in compliance with the provisions of Articles 12, no. 2, and 22, no. 4, both of the LFTA, as well as the provision in Article 4, no. 4, of the Regulation on Costs in Tax Arbitration Proceedings.

Notify.

Lisbon, Center for Administrative Arbitration, 28 September 2018

The Arbitrator

Olívio Mota Amador

[1] In this regard, see no. 108 of the Decision of the Constitutional Court no. 187/2013

[2] J.C. Vieira de Andrade - Fundamental Rights in the Portuguese Constitution of 1976, Coimbra, 1987, page 299

Frequently Asked Questions

Automatically Created

Can non-habitual tax residents in Portugal be subject to the IRS surcharge (sobretaxa)?
Yes, non-habitual tax residents in Portugal can be subject to the IRS surtax. Despite benefiting from special taxation under the non-habitual resident regime (Article 72(6) of the IRS Code), these taxpayers maintain their status as Portuguese tax residents. Law 159-D/2015 expressly includes income subject to special rates under Article 72 in the surtax base, meaning that non-habitual residents earning income from high added value activities taxed at the 20% special rate are not automatically exempt from the surtax. The key dispute in case 128/2018-T was not whether non-habitual residents are subject to the surtax, but rather how to calculate it when collectible income is zero.
What was the outcome of CAAD arbitration process 128/2018-T regarding IRS and the non-habitual resident regime?
The excerpt provided does not include the final decision of CAAD process 128/2018-T. The document shows the procedural history and arguments from both parties but ends before the tribunal's ruling. The claimants argued that a 0% surtax rate should apply since their collectible income was €0, while the Tax Authority maintained that the surtax applies to income taxed under special rates regardless of collectible income levels. The arbitral tribunal was constituted on June 1, 2018, with a decision deadline of September 27, 2018, but the outcome is not included in this excerpt.
How can taxpayers challenge an IRS tax assessment under the Portuguese tax arbitration system (RJAT)?
Taxpayers can challenge an IRS assessment under the Portuguese tax arbitration system (RJAT - Regime Jurídico da Arbitragem Tributária) by submitting a request for arbitral determination to CAAD (Centro de Arbitragem Administrativa) under Article 2(1)(a) and Article 10 of Decree-Law 10/2011. The process involves: (1) filing a formal request identifying the contested assessment; (2) automatic notification to the Tax Authority; (3) appointment of an arbitrator by CAAD's Ethics Council; (4) constitution of the arbitral tribunal; (5) submission of the Tax Authority's response and administrative file; and (6) issuance of the arbitral decision. The system provides an alternative to judicial courts for resolving tax disputes with greater speed and procedural flexibility.
Are non-habitual residents entitled to a refund and compensatory interest if an IRS surcharge is wrongly applied?
If an IRS surtax is wrongly applied to non-habitual residents, they are entitled to a refund of the amount unduly paid plus compensatory interest. Article 43 of the General Tax Code (LGT) and Article 61 of the Tax Procedure Code (CPPT) govern compensatory interest, which the State must pay when tax refunds are delayed beyond legal deadlines. In case 128/2018-T, the claimants specifically requested reimbursement of €25,140.05 plus compensatory interest calculated at the legal rate. The entitlement to compensatory interest serves to compensate taxpayers for the time value of money when the Tax Authority has retained funds to which it was not entitled.
What is the interaction between the IRS surcharge regime and the special taxation rules for non-habitual residents in Portugal?
The interaction between the IRS surtax regime and special taxation rules for non-habitual residents creates significant complexity in Portuguese tax law. Under Law 159-D/2015, Article 3(1), the surtax applies to collectible income plus income subject to special rates under Article 72(3), (6), (11), and (12) of the IRS Code. This means non-habitual residents' income from high added value activities (taxed at 20% under Article 72(6)) is included in the surtax base. However, Article 2(2) determines the applicable surtax rate based solely on collectible income levels. This creates an interpretative challenge: when collectible income is zero (because all income is taxed separately under special rates), there is disagreement whether the surtax rate should be 0% or whether it should be calculated based on the total income including specially-taxed amounts. This structural tension between the tax base definition and rate determination methodology was central to case 128/2018-T.