Process: 131/2017-T

Date: June 26, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Arbitral Decision 131/2017-T addresses whether de facto partners can submit substitute IRS declarations to claim married couple taxation treatment under Portuguese tax law. The claimants, cohabiting partners meeting união de facto requirements, initially filed separate 2013 IRS declarations marked as 'single' by oversight. They subsequently attempted to file replacement declarations within the legal deadline to be taxed jointly under the regime applicable to married taxpayers not judicially separated. The Tax and Customs Authority rejected multiple substitute declarations submitted in May 2014, despite the submissions falling within the statutory deadline under Article 60(1)(b) of the Personal Income Tax Code. The claimants argued that Article 59 of the Tax Procedure and Process Code (CPPT) grants taxpayers the right to correct declarations without subject matter limitations, and that refusing replacement declarations restricts fundamental taxpayer rights regarding family status recognition. They claimed overpayment of €447.80 by being denied the married couple's allowance. The Authority contended that deadlines for replacement declarations had expired. This case highlights critical issues in Portuguese tax administration: the scope of Article 59 CPPT substitute declaration rights, procedural deadlines for corrections involving marital status changes, administrative acceptance of de facto union declarations, and CAAD's jurisdiction over IRS assessment challenges. The arbitral tribunal examined whether taxpayers in de facto unions can retroactively correct their tax filing status through substitute declarations, balancing taxpayer correction rights against tax administration procedural requirements and deadline compliance. The decision impacts thousands of cohabiting couples seeking equitable tax treatment comparable to married taxpayers under Portuguese IRS law.

Full Decision

ARBITRAL DECISION

REPORT

A - PARTIES

A... with Tax Identification Number ... and B... with Tax Identification Number ..., both resident at Street ..., no. ..., ..., ...-... Lisbon, hereinafter referred to as Claimant or taxpayer.

TAX AND CUSTOMS AUTHORITY (which succeeded the General Directorate of Taxes, by means of Decree-Law no. 118/2011, of 15 December) hereinafter referred to as Respondent or Tax Authority.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD, and the Arbitral Tribunal was duly constituted on 28-04-2017, to examine and decide on the subject matter of the present case, and was automatically notified to the Tax and Customs Authority on 28-04-2017, as shown in the respective minutes.

The Claimant failed to appoint an arbitrator, whereby, pursuant to the provisions of no. 1 of article 6 and subsection b) 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, the Ethics Council appointed Arbitrator Paulo Ferreira Alves, the appointment having been accepted under the terms legally provided for.

On 11-04-2017 the parties were duly notified of this appointment, and did not express any intention to refuse the appointment of the arbitrators, pursuant to article 11, no. 1, subsections a) and b) of the Tax Arbitration Rules and articles 6 and 7 of the Code of Ethics.

In accordance with the provision in subsection 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, the single arbitral tribunal is duly constituted on 28-04-2017.

Both parties agree to waive the holding of the meeting provided for in article 18 of the Tax Arbitration Rules.

The arbitral tribunal is duly constituted. It is materially competent, pursuant to articles 2, no. 1, subsection a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are legally represented (articles 4 and 10, no. 2, of the same instrument and article 1 of Regulation no. 112-A/2011, of 22 March).

The case does not suffer from defects that would invalidate it.

B - REQUEST

  1. The present Claimant seeks a declaration of illegality of the tax assessments issued under Personal Income Tax for 2013, formalized by the assessment notices nos. 2014... of 5 May 2014 and 2014... of 28 May 2014.

C - BASIS OF THE CLAIM

  1. In support of its request for arbitral pronouncement, the Claimants alleged, with a view to declaring illegal the tax assessments issued under Personal Income Tax, already described in point 1 of this Award, in summary, the following:

2.1. The Claimants meet the requirements to be considered in de facto union in 2013 and wish to be taxed in accordance with the taxation regime applicable to married taxpayers not judicially separated with regard to persons and property.

2.2. Having, by oversight, submitted Personal Income Tax Form 3 declarations where they declared to be "single", they attempted, by various forms and means, to replace, within the legal deadline for submitting the joint declaration, the previously and erroneously submitted income declarations, which was not permitted.

2.3. Having failed to replace the submitted declarations, the Claimants requested the annulment of the assessment notices resulting from the Personal Income Tax Form 3 declarations erroneously submitted and the replacement thereof by another declaration where the income of the present Claimants would be assessed based on the taxation regime applicable to married taxpayers not judicially separated with regard to persons and property.

2.4. Claimants are Personal Income Tax taxpayers and, as of 31 December 2013, lived in conditions analogous to those of spouses for more than two years.

2.5. On 13 April 2014, Claimant B... submitted the Personal Income Tax Form 3 declaration relating to the year 2013, where in Section 6, concerning her marital status, she stated "single, widow, divorced or judicially separated".

2.6. From this declaration resulted assessment no. 2014... of 5 May 2014, with the amount due of €669.77.

2.7. On 1 May 2014, the Claimants submitted the Personal Income Tax Form 3 declaration no. 2013-...-...-..., in Section 6, concerning marital status, stating they were in "de facto union".

2.8. The income declaration was considered "incorrect" and, consequently, was not accepted by the Tax and Customs Authority.

2.9. On 7 May 2014, the Claimants submitted a new Personal Income Tax Form 3 declaration, which was registered under no. 2013-...-...-..., where they again declared in Section 6, concerning marital status, to be in "de facto union".

2.10. The income declaration was considered "incorrect" and was not accepted by the Tax and Customs Authority.

2.11. Given that the computer application considered the declarations jointly presented by the Claimants on 12 May 2014 as incorrect, Claimant A... submitted the Personal Income Tax Form 3 declaration relating to the year 2013, where in Section 6, concerning his marital status, he stated "single, widow, divorced or judicially separated".

2.12. From this declaration resulted assessment no. 2014... of 28 May 2014, with the amount to be refunded of €2,299.59.

2.13. On 13 May 2014, that is, still within the deadline for jointly submitting the Personal Income Tax Form 3 declaration, the Claimants submitted a request to the Lisbon Tax Office-..., where they requested that the Personal Income Tax Form 3 declarations submitted be annulled, so that the Claimants could submit a new Personal Income Tax declaration relating to the year 2013.

2.14. Given that the Claimants did not obtain, in a timely manner, any decision on what was requested, the Claimants on 4 June 2014 filed an administrative complaint with the Lisbon Tax Office-...

2.15. The aforementioned Personal Income Tax Form 3 declarations were submitted in May, that is, within the deadline provided for in article 60, no. 1, sub-paragraph b), second paragraph of the Personal Income Tax Code, applicable to the Claimants for submission of the joint Personal Income Tax Form 3 declaration.

2.16. For having been denied the possibility of benefiting from the married couple's allowance, the Claimants overpaid the estimated amount of €447.80 [€2,107.62 - (€2,299.59 + €669.77)], corresponding to the difference between the balance actually refunded (€2,299.59 - €669.77) by the Tax Authority and what would have been refunded, had the possibility of the Claimants benefiting from the married couple's allowance not been refused (€2,107.62).

2.17. The possibility of correcting their declarations is one of the taxpayer rights legally established, which find no limitation as to their subject matter.

2.18. The refusal to accept the replacement declarations submitted by the Claimants constitutes a true limitation on the possibility of correction of declarations by taxpayers in cases inherent to their respective family situation, which constitutes a restriction of a taxpayer right.

D - RESPONDENT'S REPLY

  1. The Respondent, duly notified for this purpose, submitted its reply in a timely manner in which, in brief summary, it alleged the following:

3.1. The assessments now under examination relate to Personal Income Tax declarations, form 3, for the year 2013, submitted by Claimants A and B, individually, who indicated in their marital status "single, widow, divorced or judicially separated".

3.2. As for Claimant B, she submitted the Personal Income Tax declaration on 2014-04-13, the deadline for submission thereof being 2017-04-30.

3.3. Regarding the first declaration submitted by Claimants A and B together on 2014-05-01, the time limit has expired.

3.4. The deadline provided for in article 59 of the Tax Procedure and Process Code for submission of replacement declarations, since the Claimants intend to be taxed in the situation of "de facto union", which is why they filed the administrative complaint and subsequently a hierarchical appeal.

3.5. Claimants A and B, in filing the administrative complaint of the assessments at issue, base their request on the existence of error attributable to the services, and seek the application of the taxation regime applicable to married taxpayers not judicially separated with regard to persons and property, basing this claim on the fact that they are in the situation of "de facto union".

3.6. In accordance with the provision of article 57, no. 1 of the Personal Income Tax Code, taxpayers must submit annually the form 3 declaration relating to income earned in the previous year and other elements, and in the aforementioned circumstances, the assessment is made on the basis of the elements contained in the declaration submitted by them (article 76, no. 1 of the Personal Income Tax Code and article 59, no. 1 of the Tax Procedure and Process Code).

3.7. Furthermore, the choice for the application of the taxation regime applicable to married taxpayers not judicially separated with regard to persons and property "depends on the identity of the tax residence of the taxpayers during the period required by law to verify the requirements of de facto union and during the taxation period, as well as the signature by both of the respective income declaration". (article 14, no. 2 of the Personal Income Tax Code).

3.8. However, and in accordance with Administrative Circular no. 20162 of 2012-10-29 from the Personal Income Tax Services Division:

3.9. Thus, it appears that only in the situation where taxpayers had opted for a taxation regime different from the general regime applicable could they request the alteration of the option previously made, and it appears that the default regime of the Claimants is the taxation considering the personal status of single, widow, divorced or judicially separated.

3.10. However, given that the Personal Income Tax assessments for the year 2013 were made in full accordance with the applicable legal provisions and with the understandings that expressly bind the Tax Authority, it is concluded that there is no configured situation of serious or notorious injustice.

3.11. For, given the argumentation advanced, it is evident the legal conformity of the assessments subject to the present request.

3.12. It should be noted that Administrative Circular no. 20162 of 2012-10-29 from the Personal Income Tax Services Division, regarding the admissibility of later alteration of options in terms of taxation allowed under Personal Income Tax, and the directive of the Director General of the Tax Authority of 2012-09-27, clarified that "Regarding the options inherent to the family situation arising from the provisions of articles 13, no. 5, 14 and 59 of the same Code, the possibility of subsequent alteration covers only situations in which it is intended the change from the optional regime to the default regime".

3.13. That is, the possibility of alteration of the family situation is restricted, applying only in situations in which it is intended to alter the family situation from the optional regime to the default regime;

3.14. That was not the case of the Claimants who opted for the default regime (single), being denied the possibility to alter to the optional regime (de facto union).

3.15. The Respondent concludes sustained by the total lack of merit of the request, maintaining the Personal Income Tax assessment acts challenged and absolving the Tax Authority from the request, with the due legal consequences.

E - FACTUAL GROUNDS

  1. Before proceeding to the examination of these questions, it is necessary to present the factual matter relevant to their understanding and decision, which was made on the basis of documentary evidence and taking into account the alleged facts.

  2. Regarding material facts, the present tribunal hereby establishes the following facts:

  3. On 13 April 2014, Claimant B... submitted the Personal Income Tax Form 3 declaration relating to the year 2013, where in Section 6, concerning her marital status, she stated "single, widow, divorced or judicially separated".

  4. From this declaration resulted assessment no. 2014... of 5 May 2014, with the amount due of €669.77.

  5. On 1 May 2014, the Claimants submitted the Personal Income Tax Form 3 declaration no. 2013-...-...-..., in Section 6, with the alteration of marital status to "de facto union".

  6. On 7 May 2014, the Claimants submitted a new Personal Income Tax Form 3 declaration, which was registered under no. 2013-...-...-..., where they again declared in Section 6, concerning marital status, to be in "de facto union".

  7. On 12 May 2014, Claimant A... submitted the Personal Income Tax Form 3 declaration relating to the year 2013, where in Section 6, concerning his marital status, he stated "single, widow, divorced or judicially separated".

  8. From this declaration resulted assessment no. 2014... of 28 May 2014, with the amount to be refunded of €2,299.59.

  9. On 13 May 2014, the Claimants submitted a request to the Lisbon Tax Office-..., where they requested that the Personal Income Tax Form 3 declarations submitted be annulled, so that the Claimants could submit a new Personal Income Tax declaration relating to the year 2013.

  10. Given that the Claimants did not obtain, in a timely manner, any decision on what was requested, the Claimants on 4 June 2014 filed an administrative complaint with the Lisbon Tax Office-... with number ...2014....

  11. On 6 January 2016, the Claimants were notified of the rejection of the administrative complaint.

  12. On 5 February 2016 the Claimants filed a hierarchical appeal with number ...2016....

  13. On 22 December 2016, the Claimants were notified of the final decision of rejection of the hierarchical appeal.

F - UNPROVEN FACTS

  1. Among the facts relevant to the decision of the case, contained in the challenge, all subject to concrete analysis, those not contained in the factual description above were not proven.

G - QUESTIONS TO BE DECIDED

  1. Given the positions of the parties assumed in the arguments presented, the following central questions to be settled constitute those which must, therefore, be examined and decided:

a. The one alleged by the Claimant:

(i) Declaration of illegality of the tax acts of assessment issued under Personal Income Tax for 2013, formalized by the assessment notices nos. 2014... of 5 May 2014 and 2014... of 28 May 2014.

(ii) Condemnation to payment of compensation interest.

H - LEGAL MATTERS

  1. Given the positions of the parties assumed in the written arguments submitted, the central question to be settled by the present arbitral tribunal consists in assessing the legality of the Personal Income Tax assessment acts for 2013, formalized by the assessment notices nos. 2014... of 5 May 2014 and 2014... of 28 May 2014, due to defect of violation of law.

  2. The substantive question in the present arbitral case relates to the following issue, which results from article 59 no. 3 sub-paragraph a) of the Tax Procedure and Process Code, and consists in determining whether the taxpayer can alter at various times his taxation regime under Personal Income Tax up to the deadline for submission of the income declaration.

  3. With the legislative amendment carried out by Law no. 7/2001 of 11 May, as amended by Law no. 23/2010 of 30 August, it was established that the existence of a de facto union between two persons can be proven by any legally admissible means (article 2-A), and also provides that persons living in de facto union under the conditions provided for in that law have the right to the application of the Personal Income Tax regime under the same conditions applicable to married taxpayers not judicially separated with regard to persons and property (article 3).

  4. As results from article 14:

1 - Persons living in de facto union who meet the requirements provided for in the respective law may choose the taxation regime of married taxpayers not judicially separated with regard to persons and property.

2 - The application of the regime referred to in the previous number depends on the identity of the tax residence of the taxpayers during the period required by law to verify the requirements of de facto union and during the taxation period, as well as the signature by both of the respective income declaration.

3 - In the case of exercise of the choice provided for in no. 1, the provision of no. 2 of article 13 is applicable, both persons in de facto union being responsible for compliance with the tax obligations."

  1. By meeting the requirements provided for in article 14 of the Personal Income Tax Code, that is, by having the same tax residence for more than two years, the Claimants may choose the taxation regime of married taxpayers not judicially separated.

  2. According to the factual matter proven and the Tax Authority's position in the present procedure, the same acknowledges that the Claimants meet the requirements provided for in article 14 of the Personal Income Tax Code at the deadline for submission of the declaration and as such they live in a regime of de facto union, and may benefit from the respective regime.

  3. The Tax Authority's position is limited to the fact that the Claimants had submitted in the year 2013 individually a declaration where they indicated concerning their marital status "single, widow, divorced or judicially separated", consequently resulting in the application of the general regime.

  4. Consequently, having made that choice by the Claimant in 2013, it is the Tax Authority's position in Administrative Circular no. 20162 of 2012-10-29 from the Personal Income Tax Services Division, that the Claimant could not in that same year of 2013 submit a replacement declaration in order to alter its regime from the default regime (single, widow, divorced or judicially separated) to the optional regime (de facto union), although the Administrative Circular does tell us that the opposite alteration is possible (optional regime (de facto union) to that of the default regime (single, widow, divorced or judicially separated)).

  5. It is established understanding by the case law that Administrative Circulars and administrative directives issued by the Tax Authority are binding only for their respective offices because, in the face of the law, the procedures defined, especially the "circulated law" of the Tax Authority cannot derogate from the principle of tax legality (Decision of the Central Administrative Court South case no. 02312/08 of 04/23/2008).

  6. As for the alterations or replacement declarations that the taxpayer may make to their income declaration within the deadline for submission thereof, that is, up to the resulting date, it clearly results from article 59, no. 3 "3 - In case of error of fact or law in the declarations of taxpayers, these may be replaced: a) Whatever the situation of the declaration to be replaced, if the legal deadline for its submission has not yet expired;".

  7. It clearly results from article 59, no. 3 sub-paragraph a) that the Claimants may alter the respective regime and submit a replacement declaration to do so.

  8. Being the Claimants in a situation of de facto union under the terms of article 14 of the Personal Income Tax Code, and being within the deadline of article 59, no. 3 sub-paragraph a) of the Tax Procedure and Process Code for submission of the replacement declaration, there is no legally enshrined impediment for the Claimants not to be able to proceed with the alteration of their taxation regime.

  9. In these terms it is illegal, due to violation of law, the tax acts of assessment issued under Personal Income Tax for 2013, formalized by assessment notices nos. 2014... of 5 May 2014 and 2014... of 28 May 2014, regarding the incorrect application of article 14 of the Personal Income Tax Code and article 59 no. 3 sub-paragraph a) of the Tax Procedure and Process Code.

J - QUESTIONS WITH PREJUDICIAL EFFECT

  1. In the sentence, the judge must rule on all questions that must be examined, refraining from ruling on questions that it should not know about (final part of no. 1 of article 125 of the Tax Procedure and Process Code), and the questions on which the tribunal's powers of jurisdiction are exercised are, according to no. 2 of article 608 of the Code of Civil Procedure, applicable subsidiarily to the tax arbitral process, by reference of article 29, no. 1, sub-paragraph e) of the Tax Arbitration Rules, "the questions that the parties have submitted to its examination, excepting those whose decision is prejudiced by the solution given to others (...)".

  2. Given the solution given to the question relating to the requirements for taxation of the Claimants' income by the regime applicable to married taxpayers not judicially separated with regard to persons and property, the examination of the remaining questions included in the request for arbitral pronouncement is prejudiced.

I - ON COMPENSATION INTEREST

  1. The Claimant further petitions for payment of compensation interest.

  2. Given the foregoing, the Personal Income Tax assessment in the part covered by the annulment that will be decreed results from errors of fact and law attributable exclusively to the tax administration, to the extent that the Claimant complied with her obligation of declaration and were committed by it and she could not be unaware of different understandings.

  3. In truth, being demonstrated that the claimant paid the tax challenged in the amount superior to that which is due, by force of the provisions of articles 61 of the Tax Procedure and Process Code and 43 of the General Tax Law, the Claimant has the right to the compensation interest due, such interest to be counted from the date of payment of the undue tax (annulled) until the date of issuance of the respective credit note, counting the deadline for this payment from the beginning of the deadline for spontaneous performance of the present decision (article 61, nos. 2 to 5 of the Tax Procedure and Process Code), all at the rate ascertained in accordance with the provisions of no. 4 of article 43 of the General Tax Law.

  4. The Claimant's request is granted.

L - DECISION

Therefore, given all of the above, the present Arbitral Tribunal decides:

To hold as well-founded the request for declaration of illegality of the tax acts of assessment issued under Personal Income Tax, nos. 2014... of 5 May 2014 and 2014... of 28 May 2014, which fixed a total tax amount due of €447.80 (four hundred and forty-seven euros and eighty cents), due to defect of violation of law, due to error concerning the legal requirements, which justifies the declaration of its illegality and annulment.

Condemn the Respondent to restore to the Claimant this amount unduly assessed and paid.

The value of the case is fixed at €447.80 of the amount of the assessment, taking into account the economic value of the case assessed by the value of the tax assessments challenged, and accordingly the costs are fixed in the amount of €306.00 (three hundred and six euros), to be borne by the Respondent in accordance with article 12, no. 2 of the Tax Arbitration Regime, article 4 of the Tax Arbitration Procedural Code and Table I attached thereto - no. 10 of article 35, and nos. 1, 4 and 5 of article 43 of the General Tax Law, articles 5, no., sub-paragraph a) of the Tax Procedure Code, 97-A, no. 1, sub-paragraph a) of the Tax Procedure and Process Code and 559 of the Code of Civil Procedure).

Notify.

Lisbon, 26 June 2017

The Arbitrator

Dr. Paulo Ferreira Alves

Frequently Asked Questions

Automatically Created

Can de facto partners file a substitute IRS declaration to be taxed as married couples under Portuguese tax law?
Yes, de facto partners who meet statutory requirements can file substitute IRS declarations to be taxed as married couples under Portuguese law. Article 14 of the IRS Code allows de facto unions to opt for joint taxation if they have cohabited for more than two years as of December 31 of the tax year. However, substitute declarations under Article 59 CPPT must be filed within specific deadlines. In this case, the claimants attempted replacement declarations within the legal submission deadline under Article 60(1)(b) of the IRS Code, but the Tax Authority rejected them, leading to arbitration over whether Article 59 CPPT rights were improperly restricted based on marital status corrections.
What is the legal basis for submitting a substitute tax declaration under Article 59 of the CPPT?
Article 59 of the Tax Procedure and Process Code (CPPT) establishes the taxpayer's right to submit substitute declarations (declarações de substituição) to correct errors or omissions in previously filed tax returns. Substitute declarations can be submitted within the legal filing deadline or, after that deadline, before the tax assessment is issued or before the taxpayer is notified of any inspection or audit procedure. The legal basis recognizes that taxpayers may need to correct declarations due to mistakes, changed circumstances, or newly discovered information. Crucially, taxpayer rights advocates argue Article 59 contains no subject matter limitations, meaning corrections should be permitted regardless of the nature of the error, including marital status declarations affecting taxation regime eligibility.
How does CAAD arbitration resolve disputes over IRS income tax assessments for unmarried cohabiting partners?
CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative dispute resolution mechanism for tax controversies under Decree-Law 10/2011. For IRS disputes involving unmarried cohabiting partners, CAAD tribunals review the legality of tax assessments, examining whether administrative acts comply with tax law requirements. In this case, the arbitral tribunal assessed whether the Tax Authority properly rejected substitute declarations from de facto partners seeking joint taxation, analyzing Article 59 CPPT correction rights, filing deadline compliance under Article 60 IRS Code, and whether procedural restrictions violated taxpayer rights. CAAD decisions are binding and enforceable, offering taxpayers a faster alternative to judicial tax courts for challenging IRS liquidation acts and administrative decisions.
What are the requirements to qualify as a de facto union (união de facto) for IRS taxation purposes in Portugal?
To qualify as a de facto union (união de facto) for IRS taxation purposes under Article 14 of the Personal Income Tax Code, partners must meet specific requirements: (1) cohabitation for more than two years in conditions analogous to marriage as of December 31 of the relevant tax year; (2) neither partner can be married or in another registered partnership; (3) both must be tax residents in Portugal. Once these requirements are met, de facto partners can elect joint taxation under the regime applicable to married taxpayers not judicially separated regarding persons and property. This election must be indicated in Section 6 of Form 3 (IRS declaration) by selecting 'de facto union' as marital status. Joint taxation typically provides tax benefits through income splitting and the married couple's allowance.
Can taxpayers challenge IRS liquidation acts through arbitral proceedings at CAAD?
Yes, taxpayers can challenge IRS liquidation acts through arbitral proceedings at CAAD under Article 2(1)(a) of Decree-Law 10/2011. CAAD has material jurisdiction to review the legality of tax assessment notices, including IRS liquidations, and can declare them illegal if they violate applicable tax law or taxpayer rights. Taxpayers must file arbitration requests within 90 days of notification of the challenged act or, in cases of tacit refusal of administrative complaints, within one year. CAAD arbitration covers disputes up to €10 million in tax value (increased to €30 million for certain cases). The arbitral tribunal examines substantive and procedural legality, can annul illegal assessments, and order refunds with interest. This process offers advantages over judicial courts including speed (typically 6-12 months), specialized tax arbitrators, and reduced formality while maintaining due process guarantees.