IRS Capital Gains Tax: Permanent Residence vs. Fiscal Domicile in CAAD Arbitration 144/2016-T

ARBITRAL DECISION

I – REPORT

A - The Parties and the Constitution of the Arbitral Tribunal

1. A..., taxpayer no. ..., resident at ..., ..., ... Amadora, (hereinafter referred to as "Claimant"), filed a request for the constitution of an Arbitral Tribunal, under the provisions set forth in Article 2, No. 1, paragraph a) and Article 10, Nos. 1 and 2 of Decree-Law No. 10/2011, of 20 January, hereinafter referred to as "RJAT" and Ordinance No. 112-A/2011, of 22 March, to challenge and declare the illegality of the additional personal income tax (IRS) assessment for the year 2014, with no. 2015... and compensatory interest no. 2015..., in the total amount of €26,542.99, seeking its annulment, as well as of the Order of the Honorable Deputy Finance Director, of 2-11-2015.

2. The request for the constitution of the Arbitral Tribunal was filed by the Claimant on 10-03-2016, was accepted by the Honorable President of the Administrative Arbitration Centre (CAAD) on 11-03-2016 and immediately notified to the Tax and Customs Authority. The Claimant opted not to designate an arbitrator, whereby, under the provisions of No. 1, Article 6 of the RJAT. On 04-05-2016 the Deontological Council of the Administrative Arbitration Centre designated an arbitrator for the constitution of the singular Arbitral Tribunal. Thus, in accordance with the provision in paragraph c), No. 1, Article 11, of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 19-05-2016.

On 19-05-2016 an arbitral order was issued, for the Tax and Customs Authority (AT) to submit its response within the legal deadline, in accordance with and for the purposes of the provisions in Nos. 1 and 2 of Article 17 of the RJAT.

1. On 23-06-2016 the Respondent submitted its Response and the respective Administrative Proceedings (AP), which are deemed to be fully incorporated herein. In its response, the Respondent challenged the arguments invoked by the Claimant, set out in the arbitral request filed.

2. On 05-09-2016 an arbitral order was issued in which the date of 15-09-2016, at 10 o'clock, was fixed for the meeting provided for in Article 18 of the RJAT, intended for the hearing of witnesses indicated by the Claimant.

On the date fixed, the meeting took place as scheduled, with the Claimant dispensing with witness B... and requesting the postponement of witnesses C..., D... and E... . The postponement was granted, with the agreement of the Respondent, and by mutual agreement, a second session was scheduled to complete the witness hearing on 14-10-2016, at 10 hours and 30 minutes.

After the completion of the witness hearing, the Tribunal, at the request of the parties, set a period of 15 days, equal and successive, for written arguments.

The parties were invited to send their respective procedural documents to the record in Word format and the Claimant was notified to pay the subsequent arbitration fee. Given the time necessary for the production of witness evidence and the period for submission of arguments, the Tribunal extended the period provided for in Article 21 of the RJAT by two months and designated 10-01-2017 for the delivery of the arbitral decision. All as appears in the respective minutes attached to the record and which are deemed to be reproduced.

The Claimant submitted its arguments on 31-10-2016 and the Respondent on 18-11-2016.

B - THE REQUEST FORMULATED BY THE CLAIMANT

1. The Claimant formulates the present request for arbitral decision, to obtain the declaration of illegality of the additional personal income tax (IRS) assessment, the compensatory interest assessment and the Order that terminated the correction of IRS Form 3 for the year 2014, invoking the following grounds:

a) Defect of form due to lack of reasoning, in that the assessments notified to the Claimant do not explain the grounds that determined their issuance, limiting themselves to indicate a set of values without any identification as to their nature and origin, totally imperceptible to a normal recipient;

b) Defect of form due to omission of essential formality by violation of Article 60, No. 1 of the General Tax Law (right to prior hearing).

c) Purely as a precaution, should it be understood that the Order of the Deputy Finance Director of the Finance Department of Lisbon (by delegation), issued on 2-11-2015, has any relationship with the acts of IRS assessment and compensatory interest impugned, the Claimant invokes violation of Article 50 of the Code of Tax Procedure and Process (CPPT) and Article 72 of the General Tax Law (LGT) and, finally, violation of law, by error as to the presuppositions for the application of Article 10, No. 5 of the Personal Income Tax Code (CIRS).

Whereby it concludes that the impugned assessments are illegal, requesting their annulment, with the legal consequences, including payment by the AT of compensatory interest.

C – THE RESPONSE OF THE RESPONDENT

1. In its response the AT seeks to uphold the legality of the assessments and the lack of merit of the request. It alleges in summary, regarding the defect of form, that it results from the entire exposition of grounds that substantiate the arbitral request filed that the Claimant understood very well what the reasons for the correction made were, all the more so since it accompanied the tax inspection procedure that preceded the issuance of the tax assessments and compensatory interest. Within the scope of this procedure the Claimant was notified to exercise its right to prior hearing, which it actually exercised, and therefore cannot be unaware that the Order of 2-11-2015 has a relationship with the assessments issued, since it reflects the final decision of a procedure that culminated with the issuance of said assessments. Thus it does not make sense, in the view of the Respondent, the allegation of the defects of form invoked by the Claimant.

An identical conclusion results regarding the alleged violation of Articles 50 of the CPPT and 72 of the LGT, in that the reality that proves to be relevant for the case at hand is demonstrated by documentary evidence, and, being so, of no relevance does it appear to hear witnesses. The instruction of the procedure is the responsibility of the AT and it understood that there was no interest in witness hearing, because the facts relevant to the decision are demonstrated by documents attached to the administrative proceedings. The relevant facts being proven by document, the production of witness evidence is not justified, which is a possibility that the instructing body uses if and when it considers it necessary. That was not the case in the present proceedings.

Finally, regarding the defect of violation of law, it also understands that this does not occur, given that the correction made, by virtue of disregarding the reinvestment, stems from the circumstance that it was established that the Claimant could not benefit from Article 10, No. 5 of the CIRS, in that its tax residence was different from the address of the alienated property which the Claimant declared as corresponding to its permanent primary residence. It was the Claimant itself who voluntarily changed its tax residence, whereby, the legal presuppositions for the application of No. 5 of Article 10 of the CIRS are not met. Thus, the Respondent concludes that the corrections made correspond to the correct interpretation and application of law, that the impugned assessments do not suffer from any illegality, and the present arbitral request should be dismissed.

II - PROCEDURAL REQUIREMENTS

1. The Arbitral Tribunal is regularly constituted.

2. The parties have legal personality and capacity, are legitimate and are legally represented (cf. Articles 4 and 10, No. 2 of the RJAT and Article 1 of Ordinance No. 112/2011, of 22 March).

3. The proceedings do not suffer from vices that would invalidate them.

III – FACTS

A - Facts Established

1. As relevant factual matter, the present tribunal establishes the following facts as certain:

• The Claimant acquired on 29 December 1993, for the price of 1,649,600.00 escudos, corresponding to €8,228.17, the property located at ..., ..., Lisbon;

• For this acquisition the Claimant resorted to bank credit, as results from the Copy of the public deed and the Loan Contract attached to the record;

• The Claimant acquired this property, where she had already resided since 1980, as a tenant, under a lease agreement concluded with the Institute of Financial Management of Social Security;

• The Claimant continued to reside in this property until 2014, raised her two daughters there, receives her family and friends there, cares for her granddaughter when necessary, frequents the café, the supermarket, the health center, and other points of interest, facts acknowledged by long-time neighbors, as resulted from the witness evidence produced;

• After retiring, the Claimant began to go with her companion on the professional trips he made to Sines and Barreiro, where they spent the week, in a house owned by the companion's parents, located in Barreiro;

• On 23 March 2010 the Claimant, upon obtaining her Citizen Card, chose to indicate her address at ..., ..., ..., ..., Barreiro, for practical reasons related to the receipt of correspondence;

• From then on, in relation with the AT, this came to be considered as the Claimant's tax residence;

• The Claimant, from 2010 until at least 2013, lived with her companion, during the week in Barreiro, on weekends they returned to Lisbon, to the Claimant's residence at ..., identified in a), which was always her family home and center of interests;

• During this entire period, during the week she normally resided with the companion in Barreiro, but never ceased to have her house in Lisbon, where she often remained during the week to provide assistance to her granddaughter, in which all the furniture, her clothes and she kept active the contracts for the supply of water, gas and electricity, as results from documents nos. 11, 12 and 13 attached to the arbitral request;

• She also maintained, always and continuously, her status as a user at the health center of Alvalade and the General Medicine Center of the ... Clinic of Alvalade, in accordance with documents nos. 14 and 15 attached to the arbitral request;

• Since February 2013, after the cessation of her companion's employment relationship, which he exercised in the Barreiro region, both came to live in Lisbon, in the Claimant's residence at ..., as they no longer needed to travel to Barreiro;

• In April 2014 she sold the property at ..., which needed works and had no elevator, to purchase another dwelling, more suited to her needs;

• At the time of the sale of the property the Claimant had her tax domicile at ..., ..., ..., Barreiro;

• The Claimant sold her property, the bank loan contracted for its acquisition already being fully paid, for €145,000.00;

• Already in 2015 the Claimant purchased a new property, for her permanent primary residence, the autonomous fraction designated by the letter "D", located at ..., no. –..., ..., in Amadora;

• The Claimant reinvested the amount from the aforementioned sale in the acquisition of her new permanent primary residence in Amadora;

• At the time of the alienation of the property the Claimant's tax domicile mentioned in the public deed was that of ..., ..., ..., Barreiro, as stated in the public deed attached to the Administrative Proceedings;

• Already in 2015 the Claimant changed her tax residence to her new address in Amadora;

• The Claimant filed her IRS Form 3 return for the year 2014, identified with no. ..., in which she indicated the intention to reinvest in Annex G, Table 5, field 506, which resulted in the issuance of IRS assessment no. 2015... of 2 July 2015, in the amount of €302.50, payment of which was made on 31 July 2015;

• On 13 July 2015 the Claimant was notified by the AT, informing her that her IRS return for the year 2014 was selected for examination, in that "the situation described as alienation of unreported property or need for verification of the values of expenses, value of alienation, date of acquisition of alienated property or allocation to professional activity."

• The Claimant provided the clarifications requested by the AT, within the deadline set for that purpose;

• Subsequently, the Claimant was notified by official letter no. ..., of 28 July 2015, to exercise the right to prior hearing, within a period of 15 days, regarding the AT's intention to proceed with the correction of the values declared in Annex G of IRS Form 3, disregarding the intention to reinvest manifested by the Claimant there, in order that it not be treated as property corresponding to her tax residence;

• The Claimant exercised her right to prior hearing, as stated in document no. 6 attached to the arbitral request;

• By Official Letter no. ..., of 15 December 2015, the Claimant was notified of the final decision of the AT, under which, by Order of 2 November 2015, from the Deputy Finance Director of the Finance Department of Lisbon, it was decided that "Regarding the lifting of the presumption invoked pursuant to No. 11 of Article 13 of the CIRS only from 2015 may be invoked, since until 2014, the legislation in force at the time, the tax residence is assessed by the address as the permanent primary residence and the existence of contracts with third parties, by itself, does not justify the permanent residence, which would possibly be assessed by consumption. Thus, the corrections set forth in the draft decision are maintained."

• On 29 December 2015 the Claimant was notified of the additional personal income tax (IRS) assessment and the respective compensatory interest assessment and on 30 December 2015 of the account reconciliation statement;

• The present arbitral request, for the annulment of the assessments, was filed on 10-03-2016.

B - FACTS NOT ESTABLISHED

1. With relevance to the decision, there are no facts that should be considered as not established.

C - SUBSTANTIATION OF THE FACTS ESTABLISHED

1. The facts, described above, with the exception of the facts contained in paragraphs d), e), h), i) first part; k) and l) – second part, were established as proven based on the documentary evidence that the parties submitted to the present proceedings, the Claimant together with the arbitral request filed and the Respondent with the submission of the respective administrative proceedings.

With reference to the facts contained in paragraphs d), e), h), i) – first part; k) and l) – second part, the Tribunal formed its conviction based on the witness evidence produced, assessing the consistency of the testimony, the unanimous way in which all witnesses reported the facts and their credibility. Particular assessment was given to the testimony of witness F..., real estate agent of ..., who had direct involvement in the sale of the property at ... and also in the search for new accommodation for the Claimant, although she did not complete this second transaction. She testified with total impartiality and her professional quality convinced the Tribunal of the essential factuality underlying the present proceedings. As for the remaining witnesses, all were quite consistent in the way they reported knowing of the circumstances that determined, over some years, that the Claimant traveled during the week to Barreiro, but all confirmed that even so, the essential center of the Claimant's family life was, without doubt, Lisbon. Notable are the testimonies of witnesses D..., which due to her quality as a neighbor, resident in the same district, and E..., as a resident in the same district for many years, neighbor of the Claimant, friend of the family and by various functions exercised there, namely on the residents' commission and as a local representative, revealed knowledge of the facts that the Tribunal considered highly credible. All, without exception, have known the Claimant for many years and knew the reasons why between 2010 and until the beginning of 2013 the Claimant spent many weeks in Barreiro with her companion, as she was retired and he continued to work in that region. And, because of this, so as not to be surprised by correspondence that would not be received or received in a timely manner, she provided the Barreiro address for official correspondence purposes, namely to the Finance Department, Social Security, among others.

It should be noted that, regarding the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, with the duty instead to select the facts that matter for the decision and to distinguish the established facts from those not established, as results from Article 123, No. 2 of the CPPT and Article 607, No. 3 of the Code of Civil Procedure (CPC), applicable by force of Article 29, No. 1, paragraphs a) and e), of the RJAT. Thus, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of law (cf. Article 596, applicable by force of Article 29, No. 1, paragraph e), of the RJAT).

IV – THE LAW

1. With the factual matter established as above stated, it is important to address the questions of law raised by the parties, beginning with the defects of form invoked by the Claimant. As a rule, the tribunal observes the order set out by the Claimant in the knowledge of the questions to be decided, although this rule needs to be balanced against the provisions of law. Thus, it results from Article 124 of the CPPT, applicable by force of Article 29, No. 1, paragraph a), of the RJAT, the following:

"1. In the decision, the tribunal shall assess priority those vices that lead to the declaration of non-existence or nullity of the impugned act and, thereafter, those vices alleged that lead to its annulment.

In the aforementioned groups the assessment of the vices is made in the following order:

a) In the first group, that of vices whose occurrence determine, according to the prudent criteria of the judge, more stable or effective protection of the offended interests;

b) In the second group, that indicated by the impugner, whenever this establishes among them a relationship of subsidiarity and no other vices are alleged by the Public Ministry or, in other cases, that fixed in the preceding paragraph."

1. This legal provision establishes a priority for the knowledge of the vices of the impugned act. Thus, those vices whose occurrence would determine, according to the prudent criteria of the judge, more stable or effective protection of the offended interests should be known first, which leads us to question the understanding to be given to this criterion. According to case law of the Supreme Administrative Court (STA), this principle will lead to giving priority to the knowledge of substantial vices of the act over formal vices, since the latter do not prevent the renewal of the act, and it is certain that this seems to be the understanding that favors the most effective protection of offended interests.

2. Citing explicitly some case law of the STA, which synthesizes the understanding of this Superior Court, it results, among others, from the decision delivered on 17.11.2010,[1] the following: "(...) the case law of this Supreme Court has repeatedly explained, within the framework of the interpretation of the normative content of the analogous rule set forth in Article 57 of the Law on the Organization of Administrative Tribunals, that although the most effective protection of the interests of the appellant requires, in principle, the priority knowledge of substantial or fundamental vices in relation to formal vices, namely the vice of lack of reasoning (given that the verification of this does not prevent the renewal of the act with the same legal configuration, purged, naturally, of the vice that led to the annulment)."

It results from this case law of the STA that such rule is not absolute, since it can happen that, for example, only the reasoning of the act can reveal fundamental vices through the clarification of the factual and legal framework on which the impugned act was based. This means that, when the vice of lack of reasoning is invoked, should this actually be found to exist, the Tribunal may not be in a position to proceed with the knowledge of fundamental vices, for not having all the available and essential elements to do so. The precedence of the defect of form may be justified when the inquiry into the specific motivation of the act proves to be indispensable to the control of the fundamental vices (substantive).

1. It is concluded, therefore, that the most effective protection of the interests of the appellant may pass through the priority knowledge of defects of form, specifically the vice of lack of reasoning, whenever this proves to be indispensable to the discovery of the motivation of the act. In other words, the priority knowledge of the defect of form will no longer be required, whenever the alleged lack or insufficiency of reasoning is found, in the specific case (and the assessment must obviously be case-by-case) irrelevant to the assessment and possible occurrence of the vice or vices of substance that have been specifically alleged. In the specific case of the present proceedings, none of the vices invoked by the Claimant is susceptible to generating nullity of the act. As for the invoked defects of form that the Claimant invoked, namely lack of reasoning and omission of essential formalities, it must be said that it is not evident that they occur in the specific case. In fact, from the analysis of the elements contained in the record, namely of the procedure that preceded the final decision that led to the impugned assessments, it is clear the reason that led the AT to operate the corrections to the IRS return. Moreover, even if some doubt were to persist, it could always be said that, following the aforementioned case law, maximum effectiveness in the protection of the Claimant's interests would require, in principle, the priority knowledge of the vice of violation of law in relation to the defects of form.

Furthermore, in the case under examination, having reviewed the record and all the documentary process such as the AP and with the arbitral request, it clearly results the reason why the AT considers that the Claimant does not benefit from Article 10, No. 5 of the CIRS, and that is, exclusively, that which stems from the fact that her tax domicile, at the time of the sale of the property located at ..., does not coincide with this address, but rather with a residence declared by the Claimant herself, located in Barreiro. This same is extracted from the analysis of the notification for the exercise of her right to prior hearing and, finally, from the content of the order of 2-11-2015, which incorporates the final decision that precedes the issuance of the assessments, delivered by the Deputy Finance Director of the Finance Department of Lisbon, in which it was decided that:

"Regarding the lifting of the presumption invoked pursuant to No. 11 of Article 13 of the CIRS only from 2015 may be invoked, since until 2014, the legislation in force at the time, the tax residence is assessed by the address as the permanent primary residence and the existence of contracts with third parties, by itself, does not justify the permanent residence, which would possibly be assessed by consumption. Thus, the corrections set forth in the draft decision are maintained." (emphasis ours)

Thus, the Claimant may not agree with this reasoning, but certainly she understood it well, as this results from the content of the statement she made at the prior hearing and the documentation attached to the record to rebut the presumption and, finally, by the perception of the need to produce witness evidence. The reasons for the AT's disagreement regarding these matters stem from the interpretation it itself makes of the applicable norms and the impossibility of rebutting the presumption, as results from the order transcribed above. This is, truly, the question that opposes the parties in the present arbitral request and which must be decided. Non-agreement with the grounds or motivation of the act, with the interpretation of the applicable legal norms of reference and with the assessment of evidence, allows the conclusion that we are in a position to know of the substantial vices alleged, that is, of the possible violation of law by error in the factual and legal presuppositions underlying the application of the provision contained in Article 10, No. 5 of the CIRS.

1. As stated in the established factual matter, embodied in the documentary analysis contained in the AP and the documents attached with the arbitral request and in the witness evidence produced, it is found that the central question that opposes the Claimant to the AT is whether or not the legal presuppositions are met for the Claimant to be able to benefit from Article 10, No. 5 of the CIRS. This is, therefore, the fundamental question of law that the Tribunal will have to analyze, thus ensuring the full interest of the Claimant. Despite this, and in summary it will always be said that the alleged formal vices do not occur.

A) Regarding the Defects of Form alleged by the Claimant:

1. It results from the tenor of the final decision that was communicated to her by letter of... of 15-12-2015, clearly evident that the disregarding of the reinvestment resulted, exclusively, from the fact that the tax domicile declared by the Claimant does not coincide with the address of the alienated property. Now, it does not appear that the vice of lack of reasoning is found, already because the AT justifies, albeit in a succinct and linear manner, the corrections made, which result from its interpretation regarding the concept of tax domicile and permanent primary residence. Therefore, it cannot be said that no reference was made to the factual and legal presuppositions on which the AT's decision was based, which disregarded the reinvestment with a justification objectified in the final decision notified to the Claimant. It is well-established that reasoning is a legal requirement that is imposed for any administrative or tax act, being a tax assessment a type of tax act in relation to which this requirement is imposed with maximum rigor, given the effects it produces in the legal sphere of the taxpayer. It is also worth recalling that it is a constitutional requirement by force of the provision in Article 268, No. 3 of the Constitution of the Portuguese Republic (CRP), reaffirmed in Article 77 of the General Tax Law (LGT).[2] From this latter provision itself results that, although the duty of reasoning is not restricted solely to acts unfavorable to the taxpayer, in relation to these a greater density is required. It is today well-established in national doctrine and case law, including arbitral,[3] that the legally required reasoning must meet the following characteristics:

a. Officiality: must always proceed from the initiative of the administration, with reasoning on request not being admissible;

b. Contemporaneity: must be coeval with the practice of the act, with no deferred reasoning or reasoning on request being permitted;

c. Clarity: must be comprehensible to an average recipient, avoiding polysemic or deeply technical concepts;

d. Completeness: must contain all essential elements that were determinant of the decision taken, this characteristic unfolding into the duty of justification (legal norms and factuality – domain of legality) and the duty of motivation (domain of discretion or opportunity, when an assessment is needed).

1. The duty of reasoning aims to enable interested parties to understand the reasons that led the administrative or tax authority to act or decide, so as to convince its recipient of the legality underlying it, enabling it to understand its raison d'être and to be able to consciously assess its acceptance or its impugning. This very thing has been asserted incessantly by the case law of the superior courts, reiterating that the reasoning must provide the recipient of the act with the reconstitution of the cognitive and evaluative path traveled by the entity that practiced the act, in order to clearly reveal the reasons that led it to that concrete decision. It has also been recognized, equally by doctrine and case law, that this requirement of reasoning must be balanced and moderated, being considered satisfied by the succinct and clear exposition of the facts and law grounds that motivated the decision, being able to consist of a declaration of agreement with the grounds of prior opinions, information or proposals (reasoning by relation or by referral), provided that these are integrated in the final decision, duly notified to the recipient.[4] In the case of the present proceedings, the final decision of the procedure that led to the assessment complied with these minimum requirements of reasoning.

2. Also regarding the alleged omissions of essential formalities, this Tribunal understands that they do not occur. In fact, from the analysis of the AP and from the tenor of the arbitral request itself and attached documentation, it results that the essential formalities of the procedure were complied with, highlighting the exercise of the right to prior hearing, which the Claimant herself attaches as a document to the present proceedings. Thus, the Claimant's allegation in this matter is not supported.

3. Regarding the violation of the provisions contained in Articles 50 of the CPPT and 72 of the LGT, by virtue of the non-hearing of witnesses, it will always be said that from this no omission of invalidating formality will result. This because, as the AT well alleges, the administration benefits from the possibility of assessing the need to conduct witness evidence. Now, following the reasoning of the AT, one perceives the reason why it did not conduct the probative diligence, given that, in its understanding, the address declared by the Claimant not coinciding with her tax domicile, nothing more would be necessary to form its conviction, once the AT considers it to be an irrebuttable presumption, as extracted from the substantiating Order already transcribed above. Whereby, once more, what matters is to assess whether this interpretation and application of law, by the author of the assessment act, is or is not in accordance with law.

For all that is left stated, and without further considerations, it remains to address the vices of violation of law alleged by the Claimant.

B) The Substantive Issue: the verification of the factual and legal presuppositions for application of Article 10, No. 5 of the CIRS:

1. Advancing to address the substantive issue that truly constitutes the question to be decided in the present proceedings, it is important to evaluate whether, at the time of the alienation of the property, the Claimant possessed her permanent primary residence in the alienated property. Intimately connected to this question, one must assess whether the tax domicile declared by the taxpayer to the AT constitutes an irrebuttable presumption that that address corresponds to the permanent primary residence of the taxpayer. The answer to these questions is fundamental to assess the verification of the legal requirements for the taxpayer to be able to benefit from the exclusion from taxation, by reinvestment of the realization value of permanent primary residence, provided for in Article 10, No. 5 of the CIRS.

2. Let us look at the legal norms applicable to the solution of the case. We are in the presence of two determinant concepts: that of tax domicile and that of permanent primary residence. These are not identical concepts. According to No. 1 of Article 19 of the LGT, the tax domicile of the taxpayer is, unless otherwise provided,

"a. For natural persons, the place of habitual residence;

(...)"

"2 - The tax domicile also includes the electronic mail box, as provided for in the public service of electronic mail box.

3 - It is mandatory, in accordance with the law, to communicate the domicile of the taxpayer to the tax administration.

4 - Change of domicile is ineffective while not communicated to the tax administration.

5 - Taxpayers resident abroad, as well as those who, although resident in the national territory, are absent from it for a period exceeding six months, as well as legal entities and other entities legally assimilated that cease activity, must, for tax purposes, designate a representative with residence in the national territory.

(...)"

"8 - The tax administration may rectify ex officio the tax domicile of taxpayers if such stems from the elements at its disposal."

1. As results from the tenor of the transcribed norm, the concept of tax domicile is a formal concept, which may or may not coincide with the permanent primary residence of the taxpayer, as the predominant interest of the norm is to ensure that the taxpayer, whatever the specificity of his or her personal or professional life, in the country or abroad, is quickly and effectively reachable and notified of all acts and for all fiscally relevant purposes. Therefore, the concept also includes the concept of electronic mail box and, in the case of non-residents, requires the designation of a tax representative. It is already clear that this concept will not, in many cases, coincide with that of permanent primary residence. By way of example alone, professional reasons may require the taxpayer to be absent on working days from the area of his or her residence, as frequently happens with teachers, judges, doctors, nurses, engineers and many other professionals who, by virtue of this, may prefer to indicate their tax domicile at the seat of their place of work to more easily be contacted, notified and receive their correspondence, especially registered, which they would be deprived of receiving or even of collecting at the post office by notice, as this can only occur on working days and during the business hours of the respective services. It is this exemplary situation, in all respects identical to that which led the Claimant in the present proceedings to indicate the Barreiro address, when she requested her new personal identification card (Citizen Card), because at that time she was already retired and for valid personal reasons, perfectly explained and proven in the record, she spent working days outside of Lisbon, with her companion, given that he still worked and his place of work was Barreiro, sometimes in Sines, but in any case it was closer to remain in Barreiro than in Lisbon.

But the fact that someone, for reasons of a personal or professional nature, finds themselves temporarily, or even regularly, during working days, living in another place different from their habitual residence, does not mean that this ceases to be so or that the provisional or work address becomes confused or even presumed to be their permanent primary residence.

1. The law does not provide a concept of "permanent primary residence," which is not found in a legal definition, but we can arrive at this concept by resorting to norms of our legal system that help us to integrate the concept. It is a concept, as is well-known, much used in the context of personal income tax (IRS), with respect to the taxation of real estate capital gains. Thus, the legislator delimited negatively the field of application of the IRS, through the expressed norms of exclusion from taxation enshrined in Nos. 5 and 6 of Article 10 of the Personal Income Tax Code.

2. Having arrived here, it appears important and relevant for the decision to delimit the meaning and scope of the aforementioned legal provisions, to assess what should be understood by permanent primary residence. Let us see, therefore, what results from Article 10 of the CIRS, in the wording in force at the time of the taxable event (2014):

"No. 1 – Capital gains are gains obtained which, not being considered professional or business income, income from capital or real property income, result from:

a. Onerous alienation of real rights over real property (...)

(...)"

"No. 5 - Gains from the onerous transfer of real property intended as permanent primary residence of the taxpayer or of his or her family unit are excluded from taxation, under the following conditions:

a) If, within 36 months from the date of realization, the realization value, deducted from the amortization of any loan contracted for the acquisition of the property, is reinvested in the acquisition of the ownership of another property, land for the construction of property, or in the construction, expansion or improvement of another property exclusively for the same purpose situated in Portuguese territory or in the territory of another State member of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters;

b) If the realization value, deducted from the amortization of any loan contracted for the acquisition of the property, is used in payment of the acquisition referred to in the preceding paragraph provided that it is effected in the 24 months preceding;

c) For the purposes of the provision of paragraph a), the taxpayer must manifest the intention to proceed with reinvestment, albeit partial, mentioning, in the tax return for the year of alienation, the value he or she intends to reinvest;

"No. 6 - There shall be no place for the benefit referred to in the preceding number when:

a) Where reinvestment is in the acquisition of another property, the acquirer does not allocate it to his or her residence or that of his or her family unit, until six months after the end of the period in which reinvestment must be effected;

b) Where reinvestment is in the acquisition of land for construction, the acquirer does not commence, except for reasons attributable to public entities, construction within six months after the end of the period in which reinvestment must be effected or does not request the inscription of the property in the property register within 24 months from the date of commencement of works, and must, in any case, allocate the property to his or her residence or that of his or her family unit by the end of the fifth year following that of realization;

c) Where reinvestment is in the construction, expansion or improvement of property, works are not commenced within six months after the end of the period in which reinvestment must be effected or the inscription of the property or alterations is not requested in the property register within 24 months from the date of commencement of works, and must, in any case, allocate the property to his or her residence or that of his or her family unit by the end of the fifth year following that of realization."

1. Thus, following the provisions of the transcribed norms, the cumulative requirements necessary for the tax exclusion regime to be applicable are as follows:

a) The alienated property must be the permanent primary residence of the alienating taxpayer or of his or her family unit;

b) The reinvestment in the acquisition of the new residence (apartment or dwelling) must occur within 36 months, counted from the date of alienation of the family home, or in the 24 months preceding that same date;

c) The realization value to be reinvested, as a rule, corresponds to the value for which the property is transferred, except in cases where a loan intended to acquire the property now alienated has been contracted, in which the realization value to be reinvested corresponds to the value of transfer of the alienated property deducted from the amount necessary to amortize said loan;

d) The realization value must be reinvested in the acquisition of the ownership of another property, land for the construction of property, or in the construction, expansion or improvement of another property exclusively for the same purpose (permanent primary residence of the taxpayer or of his or her family unit);

e) The acquired property must be located in Portuguese territory or in the territory of another State member of the European Union or of the European Economic Area, provided that, in the latter case, there is an exchange of information on tax matters;

f) The property must be allocated to residence of the acquirer or of his or her family unit within six months following the end of the period in which reinvestment must be effected.

1. Now, in the case of the proceedings only the first of the presuppositions is at issue, precisely the first, that is, whether the alienated property is to be considered as permanent primary residence. As for the remaining presuppositions, it is well-established that they are met in the concrete case. As we have already seen, Article 19 of the LGT, when referring to that tax domicile corresponds to habitual residence, does not establish an irrebuttable legal presumption, as the AT claims. First of all because irrebuttable presumptions cannot be established in matters of tax incidence, as results from Article 73 of the LGT. Whereby the substantiating order of the impugned tax acts itself suffers, immediately, from error as to the fundamental legal presupposition for the application of the norm.

2. There may be divergence between habitual residence and permanent primary residence, just as tax domicile does not always coincide with residence in the sense of the place where the person has his or her dwelling. An identical conclusion is extracted from Article 82 of the Civil Code, which admits the possibility of residence or domicile in different places. In the case of the proceedings the Claimant never had any other residence or permanent primary residence other than her house in Lisbon, located at ... . What she did have, yes, was a second, temporary residence (from 2010 to 2013) in Barreiro, for personal and professional reasons, but even during this period of time her center of interests continued to be Lisbon, where her family home was located, where she spent her weekends, where she remained sometimes during the week to provide support to the family, namely to grandchildren when they were ill, where she had her family medicine health center, her lifelong friends and neighbors. She always maintained the contracts for the supply of essential public services active, with consumption, albeit reduced, as she spent her weekends there. She always maintained her house furnished and prepared to return to reside there with a character of permanence when her companion retired or ceased to work as occurred in 2013. To all this is added the fact that at the time of the alienation of the property, she was residing with a character of permanence, again, in her house in Lisbon. Reason for which they felt the need to reconsider their option for another dwelling, since that one needed works and was located on the third floor without an elevator, which posed some problems, especially for the future given the Claimant's age and needs and only for purposes of correspondence, it truly never corresponded to her permanent primary residence, nor paid rent as it was a location used for an office and with minimum comforts to sleep and take meals.

3. Facing this factuality, it remains to analyze the understanding that doctrine and case law have embraced on this question. These also conclude that there is no necessary identity between "tax domicile" and "permanent residence" admitting that the taxpayer can prove his or her permanent residence by presenting "justifying facts" that he or she fixed there in a usual and permanent manner the center of his or her personal life. In this sense, Decision No. 04550/11 of the Central Administrative Court of the South, deepened the concepts in confrontation and concluded that: "The concept of tax domicile established in the provision of Article 19 ° of the LGT, namely in its No. 1 is a special domicile that refers to a determined place for the exercise of rights and the fulfillment of duties provided for in the tax norms which, being special, (...) although, ideologically and in its essence the provision of that first legal clause connects with the necessity of the taxpayer and the Tax Administration being in contact whenever necessary for the exercise of their respective rights and duties, in homage to the principle of collaboration inherent in Article 59 ° of the LGT."

4. Tax domicile is, thus, a special domicile, by which is exposed in a determined place the exercise of rights and the fulfillment of duties provided for in the tax norms.[5] Following, still, the Decision cited above, concludes the Court that in accordance with Article 19, No. 3, of the LGT, change of domicile is ineffective while not communicated to the AT, but according to Article 43, No. 2 of the CPPT, the norm that change of domicile is not opposable to the AT if not declared to it, providing its No. 3 that communication only produces effects if the interested party makes proof of having already requested or obtained the updating of the domicile or seat in the taxpayer's fiscal number. That is, the consequence for non-fulfillment of this obligation is the non-opposability to the AT of the lack of receipt of any notice or communication, without prejudice to what the law provides regarding the obligation of service and notification and the terms in which they must be effected. From this, returning to the beginning of our reasoning, it is concluded that the concepts of tax domicile and permanent primary residence are not the same thing, do not have the same meaning and scope.

5. Nevertheless, it constitutes a presumption that the habitual residence of the taxpayer will be situated at that address, a presumption that may be rebutted. Certain it is that, being the first presupposition for the application of the exclusion from taxation provided for in No. 5 of Article 10, the requirement of "permanent primary residence" that integrates the alienated property, we have to refer to the factuality proven in the present proceedings to conclude. In fact, the presupposition "permanent primary residence" is the one that will determine the exclusion from taxation in case of alienation of the property, at least during the period legally stipulated for purposes of reinvestment, in accordance with Nos. 5 and 6 of Article 10 of the Personal Income Tax Code. Now, at the time of occurrence of the fact (alienation of the property located at ... – Lisbon) her permanent primary residence was the one corresponding to this address in Lisbon. Her tax domicile is that which, by oversight, was still maintained in Barreiro, a situation that only changed when she purchased the new residence in Amadora.

6. It remains, by force of the non-coincidence between tax domicile and permanent primary residence referred to in No. 5 of Article 10 of the Personal Income Tax Code, to assess whether the Claimant managed to prove that her permanent primary residence corresponded to the location of the alienated property, in accordance with and for the purposes of No. 5 of Article 10 of the CIRS.

7. Given the factual matter proven in the present proceedings, the Tribunal concludes that the Claimant demonstrated, with facts evidenced, some in documents and others proven by the witness evidence produced, that the house located in Lisbon, at ... was, effectively, her permanent primary residence. Corresponding this concept to a real, historical and complex situation, from the individual and family point of view, such as sleeping, eating, socializing, remaining with family (in the case with the companion, daughters and grandchildren), and others that respect the location in question, there is no doubt that the Claimant proved to be there, in that location, in that property her permanent habitual residence, of her entire life, despite the fact that for a brief period of time comprised between 2010 and 2013 she spent part of her time in Barreiro. As results from the case law of our superior courts, the "concept of 'permanent primary' residence should be understood in the sense of habituality and normality and not properly in the sense of absolute chronological stay without any break in continuity."[6]

8. For this purpose, the acts or facts that demonstrate the link of the taxpayer to the property are not limited to the link to the tax jurisdiction in which the property is located or to the correspondence of the residence with the tax domicile registered in the finance services. These elements are mere indications that the beneficiary intends to fix or fixed his or her real and effective residence in the property and in it fixed the center of his or her personal life, which is materialized through certain physical conditions such as the existence of furniture, contracts for the supply of water, gas and electricity, the actual legal situation of the property (declarations, inscriptions in registers, etc.) and the social life of the taxpayer, his or her integration in the environment, knowledge of and by neighbors, the place of voting, his or her frequency at common places (schools, supermarkets, etc). Now, in the case of the proceedings the documentary evidence already strongly suggested that the habitual and permanent residence of the Claimant was the one corresponding to the alienated property. But the witness evidence was, equally, determinant for the full clarification of any doubts that could persist. The witnesses heard, with emphasis on the neighbors and the real estate mediator, left no doubt to the tribunal that there was and always was the center of the Claimant's personal and family interests.

9. To this purpose, Professor Alberto dos Reis's teaching is recalled, cited in the Decision of the Supreme Court of Justice of 12 February 2009, which equated permanent residence with habitual and stable residence, considering, however, that it is not required that the person always live in a house, being able to have another where they spend one, two or three months a year, for example a country house or beach house where they install themselves during the summer. It is, however, essential, "that the center of stable and durable permanence be located in a determined place, where his or her home is installed, his or her logistics organized, where he or she socializes, and from which, whenever absent, does so on a transitory or temporary basis, and with the purpose of returning with stability, as his or her domestic economy and family unit are found there."[7]

10. Finally, it is important to note that this case law came to be reaffirmed in recent Decisions, which are invoked by the AT in its response, namely the Decisions of the STA of 9-7-2014, in case no. 01146 and of 17-09-2014, in Case 0158/13, as well as in Decision STA of 18~02~2016, in case no. 08826/15. The common question to all is whether the alienated property was effectively (or not) permanent primary residence, in the sense that the interested party resided there (if not always, at least most of the time) and, above all, that it corresponded to the center of his or her family and social interests. In the Decisions cited by the AT it results, equally, that the demonstration of such factuality is a matter of proof, which may or may not be achieved. In the present proceedings, that proof was achieved. And it should not be said that in the public deeds executed, of alienation and purchase of the new residence, the Claimant declared her residence ..., Barreiro, because this mention has, precisely, underlying her tax domicile and not the address corresponding to the Claimant's permanent primary residence, for decades, first as a tenant of the Institute of Financial Management of Social Security, later as owner, which she was and in which she resided until its alienation in 2014. It should be added that, on this date (of alienation), the Claimant was already residing, with permanence, at this same address, as her companion no longer worked in Barreiro and had also returned to Lisbon.

11. In truth, facing the divergence between tax domicile and permanent primary residence, all that the Claimant had to do was prove the facts demonstrating that that address corresponded to her permanent primary residence, in accordance with the rules of burden of proof. Thus, it results from Article 74, No. 1 of the LGT that "the burden of proof of the facts constituting the rights of the tax administration or of the taxpayers rests upon whoever invokes them". Article 342 of the Civil Code also determines in its No. 1 that "it is incumbent on he who invokes a right to make proof of the facts constituting the right alleged," determining No. 2 of the same article that "The proof of the facts preventing, modifying or extinguishing the right invoked is the responsibility of he against whom the invocation is made."

12. It is, therefore, the understanding of this Tribunal that it is the responsibility of the taxpayer, now Claimant, to prove permanent habitual residence and that she achieved this demonstration by rebutting the presumption of correspondence between tax domicile and permanent primary residence. In fact, in light of the facts established as proven, the Tribunal concludes that, until the alienation of the property, the Claimant managed to prove that in it she engaged in all the typical acts of a permanent and habitual residence. If for a period of some years she interspersed this with another residence, for personal reasons, the truth is that she never ceased to refer to her Lisbon address as corresponding to her permanent primary residence. It is still relevant that, even this situation, which in no way can harm her, had already ceased in February 2013, from which date she again resided uninterruptedly in her Lisbon address, corresponding to the alienated property. It is certain that she could have changed her tax domicile, but the Claimant's behavior in not having done so reflects only ignorance and naiveté that cannot harm her, all the more so that, in complete good faith, she indicated as tax domicile a "borrowed" address, temporary, out of concern for the receipt of her tax correspondence.

13. The fact that her tax domicile was different since 2010 constitutes a rebuttable presumption in the terms already explained above. The Claimant managed to rebut this presumption, whereby the impugned acts are based on error as to the factual and legal presuppositions underlying the application of No. 5 of Article 10 of the CIRS, and the reinvestment should be considered, for all legal purposes, effectively proven in the acquisition of the Claimant's new permanent primary residence.

Thus, with all the presuppositions set forth in No. 5 of Article 10 of the CIRS being met, the present arbitral request should be granted in its entirety.

Regarding compensatory interest, it is added:

1. The Claimant combines, with the request for annulment of the tax acts subject of the present proceedings, the request for condemnation of the AT for the payment of compensatory interest. In light of the merit of the annulment request, the reimbursement to the Claimant of the amounts paid should be made with respect to the annulled tax acts. In the case at hand, it is manifest that the illegality of the assessment acts, whose amount the Claimant paid, is attributable to the AT, which, on its own initiative, engaged in them incurring in error as to the factual and legal presuppositions underlying the legal provision.

2. Consequently, the Claimant is entitled to compensatory interest, in accordance with Articles 43, No. 1 of the LGT and 61 of the CPPT. Compensatory interest is due from the date of the payments that prove to be made, and calculated based on the respective value, until its full reimbursement to the Claimant, at the legal rate, in accordance with Articles 43, Nos. 1 and 4, and 35, No. 10 of the LGT, 61 of the CPPT and 559 of the Civil Code and Ordinance No. 291/2003, of 8 April (without prejudice to any subsequent changes in the legal rate). In harmony with the provision in paragraph b) of Article 24 of the RJAT the arbitral decision on the merit of the claim that is not subject to appeal or impugning binds the tax administration from the end of the deadline provided for appeal or impugning, and this must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for spontaneous execution of the decisions of the judicial tax courts, "reestablish the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the necessary acts and operations for that purpose," which is in line with the provision in Article 100 of the LGT [applicable by force of the provision in paragraph a) of No. 1 of Article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of full or partial merit of a complaint, judicial impugning or appeal in favor of the taxpayer, to the immediate and complete reestablishment of the legality of the act or situation that is the object of the dispute, including the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision."

3. Although Article 2, No. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals operating in the Administrative Arbitration Centre, making no reference to condemnatory decisions, it should be understood that included in its jurisdiction are the powers that in judicial impugning proceedings are attributed to tax courts, being that the interpretation that harmonizes with the sense of the legislative authorization on which the Government based itself to approve the RJAT and in which is proclaimed, as the first directive, that "the tax arbitral process must constitute an alternative procedural means to the judicial impugning process and to the action for the recognition of a right or legitimate interest in tax matters."

4. The judicial impugning process, despite being essentially a process of annulment of tax acts, admits the condemnation of the tax administration for the payment of compensatory interest, as is deduced from Article 43, No. 1 of the LGT, in which is established that "compensatory interest is due when it is determined, in gracious complaint or judicial impugning, that there was error attributable to the services from which results payment of the tax debt in an amount higher than the legally due" and Article 61, No. 4 of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, which corresponds to No. 2 in the original wording), which establishes that "if the decision that recognized the right to compensatory interest is judicial, the deadline for payment counts from the beginning of the deadline for its spontaneous execution."

5. Thus, No. 5 of Article 24 of the RJAT in saying that "payment of interest, regardless of its nature, is due, in the terms provided for in the general tax law and in the Code of Tax Procedure and Process" should be understood as permitting the recognition of the right to compensatory interest in the arbitral process. In the case at hand, it is manifest that, as a result of the declaration of illegality and consequent annulment of the impugned assessment acts, there is place for reimbursement of the tax, by force of the aforementioned Articles 24, No. 1, paragraph b), of the RJAT and 100 of the LGT, as such is essential to "reestablish the situation that would have existed if the tax act subject of the arbitral decision had not been practiced," in the part corresponding to the correction that was considered illegal.

6. The AT must, therefore, give execution to the present arbitral decision, in accordance with Article 24, No. 1, of the RJAT, and reimburse the Claimant the amounts paid plus the respective compensatory interest, at the supplementary legal rate of civil debts, in accordance with Articles 35, No. 10, and 43, Nos. 1 and 5, of the LGT, 61 of the CPPT, 559 of the Civil Code and Ordinance No. 291/2003, of 8 April (or diploma or diplomas that succeed it). Compensatory interest is due from the dates of the payments made until the date of processing of the credit note, in which they are included (Article 61, No. 5 of the CPPT).

V. DECISION

In accordance with the above stated, this Arbitral Tribunal decides:

a) To find merit in the arbitral request and declare the illegality of the corrections made and the respective assessments, namely: personal income tax (IRS) assessment no. 2015... and respective compensatory interest assessment no. 2015..., by vice of violation of law by error as to the factual and legal presuppositions;

b) To declare the annulment of all impugned acts with all legal consequences, namely the reimbursement of the amounts paid plus the corresponding compensatory interest;

c) To condemn the Tax and Customs Authority for the payment of the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €26,542.99 in accordance with Article 97-A, No. 1, a), of the CPPT, applicable by force of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at €1,530.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, by the unsuccessful party, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4 of the cited Regulation.

Notify.

Lisbon, 10 January 2017

The Arbitral Tribunal,

(Maria do Rosário Anjos)

[1] Cf. Decision STA of 17-11-2010, in case no. 01051/09; see, in the same sense, Decision STA of 23.04.97, in case no. 35.367, all available at www.dgsi.pt.

[2] In this sense, see Diogo Leite Campos, Benjamin Silva Rodrigues and Jorge Lopes de Sousa (2012) General Tax Law, Annotated and Commented, 4th Edition, Publishing House Encontro da Escrita, Lisbon, pp. 675 et seq.

[3] To this purpose, see, among others, the arbitral decisions delivered in cases nos. 30/2012-T and 109/2013 delivered on 1-08-2012 and 07-01-2014, respectively.

[4] In this sense, see, among others, Joaquim Freitas da Rocha (2009) Lessons in Tax Procedure and Process, 3rd edition, Coimbra Publishing House, Coimbra, pp. 113 et seq.

[5] In this sense, see António Lima Guerreiro, (2000) General Tax Law annotated, King of Books, p. 119; Diogo Leite de Campos and others (2003) General Tax Law commented and annotated, Vislis, 2003, p. 124.

[6] In this sense, Cf. Decision of the Supreme Administrative Court of 23-11-2011, case no. 0590/01, at www.dgsi.pt. According to this Decision, referring to a situation of exemption from Real Estate Transfer Tax, to ensure the purpose underlying the granting of the tax benefit, which consists of stimulating and encouraging access to permanent primary residence (cf. para. c) of No. 2 of Article 65 of the CRP), it is sufficient that the beneficiary organize in the property the conditions of his or her normal life and family unit, in such a way that in it is seen the place of his or her residence.

[7] Cf. Decision STA of 12-02-2009, in case no. 09A144, available at www.dgsi.pt.