Process: 156/2017-T

Date: January 9, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 156/2017-T addresses a complex IRS tax residency dispute involving a Portuguese taxpayer who relocated to Spain in 2008 for employment. The claimant worked as Director of Communications for a Spanish company and registered under Spain's special regime for relocated workers (régimen especial para trabajadores desplazados). She maintained rental properties in Madrid, held a Spanish bank account, and obtained Spanish tax residence certificates for 2010-2013. Despite initially filing Portuguese IRS returns as resident (declaring only Portuguese-source income), she later changed her status to non-resident with retroactive effect from 2010 and submitted replacement declarations.

The Portuguese Tax Authority challenged this position, issuing an IRS liquidation of €19,877.16 for tax year 2012, arguing she remained a Portuguese tax resident. The Authority relied on evidence including three urban properties registered in Portugal, mortgage interest payments for permanent residence, and insufficient notification of tax domicile change under LGT Article 19(4). The core legal question centered on applying CIRS Article 16 residency criteria and the Portugal-Spain Double Taxation Convention tie-breaker rules.

The claimant argued that her employment contract, Spanish rental agreements, and official Spanish tax residence certificates demonstrated genuine tax residency in Spain for 2012. She contended that registration under Spain's special regime for displaced workers did not preclude full Spanish tax residency status. The arbitral tribunal analyzed whether the 183-day presence test or habitual residence presumption under CIRS Article 16(1) applied, considering her physical presence in Spain, economic ties, and intent to maintain habitual residence there versus property ownership in Portugal.

Full Decision

ARBITRAL DECISION

The Arbitrator Dr. Maria Antónia Torres, designated by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Singular Arbitral Tribunal, constituted on 15 May 2017, hereby decides as follows:

1. REPORT

1.1. A..., taxpayer no..., resident at Rua ..., no..., ..., Aveiro, notified of the IRS liquidation statement no. 2016..., requested the constitution of an arbitral tribunal, under article 2, no. 1, paragraph a), and article 10, both of Decree-law no. 10/2011, of 20 January (hereinafter "RJAT").

1.2. The request for arbitral pronouncement has as its object the declaration of illegality, and consequent annulment, of the IRS liquidation statement no. 2016..., relating to the tax year 2012, better identified in the initial petition presented by the Claimant, and which is hereby considered articulated and reproduced for all legal purposes.

According to the initial petition, the Claimant was notified of the IRS liquidation statement referred to above, with an amount payable of €19,877.16 (nineteen thousand eight hundred and seventy-seven euros and sixteen cents), to be paid by 26 December 2016.

Under the Special Program for Reduction of Indebtedness to the State, the Claimant paid the amount of €17,741.81 (seventeen thousand seven hundred and forty-one euros and eighty-one cents).

Not agreeing with the classification underlying such IRS liquidation, the Claimant requested the constitution of this Arbitral Tribunal, a request that was accepted.

1.3 The Claimant considers that she should be considered a tax resident in Spain and not a tax resident in Portugal in the year 2012. Therefore, the Claimant considers that she paid the tax that was due, having paid in Portugal tax only on income from Portuguese source. The Claimant defends herself by presenting a set of evidence and, including, a certificate of residence issued by the Spanish Tax Authority covering the year in question.

1.4. The position of the Respondent is that the Claimant should be considered a tax resident in Portugal, and therefore would have the obligation to declare all her income there even if obtained outside Portugal.

The Respondent understands that the Claimant was registered and considered in Spain as a tax resident only for income obtained in that country, having been registered under the "Special regime applicable to relocated workers in Spanish territory."

In Portugal, at that date, and still has, registered in her name three urban properties and has, also in 2012, the payment of interest incurred for the acquisition of permanent own residence.

The Respondent also bases her position on the changes that were made by the Claimant to her residence in Portugal.

The Claimant disagrees that the employment contract, the lease contract, authorization for use of vehicle, fines or the existence of a bank account constitute proof of tax residence in that State.

By application of the Convention for the Elimination of Double Taxation between Portugal and Spain, the Respondent concludes that the Claimant should be considered a tax resident in Portugal, arguing that the pending request should be judged unfounded.

1.5. The arbitral tribunal meeting provided for in article 18 of the RJAT was dispensed with.

2. JURISDICTION AND ADMISSIBILITY

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2 of the RJAT.

The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No procedural defects were identified.

3. FACTUAL FINDINGS

With relevance to the decision on the merits, the Tribunal considers the following facts proven:

  1. The Claimant began, as from 1 October 2008, to carry out her professional activity in Spain, working for B..., S.A., as Director of Communications;

  2. She proceeded with her registration as a tax payer in Spain, having obtained a NIE (Número de Identificación de Extranjeros);

  3. She began paying tax in Spain (option made on 25 February 2009) under the special taxation regime for tax residents in Spain who meet the criteria of the "special regime for relocated workers in Spain" (period 2009 to 2014);

  4. She entered into a lease agreement on 29 October 2008 for a property located in Madrid, at the urban property located at ..., ..., address at which she resided until the end of 2011;

  5. On 15 March 2012 she entered into a new lease agreement for a property located at ..., ..., ..., ... in Madrid where she remained until 31 July 2014;

  6. In 2012 she had an account opened at C...;

  7. Upon her departure to Spain, the Claimant did not immediately notify the Tax Authority of her non-residence for tax purposes in Portugal;

  8. However, her income declarations - IRS Form 3 were submitted as resident, although declaring only the income earned in Portugal;

  9. In 2014, when she became aware of this fact, she changed her status to non-resident, having requested retroactive effect from 1 January 2010;

  10. She then submitted replacement IRS Form 3 declarations, now as a non-resident for tax purposes in Portugal;

  11. She obtained certificates of tax residence in Spain from 2010 to 2013;

  12. On 14 October 2015 the Claimant requested from the Portuguese Tax Authority her registration as a non-habitual resident in Portugal, this request having been approved for the period 2015 to 2024;

Facts Not Proven:

No essential facts with relevance to the assessment of the merits of the case were found that were not proven.

Basis of Factual Findings

The conviction regarding the facts found proven was based on the evidence presented by the Claimant and the Respondent.

4. LEGAL ANALYSIS

With the factual findings established, it is necessary to examine the legal issues raised by the parties.

As identified above, the question to be decided concerns whether, in light of the legislation in force at the time and the facts proven, the Claimant should or should not be considered resident in Portugal, and consequently, whether or not the IRS liquidation here in question is lawful.

Given the factuality described above, it is now necessary to frame it within the applicable legislation.

In accordance with article 19 of the LGT, which prescribes on the concept of tax domicile:

"1 - The tax domicile of the taxable person is, unless otherwise provided:

a) for individuals, the place of habitual residence;

b) for legal entities, the place of head office or effective management or, failing these, of its permanent establishment in Portugal."

And also the same article:

"4 - Any change of domicile is ineffective unless communicated to the tax administration. ..."

In turn, article 15 of the CIRS establishes taxation on income on a worldwide basis for those considered tax residents in Portugal: "Where persons are residents in Portuguese territory, the IRS is levied on all their income, including that obtained outside that territory. In the case of non-residents, the IRS is levied only on income obtained in Portuguese territory."

And article 16 of the CIRS considers:

"1 - Persons who are resident in Portuguese territory are those who, in the year to which the income relates:

a) have remained there for more than 183 days, consecutive or interpolated;

b) having remained for less time, have there, on 31 December of that year, housing in conditions that lead to the presumption of intention to maintain and occupy it as habitual residence;

c) on 31 December, are crew members of ships or aircraft, provided that these are in the service of entities with residence, head office or effective management in that territory;

d) perform abroad functions or commissions of a public nature, in the service of the Portuguese State.

2 - Persons who constitute the family unit are always deemed to be resident in Portuguese territory, provided that any of the persons responsible for its direction resides there.

3 - The status of resident resulting from the application of the provisions of the preceding number may be set aside by the spouse who does not meet the criterion provided for in paragraph a) of no. 1, provided that they provide evidence of the non-existence of a connection between the majority of their economic activities and Portuguese territory, in which case they are subject to taxation as non-resident with respect to income of which they are the holder and which is considered obtained in Portuguese territory in accordance with article 18.

4 - Being made the evidence referred to in the preceding number, the spouse resident in Portuguese territory presents a single declaration of their own income, their share in common income and the income of dependents in their charge, according to the regime applicable to persons in the situation of de facto separated ...

6 - Non-habitual residents in Portuguese territory are considered those taxable persons who, becoming tax residents in accordance with nos. 1 or 2, have not been resident in Portuguese territory in any of the five preceding years."

It is also important to recall article 4 of the Convention for the Elimination of Double Taxation concluded between Portugal and Spain:

"1 – For the purposes of this Convention, the term 'resident of a Contracting State' means any person who, by virtue of the legislation of that State, is subject to tax there due to his domicile, his residence, the place of management or any other criterion of a similar nature. However, this term does not include any person who is subject to tax in that State only with respect to income from sources located in that State.

2 – When, by virtue of the provisions of no.1, an individual is a resident of both Contracting States, the situation shall be resolved as follows:

a) shall be considered a resident of the Contracting State in which he has a permanent home at his disposal. If he has a permanent home at his disposal in both States, shall be considered a resident of the State with which his personal and economic relations are closer (centre of vital interests);

b) if the State in which he has the centre of vital interests cannot be determined, or if he does not have a permanent home at his disposal in either of the States, shall be considered a resident of the Contracting State in which he normally resides;

c) if he normally resides in both States, or if he does not normally reside in either of them, shall be considered a resident of the State of which he is a national.

d) if he is a national of both States, or is not a national of either of them, the competent authorities of both States shall settle the case by mutual agreement".

Now let us see. It became clear from the facts presented that the Claimant in 2012 carried out her professional activity in Spain, where she was taxed on income obtained there through a special regime applicable to residents in Spain who are in a situation of professional relocation and who meet certain requirements. With respect to the year 2012, the tax period in question in the present case, the Claimant filed the respective income declaration (IRS) also in Portugal, given that she had property income obtained there and only with respect to that income. However, the initial declaration was filed in the capacity of resident, and a replacement declaration as a non-resident in Portuguese territory was only filed in 2014 when the Claimant notified the ATA of her relocation to Spain in 2008.

In conclusion, the Claimant declared herself resident in Spain and non-resident in Portugal in the year 2012. And it is this classification in Portugal as non-resident that the Respondent contests.

However, on 14 October 2015, the Claimant requested from the Respondent her registration as a non-habitual resident in Portuguese territory, which came to be accepted by the AT for the period between 2015 and 2024. Now, in accordance with the provisions of no. 6 of article 16 of the CIRS, previously transcribed (current no. 8 of article 16 of the CIRS), in order to be considered a non-habitual resident, it is required that the requesting taxable person has not been considered resident in Portuguese territory in any of the five preceding years.

Now, thus being, the Respondent considered, in the present case, and based on the information at her disposal, the Claimant as not having resided in Portugal from 2010 to 2014 (including, therefore, the year 2012).

Now, if that is the case, the Claimant can only be taxed with respect to the year 2012 on income obtained in Portuguese territory, in accordance with the declaration filed by the Claimant herself, there being, therefore, no legal support for the IRS liquidation statement here in question, since it was the Respondent herself who confirmed the status of non-resident in the year in question. It is not conceivable that, given the same facts, the Respondent should consider the Claimant as non-resident in Portugal in the year 2012 and later come to question that classification.

In view of this conclusion, the tribunal considers it unnecessary to confront the facts with any other applicable legal norms, in particular the Convention for the Elimination of Double Taxation concluded between Portugal and Spain.

As regards the payment of compensatory interest, considering that the illegality of the liquidation in question has been concluded, it is evident the error attributable to the services which resulted in improper payment of tax obligation. Thus, and in accordance with the provisions of article 100 of the LGT, the Respondent is obliged to restore the situation that would exist if the annulled act had not been performed, namely through the payment of compensatory interest.

5. DECISION

Given the foregoing, it can only be concluded that the Claimant was considered a non-tax resident in Portugal in the year under analysis, so this arbitral tribunal decides to judge the request for a declaration of illegality of the tax act of IRS liquidation, relating to the year 2012, better identified above, to be well-founded.

Thus, the reimbursement of amounts unduly paid by the Claimant on account of IRS is ordered, in the amount of €17,741.81 (seventeen thousand seven hundred and forty-one euros and eighty-one cents), plus the respective compensatory interest, provided for in article 43 of the LGT and article 61 of the CPPT.

**

The value of the case is fixed at €17,741.81 (seventeen thousand seven hundred and forty-one euros and eighty-one cents) in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, paragraph a) of the CPPT and 306 of the CPC.

The amount of costs is fixed at €1,224 (one thousand two hundred and twenty-four euros) under article 22, no. 4 of the RJAT and Table I attached to the RCPAT, to be paid by the Respondent, in accordance with the provisions of articles 12, no. 2 of the RJAT and 4, no. 4 of the RCPAT.

Notification to be made.

Lisbon, 9 January 2018

The Arbitrator

(Maria Antónia Torres)

Document prepared by computer, in accordance with article 131, no. 5 of the Code of Civil Procedure, applicable by reference to article 29, no. 1, paragraph e) of the RJAT.

The writing of this arbitral decision is governed by the orthography prior to the 1990 Orthographic Agreement.

Frequently Asked Questions

Automatically Created

How is tax residency determined between Portugal and Spain under IRS rules?
Tax residency between Portugal and Spain is determined by applying CIRS Article 16(1) criteria first: 183+ days presence in Portugal (consecutive or interpolated), or maintaining housing in Portugal on December 31 suggesting intent for habitual residence. If both countries claim residency, the Portugal-Spain Double Taxation Convention provides tie-breaker rules examining permanent home availability, center of vital interests (personal/economic relations), habitual abode, and ultimately nationality. The taxpayer must communicate any domicile change to tax authorities under LGT Article 19(4) for it to be effective.
Can a taxpayer registered under Spain's special regime for displaced workers be considered a Portuguese tax resident?
Yes, a taxpayer registered under Spain's special regime for displaced workers (régimen especial para trabajadores desplazados) can still be considered a Portuguese tax resident. The Spanish special regime is an optional taxation method for certain income earned in Spain by qualifying workers, but does not automatically determine tax residency status. Portuguese authorities assess residency independently using CIRS Article 16 criteria, examining physical presence, habitual residence indicators, and property ownership. Registration in Spain's special regime addresses how Spanish-source income is taxed, not which country holds primary residence rights for worldwide income taxation purposes.
What evidence is required to prove fiscal residency in Spain for IRS purposes in Portugal?
To prove Spanish fiscal residency for IRS purposes, taxpayers should provide: (1) official tax residence certificates issued by Spanish Tax Authority (Agencia Tributaria) for the relevant tax years; (2) evidence of physical presence exceeding 183 days in Spain (rental/property agreements, utility bills, employment contracts); (3) Spanish tax returns (declaración de la renta) showing worldwide income declaration; (4) NIE (Número de Identificación de Extranjeros) registration; (5) documentation of center of vital interests in Spain (employment, family location, economic activities, bank accounts); (6) proof of notification to Portuguese Tax Authority of non-residence status under LGT Article 19(4). Multiple corroborating documents strengthen the residency claim.
What are the consequences of being classified as a Portuguese tax resident for worldwide income taxation under IRS?
Portuguese tax residents face worldwide income taxation under CIRS Article 15, requiring declaration of all income regardless of source country in annual IRS returns (Modelo 3). This includes foreign employment income, investment returns, rental income, capital gains, and other worldwide earnings. Residents must report foreign income even if already taxed abroad, though double taxation relief may apply through tax credits or exemptions under applicable conventions. Non-compliance with worldwide income declaration obligations can result in IRS liquidations with additional tax assessments, interest charges, and potential penalties. Tax residents cannot limit Portuguese taxation to Portuguese-source income only.
How does CAAD arbitration handle disputes over dual tax residency and IRS liquidation challenges?
CAAD arbitration handles dual residency disputes by analyzing factual evidence against CIRS Article 16 criteria and applicable double taxation conventions. The tribunal examines documentation proving physical presence, habitual residence indicators, property ownership, economic ties, and timely notification of domicile changes. In Process 156/2017-T, the tribunal assessed Spanish rental agreements, tax residence certificates, employment contracts, versus Portuguese property ownership and mortgage payments. Challenges to IRS liquidations based on residency classification require proving the taxpayer met foreign residency criteria while failing Portuguese residency tests. CAAD applies tie-breaker rules from bilateral tax treaties when both jurisdictions claim residence rights, examining permanent home location, center of vital interests, and habitual abode sequentially.