Process: 185/2018-T

Date: March 7, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 185/2018-T) addresses IRS taxation of employment income under the Portugal-Czech Republic Double Taxation Convention. A French national working for a French bank was seconded to Portugal, then transferred to Prague in September 2012 to work for a Czech group company for three years. He moved his entire family to the Czech Republic, terminated his Portuguese lease, enrolled his children in school there, and registered with Czech authorities. He filed tax returns as a Czech resident for 2012-2013 and paid taxes there. However, Portuguese tax authorities (AT) issued additional IRS assessments treating him as a Portuguese tax resident, demanding €75,637.71. The taxpayer challenged these assessments through tax arbitration, arguing: (1) lack of proper reasoning; (2) violation of his right to prior hearing under Article 60(1) of the General Tax Law (LGT); and (3) incorrect application of tax residency rules, claiming the Double Taxation Convention should apply for 2012 and that Article 16(1) of the IRS Code (which defines tax residency) shouldn't classify him as Portuguese resident for 2013. The case illustrates the complexity of determining tax residency when employees are internationally mobile, the application of double taxation conventions to employment income, and procedural safeguards in Portuguese tax law. The arbitral tribunal had to determine whether the taxpayer's center of vital interests shifted to the Czech Republic, making him non-resident in Portugal, and whether the AT properly followed administrative procedures before issuing additional assessments.

Full Decision

ARBITRAL DECISION

I – REPORT

On 9 April 2018, A..., Tax Identification Number..., resident at Rue..., no...., locality of..., France, filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly designated RJAT), seeking the declaration of illegality of the Personal Income Tax (IRS) assessment acts No. 2016... and No. 2016..., relating, respectively, to the years 2012 and 2013, and corresponding assessments of compensatory interest, in the total amount of €75,637.71, as well as the decision to dismiss the administrative claim which had the aforementioned assessments as its subject matter.

To support its request, the Claimant alleges, in summary:

  • Defect of lack of reasoning;
  • Defect of violation of law, by violation of Article 60, No. 1 of the General Tax Law (LGT), in that the assessments in question were not preceded by the right to be heard;
  • Defect of violation of law in relation to the year 2012, by violation of the Convention to Avoid Double Taxation concluded with the Czech Republic, and in 2013, in that Article 16, No. 1 of the Personal Income Tax Code, which imposes the classification of a taxpayer as resident, does not apply to him.

On 10-04-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed with the appointment of an arbitrator, whereupon, under Article 6, No. 2, subparagraph a) and Article 11, No. 1, subparagraph a) of the RJAT, the President of the Ethics Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 01-06-2018, the parties were notified of these designations and expressed no intention to refuse any of them.

In accordance with Article 11, No. 1, subparagraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 21-06-2018.

On 10-09-2018, the Respondent, duly notified for this purpose, filed its response, defending itself by means of a counter-argument.

On 31-10-2018, the hearing referred to in Article 18 of the RJAT took place, where witnesses presented by the Claimant were examined, the period provided for in Article 21, No. 1 of the RJAT being also extended by two months, under No. 2 of the same article.

A period having been granted for the submission of written pleadings, these were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

It was indicated that the final decision would be notified by the end of the period provided for in Article 21, No. 1 of the RJAT, extended under No. 2 of the same article.

The Arbitral Tribunal is materially competent and is properly constituted, under Articles 2, No. 1, subparagraph a), 5, and 6, No. 2, of the RJAT.

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

The proceedings are free from nullities.

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

All things considered, it is proper to decide as follows:

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven
  • The Claimant has French nationality.
  • On 10-09-1990, the Claimant entered into an employment contract with company B..., S.A., a credit institution of French law, which has its head office and effective management in France.
  • Until August 2012, the Claimant was seconded to Portugal in the service of B... (branch in Portugal of B..., S.A.), where he exercised functions as director of risk, methods and quality, and director of credit recovery.
  • From 1 September 2012, the Claimant began exercising functions as Financial and Risk Director at C..., a financial company integrated in the B... Group and with head office in Prague.
  • The Claimant signed an amendment to his employment contract with B... S.A., under the terms of which he would exercise functions at C..., in Prague, from 1 September 2012, and for a period of 3 years.
  • At the end of August 2012, the Claimant terminated the lease of the house in which he lived in Lisbon.
  • On 27-08-2012, C... issued a certificate in which it declared that "We certify that the above-mentioned employee is an employee in the employment relationship with the above-mentioned employer on the basis of the employment contract on 3 September 2012. The employment agreement is concluded for a specified period of time – 3 years."
  • The move to Prague resulted in a change of school for the Claimant's children, who were enrolled in the French School in Prague.
  • Also the Claimant's spouse moved to Prague in 2012.
  • Upon arrival in the Czech Republic, the Claimant and his entire family registered with the Czech authorities for the purpose of obtaining a European health card in order to benefit from complete health assistance in that country.
  • The tax authorities of the Czech Republic certified the Claimant's residence in that country from 2012 until 2015.
  • During the period he resided in Prague, the Claimant and his family lived in a rented house, the lease being paid for by C...
  • C... made a service vehicle available to the Claimant in Prague, Czech Republic.
  • The employment relationship with C... ended only in August 2015, at which time the Claimant returned to France, where he began to reside.
  • The Claimant, for the years 2012 and 2013, submitted income declarations to the tax authorities of the Czech Republic as a resident.
  • From these assessments, income tax payment in the Czech Republic resulted.
  • On 24-03-2017, the Claimant informed the AT of the fact that he had ceased to be a tax resident in Portugal, having altered his residence in the AT records.
  • The Claimant submitted Personal Income Tax Form 3 (Model 3) declarations as a resident in 2012 and 2013, in which he only declared income obtained in Portugal.
  • The Claimant proceeded with payment of the tax thus calculated.
  • The AT issued additional Personal Income Tax assessments and compensatory interest for the years 2012 and 2013, with reference to 2012, calculating the amount of €25,105.93 to be paid and, with reference to 2013, calculating the amount of €50,531.78.
  • The aforementioned assessments were sent to the address Rua..., no..., ...-... Lisbon.
  • The Claimant became aware of the aforementioned assessments by consultation in the Tax Portal.
  • On 25-01-2017, the Claimant fully paid the Personal Income Tax and compensatory interest amounts calculated in the aforementioned official assessments.
  • The Claimant filed an administrative claim against the aforementioned official assessments.
  • The Claimant was notified of the draft dismissal of the administrative claim and, if he wished, to exercise the right to prior hearing.
  • Within the scope of the right to prior hearing, the Claimant submitted the originals of the three residence certificates issued by the tax authorities of the Czech Republic, the first relating to 2012 and issued on 1 September 2012, and the last relating to 2015 and issued on 6 April 2015.
  • The Claimant was notified of the decision dismissing the administrative claim.
  • The aforementioned dismissal decision contains the following:
A.2. Facts Established as Not Proven

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

A.3. Reasoning for Matters of Fact Proven and Not Proven

With respect to matters of fact, the Tribunal need not pronounce itself on everything alleged by the parties, but rather has the duty to select the facts that are important for the decision and to distinguish proven from unproven matters (see Article 123, No. 2, of the Code of Administrative Tax Procedure (CPPT) and Article 607, No. 3 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, No. 1, subparagraphs a) and e), of the RJAT).

In this manner, the facts relevant to the judgment of the case are chosen and selected according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see former Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the CPPT, the documentary and testimonial evidence, and the Administrative Procedure file joined to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the Court of Administrative Appeals - Southern Section of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned."

No allegations made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the concrete matters of fact above consolidated, were either proven or not proven.

B. ON THE LAW

As stated previously, the Claimant attributes the following defects to the tax acts sub iudice:

  • Defect of lack of reasoning;
  • Defect of violation of law, by violation of Article 60, No. 1 of the LGT, in that the assessments in question were not preceded by the right to be heard;
  • Defect of violation of law in relation to the year 2012, by violation of the Convention to Avoid Double Taxation concluded with the Czech Republic, and in 2013, in that Article 16, No. 1 of the Personal Income Tax Code, which imposes the classification of a taxpayer as resident, does not apply to him.

Article 124 of the CPPT provides:

"1 - In the judgment, the court shall assess as a priority the defects that lead to the declaration of non-existence or nullity of the impugned act and, then, the defects alleged that lead to its annulment.

2 - In the aforementioned groups, the assessment of defects is made in the following order:

a) In the first group, those of the defects whose substantiation determines, according to the prudent judgment of the judge, more stable or effective protection of the injured interests;

b) In the second group, the one indicated by the party challenging the act, provided that the latter establishes a subsidiary relationship between them and no other defects are alleged by the Public Prosecutor or, in other cases, the one set out in the preceding subparagraph."

In this manner, and as the Claimant did not establish any subsidiary relationship, the assessment shall proceed to the defect of violation of law, as it is the one whose substantiation determines more stable and effective protection of the injured interests.

The situation at issue in the present arbitral proceedings is of relatively simple configuration.

At stake is the taxation of the Claimant on income earned outside Portugal, in the years 2012 and 2013, it being verified that:

  • the Claimant ceased to have in Portugal, from September 2012 onwards, a dwelling in conditions that suggest the intention to maintain and occupy it as his habitual residence;

  • the Claimant only informed the AT of the fact that he had ceased to be a tax resident in Portugal, having altered his residence in the AT records, on 24-03-2017.

The legal relevance of these facts should be assessed in light of the following provisions:

  • Article 16, No. 1, subparagraphs a) and b) of the applicable Personal Income Tax Code (years 2012 and 2013):

"1 - Residents in Portuguese territory are persons who, in the year to which the income relates:

a) Have spent more than 183 days there, consecutively or interpolated;

b) Having spent less time there, have on 31 December of that year a dwelling in conditions that suggest the intention to maintain and occupy it as their habitual residence;";

  • Article 19, Nos. 1/a), 3 and 4 of the applicable LGT:

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

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

3 - Communication of the tax domicile to the tax administration is mandatory, in accordance with the law. 4 - The change of domicile is ineffective as long as it is not communicated to the tax administration.";

  • Article 4 of the Convention to Avoid Double Taxation concluded between Portugal and the Czech Republic:

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

2 — When, by virtue of the provisions of No. 1, a natural person is a resident of both Contracting States, the situation shall be resolved as follows:

a) He shall be considered a resident of the State in which he has a permanent dwelling at his disposal. If he has a permanent dwelling at his disposal in both States, he shall be considered a resident of the State with which his personal and economic relations are closest (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 dwelling at his disposal in either State, he shall be considered a resident of the Contracting State in which he habitually resides;

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

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

  • Article 15 of the Convention to Avoid Double Taxation concluded between Portugal and the Czech Republic:

"1 — Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and similar remuneration obtained from an employment by a resident of a Contracting State may only be taxed in that State, unless the employment is exercised in the other Contracting State. If the employment is exercised there, the corresponding remuneration may be taxed in that other State.

2 — Notwithstanding the provisions of No. 1, remuneration obtained by a resident of a Contracting State from an employment exercised in the other Contracting State may only be taxed in the first-mentioned State if:

a) The recipient remains in the other State during a period or periods that do not exceed, in total, 183 days in any period of 12 months; and

b) The remuneration is paid by an employer or on behalf of an employer who is not a resident of the other State; and

c) The remuneration is not borne by a permanent establishment or by a fixed installation that the employer has in the other State.

3 — Notwithstanding the preceding provisions of this article, remuneration from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State in which the effective place of direction of the enterprise is situated."

Before proceeding, and as previously stated, there is no doubt in this Tribunal that the Claimant, from September 2012 onwards, came to reside, on a permanent basis, in the Czech Republic, and the testimonial and documentary evidence presented are absolutely clear on this point.

Given this, it shall be assumed that, as alleged by the Claimant and not contested by the Respondent, the additional assessments concern income earned by the Claimant, in the years 2012 and 2013, in the Czech Republic.

Indeed, the Claimant assumes such circumstance in his arbitral request, stating that, as was established as fact, he submitted Personal Income Tax Form 3 (Model 3) declarations as a resident in 2012 and 2013, in which he only declared income obtained in Portugal, and proceeded with payment of the tax thus calculated, and the Respondent states that "the Claimant, throughout his arguments both in the administrative and in the arbitral proceedings, disputes all the factual matters taken as settled by the AT, as well as all the law applicable to such factual matters".

Otherwise, it would necessarily have to be concluded that the assessments in question are voidable due to lack of reasoning, as alleged by the Claimant, since it is not clear where the income comes from that the AT intends to tax in the assessments now in question.

Therefore, as noted, it shall be assumed that the income taxed by such assessments is that earned by the Claimant, in the years in question, in the Czech Republic.

Given this, and in light of Article 15 of the Convention to Avoid Double Taxation concluded between Portugal and the Czech Republic, it must be concluded that such income cannot be taxed in Portugal.

Firstly, there is no doubt that income from dependent employment is at issue, as indeed appears from the official declarations elaborated by the AT itself and which form the basis of the assessments now being contested, and therefore Article 15 applies.

Furthermore, although with respect to the year 2012 it is verified that the Claimant did not remain for more than 183 days in the Czech Republic in that year, the fact is that the requirements listed in No. 2 of Article 15 are cumulative, and it is not established that there is any situation provided for in Articles 16 (members of boards of companies), 18 (pensions), 19 (public remuneration), 20 (students) or 21 (professors and researchers) of the Convention, nor that:

  • The remuneration was paid by an employer or on behalf of an employer who is not a resident of the other State; and

  • The remuneration was not borne by a permanent establishment or by a fixed installation that the employer has in the other State.

Thus, under Nos. 1 and 2 of the article in question, the salaries, wages and similar remuneration obtained by the Claimant from employment in the Czech Republic may only be taxed there, and not in Portugal.

The commentaries on the OECD Model Convention to Avoid Double Taxation between States are, moreover, clear on this matter, noting in the first commentary to Article 15 that the first number of this article establishes the general rule that income from dependent employment is taxable in the State where the employment is effectively exercised.

Commentary 4 to the same provision also makes clear that the three conditions listed in No. 2 are cumulative.

Finally, Commentary 6.2 clarifies that the purpose of subparagraphs b) and c) of No. 2 of Article 15 in question is to avoid taxation at source of short-term employments, in so far as employment income does not qualify as a deductible charge in the source State, because the employer is not a taxpayer in that State, being neither resident there nor having a permanent establishment there.

Now, this is clearly not the case, with the entity paying the income earned by the Claimant in the Czech Republic being a company incorporated in that country, and, as such, resident there and subject to tax.

By all the foregoing, there is no doubt that, under Nos. 1 and 2 of Article 15 of the Convention in question, Portugal is prohibited from subjecting to tax the Claimant's income from dependent employment in the Czech Republic.

Without ignoring that other readings are possible, and without prejudice to their merit, beyond what has been pointed out above, and especially regarding the content of the first commentary to Article 15 of the OECD Model Convention, it shall be said that such readings rest, essentially, on considerations of international law, whereas in this case what is at issue is a purely internal legal relationship between Portugal and one of its taxpayers, whereby, in the first instance, the interpretative criteria should be those of national law and, in particular, the principles of legality and typicality of tax provisions of incidence, and corresponding requirements of legal certainty, from which should follow the prevalence of the legal text published in the Portuguese language, in so far as it will be that which will be read and interpreted by national taxpayers, a text which is unequivocal, in affirming, in No. 2 of Article 15 of the Convention published in the Official Gazette (DR), that the income referred to there can only be taxed in Portugal under the conditions referred to there.

On a more general level, it is also believed that, given that what is at issue is a convention to avoid double taxation, the interpretations that lead, in the most practical and simple way, to the elimination of double taxation should be privileged, especially, as is the case, when no relevant material interest is discerned that is overlooked by such interpretations, as is indeed corroborated by the relevant commentaries to Article 15 of the OECD Model Convention.

Finally, it should also be noted that an interpretation that sustains the cumulative competence of both States to tax the income to which Article 15 of the Convention in question refers, in addition to contradicting the express letter of No. 2 of that article, leads to the practical uselessness of the last sentence of No. 1 of the same provision, since it gives it the same meaning that would already result from that No. 2, if that last sentence did not appear there.

Furthermore, as stated in the Decision of the Supreme Administrative Court (STA) of 02-02-2011, delivered in case 0621/09, "By virtue of the provisions of Article 8 of the Portuguese Constitution the provisions of international conventions validly concluded and regularly ratified and approved are in force in the internal legal order as soon as published, constituting an immediate source of rights and obligations for their addressees."

Therefore, regardless of all else, the conclusion must be that the assessments sub iudice are illegal.

This conclusion will not be hindered by the fact that the Claimant could be qualified as a resident in Portugal in the years in question, either in light of national law or in light of the Convention itself, since Article 15 thereof expressly refers to "remuneration obtained by a resident of a Contracting State from an employment exercised in the other Contracting State", that is, it presupposes, precisely, that what is at issue is a resident in one of the States, in this case Portugal, who earns remuneration from an employment exercised in the other, in this case the Czech Republic.

Nevertheless, it shall be said that, even if this were not the case, the arguments wielded by the Respondent would in no way be acceptable.

Thus, first and foremost, Article 19 of the LGT concerns only the question of tax domicile, a concept which is not that underlying Article 16, No. 1 of the Personal Income Tax Code, which relates to physical presence in Portugal for more than 183 days in a year, and the possession of "a dwelling in conditions that suggest the intention to maintain and occupy it as one's habitual residence."

The circumstance that No. 1, subparagraph a), of the said Article 19 provides that tax domicile, for natural persons, corresponds, as a rule, to the place of habitual residence, does not, of course, have the effect of making this correspond to that.

What is said there is that tax domicile should correspond to habitual residence, and that, if the latter changes and such change is not communicated, such change is ineffective for purposes of determining tax domicile, and not for other effects that follow from or presuppose the place of habitual residence, and not tax domicile.

This is, as can be seen, the case with Article 16, No. 1 of the Personal Income Tax Code, which does not refer to tax domicile, even though it could perfectly do so, as happens, for example, with Article 14, No. 2 of the same Code, which expressly refers to tax domicile.

Additionally, even in the case of this latter article, it has already been understood by the STA that "The obligations resulting from Articles 19 of the LGT and 14, No. 2 of the Personal Income Tax Code, for unmarried cohabitants can only be viewed as formal requirements which, however, do not prevent the option for the joint taxation regime, since this depends on other substantive requirements."

That is, and in summary: Article 19 of the LGT imposes the equivalence of tax domicile to habitual residence, but does not make the latter equivalent to the former, whereby the ineffectiveness referred to in No. 4 relates to the effects of the change of habitual residence not communicated, with respect to tax domicile, and not to the remaining effects of such change.

Furthermore, and with respect to the documentary obstacles wielded by the AT, apart from these not being justified by any legal provision, which is not even invoked, they have no relation whatever with the regime of the Convention, which, as noted, does not presuppose the Claimant's residence in the Czech Republic, for income from dependent employment exercised in that country to be taxed there.

In light of all the foregoing, it must be considered that the assessment acts which are the subject of the present arbitral action are affected by errors of fact and law, and should, consequently, be annulled, with the knowledge of the remaining defects attributed to them by the Claimant becoming moot.

As regards the request for indemnity interest formulated by the Claimant, Article 43, No. 1, of the LGT establishes that indemnity interest is due when it is determined that there was an error attributable to the services which results in payment of the tax debt in an amount exceeding that legally due.

In the case, the error affecting the annulled assessments is attributable to the Tax Authority and Customs Authority, which made the assessment acts that are the subject of the present arbitral action, without the necessary factual and legal support.

The Claimant therefore has the right to be reimbursed for the amount he paid (under the provisions of Articles 100 of the LGT and 24, No. 1, of the RJAT) by virtue of the annulled acts and, furthermore, to be compensated for the unduly paid amount through the payment of indemnity interest by the Respondent, from the date of the undue payment, until its reimbursement, at the legal supplementary rate, under Articles 43, Nos. 1 and 4, and 35, No. 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

C. DECISION

The Arbitral Tribunal hereby decides to wholly grant the arbitral request formulated and, in consequence:

  • Annul the Personal Income Tax assessment acts No. 2016 ... and No. 2016 ..., relating, respectively, to the years 2012 and 2013, and the corresponding assessments of compensatory interest, as well as the decision to dismiss the administrative claim which had the aforementioned assessments as its subject matter;

  • Condemn the AT to the restitution of the tax unduly paid, by virtue of the assessments now annulled, as well as to the payment of indemnity interest, in the terms determined above;

  • Condemn the Respondent to pay the procedural costs, fixed below.

D. Case Value

The case value is fixed at €75,637.71, under Article 97-A, No. 1, a), of the Code of Administrative Tax Procedure, applicable by virtue of subparagraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 3 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €2,448.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the AT, since the request was entirely upheld, under Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 5, of the cited Regulation.

Let notification be made.

Lisbon, 7 March 2019

The Arbitrator President

(José Pedro Carvalho)

The Voting Arbitrator

(Maria Alexandra Mesquita)

The Voting Arbitrator

(Sofia Ricardo Borges, with attached dissenting opinion)

DISSENTING OPINION

For the reasons I shall briefly set out, I do not concur with the decision as it pertains to the year 2012, voting dissenting on this point. As for the year 2013, I concur with the decision, albeit for reasons not entirely coinciding with those underlying it. As follows.

As to the year 2012.

First and foremost, I do not concur, in particular, with the following assertions in the present Decision: "(...) in light of Article 15 of the Convention to Avoid Double Taxation concluded between Portugal and the Czech Republic, it must be concluded that such income cannot be taxed in Portugal."; "(...) under Nos. 1 and 2 of the article in question, the salaries (...) obtained by the Claimant from employment in the Czech Republic may only be taxed there, and not in Portugal."; "(...) under Nos. 1 and 2 of Article 15 of the Convention in question, Portugal is prohibited from subjecting to tax the Claimant's income from dependent employment in the Czech Republic." And, thus, I do not concur with the reasoning which, in the Decision, underlies them.

Let us see.

Under the Convention to Avoid Double Taxation concluded between Portugal and the Czech Republic (hereinafter "the CDT P-RC" or "the CDT"), whose Article 15 is, in my view, copied in its entirety from the article with the same number as contained in the OECD Model Convention (CMOCDE), whenever a situation arises where dependent employment income is earned by a resident of one of the two Contracting States by virtue of the exercise of his employment activity in the territory of the other Contracting State, that latter State (the Source State, here, strictly speaking, in the sense of the State of the place where the activity is exercised; for this reason hereinafter also "Source-activity State" or "State of activity") will, in principle, have competence to tax the respective income.

But this is so, not because the "State of activity" has, from the outset, competence to tax a situation falling under Article 15. This is so solely because the legislator understood that – in the case where the activity is exercised in that other State, other than the one in which the taxpayer ("TP") is Resident – may justify the departure from the general rule applicable to the taxation of dependent employment income in situations covered by Article 15 (of the CMOCDE and the CDT P-RC).

Indeed, the rule which Article 15 establishes is, moreover in coherence with the logic of the CMOCDE (and the CDT P-RC), that of the competence of the State of Residence. And in this specific case, the competence of the State of Residence with exclusivity. Only departing from the rule when it is verified that the exercise of the activity giving rise to the income occurs in the other Contracting State. It is this which is the meaning of No. 1 of Article 15 (first part of the first sentence / final part of the first sentence and second sentence, respectively).

And it is not understood, with all due respect, that the second part of No. 1 of Article 15 (the second sentence, namely: "If the employment is exercised there, the corresponding remuneration may be taxed in that other State.") is such as to attribute a competence to the State of activity other than merely cumulative with the competence of the State of Residence. This second part of No. 1 merely comes, in my understanding, to remove the exclusivity of competence of the State of Residence. Which is after all the rule – as contained in the initial part of No. 1 (first part of the first sentence, namely: "1. Subject to the provisions of (...), salaries (...) obtained from an employment by a resident of a Contracting State may only be taxed in that State").

We thus see Article 15 as establishing, first of all, a general rule - that of the exclusive competence of the State of Residence; then, an exception to that rule – an exception contained in the final part of the first sentence of No. 1 and the second sentence of the same number, in which competence to tax is also attributed to the State of activity. And, finally, an exception to the aforementioned exception - as contained in No. 2 of the Article. This exception to the exception which, once the respective requirements are met for it to operate, brings us back to the general rule, i.e., to the rule of exclusive competence of the State of Residence. And which, if such requirements are not met, keeps us in the exception to the general rule, that is, keeps us in the cumulative competence of the two Contracting States. Although the State of activity has the right to tax these income primarily, but without this removing the competence, also existing, of the State of Residence. And, always, with the mechanisms of Article 23 of the CDT applicable to mitigate/eliminate the double taxation potentially arising therefrom.

In this same sense in which we interpret Article 15 of the CMOCDE, see, among others, Alberto Xavier, "Direito Tributário Internacional" [International Tax Law], 2nd Ed., Almedina, 2007, p. 618 et seq.; Luc De Broe, "Article 15. Income from Employment", in "Klaus Vogel on Double Taxation Conventions", 4th Ed., Vol. II, Kluwer Law International, p. 1089 et seq.; Roy Rohatgi, "Basic International Taxation", Kluwer Law International, pp. 103-104; Philip Baker, "Double Taxation Conventions and International Tax Law: A Manual on the OECD Model Tax Convention on Income and on Capital of 1992", 2nd Ed., Sweet & Maxwell, London, 1994, p. 299 et seq.

In summary, it is not understood, in any case, that exclusive taxation competence was conferred to the Source-activity State by virtue of being so (i.e., by virtue of being the State where the activity is exercised) (nor even in situations where the cumulative requirements of the subparagraphs of No. 2 are not met).

Nor do we see how the understanding we follow could be set aside by reasons of legal hermeneutics, which hypothetically would lead to interpreting the provision of No. 2 of Article 15, given its wording, in our view "less felicitous," contained in the Portuguese version of the CMOCDE and the CDT (namely: "(...) may only be taxed in the first-mentioned State if: (...)") as meaning that, in this case, Portugal is deprived of taxation competence unless the three cumulative requirements of the subparagraphs of No. 2 are met. That is, that Portugal would only have competence to tax with the three cumulative requirements that constitute the condition for the exception to the exception to operate (see supra). And that, therefore, thus, if one (or more) of the requirements (negative, note) were not met, Portugal would lose its competence to tax. That, thus, would be – exclusively – left to the Source-activity State.

No.

If the three cumulative requirements are met – requirements operative of the exception to the exception - what happens, we have already seen, is that we return to the general rule: exclusive competence of the State of Residence.

If they are not met (these three negative requirements, cumulatively), then we do not return to the general rule. We remain in the exception contained in the second part of No. 1 of the Article, which thus is not removed by No. 2. We remain, therefore, in the cumulative competence of the State of activity.

Why?

Because it was understood (and thus enshrined in Article 15), and rightly so, that in this case (if at least one of the situations contained in the subparagraphs of No. 2 is verified, but by their positive verification) there will be a connection with the Source-activity State which, by being relevant, deserves consideration for these purposes. For purposes of also attributing to that State competence to tax.

It seems to us clear, and it seems to us to be the only interpretation coherent both with the ratio legis, and with the systematic element necessarily to be taken into account in the interpretation of the provision.

More, by this interpretative route there is, nonetheless, a minimal correspondence to the letter of the law. For the wording of No. 2, in the Portuguese version, is, in our view, a wording less well achieved, which would have been better served by a more rigorous ordering of the elements of the sentence (moreover in coherence, also, with what is contained in the wording of No. 1). Thus:

    1. Notwithstanding the provisions of No. 1, if: a) (...); b) (...); c) (...), remuneration obtained by a resident of a Contracting State from an employment exercised in the other Contracting State may only be taxed in the first-mentioned State. -

That is, dealing first with the provision and, only finally, with the enactment.

It does not seem to us that the legislator, in the case of No. 2, knew how to express with complete correctness/linguistic rigor his thinking. Combining letter and spirit of the law, we see no way but to follow the interpretation we have just referred to.

It should be noted, further, that also the rules of interpretation of International Treaties in tax matters - which are clear in the sense that the same should be interpreted in accordance with the general terms of the interpretation of Treaties and the rules of tax law, taking special account of Articles 31 to 33 of the Vienna Convention on the Law of Treaties - lead us, in our view, to the same conclusion above.

Furthermore, if doubts remained, both the English version and the French version of the CMOCDE are, in our view, clear in the sense of the interpretation we follow (see respective Articles 15, Nos. 2, in its body, final part: "shall be taxable only in the first mentioned State if" and "ne sont imposables que dans le premier État si"). And the fact that among the authentic versions of the CDT P-RC – see Assembly of the Republic Resolution No. 26/97, of 8 January 1997, which approved the CDT for ratification - include, in addition to the Portuguese, the Czech and English versions, is also of a nature to dispel any doubts.

Nor, also, by way of Commentary 1 to Article 15 would the understanding we follow be prejudiced. Indeed, this Commentary is not, in our view, entirely rigorous – see, by comparison, the rules of Article 15, as we have just set out above. In this same sense, that the same is susceptible to inducing in error, see Philip Baker in commentary to Paragraph 1 of the Commentaries to Article 15.

More, in any case, the Commentaries, with all the merit and virtues of assistance they bring to the interpretation of conventional provisions, are not, themselves, law.

Also the fact that Portugal initially made a Reservation to subparagraph b) of No. 2 of Article 15 of the CMOCDE, which added an additional requirement for Portugal to recognize the exclusive taxation competence of a State of Residence, militates in the same sense of clarification of any doubt that may have existed at that time.

Furthermore, we are not unaware that there has been, in the past, Judicial Precedent in the sense contrary to that we follow with reference to No. 2 of Article 15. Still, and always with all the respect that is due, we believe that as of the present date the doubts that, in earlier times of validity of the CDT (as of others also themselves drawn from the CMOCDE as translated into Portuguese), may legitimately have arisen in the face of a less rigorous wording which was indeed conferred on the provision in the Portuguese version are no longer justifiable. Doubts which, reiterate, we see no reason for, if they have existed, to subsist.

Finally, referring also to the year 2012, it does not raise any question for us regarding the determination of the State of Residence. Proven as it is in the record that the TP resided always, in that year, in Portugal, until he moved his residence to the Czech Republic on 1 September, there is no doubt (this is our understanding) that the criteria enshrined in our internal law are applicable to fill No. 1 of Article 4 of the CDT. And thus, to consider the TP in that same year as Resident for this purpose, in Portugal.

With reference, therefore, to the Assessments relating to 2012

We would hear the other defects invoked by the Claimant and, concluding that they do not obtain (as to the alleged lack of reasoning, see what is stated in the Decision and, also, the fact that the TP demonstrates after all to know the cognitive path of the Respondent, and as to the alleged omission of the right to be heard, see the principle of beneficial use of the act), we would decide on the lack of merit of the Arbitral Request in this measure. That is, in the part referring to the Tax assessments reported to the year 2012 (presupposing due recognition of the tax credit cf. Article 23 of the CDT), and in the part relating to the corresponding request for indemnity interest, we would deny the appeal.

As to the year 2013.

In light of the facts proven and the TP having resided throughout the year 2013 in the Czech Republic, we see no way but to consider the TP in that year as Resident in that country.

We know that for purposes of the CMOCDE (and the CDT P-RC) residence will be determined, in the limit, by the tiebreaker rules contained in Nos. 2 and 3 of Article 4 of the CMOCDE/the CDT.

In this case, given the factual circumstances proven, if the qualification as Resident in the Czech Republic did not follow from No. 1 of Article 4, it would necessarily follow from the rules of No. 2 of the same Article.

Being Resident there, and earning dependent employment income there, the situation comes down, in our view, to the rule contained in the first part of No. 1 of Article 15. That is, the Czech Republic has exclusive taxation competence. And the assessments issued by the Respondent cannot, thus, be maintained in the Legal Order.

It should be noted, further, that in this sense we do not concur, as to the year 2013, with the assertion contained in the Decision – p. 13, penultimate paragraph – to the effect that the regime of the Convention does not presuppose the Claimant's residence in the Czech Republic for income from dependent employment earned there to be (we would say: may be) taxed there. Indeed, for such income to be taxed with exclusivity, we understand, as follows from the foregoing, that the TP's residence in that same State is required.

Sofia Ricardo Borges

FOOTNOTES:

[1] Available at www.dgsi.pt, as with the remaining case law cited without mention of source.

[2] See Assembly of the Republic Resolution No. 26/97, published in the Official Gazette I Series-A, of 09-05-1997.

[3] See point 21 of the Respondent's response.

[4] Decision of 16-11-2016, delivered in case 0761/15.

[5] See, also, with interest for the interpretation of Article 15, albeit regarding the Operative Principles of International Tax Law, Paula Rosado Pereira, "Princípios do Direito Fiscal Internacional: Do Paradigma Clássico ao Direito Fiscal Europeu" [Principles of International Tax Law: From the Classical Paradigm to European Tax Law], Theses Collection, Almedina, 2011, p. 104; and, albeit regarding two Judicial Decisions, and in Commentary to the same, Gustavo Lopes Courinha, "Estudos de Direito Internacional Fiscal" [Studies in International Tax Law], A AFDL Publisher, Lisbon, 2015, pp. 26-69.

[6] Without prejudice to it having exclusive taxation competence in the case of, and to the extent that, it is simultaneously the State of Residence.

[7] Regarding the interpretation of Treaties in Tax matters, see, among others, Alberto Xavier, op. cit., p. 149 et seq.; Philip Baker, op. cit., p. 21 et seq.

[8] Paragraph 1 of the Commentaries to Article 15.

[9] Philip Baker, op. cit., p. 299: "This is somehow misleading: Article 15(1) provides that the state of residence of a taxpayer should have the exclusive right to tax income from employment, unless the employment is exercised in the other Contracting State (...)".

[10] In the words of Alberto Xavier, op. cit., p. 153: "The interpretative weight of the Commentaries cannot, therefore, go beyond what is recognized to the best doctrine."

[11] Withdrawn in 1995.

[12] See, first of all, the Decisions Commented by Gustavo Lopes Courinha, op. cit., p. 27 and p. 53.

Frequently Asked Questions

Automatically Created

How does the Double Taxation Convention between Portugal and the Czech Republic apply to employment income (IRS)?
The Double Taxation Convention between Portugal and the Czech Republic applies to employment income (rendimentos de trabalho dependente) by establishing tie-breaker rules to determine tax residency when a person could be considered resident in both countries. Under these conventions, employment income is generally taxable in the country where the work is physically performed, unless specific exceptions apply (such as short-term presence or employment by a non-resident employer). The Convention prevents the same income from being taxed twice by allocating taxation rights between the treaty countries. In this case, the taxpayer argued that as a Czech resident working in Prague for a Czech company, his employment income should be taxed exclusively in the Czech Republic under the Convention, not in Portugal, even though he had previously been resident in Portugal.
Can a taxpayer challenge IRS tax assessments based on lack of proper justification (falta de fundamentação)?
Yes, taxpayers can challenge IRS assessments based on lack of proper justification (falta de fundamentação) as this constitutes a formal defect that violates Portuguese tax law. Article 77 of the LGT requires all tax acts to be properly reasoned, stating the factual and legal grounds for the decision. The reasoning must be sufficient for taxpayers to understand why the tax was assessed and to effectively exercise their right of defense. An assessment lacking adequate reasoning is illegal and subject to annulment. In this arbitral proceeding, the Claimant alleged defect of lack of reasoning as one of the grounds for challenging the IRS assessments, arguing that the tax authorities failed to properly explain why they considered him a Portuguese tax resident for 2012 and 2013 despite evidence of his relocation to the Czech Republic.
What are the residency rules under Article 16(1) of the Portuguese IRS Code for tax purposes?
Article 16(1) of the Portuguese IRS Code (Código do IRS) establishes that persons are considered tax residents in Portugal if, on January 1st of the relevant year, they: (a) remain in Portuguese territory for more than 183 days, consecutive or interpolated, in any 12-month period beginning or ending in the year concerned; or (b) having remained for a shorter period, have on any day of that period a dwelling under circumstances that suggest intention to maintain and occupy it as habitual residence; or (c) on December 31st of the relevant year, are crew members of ships or aircraft if the ships or aircraft are registered in Portugal. Tax residency determines whether a person is subject to worldwide taxation in Portugal. In this case, the taxpayer contested the application of Article 16(1), arguing that he should not be classified as a Portuguese resident for 2012-2013 because he had relocated his habitual residence to the Czech Republic.
Is the right to a prior hearing (direito de audição) under Article 60(1) of the LGT mandatory before IRS tax assessments?
Yes, the right to prior hearing (direito de audição prévia) under Article 60(1) of the LGT is mandatory before the tax authorities issue assessments that negatively affect taxpayers' rights or legally protected interests. This procedural guarantee allows taxpayers to present their views and submit evidence before a final decision is made. Failure to grant prior hearing when required constitutes a procedural violation that can invalidate the tax act. However, Article 60 establishes exceptions where prior hearing may be dispensed with, such as in cases of tax assessments based on taxpayer declarations or when legal provisions specifically exclude this requirement. In this case, the Claimant alleged that the AT violated Article 60(1) by not granting prior hearing before issuing the additional IRS assessments for 2012 and 2013, though the AT would likely argue that prior hearing was not required for assessments based on declared information or that the right was adequately provided during the administrative complaint (reclamação graciosa) phase.
How can taxpayers use CAAD tax arbitration to contest IRS assessments and denied complaints (reclamação graciosa)?
Taxpayers can use CAAD (Centro de Arbitragem Administrativa) tax arbitration as an alternative dispute resolution mechanism to contest IRS assessments and decisions denying administrative complaints (reclamação graciosa). Under the RJAT (Legal Regime of Arbitration in Tax Matters), taxpayers may request constitution of an arbitral tribunal to challenge the legality of tax acts, including IRS assessments and decisions on administrative complaints, without first resorting to judicial courts. The arbitration process is generally faster than judicial proceedings, with decisions typically issued within six months (extendable). Taxpayers can challenge assessments on substantive grounds (incorrect application of law, factual errors) and procedural grounds (lack of reasoning, violation of right to hearing). To use CAAD arbitration, taxpayers must file a request within the legal deadline, pay the required fee, and the dispute value must fall within CAAD's jurisdiction. Arbitral decisions have the same force as judicial court decisions and are binding on the tax authorities, providing an efficient alternative to traditional litigation for resolving IRS disputes.