Summary
Full Decision
ARBITRAL DECISION
The arbiter Pedro Miguel Bastos Rosado, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Singular Arbitral Tribunal, decides as follows:
Report
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A..., with the tax identification number..., resident in..., ..., ..., ..., United States of America, hereinafter referred to as the Claimant, presented, on 23 April 2018, a request for arbitral ruling, with a view to the declaration of illegality and consequent annulment of the act of assessment of Personal Income Tax (IRS), for the year 2016, with the number 2017..., in the amount of € 10,941.19 (ten thousand nine hundred and forty-one euro and nineteen cents), as well as of the decision dismissing the administrative review petition presented, with the TAX AND CUSTOMS AUTHORITY being the Respondent, hereinafter referred to as the Respondent or AT.
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The subject matter of the request for arbitral ruling consists of the declaration of illegality and consequent annulment of the tax act of IRS assessment referred to in point 1 (mediate object) and of the decision dismissing the administrative review petition presented (immediate object), on the grounds of lack of reasoning and violation of law, due to error in the legal premises.
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The Claimant further requests the reimbursement of the tax paid unduly, plus compensatory interest, at the legal rate, until the full reimbursement of the amount due, calculated on the amount paid unduly.
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The request to constitute the arbitral tribunal was accepted by the President of the Centre for Administrative Arbitration (CAAD), on 24 April 2018, and subsequently notified to the AT.
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The Claimant did not proceed to appoint an arbiter, wherefore, pursuant to article 6, paragraph 1, and article 11, paragraph 1, letter a) of the RJAT, the President of the Deontological Council of the CAAD designated, on 29 May 2018, the undersigned as arbiter of the singular arbitral tribunal, which communicated acceptance of the designation within the deadline.
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On 14 June 2018, the parties were notified of the arbiter's designation, having raised no objections.
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In accordance with the provisions of article 11, paragraph 1, letter c) of the RJAT, the singular arbitral tribunal was constituted on 4 July 2018.
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To substantiate the request for arbitral ruling, the Claimant alleged, in summary, the following:
8.1 That she obtained rental income from real properties leased in Portuguese territory in the fiscal year 2016;
8.2 That she has losses to carry forward from the years 2012 and 2015 and that the same should be deducted in the fiscal year 2016;
8.3 That the AT did not consider the option for aggregation of all rental income (category F) of IRS as declared in Annex F of IRS Form 3 for the fiscal year 2016;
8.4 That the AT disregarded the carry forward of losses determined in the years 2012 and 2015 in the 2016 IRS assessment;
8.5 That the assessment act contested, as well as the decision dismissing the administrative review petition presented against it, violate the principles of taxation of actual income and of tax legality, contained in article 103 of the Constitution of the Portuguese Republic (CRP) and the provisions of article 8, paragraph 2, of the CRP, by violation of article 26 of the Convention to Avoid Double International Taxation between Portugal and the United States of America (CDT);
8.6 That the assessment act contested, as well as the decision dismissing the administrative review petition presented against it, suffer from the vice of violation of law, by violation of the norms contained in articles 22, paragraphs 1 and 3, letter a), 55, paragraphs 1 and 2, and 72, paragraphs 8 and 9, all of the IRS Code and of article 8 of the General Tax Law (LGT);
8.7 That such acts should further be annulled for being based on error of law and fact attributable to the AT;
8.8 That such acts are further illegal for lacking reasoning;
8.9 The Claimant concludes by alleging that the express decision dismissing the administrative review petition and the IRS assessment should be declared illegal and annulled, making a request for reimbursement of the tax paid unduly, as well as for payment of compensatory interest.
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Notified in accordance with the terms and for the purposes of article 17 of the RJAT, the Respondent presented a reply and remitted the "administrative file" (hereinafter referred to only as AF).
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In its reply, the AT invoked, in summary, the following:
10.1 - That the arguments raised by the Claimant "distort (…) the structural principles of IRS" and that the Claimant "also obfuscates essential norms for the correct application of law to the present dispute" (see articles 17 and 18 of the Reply);
10.2 - That as regards rental income of non-residents "letter a) of paragraph 3 of article 22 of the CIRS determined, and was determining, that aggregation does not occur, with instead a taxation being provided by way of the application of rates with special or liberatory character, namely in what is provided in article 72 of the CIRS." (article 22 of the Reply);
10.3 - That at the date of the facts, rental income obtained by non-residents was taxed in accordance with paragraph 1 of article 72 of the CIRS at a rate of 28%.
10.4 - That the operation of loss deduction is a prior, anterior and conditioned process by the possibility of aggregation;
10.5 - That the law prevents non-residents from aggregating the rental income obtained by them in national territory;
10.6 - That, a fortiori, that prior operation (loss deduction) cannot be carried out, since the same would always be conditioned by the prior aggregation of income (only possible for residents);
10.7 - That, since aggregation is not possible, the application of the regime of article 55 of the CIRS to the factual situation of the case is prohibited.
10.8 - That article 55 of the CIRS "cannot be interpreted otherwise than in the sense that only in cases where the tax base is determined through the aggregation of income can loss deduction, determined in prior years, be carried out." (article 39 of the Reply).
10.9 That the request should be ruled unfounded, with no place for the payment of any compensatory interest.
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By order of 20 October 2018, the meeting provided for in article 18 of the RJAT was dispensed with and it was determined that the process proceed with optional written submissions.
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In the same order of 20 October 2018, 17 December 2018 was indicated as the deadline for issuing the arbitral decision.
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The parties presented written submissions, in which they reiterated the positions assumed in the initial procedural documents.
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By order of 17 December 2018 it was indicated that the arbitral decision would be issued and notified to the parties by the end of the deadline set in article 21, paragraph 1 of the RJAT (4 January 2019).
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By order of 4 January 2019, the Tribunal decided to extend the deadline for issuing the arbitral decision by a period of two months, indicating that the arbitral decision would be issued and notified to the parties by 4 March 2019.
II. Preliminary Examination
The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, paragraph 1, letter a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January, and is competent.
The parties are duly represented, enjoy standing and procedural capacity and have legitimacy (articles 4 and 10, paragraph 2, of the same decree and article 1 of Ordinance No. 112-A/2011, of 22 March).
The process is not affected by nullities.
The request to constitute the arbitral tribunal is timely.
III. Factual Matters
1. Proven Facts
The following facts with potential relevance to the decision are deemed proven:
A) In the year 2016, the Claimant had tax residence in the United States of America, being duly classified as a non-resident taxpayer in Portugal.
B) On 22 May 2017, the Claimant, as a non-resident, submitted via the internet IRS Form 3, relating to income for the year 2016 (...), composed of Annex "F", where income from rent in the amount of Euro 53,717.46 was declared, on which source withholdings of Euro 1,458.77 were made, maintenance and conservation expenses of Euro 6,610.67 and Municipal Tax on Real Property in the amount of Euro 2,821.20 (See documents nos. 1 and 8 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
C) In the said IRS Form 3, the Claimant declared in field 06 of table 7B of the respective Annex "F" that she intended to opt for the aggregation of the income indicated in field 4, in the amount of Euro 53,717.46, (See documents nos. 1 and 8 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
D) On 20 June 2017, the AT carried out the IRS assessment for the year 2016, number 2017..., with the amount payable of Euro 10,941.19, which was notified to the Claimant (See documents nos. 1 and 2 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
E) Not having the assessed amount been paid by 31 August 2017, the AT instituted on 21 September 2017 the enforcement process no. ...2017... (See document no. 1 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
F) On 24 October 2017, the Claimant proceeded to pay the amount due for execution, which resulted in the extinction of the enforcement process and the inherent full payment of the amount of the IRS assessment for the year 2016, no. 2017... (See document no. 1 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
G) With regard to the years 2011 and 2013 and 2015, the Claimant presented requests for arbitral ruling requesting the declaration of illegality of the IRS assessments submitted for those periods, which equally disregarded the deduction of losses from prior years to the rental income obtained;
H) These requests resulted in Arbitral Decisions on Process no. 96/2015-T (years 2011 and 2013) and on Process no. 399/2017-T (year 2015), which came to grant the claims of the now Claimant as to the acceptance of loss carry forward and, consequently, declare illegal the IRS assessments for the fiscal years 2011 and 2013 and 2015.
I) On 13 December 2017, the Claimant submitted to the AT, via the internet, an administrative review petition against the IRS assessment act of 2016 no. 2017..., which came to correspond to the administrative review petition procedure no. ...2017... (See documents nos. 1 and 3 attached with the request for arbitral ruling and the Administrative File, whose contents are deemed reproduced);
J) By Memorandum no. ... of 2018-02-02 from the AT, the Claimant was notified of the decision dismissing the administrative review petition procedure no. ...2017... (See document no. 1 attached with the request for arbitral ruling, whose contents are deemed reproduced, in which it is stated, among other things, the following:
II – ALLEGATIONS OF THE PETITIONER
It follows from what is alleged in the petition that the taxpayer disagrees with the assessment contested, invoking that in the same the option for aggregation of all income of category F was not considered, as declared in field 7 B of Annex "F", for purposes of carry forward of losses determined in the years 2012 and 2015, to the positive net result, determined per property, in the year 2016.
Furthermore, with regard to a similar issue, the Centre for Administrative Arbitration (CAAD) has already ruled favorably, for the years 2011 and 2013, in the process with no. 96/2015-T, whose challenge was presented following the orders of dismissal issued in the administrative review petition and hierarchical appeal procedures presented for said years, an identical process having been presented with regard to the assessment for the year 2015, which is awaiting the decision of the CAAD.
It thus requests that the assessment now contested, relating to the year 2016, be corrected, and a new assessment be processed where the option for aggregation and the deduction of losses in the global amount of 8,012.14 € are taken into account, with the value of 7,829.44 € relating to losses determined in the year 2012 and 182.70 € in the year 2015, with the consequent reimbursement in the amount of 2,243.40 €.
III – DESCRIPTION OF FACTS
On 22-05-2017, the taxpayer, now petitioner, as a non-resident, submitted via the internet IRS Form 3, relating to the income for the year 2016, ..., composed of Annex "F", where income from rent in the amount of 53,717.46 € was declared, on which source withholdings of 1,458.77 € were made, conservation and maintenance expenses in the amount of 6,610.67 € and Municipal Tax on Real Property in the amount of 2,821.20 €.
In the said declaration, the taxpayer declared in field 06 of table 7B of the respective Annex "F" that he intended to opt for the aggregation of the income indicated in field 4, in the amount of 53,717.46 €, see sheet 8 of the case file.
On 20-06-2017, the assessment now being contested was carried out, which, not having been paid within the voluntary payment deadline, gave rise to the institution of the enforcement process no. ...2017..., on 21-09-2017, which is extinct by voluntary payment on 24-10-2017, see sheet 4 of the present procedure.
From consultation of the computer system, namely the running account – Losses Category F, the balance of losses to be deducted is ascertained to relate to 2012 and 2014, the value being 24,949.60 € and 317.24 €, respectively, see sheet 11 of the present case file.
IV – EXAMINATION OF THE REQUEST
The petitioner and her respective tax representative have legitimacy for the act, in accordance with article 9 of the CPPT and articles 19, paragraph 6, and 65 of the General Tax Law (LGT), the means of action used is the appropriate one, in accordance with articles 68 and 99 of the CPPT, and the present action appears to be timely, in accordance with paragraph 1 of article 70 of the CPPT, since it was presented on 13-12-2017, within the 120-day period from the end of the voluntary payment deadline which occurred on 31-08-2017.
At the present date, there is no knowledge that any judicial challenge has been presented on the matter under analysis.
In the case at hand, the petitioner intends that the option for aggregation of category "F" income be considered, in accordance with what was indicated in the declaration, which was presented in the capacity of non-resident, and deduction of losses in the global amount of 8,012.14 €, with the value of 7,829.44 € relating to loss carry forward from the year 2012 and 182.70 € from the year 2015.
With regard to the taxation of non-resident individuals, IRS applies only to income obtained in Portuguese territory, as provided in paragraph 2 of article 15 of the Personal Income Tax Code (CIRS), resulting from letter a) of paragraph 3 of article 22 of the CIRS the impossibility of aggregation of income obtained by them.
With no aggregation, the rental income obtained by the petitioner, as a non-resident in national territory or in another Member State of the European Union or of the European Economic Area, in the year 2016, is taxed at the special rate of 28%, in accordance with the provisions of letter e) of paragraph 1 of article 72 of the CIRS.
From the analysis of the assessment in question in the present case, it is verified that to the global amount of rental income obtained, in the amount of 53,717.46 €, the total of expenses incurred and paid, provided for in article 41 of the CIRS, was subtracted, in the amount of 9,431.87 €, resulting in the net taxable income in the amount of 44,285.59 €.
Since the losses of category F generated in 2012 and 2014, contained in the computer system, are prior to 1 January 2015, in accordance with paragraph 1 of article 55 of the CIRS, in the wording prior to Law No. 82-E/2014, of 21 December, only in cases where the tax base is determined through the aggregation of all income can the negative result determined in any category of income be deductible to the set of net income subject to taxation, and the negative net result determined in category F can only be deductible in the same category, being able to be carried forward for the five years following that to which it relates, see paragraph 2 of the said article.
Thus, since the possibility of aggregation is not granted to non-resident taxpayers, that is, the income of category F not entering into the total calculation of net income subject to taxation, the mechanism of loss deduction provided for in article 55 of the CIRS is not applicable.
As for the decision of the Arbitral Tribunal which the petitioner refers to, it has effects only in the concrete terms of its decision, not applying to other situations, namely, the assessment in question in the present case.
V – PROPOSED DECISION
In light of the above, it is concluded that the present request cannot proceed, with the proposal being Dismissal, granting to the petitioner her respective right to be heard.
VI – ADDITIONAL INFORMATION – PRIOR HEARING
Once the investigation of the process was completed, information was drawn up and the corresponding draft decision was made, on 04-01-2018, in the sense of dismissal, and knowledge thereof was given to the petitioner's representative through memorandum no..., dated 05-01-2018, accompanied by a photocopy of the said information.
The notification was made by registered mail on the same date, as shown in the record on sheet 24, for the purpose of the right to prior hearing provided for in article 60 of the General Tax Law, and a deadline of 15 days was granted for the exercise of this right which is provided for in paragraph 6 of the same article.
Since, to date, the taxpayer has not exercised this prerogative and the deadline for that purpose has already elapsed, the draft decision should be confirmed in which dismissal of the petition is proposed and the interested party should be notified of the right to appeal or judicially contest the decision, in accordance with articles 66 and 99 of the CPPT.
In light of the above, I am of the opinion that the decision of dismissal should be maintained, converting the draft decision into final.
To superior consideration.
L) On 23 April 2018, the Claimant presented the request for arbitral ruling that gave rise to the present process.
M) The Claimant has a loss carry forward from category F of IRS in the global amount of 8,012.14 Euro, with the value of 7,829.44 Euro relating to the year 2012 and 182.70 Euro relating to the year 2015.
2. Substantiation of the Factual Matters Deemed Proven
The proven facts are based on documents attached by the Claimant with the request for arbitral ruling and on the administrative file, whose authenticity has not been called into question.
With regard to the carry forward of losses from category F of IRS, the Tax and Customs Authority does not question what is asserted by the Claimant regarding the amounts of losses to be carried forward.
And in the decision dismissing the administrative review petition procedure no. ...2017... (See document no. 1 attached with the request for arbitral ruling) the following is stated:
"From consultation of the computer system, namely the running account – Losses Category F, the balance of losses to be deducted is ascertained to relate to 2012 and 2014, the value being 24,949.60 € and 317.24 €, respectively, see sheet 11 of the present case file".
"Furthermore, with regard to a similar issue, the Centre for Administrative Arbitration (CAAD) has already ruled favorably, for the years 2011 and 2013, in the process with no. 96/2015-T, whose challenge was presented following the orders of dismissal issued in the administrative review petition and hierarchical appeal procedures presented for said years, an identical process having been presented with regard to the assessment for the year 2015, which is awaiting the decision of the CAAD".
"Since the losses of category F generated in 2012 and 2014, contained in the computer system, are prior to 1 January 2015, in accordance with paragraph 1 of article 55 of the CIRS, in the wording prior to Law No. 82-E/2014, of 21 December, only in cases where the tax base is determined through the aggregation of all income can the negative result determined in any category of income be deductible to the set of net income subject to taxation, and the negative net result determined in category F can only be deductible in the same category, being able to be carried forward for the five years following that to which it relates, see paragraph 2 of the said article."
It is thus manifest that when the decision on the administrative review petition procedure was made, no consideration was given to losses with regard to the assessment for the year 2015, firstly because the arbitral decision on Process no. 399/2017-T, relating to the year 2015, had not yet been issued, within the scope of which the deduction of losses from prior years came to be accepted and, consequently, caused a change in the running account – Losses Category F and the respective new balance of losses to be deducted.
3. Unproven Facts
There are no other facts with relevance to the arbitral decision that have not been deemed proven.
IV. Matters of Law
1. Order of Appraisal of Vices
In accordance with the provisions of article 124 of the CPPT, subsidiarily applicable by virtue of the provisions of article 29, paragraph 1, of the RJAT, with no vices being attributed to the contested acts that lead to a declaration of non-existence or nullity, nor a relationship of subsidiarity being indicated, the order of appraisal of the vices should be that which, according to the prudent discretion of the judge, most stably or effectively protects the interests offended.
In the appraisal of the vices attributed to the act whose declaration of illegality is requested, one should begin with "the vices whose establishment determines, according to the prudent discretion of the judge, the most stable or effective protection of the interests offended" [article 124, paragraph 2, of the CPPT, applicable by virtue of the provisions of article 29, paragraph 1, letter a), of the RJAT], since "tax arbitration aims to strengthen the effective and actual protection of the rights and legally protected interests of taxpayers" (article 124, paragraph 3, of Law No. 3-B/2010, of 28 April).
For this reason, the vice of lack of reasoning invoked by the Claimant will not be appraised as a priority, which has a merely formal nature and whose establishment does not preclude the possibility of renewal of the act with the same content, and one will begin by appraising the vice of violation of law, whose establishment prevents the renewal of the assessment act.
Since it appears that, from the establishment of the vice of violation of law, due to error in the application of the law concerning the taxation of rental income obtained by the Claimant in the year 2016, there will result effective protection of the offended interests, we shall proceed to its appraisal.
2. Appraisal of the Merits of the Request for Arbitral Ruling
The two fundamental questions consist in knowing whether, in the case under analysis: I) the aggregation of rental income obtained in the year 2016 by non-residents in national territory would be admissible; and II) even if aggregation of said income were not admissible, whether loss deduction from category F, determined in prior years, would be possible.
The AT understands that the law not only does not permit non-residents to aggregate, but that the prior operation (loss deduction) is equally not capable of being carried out since the same would always be conditioned by the prior aggregation of income (only possible for residents).
In its Reply, the AT notes the existence of established jurisprudence of the CAAD regarding the matter at issue, "however it does not follow it" (see article 62 of the Reply).
The AT refers to Arbitral Decisions on Process no. 96/2015-T (regarding years 2011 and 2013) and on Process no. 399/2017-T (regarding year 2015).
It should be stated from the outset that the Arbitral Decisions in question, whose grounds and tenor we hereby express agreement with, did not fail to respond to the first of the questions – possibility or impossibility of aggregation of rental income obtained by non-residents in national territory – in a sense favorable to the position defended by the AT.
Let us see:
2.1. On the Possibility of Aggregation of Rental Income Obtained by Non-Residents in National Territory
Paragraph 2 of article 15 of the IRS Code provides that "in the case of non-residents, IRS applies only to income obtained in Portuguese territory", thus implementing the principle of territoriality or source of income versus the "worldwide income" principle applicable to residents in Portuguese territory.
As for income obtained by residents, the option of its taxation through aggregation is provided for.
Aggregation consists, from the outset, of the operation by which the total income of the various categories of IRS is determined, with a view to determining net income, after the deductions and reductions provided for in the sections following article 22 of the IRS Code have been effected.
And it is on this net income that the general and progressive rates will apply, in the case of residents in national territory.
Conversely, as regards income obtained in Portuguese territory by non-residents, letter a) of paragraph 3 of article 22 of the IRS Code determined that aggregation of this income cannot occur.
Article 22
Aggregation
Paragraph 3 - The following are not aggregated for the purposes of their taxation:
a) Income obtained by taxpayers who are non-residents in Portuguese territory, without prejudice to the provisions of paragraphs 8 and 9 of article 72.
Letter e) of paragraph 1 and paragraph 8 of article 72 of the CIRS further provides:
Article 72
Special Rates
1 - The following are taxed at the autonomous rate of 28%:
e) Rental income.
8 - The income provided for in letters c) to e) of paragraph 1, in paragraph 5 and in paragraph 6 may be aggregated by option of their respective holders resident in Portuguese territory.
Accordingly, the taxation of rental income obtained by non-residents is provided for by way of the application of a special proportional rate of 28%.
This special rate does not assume a liberatory character, presupposing declarative obligations to be fulfilled by non-residents who obtain this category of income.
On this question, as already mentioned, the doctrine set forth in the aforementioned Arbitral Decisions is endorsed in the present Decision.
"The IRS Code, approved by Decree-Law No. 442-A/88, of 30 November, introduced a new model of taxation of personal income, in obedience to the constitutional imperative that 'Personal income tax shall aim at the reduction of inequalities and shall be unique and progressive, taking into account the needs and income of the family unit', established in paragraph 1 of article 104 of the CRP."
"It was in this context that the determination of taxable income came to be made through aggregation, that is, by the sum of net income from the various income categories (with some exceptions), after the specific deductions of each of those categories had been made, as well as the deduction of some losses, thus arriving at the global net income."
"To justify the creation of the aggregation figure, paragraph 3 of the Preamble of the IRS Code provides that 'only the unitary perspective allows the distribution of the tax burden according to a rational scheme of progressivity, in consonance with taxpaying capacity'."
"Understandably, this unitary perspective of personal income taxation would only apply to taxpayers resident in national territory, since non-residents would only be taxed on income obtained in this territory, subject to liberatory rates or special rates, of a proportional nature and without the possibility of aggregation."
"Effectively, aggregation has the fundamental objective of taxation of the overall income of taxpayers resident in national territory, by the application of progressive rates, with a view to the implementation of the principle of taxpaying capacity in personal income taxation."
"(...) the relevant normative precepts of the IRS Code (see paragraph 2 of article 22 and paragraph 5 of article 72) provide, in the wording in force on the date in question (2016), that rental income obtained by taxpayers who are non-residents in national territory relating to real property located therein are taxed at the special rate of 28%, with no possibility of aggregation."
The Claimant also invokes the principle of non-discrimination enshrined in article 26 of the CDT concluded between Portugal and the United States of America to substantiate her claim.
Adhering to the contents of the aforementioned Arbitral Decisions, it should be stated that:
"The principle of non-discrimination is a corollary of the general principle of equality, with regard to the criterion of nationality."
"Effectively, the CDT itself provides, in its article 26, that the objective element of the provision is to prevent foreigners (non-nationals of one of the States) from being subject, in a given State, to any taxation or corresponding obligation that is different or more onerous than those to which nationals of that State who are in the same situation are or could be subject."
"Falling, therefore, the emphasis of the principle of non-discrimination on its foundation in the nationality of a given taxpayer, rather than on their tax residence, which is considered a legitimate criterion for differentiated tax treatment."
"The Claimant further invokes the decision made in arbitral process no. 127/2012-T."
"However, the question there decided relates to 'taxation of capital gains resulting from the onerous disposal of real rights over real property, carried out by a taxpayer resident in another Member State of the European Union', a situation which is, manifestly, neither objectively nor subjectively comparable to that of the present case."
By the above, we equally conclude that the assessment in question does not violate the principle of non-discrimination provided for in the CDT concluded between Portugal and the United States of America, and, consequently, does not suffer from unconstitutionality by violation of article 8 of the CRP, which establishes the primacy of international law over the domestic order, the norms contained in the IRS Code referred to above being applicable to the concrete situation of the Claimant.
Since aggregation is not possible in the situation at hand, the position of the Claimant is nonetheless curious. While on the one hand she insists on the possibility of being able to opt for aggregation, on the other hand she ends up requesting reimbursement of the amount paid in excess without heeding the consequences of aggregation itself.
For rental income, when taxed autonomously, is taxed on the basis, as stated above, of a special rate of 28%. Already in the case of aggregation (which only appears possible for residents in national territory), rental income becomes subject to the general and progressive rates of article 68 of the CIRS.
For this reason, the option for aggregation of rental income (when it exists) should be carefully weighed, since the general and progressive rates of article 68 of the CIRS could lead to a total IRS collection that is higher.
Now, if we carefully look at the taxable income contained in the IRS assessment demonstration note, and even after considering the losses from prior years invoked by the Claimant, if aggregation were possible and accepted, it appears to us manifest that from the application of the average and normal rates (columns A and B) of article 68 of the CIRS a total collection would result that is higher than that which results from the application of the special rate of 28% of article 72 of the CIRS.
Accordingly, the Claimant's claim that aggregation be considered would only be understandable if aggregation were a necessary condition, as is the understanding of the AT, for loss deductions to be accepted, which, as we have already anticipated above, is not the position of the Tribunal.
Thus, the position of this Tribunal is that, notwithstanding the declarative obligation that rests on non-resident taxpayers who obtain rental income (category F) in Portugal, it is not possible to aggregate such income obtained by a taxpayer with tax residence in the United States of America, as is the case with the Claimant in the year 2016.
2.2. On the Possibility of Loss Deduction from Category F, Determined in Prior Years, Even if Aggregation of Rental Income Obtained by Non-Residents in National Territory Is Not Admissible
The Respondent contends that, since aggregation of rental income obtained by non-residents is not possible, from this "(…) it inexorably results that the operation of deductions, particularly loss deduction, which is what concerns us here (which is not a specific deduction of Cat. F), and reduction is a prior, anterior and conditioned process by the possibility of aggregation."
"Concluding that by the lack of normative provision that prevents non-residents from aggregating the income obtained by them obtained in national territory - in the case at hand, the income of Cat. F (rental) -, a fortiori, that prior operation (loss deduction) is not capable of being carried out, since the same would always be conditioned by the prior aggregation of income (only possible for residents.)".
Let us examine this question:
Paragraph 1, letter b) and paragraph 8 of article 55 of the CIRS provide (wording of Law No. 82-E/2014, of 31 December):
Article 55
Loss Deduction
1 - For each income holder, the negative net result determined in any category can only be deducted to its positive net results of the same category, in the following terms:
b) The negative net result determined in a given year in category F can only be carried forward for the six years following that to which it relates;
8 - The right to carry forward the negative net result provided for in letter b) of paragraph 1 is forfeited when the properties to which the expenses relate do not generate category F income for at least 36 months, consecutive or interpolated, of the five years following that in which the expenses were incurred.
Citing Arbitral Decision No. 96/2015-T on this matter, it is an established point that "the historical legislator of IRS (…) did not intend the taxation of every and any increase, but only of the net increase".
However, and still following the line of thought propounded by this Decision, "the determination of net income is not satisfied merely by the consideration of deductions specific to each category of income (the reference to article 41 of the IRS Code acquiring relevance, in the present case, which refers to the possibility of specific deductions to rental income in each year)."
"Since expenses incurred for the obtaining of income in a given year may exceed the income itself of that same year."
"In this sense, the need arises for, under pain of, with taxation, reaching the income-producing source, to also permit the deduction of losses from prior years which, after all, 'are nothing more than the excess over the specific deduction to be considered in the year in which the expenses are incurred' (see Arbitral Decisions referred to above)."
"Now, taking into account that the losses to be carried forward are nothing more than the accumulation of specific deductions which, in each year, can only be deducted from the taxable matter of that same year, up to its amount, and can be deducted from the positive taxable matter of subsequent years, within the time limit established by law, it is not seen how the said principle of taxation of net income can be satisfied without consideration being given to losses to be carried forward from prior years."
And, as defended by the Claimant, there is no norm that excludes the possibility of loss deduction by non-resident taxpayers.
"Considering the arguments of the Respondent, if it is true that aggregation operates at a phase subsequent to that of the subtraction of 'deductions and reductions provided for in the sections following' (see paragraph 1 of article 22 of the IRS Code), from this it will not necessarily follow that, if aggregation is not possible, it ceases to be possible to benefit from these deductions."
"Effectively, the only exception of this kind is that which refers to loss deduction from category G (relating to certain equity capital gains), by residents in national territory, in accordance with letter d) of paragraph 1 of article 55 of the CIRS, in the wording in force in the year under analysis (2016), according to which 'The negative balance determined in a given year, relating to the operations provided for in letters b), c), e), f), g) and h) of paragraph 1 of article 10, can be carried forward for the five years following when the taxpayer opts for aggregation.' (emphasis ours)."
"Contrary to the position transmitted by the AT on the possibility of loss deduction without prior aggregation, legal doctrine has already pronounced on the taxation of category F income obtained by residents, at proportional rates (although these can opt for aggregation), instituted by Law No. 66-B/2012, of 31 December (article 72, paragraph 7, of the IRS Code). We permit ourselves to cite Rui Duarte Morais, who states 'Note that, being at issue a special rate (and not a liberatory rate), this applies to income determined in the general manner, that is to say, to net income, meaning that the taxpayer continues to be admitted to make the specific deductions that the law provides for. As he will also maintain the right to carry forward losses he may have had, in this category, in prior years.' "
(See Arbitral Decision No. 96/2015-T).
By the above, the Tribunal concludes that it is possible for the Claimant to effect deductions of losses determined in the years 2012 and 2015 to the rental income obtained in 2016, notwithstanding the fact that aggregation of these income items is not possible.
In light of the above, and without need for further considerations, it is necessary to conclude that both the express dismissal of the administrative review petition no. ...2017..., which should not have been wholly dismissed but rather judged partially founded, and the contested IRS assessment suffer from the vice of violation of law, due to error regarding the legal premises, embodied in the erroneous interpretation and application of letter b) of paragraph 1 of article 55 of the CIRS, which implies the declaration of its illegality and consequent partial annulment, which will be decided in fine.
3. Prejudiced Questions
Since the request for arbitral ruling proceeds on the ground of a vice of violation of law due to error regarding the legal premises, by violation of letter b) of paragraph 1 of article 55 of the CIRS, which ensures effective and stable protection of the Claimant's rights, the appraisal of the other vices attributed to it is prejudiced, namely formal and procedural vices, such as the vice of lack of reasoning.
In fact, as is implicit in the establishment of an order of appraisal of vices, in the cited article 124 of the CPPT, once a vice that prevents the renewal of the contested act has been judged to exist, there is no need to appraise the others attributed to it.
Effectively, if it were always necessary to appraise all the vices attributed to tax acts, it would be immaterial the order in which their appraisal was made.
For this reason, once judgment is rendered on the request upon the ground of a vice of violation of law that prevents the renewal of the contested acts with the same tenor, the appraisal of the other vices attributed to it is prejudiced, whether formal and procedural, or also of violation of law.
4. Request for Reimbursement of the Amount Paid and Compensatory Interest
The Claimant makes a request for reimbursement of the amounts collected by the AT in excess, as well as for payment of compensatory interest.
The AT contends, in sum, that "the allegations of the Claimant cannot, in any way, proceed, since they make a manifestly erroneous interpretation and application of the legal norms subsumed to the case sub judice", that "it made a correct subsumption of the facts to the law", that there was no "error attributable to the services", wherefore "there is no place for the payment of any compensatory interest" (see articles 64 to 67 of the Reply).
In accordance with the provisions of letter b) of article 24 of the RJAT, the arbitral decision on the merits of the claim, against which no appeal or challenge is possible, binds the Tax Administration from the end of the deadline provided for appeal or challenge, the Administration being required to, in the exact terms of the establishment of the arbitral decision in favor of the taxpayer and by the end of the deadline provided for spontaneous execution of the decisions of judicial tax courts, "restore the situation that would have existed if the tax act subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose", which is in keeping with the provisions of article 100 of the LGT [applicable by virtue of the provisions of letter a) of paragraph 1 of article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial success of an administrative review petition, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject of the dispute, including the payment of compensatory interest, where applicable, from the end of the deadline for execution of the decision".
Although article 2, paragraph 1, letters a) and b), of the RJAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals functioning in the CAAD, making no reference to condemnatory decisions, it should be understood as comprehending within its jurisdiction the powers that in judicial challenge proceedings are attributed to tax courts, this being the interpretation that accords with the tenor of the legislative authorization upon which the Government based itself to approve the RJAT, in which it is proclaimed, as the first directive, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".
The judicial challenge process, despite being essentially an annulment process of tax acts, admits condemnation of the Tax Administration to pay compensatory interest, as is apparent from article 43, paragraph 1, of the LGT, in which it is established that "compensatory interest is due when it is determined, in an administrative review petition or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due" and from article 61, paragraph 4 of the CPPT (in the wording given by Law No. 55-A/2010, of 31 December, which corresponds to paragraph 2 in the initial wording), that "if the decision that recognized the right to compensatory interest is a judicial one, the period for payment is counted from the beginning of the deadline for its spontaneous execution".
Thus, paragraph 5 of article 24 of the RJAT, in saying that "payment of interest is due, regardless of its nature, in the terms provided for in the general tax law and in the Code of Procedure and Process in Tax Matters", should be understood as permitting the recognition of the right to compensatory interest in the arbitral process.
On the other hand, the right to compensatory interest depending on the right to reimbursement of amounts paid unduly, which are its calculation basis, it is implicit in the possibility of recognition of the right to compensatory interest the possibility of appraisal of the right to reimbursement of those amounts.
It is thus necessary to appraise the request for reimbursement of amounts unduly paid and for payment of compensatory interest.
By what has been stated, the request for arbitral ruling proceeds only partially as regards the IRS assessment no. 2017..., relating to the year 2016, in the part in which it did not consider the deduction of losses from category F in the global amount of 8,012.14 Euro, with the value of 7,829.44 Euro relating to the year 2012 and 182.70 Euro relating to the year 2015.
It is proven that, in the year 2016, the Claimant obtained a global income of 53,717.46 Euro, had specific deductions in the amount of 9,431.87 Euro and source withholdings of 1,458.77 Euro and that in the IRS assessment a special rate of 28% was applied to the taxable income.
With the losses from prior years in the amount of 8,012.14 Euro being considered, to be deducted from the taxable income determined in the assessment in question, it is manifest that, after the application of the special rate and after deducting from the collection the amount of the source withholding, the tax determined would be lower by 2,243.40 Euro, as requested by the Claimant in the administrative review petition procedure.
For this reason, the Claimant has the right to be reimbursed of this amount, by virtue of the said articles 24, paragraph 1, letter b), of the RJAT and 100 of the LGT, since such is essential to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been performed".
By the above, the request for reimbursement of the amount paid unduly of 2,243.40 Euro (two thousand two hundred and forty-three euro and forty cents) is established.
The illegality of this assessment is attributable to the AT, since it issued it on its own initiative, with erroneous interpretation of the law.
Consequently, the Claimant has the right to compensatory interest, in accordance with articles 43, paragraph 1, of the LGT and 61 of the CPPT, relating to the amount to be reimbursed.
Compensatory interest shall be paid from the date on which the Claimant made the payment until full payment of the amount to be reimbursed, at the legal default rate, in accordance with articles 43, paragraph 4, and 35, paragraph 10, of the LGT, article 61 of the CPPT, article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.
V. Decision
In light of the above, the Arbitral Tribunal decides:
To judge the request for arbitral ruling founded as regards the declaration of illegality of the administrative review petition decision no. ...2017..., in the part in which it did not accept loss deduction, and to annul the respective order of dismissal;
To judge the present request for arbitral ruling partially founded as regards the declaration of illegality and the consequent annulment of the act of assessment of Personal Income Tax (IRS), for the year 2016, no. 2017..., in the part in which it did not accept loss deduction in the part in which it did not consider the deduction of losses from category F in the global amount of 8,012.14 Euro, with the value of 7,829.44 Euro relating to the year 2012 and 182.70 Euro relating to the year 2015;
To judge founded the request for reimbursement to the Claimant only of the amount of 2,243.40 Euro (two thousand two hundred and forty-three euro and forty cents).
To judge founded the request in the part relating to the recognition of the right to compensatory interest in favor of the Claimant, by virtue of the part of the tax unduly paid, from the date on which the Claimant made the payment (24/10/2017) until full payment of the amount to be reimbursed (2,243.40 Euro), at the legal default rate.
VI. Value of the Process
In accordance with the provisions of articles 306, paragraph 2, and 297, paragraph 2 of the CPC, article 97-A, paragraph 1, letter a) of the CPPT and article 3, paragraph 2, of the Regulations of Costs in Tax Arbitration Processes, the value of the process is fixed at € 10,941.19 (ten thousand nine hundred and forty-one euro and nineteen cents).
VII. Costs
In accordance with the provisions of articles 22, paragraph 4, and 12, paragraph 2, of the RJAT, article 2, paragraph 1 of article 3 and paragraphs 1 to 4 of article 4 of the Regulations of Costs in Tax Arbitration Processes, as well as Table I attached to this regulation, the total value of costs is fixed at € 918.00 (nine hundred and eighteen euro), charged to the Tax and Customs Authority.
Lisbon, 4 March 2019
The Arbiter,
Pedro Miguel Bastos Rosado
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