Process: 21/2017-T

Date: July 28, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 21/2017-T) addresses whether taxpayers can claim IRS capital gains exclusion when reinvesting proceeds from selling their principal residence into a new home, despite not formally communicating their change of tax domicile. The taxpayers sold their residence on November 17, 2014, and reinvested proceeds seven days later on November 24, 2014, in a new property they immediately occupied as their principal residence. The Portuguese Tax Authority issued an assessment of €35,546.98, denying the reinvestment exclusion under Article 10(5)(a) of the IRS Code because the taxpayers failed to communicate the residence change to tax authorities, and one spouse subsequently changed fiscal domicile to Angola. The taxpayers argued that Article 10(5) and (6) require only actual permanent residence, not formal communication under Article 19(3) of the General Tax Law. They provided documentary evidence of occupying the new property as their habitual residence from November 2014. The central legal issue is whether the capital gains reinvestment exemption depends on procedural compliance with tax domicile notification requirements or substantive proof of permanent residence. This case clarifies the relationship between fiscal domicile formalities and substantive tax benefits for principal residence transactions, with significant implications for taxpayers reinvesting property sale proceeds.

Full Decision

ARBITRAL DECISION

I. REPORT

On 4 January 2017, taxpayers A... and B..., married, with tax identification numbers (NIF) ... and ..., respectively, resident in ..., no...., ... (hereinafter referred to as Claimants or, individually, as the Claimant) filed, pursuant to the combined provisions of Articles 2, no. 1, subparagraph a), 5, no. 2, 6, no. 1 and 10, no. 1, subparagraph a), all of the Legal Regime for Arbitration in Tax Matters (RJAT), approved by Decree-Law no. 10/2011, of 20 January, in conjunction with subparagraph a) of Article 99 and subparagraphs e) and f) of no. 1 of Article 102, both of the Code of Tax Procedure and Process (CPPT), a request for the constitution of a Single Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the respondent, with a view to declaring the illegality and consequent annulment of the income tax assessment for Personal Income Tax (IRS) for the year 2014 bearing number 2015..., in the amount of € 35,546.98 (thirty-five thousand, five hundred and forty-six euros and ninety-eight cents), sustained by the decision denying the gracious complaint no. ...2016....

The Claimants further petition for the condemnation of the Respondent to restitution of the amounts paid (value of the disputed assessment and increased by the tax enforcement proceedings within which the tax was paid), with accrual of indemnificatory interest, pursuant to Articles 43 and 100 of the General Tax Law (LGT).

Summary of the Parties' Positions

a. Of the Claimants:

The Claimants sustain the request for annulment of the IRS assessment for the year 2014 on the following facts and arguments:

1. At issue is the refusal of the AT to recognize the Claimants' right to exclusion of capital gains through reinvestment of the proceeds from the sale of their principal residence, provided for in Article 10, no. 5, subparagraph a), of the IRS Code, in the acquisition of a new property with the same purpose;

2. The alienation of their previous principal residence occurred on 17 November 2014 and, on 24 November 2014, the reinvestment of part of the proceeds in the acquisition of another property, which the Claimants allocated to their principal residence and that of their household, from the end of November 2014;

3. On 2 May 2015, the Claimants filed the IRS return, form 3, in which they declared the reinvestment of part of the proceeds, being subsequently notified of discrepancies in the completion of the return, which were maintained by the AT, notwithstanding documentary justification;

4. Not having proceeded with the substitution of the return, as was suggested to them, the AT services prepared an official return, with elimination of the amount intended to be reinvested in the acquisition of the new address, the amount referring to "expenses and charges" and correction of the acquisition value of the alienated property;

5. From the corrections introduced by the AT resulted the assessment now disputed, against which the Claimant filed, on 29 February 2016, a gracious complaint and which, not having been paid in due time, led to the opening of tax enforcement proceedings, within which the sum of € 37,027.68 was paid on 31 August 2016;

6. The AT based the decision denying the gracious complaint on the fact that the Claimant had not communicated the change of tax residence to the new address and, subsequently, communicated the change of residence to Angola;

7. The AT further argues that the Claimant does not have the right to benefit from the reinvestment regime, for which the situation of the household is relevant and one of its members altered the tax residence to an address different from that of the property in relation to which the reinvestment was effected;

8. Now, numbers 5 and 6 of Article 10 of the IRS Code do not condition the validity of the said benefit to the communication of change of tax residence, provided for in Article 19, no. 3, of the LGT, but only to permanent residence;

9. The AT cannot fail to recognize the right of the taxpayers to exclusion of the taxation of capital gains when, notwithstanding that they have not communicated the change of tax residence, they prove that on the date of the facts constituting their substantive right they had habitual residence in the location in question;

10. Existing, in the case at hand, sufficient proof of that right, the assessment subject of the present request, and subsequent acts, incur violation of nos. 5 and 6 of Article 10 of the IRS Code.

The Claimants conclude with the request for declaration of the illegality of the disputed acts (IRS assessment of 9 December 2015, in the amount of € 35,546.98 and decision denying the gracious complaint no. ...2016...) and their consequent annulment, with the condemnation of the Respondent to reimbursement of the excess tax assessed, including compensatory and default interest and other surcharges imposed on them, as well as payment of indemnificatory interest.

b. Of the Respondent:

Notified pursuant to the terms and for the purposes provided in Article 17 of the RJAT, the AT presented a reply and attached the administrative file (PA), alleging, in summary:

1. At issue is the taxation of income earned by the Claimants in 2014, in the form of capital gains, referring to the alienation, on 17 November 2014, of the autonomous unit which they had allocated to their principal residence;

2. In the IRS return filed on 2 May 2015, the Claimants declared the alienation of the autonomous unit, for the value of € 345,000.00; its acquisition, in August 2012, for € 212,450.00 and the reinvestment of the sum of € 310,000.00 in the purchase, on 24 November 2014, of another property allocated to their principal residence;

3. Following the clarifications provided regarding the noted discrepancies, the Claimants were informed electronically that they should substitute the return, to correct the acquisition value of the autonomous unit to € 146,097.79 and elimination of the reinvestment values, as this depends on the allocation of the new property to permanent residence of the return filers and that, in this case, the Claimant only altered her tax residence on 21 June 2015 and the Claimant altered his tax residence to resident abroad on 1 February 2015;

4. The controversial matter in the case is restricted to determining whether the Claimants met the requirements provided in nos. 5, subparagraph a) and 6 of Article 10 of the IRS Code, in the wording in force at the date of the facts, given that, in the context of the gracious complaint, questions relating to the acquisition value of the property and expenses and charges were not raised;

5. Pursuant to the provision in subparagraph a) of no. 6 of Article 10 of the IRS Code, the Claimants had a period of six months after the reinvestment to allocate the acquired property to their residence or that of their household; not having done so, there is no right to the benefit of exclusion of taxation of capital gains income.

For the reasons set out, the AT concludes by defending the legality of the disputed assessment and the lack of merit of the request for an arbitral decision, as not proven, with absolution of the Respondent.

Procedural Course

The request for an arbitral decision was filed on 4 January 2017, having been accepted by His Excellency the President of the CAAD and automatically notified to the AT on 20 January 2017.

As the Claimants manifested the intention not to appoint an arbitrator, the undersigned was appointed arbitrator by His Excellency the President of the Ethics Council of the CAAD, pursuant to the provision in no. 1 of Article 6 of the RJAT, a role which she accepted within the legally prescribed period, without opposition from the Parties.

The arbitral tribunal was constituted on 21 March 2017.

On 8 June 2017, the meeting referred to in Article 18 of the RJAT took place, during which the witnesses called by the Claimants were examined and the subsequent procedural course was defined, designating 28 July 2017 for the rendering of the arbitral decision.

The proceedings continued with successive written submissions, in which the Parties reiterated the positions assumed in the initial pleadings.

II. SANITATION

1. The single arbitral tribunal is competent and was regularly constituted, pursuant to Articles 2, no. 1, subparagraph a), 5 and 6, all of the RJAT.

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

3. The proceedings do not suffer from defects which would invalidate them.

III. GROUNDS

III.1 FACTUAL MATTERS

The factual matters relevant for the understanding and decision of the case, after critical analysis of the documentary evidence attached to the Initial Petition (IP), of the testimony of the witnesses examined, which proved to be impartial, coherent and credible, and of the Administrative File (AF), are established as follows:

A – Established Facts

1. On 17 November 2014, the Claimants proceeded to the alienation, for the value of € 345,000.00, of the autonomous unit designated by the letters AX of the urban property registered in the land registry of the Parish of ... under article..., with the Tax Patrimonial Value of € 212,450.00 (Doc. 1 attached to the IP);

2. The said autonomous unit had been acquired by the Claimants by deed of sale executed in the ... Notarial Office of Lisbon, on 29 May 2002, registered on page 70 of the Book ...-... (see extract of the "detail of urban property history" at page 27 of the AF), having constituted, until the date of alienation, the principal and permanent residence of their household (IP, AF and witness testimony), composed of them and their minor child (IP, AF and witness testimony);

3. On 21 November 2014, the Claimant paid, in the Treasury of Finances with the code ... (Loures...), the assessments of Municipal Tax on Onerous Transfers of Real Estate (IMT), in the sum of € 12,840.68 (Doc. 3 attached to the IP) and Stamp Duty (IS) – item 1.1 of the General Table, in the sum of € 2,480.00 (Doc. 4 attached to the IP), referring to the acquisition, intended for residence and for the price of € 310,000.00, of the urban property registered in the land registry of the Parish of..., municipality of Oeiras, under article...;

4. On 24 November 2014, by deed of sale executed in the Second Land Registry Office of Oeiras, next to which the documents of payment of the IMT and IS assessments already indicated were filed, the Claimants acquired the urban property previously identified, which they declared to be intended for their principal and permanent residence (Doc. 2 attached to the IP);

5. Between the date of purchase of the new residence and the end of 2014, the Claimants acquired various goods and services intended for it:

- They contracted security and surveillance services (Docs. 5 and 6 attached to the IP);
- They contracted water supply service (Doc. 7 attached to the IP);
- They contracted electricity and gas services (Docs. 12 to 14 attached to the IP);
- Cable television service was installed at that residence (Doc. 9 attached to the IP, in the name of the Claimant);
- They acquired furniture that was delivered there (Docs. 10 and 15 attached to the IP);

6. From the end of November 2014, the Claimants and their minor child began to sleep in the new house, where they came to reside, to receive friends and family members (witness testimony);

7. On 1 February 2015, the Claimant communicated to the AT the change of his residence to Angola, having departed for that country on a work assignment, with maintenance of his employment relationship in national territory (witness testimony), appointing the Claimant his tax representative (pages 30 to 31 of the AF);

8. The Claimant does not have his own residence in Angola, where he sleeps in a rented room, frequently traveling to Portugal, to the property acquired in November 2014 which, since then, is his "home" (witness testimony);

9. On 2 May 2015, the Claimants filed the IRS return, form 3, for income of 2014, identified with number ...-2014-...-..., in which they included Annex G (Capital Gains and other Patrimonial Increases), having indicated:

In box 4: the alienation, in November 2014, for the value of € 345,000.00, of the urban property registered under article..., unit AX, of the parish with the code ... (...), acquired in August 2002, for the sum of € 212,450.00 and, as expenses and charges, the sum of € 13,573.18;

In box 5 (Reinvestment of the proceeds from the alienation of property intended for principal and permanent residence), field 506 (Value of proceeds intended to be reinvested (without resorting to credit), the sum of € 345,000.00 and field 508 (Value reinvested in ... the year of the return after the date of alienation (without resorting to credit), the sum of € 310,000.00;

10. On 21 June 2015, the Claimant communicated to the AT the change of her tax residence to the address of the new residence, located at ..., no...., ...-...... (pages 32 and 32 verso of the AF);

11. Subsequently, discrepancies were noted in the completion of Annex G to whose justification, provided on 1 September 2015, the Head of the Finance Service of Lisbon ... replied to the Claimant, electronically, that he should "substitute IRS to correct Annex G: Property acquisition value .../AX is 146,097.79 Euros, as per the purchase deed of May/2002, filed in this Finance Service. (...) If you do not make the corrections, they will be made officially (...)" (page 24 of the AF);

12. The return not having been substituted, an official return was prepared on 1 December 2015 (return 25, lot...), with corrections to Annex G, which resulted in (pages 25 and 26 of the AF):

The alteration, in box 4, of the value and date of acquisition of the autonomous unit AX of the urban property registered under article..., of the Parish..., from August to May 2002 and from € 212,450.00 to € 146,097.79;

The elimination of expenses and charges entered in the same box, of the sum of € 13,573.18;

The elimination, in box 5, fields 506 and 508, respectively, of the values of € 345,000.00 and € 310,000.00, the latter relating to the materialization of the reinvestment after alienation, without resorting to credit;

13. As a result of the alterations described, an IRS assessment no. 2015..., dated 9 December 2015, in the total value of € 35,546.98, was issued in the name of the Claimants (IP and AF);

14. On 29 February 2016, the Claimants filed a gracious complaint against the IRS assessment now disputed, instituted under number ...2016...;

15. The gracious complaint was denied by order of the Head of the Administrative Justice Division, of the Finance Directorate of Lisbon, dated 22 September 2016, notified to the Claimants on 6 October 2016 (postal service record no. RD...PT and acknowledgment of receipt with copies attached to the AF);

16. Among the grounds of the decision denying the complaint are those that "the taxpayers had 6 months after the period of 36 months (...) to allocate the property subject of the reinvestment to their residence and, this period still being in progress, subject B (...) changed his tax residence to this address (...), on 21-06-2015"; (...) "with respect to subject A (...), also within the period provided in no. 6 of Article 10 of the IRS Code, the change of his situation to resident abroad was communicated on 01-02-2015" (...); "The Claimants being in the situation of married persons, what is relevant for the benefit of exclusion of taxation is the situation of the household" and "Thus, having one of the elements (subject A) that comprise this household changed his tax residence to an address different from that of the property in relation to which the reinvestment was effected there will be no right to the benefit provided in subparagraph a) of no. 6 of Article 10 of the IRS Code.";

17. In the event of non-payment of the IRS assessment no. 2015... within the period of voluntary collection, tax enforcement proceedings no. ...2016... were instituted, within which the total sum of € 37,027.68 was paid on 31 August 2016 (including the amount to be enforced of € 35,546.98, default interest of € 797.74 and costs of € 628.96).

B – Unproven Facts

The amount of expenses borne by the Claimants with the alienation, on 17 November 2014, of the autonomous unit identified in the case, was not proven.

III.2 GROUNDS OF LAW

1. The issue to be decided

The issue to be decided boils down to determining whether, given the facts proven and the legal norms in force at the date of the facts, the Claimants may benefit from the exclusion of taxation of capital gains resulting from the alienation of the property that constituted their previous principal and permanent residence, the proceeds of which they reinvested, in part, in the acquisition of another property with the same purpose.

The Respondent understands that they may not, although it presents different grounds, in the context of the gracious complaint and of the Reply to the request for an arbitral decision, respectively.

Thus, while the decision on the gracious complaint is based on the fact that "the taxpayers had 6 months after the period of 36 months (...) to allocate the property subject of the reinvestment to their residence and, this period still being in progress, subject B (...) changed his tax residence to this address (...), on 21-06-2015"; (...) "with respect to subject A (...), also within the period provided in no. 6 of the IRS Code, the change of his situation to resident abroad was communicated on 01-02-2015" (...); "The Claimants being in the situation of married persons, what is relevant for the benefit of exclusion of taxation is the situation of the household" and "Thus, having one of the elements (subject A) that comprise this household changed his tax residence to an address different from that of the property in relation to which the reinvestment was effected there will be no right to the benefit provided in subparagraph a) of no. 6 of Article 10 of the IRS Code."; in the Reply to the request for an arbitral decision, the AT comes to defend that "the Claimants had 6 months after the reinvestment to allocate the acquired property to their residence or that of the household" and "The Claimant (...) changed her tax residence, thus allocating the property (...) to her residence, on 21-06-2015, more than 6 months after its acquisition on 24-11-2014". (...) "The Claimant (...), on 01-02-2015, within the period of 6 months, communicated the change of residence to resident abroad, (...)" ; "Having (...) the Claimant (...), changed residence to resident abroad, not having even allocated the acquired property to his residence, we follow the understanding that there will be no right to the benefit provided in subparagraph a), no. 5, of Article 10 of the IRS Code". (...) "The Claimants did not fulfill the requirements of subparagraph a), no. 6, of Article 10 of the IRS Code".

2. The Applicable Law

At the date of the facts, the following were the wording of nos. 5, subparagraph a) and 6, subparagraph a) of Article 10 of the IRS Code, norms that set forth the requirements for the negative delimitation of the incidence of IRS on capital gains income, in the situation under analysis:

"Article 10 - Capital Gains

(...)

5 - Excluded from taxation are gains resulting from the onerous transfer of property intended as principal and permanent residence of the taxpayer or of his household, under the following conditions:

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

(...)

6 - There shall be no right to the benefit referred to in the previous number when:

a) In the case of reinvestment in the acquisition of another property, the acquirer does not allocate it to his residence or that of his household, within six months following the end of the period within which the reinvestment must be effected;

(...)"

For the Claimants to be able to benefit from the exclusion of taxation of capital gains in the present case, it became necessary that:

a) Both the alienated property (source property) and the acquired property (destination property) be intended as principal and permanent residence "of the taxpayer or of his household";

b) That the reinvestment of the proceeds from the source property, for the purposes indicated, occur within the maximum period of 36 months, in the acquisition of a new property with the same exclusive purpose, and,

c) That the new property (destination property) be allocated as principal residence of the taxpayer or of his household, within six months following the end of the period within which the reinvestment should be effected.

The date of alienation (17 November 2014) and the purpose to which the source property was allocated (principal and permanent residence) are documented, as is the compliance with the deadline for reinvestment in the destination property (24 November 2014).

The reasons on which the AT's refusal to recognize the Claimants' right to the exclusion of taxation of capital gains income for 2014, resulting from the alienation of their previous principal and permanent residence, are based, are, on the one hand, the failure to comply with the deadline for allocating the property as principal and permanent residence "of the taxpayer or of his household" and, on the other, the situation of the same household, given the absence from national territory of one of its members.

As to the question of the deadline for allocating the acquired property as principal and permanent residence "of the taxpayer or of his household", as has been seen, the positions taken by the AT in the gracious complaint and in the Reply, in arbitral proceedings, are divergent, although they center, in a way, on the change of the taxpayers' tax residence to the new address: that of the Claimant, on 21 June 2015, more than six months after the date of reinvestment and that of the Claimant, which did not occur within the said period of six months, as he communicated to the AT, on 1 February 2015, the change of his residence to Angola.

This is, however, an irrelevant divergence.

In fact, even if one were to admit a restrictive interpretation of the norm contained in subparagraph a) of no. 6 of Article 10 of the IRS Code, so as to understand that the allocation of the new property as principal residence "of the taxpayer or of his household" should occur within the period of six months from the date of reinvestment, if occurring before the maximum period of 36 months referred to in subparagraph a) of no. 5 of the same article (a contrary sense seems to be the view of Rui Duarte "On the IRS", 3rd Edition, Almedina, 2014, p. 140, citing the arbitral decision delivered in case no. 61/2012-T), it will always be necessary to count on the change of the said deadline, from six to twelve months, by Law no. 82-E/2014, of 31 December, which carried out the reform of the taxation of individuals and entered into force on 1 January 2015, the first deadline still being in progress.

As the new law established a longer period, Article 297, no. 2 of the Civil Code determines that this is equally applicable to deadlines that have already begun, but that all time elapsed from their initial moment is computed therein.

Thus, and even if the communication to the AT of the change of tax residence to the new residence were a condition sine qua non of the exclusion of taxation of capital gains (the case law of the Superior Courts has understood that it is not, insofar as "the taxpayer may demonstrate his residence in a certain place through 'justifying facts', so it cannot be understood that in the case in question where no. 5 of Article 10 of the IRS Code does not even refer to the concept of tax residence it could be understood that the failure to communicate the change of tax residence would impede 'permanent residence'" – see the Judgment of the Central Administrative Court South, of 10 August 2015, case 06685/13, available at www.dgsi.pt), it will always be said that the Claimant proceeded to such communication within the legally established deadline which, taking into account the aforementioned change, introduced by Law no. 82-E/2014, of 31 December, to the wording of subparagraph a) of no. 6 of Article 10 of the IRS Code, would only end on 24 November 2015.

Given what has been said and the witness testimony produced, it is concluded, therefore, that the Claimant not only established her residence in the property acquired for that purpose, with the partial reinvestment of the proceeds from the alienation of the property that previously constituted her principal and permanent residence, within the legally fixed deadline, but also duly communicated to the AT the change of her tax residence to the corresponding address.

However, the AT further conditions the recognition of the Claimants' right to the exclusion of taxation of capital gains income, reinvested in the new residence, to the "situation of the household" presuming that, by reason of the fact that the Claimant communicated the change of residence to resident abroad, he will not have "even allocated the acquired property to his residence".

As follows from the wording of the norms contained in nos. 5, subparagraph a) and 6, subparagraph a) of Article 10 of the IRS Code, applicable to the situation in question, there shall be right to the exclusion of taxation of capital gains obtained with the alienation of property "intended as principal and permanent residence of the taxpayer or of his household", reinvested in the acquisition of another property intended by the acquirer "as his residence or that of his household", within the periods provided therein.

Notwithstanding the IRS Code not containing a definition of "household", the situation of the Claimants fits within the provision of Article 13, no. 3, subparagraph a), in the wording at the date of the facts, according to which "3 - The household is constituted by: a) Spouses not judicially separated in persons and property and their dependents; (...)", with Article 13, no. 2 further providing that, "2 - Where a household exists, the tax is due by the aggregate income of the persons constituting it, those to whom its direction falls being considered as taxpayers".

The persons to whom the direction of the household falls are both spouses, in accordance with the principle of equality of rights and duties, pursuant to Article 1671 of the Civil Code, both spouses being taxpayers of the tax.

On the other hand, both subparagraph a) of no. 5 and subparagraph a) of no. 6, both of Article 10 of the IRS Code, establish as prerequisites for the exclusion of taxation of capital gains income that both the alienated property and the acquired property be intended as principal residence "of the taxpayer or of his household".

Now, this disjunctivity expressed by the conjunction "or" seems to admit that, although one of the taxpayers has not established, for good reason, in particular professional, his residence in the new property, the right to that benefit is not precluded, if the property in which the proceeds from the alienation of the previous residence were reinvested has been allocated to the residence "of his household".

Being so, and even if the witness testimony had not resulted, as it did, in the conviction of the arbitral tribunal that the Claimant actually intended the acquired property for his own principal residence before absenting himself abroad, the right to the exclusion of taxation of capital gains income that gave rise to the disputed assessment would always have to be recognized to him, because that property is intended for the residence of the remaining members of his household, the wife, also a taxpayer of the tax, and the minor child, as a dependent.

In light of the foregoing, it is concluded that the IRS assessment for the year 2014, here disputed, is illegal due to error as to the premises of law on which it was based, given the incorrect interpretation of the applicable legal norms.

It must, however, be noted that the exclusion of taxation of capital gains to which we have been alluding is not total, but only partial, as the reinvestment of the proceeds from the source property was partial.

In fact, as appears from the evidence above, that first property was alienated for the value of € 345,000.00, the new property intended as the principal residence of the Claimants and their household having been acquired for € 310,000.00, it being necessary to take into account the provision in no. 7 of Article 10 of the IRS Code, which provides that "7 - In the case of partial reinvestment of the proceeds and the conditions established in the previous number being met, the benefit referred to in no. 5 shall apply only to the proportional part of the gains corresponding to the value reinvested."

Such partial reinvestment might, at first glance, lead to a partial annulment of the disputed act, given that the assessment is a divisible act, both by nature, as it concerns the assessment of an obligation of a pecuniary nature, and by legal definition, since Article 100 of the General Tax Law (LGT) admits the "total or partial granting of complaints or administrative remedies, or judicial proceedings in favor of the taxpayer".

However, in the situation in question, this arbitral tribunal considers it appropriate to adhere to the case law of the Supreme Administrative Court which, with due deference, is transcribed (see the recent Judgment of the SAC, delivered on 28/06/2017, in case no. 01129/16, available at www.dgsi.pt), and from which follows the requirement for complete annulment of the assessment here disputed:

"In the judgment dated 09.07.2014, appeal no. 01146/13, it was written with interest: 'Consequently, and at first glance, it would appear that the assessment should be partially annulled, in the part relating to gains from the transfer ... given the rule of admissibility of partial annulment of the act of tax assessment, consensually accepted by case law and doctrine by appeal to the divisibility of that tax act. (See the Judgment of the Plenum of the Tax Litigation Section of 10/4/2013, in appeal no. 298/12, where the case law set out in the Section judgments is reaffirmed, dated 12/1/2011, in appeal no. 0583/10, of 12/1/2012, in appeal no. 0965/10, of 10/10/2012, in appeal no. 0533/12 and of 5/12/2012, in appeal no. 0477/12.)

However, it does not seem to us that this can happen in the present case.

For in order to determine whether the act of assessment should be totally or partially annulled, it is necessary to determine the type of illegality that affects it and to analyze whether it is susceptible of affecting it in its entirety, in which case it must be integrally annulled.

Now, in the case at hand, it must be noted that we are dealing with income tax, in which the determination of the amount of tax due passes through the application of the general rates corresponding to the taxable income determined, rates which are, as a rule, progressive and not fixed, as occurs with the taxation of gains from the alienation of property by resident taxpayers, to which the final IRS rates are applicable.

(...)

Therefore, the reduction of taxable income requires the practice of a new tax act, being impracticable the mere partial annulment or reformation of the disputed tax act, because the court cannot substitute the tax rate actually applied in the disputed assessment for another, that is, cannot substitute itself for the tax administration in the application of another rate of tax to the taxable income that remains for taxation in capital gains.", see more recently the judgment dated 23.11.2016, appeal no. 039/16.

Also in the case at hand we are in a situation identical to those judgments which denied partial annulment of the act, and did so precisely because it cannot be foreseen, for now, what will be the actual result of said annulment on the assessment effected, whether it will be sufficient with a mere arithmetic operation of subtraction of income from that which was considered for the purpose of calculating the tax and determining the rates or whether it will require the reweighting of the application of a new tax rate to the income not affected by the annulment, etc.".

For the reasons pointed out, also in the case at hand the IRS assessment for the year 2014, the subject of the request for constitution of the arbitral tribunal, must be completely annulled.

3. Of the Restitution of Amounts Paid. Of the Request for Indemnificatory Interest.

Beyond the declaration of illegality and consequent annulment of the IRS assessment for the year 2014, the Claimants also petition for the condemnation of the Respondent to restitution of the amounts paid in the context of the tax enforcement proceedings no. ...2016..., which include the value of the disputed assessment, default interest of € 797.74 and costs of € 628.96, in the total sum of € 37,027.68.

Among the effects of the arbitral decision to which no appeal or challenge lies, to which Article 24 of the RJAT alludes, is that of binding the AT to the reestablishment of the situation that would exist if the tax act subject of the arbitral decision had not been practiced.

Such reconstitution of the situation existing prior to the practice of the annulled tax act comprehends the restitution of all amounts indebtedly paid by the taxpayers, in which is included the restitution of the surcharge from the tax enforcement proceedings within which the coercive collection of the assessed tax occurred, as well as the "payment of interest, regardless of its nature, pursuant to the terms provided in the general tax law and in the Code of Tax Procedure and Process".

Pursuant to the provision in no. 1 of Article 43 of the LGT, "Indemnificatory interest shall be due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due.".

In the case in question, as the disputed assessment cannot be maintained, the Claimants' right to restitution of the amounts indebtedly paid must be recognized, plus indemnificatory interest, given that it has been demonstrated that such assessment is affected by error attributable to the Tax Administration.

IV. DECISION

Based on the grounds of fact and law set out above, it is decided:

a. To wholly grant the request for declaration of illegality of the IRS assessment for the year 2014, issued in the name of the Claimants, determining its annulment;

b. To condemn the AT to restitution of the amounts indebtedly paid, including the surcharge from the tax enforcement proceedings no. ...2016...;

c. To condemn the AT to payment of indemnificatory interest, pursuant to Article 43 of the LGT.

CASE VALUE: In accordance with the provision in Article 306, nos. 1 and 2, of the CPC, 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at € 35,546.98 (thirty-five thousand, five hundred and forty-six euros and ninety-eight cents).

COSTS: Calculated in accordance with Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 1,836.00 (one thousand eight hundred and six euros), to be borne by the Tax and Customs Authority.

Lisbon, 28 July 2017.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, pursuant to no. 5 of Article 131 of the CPC, applicable by reference to subparagraph e) of no. 1 of Article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the 1990 spelling agreement.

Frequently Asked Questions

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What are the requirements for IRS capital gains tax exclusion when reinvesting in a new primary residence in Portugal?
Under Article 10(5)(a) of the IRS Code, capital gains exclusion when reinvesting in a new primary residence requires: (1) alienation of property allocated to the taxpayer's principal residence, (2) reinvestment of the proceeds in acquiring another property, and (3) allocation of the newly acquired property to permanent residence of the taxpayer or their household within six months of reinvestment. The disputed issue is whether formal communication of tax domicile change under Article 19(3) of the General Tax Law is also required, or whether actual proof of permanent residence suffices. Taxpayers must demonstrate habitual occupation of the new property as their principal dwelling.
How does the Portuguese Tax Authority verify reinvestment of proceeds from the sale of a permanent home?
The Portuguese Tax Authority verifies reinvestment through documentation submitted with the IRS return (Model 3) and cross-references tax domicile records. In this case, the AT examined: (1) the sale deed showing alienation value of €345,000 on November 17, 2014, (2) the purchase deed showing acquisition on November 24, 2014, (3) declared reinvestment amount of €310,000, (4) tax domicile communication records showing no change until June 21, 2015 for one spouse and February 1, 2015 change to Angola for the other spouse, and (5) acquisition costs and expenses. The AT may request supporting documentation and notify taxpayers of discrepancies, requiring either substitute returns or preparing official corrections.
Can taxpayers claim capital gains reinvestment exclusion under Article 10(5)(a) of the IRS Code if the reinvestment occurs within days of the sale?
Yes, taxpayers can claim capital gains reinvestment exclusion under Article 10(5)(a) even when reinvestment occurs within days of the sale. In this case, the seven-day period between sale (November 17, 2014) and purchase (November 24, 2014) was not challenged by the Tax Authority. The critical legal requirement is that the new property must be allocated to permanent residence within six months after reinvestment, not that reinvestment occur within a specific timeframe after the sale. The controversy centered on whether the taxpayers satisfied the permanent residence requirement, particularly given the lack of formal tax domicile communication.
What is the procedure for challenging an IRS tax assessment through arbitration (CAAD) when reinvestment deductions are denied?
To challenge an IRS assessment through CAAD arbitration when reinvestment deductions are denied: (1) first exhaust administrative remedies by filing a gracious complaint (reclamação graciosa) within the statutory deadline, (2) if the complaint is denied, file a request for arbitration under Articles 2(1)(a) and 10(1)(a) of the Legal Regime for Arbitration in Tax Matters (RJAT) within 90 days, (3) specify the disputed assessment and grounds for illegality, citing relevant IRS Code provisions, (4) attach the administrative file and supporting documentation proving compliance with legal requirements, (5) request reimbursement of amounts paid plus compensatory interest under Articles 43 and 100 of the General Tax Law, and (6) provide witness testimony and evidence at the Article 18 RJAT hearing.
How does fiscal domicile affect eligibility for the capital gains reinvestment exemption under Portuguese IRS rules?
Fiscal domicile significantly affects eligibility for capital gains reinvestment exemption under Article 10(5) and (6) of the IRS Code. The Tax Authority's position is that taxpayers must formally communicate change of tax residence under Article 19(3) of the General Tax Law to the address of the newly acquired property, and all household members must maintain consistent fiscal domicile. In this case, denial was based on: (1) failure to communicate residence change to the new property address, and (2) one spouse changing fiscal domicile to Angola. The taxpayers argued that substantive permanent residence matters, not procedural formalities, and that actual habitual occupation of the new property from November 2014 should suffice regardless of formal communication timing or one spouse's subsequent foreign residence.