Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Baeta de Queiroz (Arbitrator President), Nuno Cunha Rodrigues and Diogo Leite de Campos, designated by the Ethics Council of the Administrative Arbitration Centre to form an arbitral tribunal, hereby decide:
I – REPORT:
A…, taxpayer …, and his wife B…, taxpayer …, resident at R. … …, in Porto (hereinafter Claimants, taxpayers and individually A… or B…), pursuant to paragraph a) of section 1 of Article 2, paragraph a) of section 2 of Article 6 and paragraph a) of sections 1 and 2 of Article 10, all of Decree-Law No. 10/2011, of 20 January – Legal Regime for Arbitration in Tax Matters (LRAT) – requested the establishment of a collective arbitral tribunal in tax matters.
The Claimants request that the Arbitral Tribunal rule on the following additional assessments of personal income tax:
- Assessment of Personal Income Tax (IRS) and compensatory interest relating to employment income (aggregation with progressive rate) for the year 2012, in the total amount of €67,530.37 (doc. no. 2017 … and Liq. 2017…);
- Assessment of IRS and compensatory interest (with surtax) relating to employment income (aggregation with progressive rate) for the year 2013, in the total amount of €213,254.25 (doc. no. 2017 … and Liq. 2017…);
- Assessment of IRS and compensatory interest (with surtax) relating to employment income (aggregation with progressive rate) for the year 2014, in the total amount of €189,412.18 (doc. no. 2017 … and Liq. 2017…);
- Additional assessment of capital income under IRS (and compensatory interest), taxed at the exemption rate, in the total amount of €27,862.01, for the year 2012 (Source Withholding of Income Tax) (doc. 2017…, Liq. …);
- Additional assessment of capital income under IRS (and compensatory interest), taxed at the exemption rate, in the total amount of €793,956.83, for the year 2013 (Source Withholding of Income Tax) (doc. 2017…, Liq. …);
- Additional assessment of capital income under IRS (and compensatory interest), taxed at the exemption rate, in the total amount of €574.71, for the year 2014 (Source Withholding of Income Tax) (doc. 2017 …, Liq. …);
The Claimants request that this tribunal declare the disputed assessments illegal, on grounds of erroneous apprehension of relevant facts and incorrect interpretation of the applicable laws (namely Article 8 of the Constitution of the Portuguese Republic (CRP), Article 16 of the IRS Code, Article 4 of the Convention to avoid double taxation concluded between Portugal and Spain, Articles 77, 63, section 4, of the General Tax Law (LGT)).
The application for establishment of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (TA) on 28 March 2017.
The Claimants did not appoint an arbitrator, and therefore, pursuant to paragraph a) of section 2 of Article 6 and paragraph a) of section 1 of Article 11 of the LRAT, the President of the Ethics Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline.
On 18-05-2017, the parties were notified of these designations and expressed no objection to any of them.
In accordance with the provisions of paragraph c) of section 1 of Article 11 of the LRAT, the collective arbitral tribunal was constituted on 7-06-2017.
The Tax and Customs Authority (TA) responded on 12 July 2017, arguing that the Claimants' claim should be dismissed as unfounded.
On 8 September 2017 the first meeting of the collective arbitral tribunal was held, pursuant to Article 18 of the LRAT, for the examination of the nine witnesses called by the Claimants, which, due to the absence of the Claimants' representative, was rescheduled to 28 September 2017, on which date four of the nine witnesses called by the Claimants were examined, and there was also a statement from Claimant B…, and minutes of the same meeting were drawn up, which are attached to the case file.
At that meeting:
The Claimants and the Respondent made oral submissions;
The tribunal requested from the parties the submission of procedural documents in Word format;
The tribunal, in compliance with the provisions of Article 18, section 2 of the LRAT, set 30-11-2017 as the date for the delivery of the arbitral decision.
RULING ON PROCEDURAL MATTERS:
The arbitral tribunal was regularly constituted and is materially competent, pursuant to the provisions of Articles 2, section 1, paragraph a), and 30, section 1, of DL No. 10/2011, of 20 January.
The parties possess legal standing and capacity, are parties to the dispute and are represented (Articles 4 and 10, section 2, of the same decree-law and Article 1 of Ordinance No. 112-A/2011, of 22 March).
The joinder of claims requested by the Claimants is accepted since, pursuant to Article 3, section 1 of the LRAT, it is permissible in relation to different acts "when the success of the claims depends essentially on the appreciation of the same circumstances of fact and the interpretation and application of the same principles or rules of law".
The case is free from nullities and no exceptions were raised.
Thus, there is no obstacle to proceeding to the merits of the case.
POSITIONS OF THE PARTIES:
In summary, there are two positions in conflict in these proceedings.
Claimant A… argues that he did not meet any legal criterion capable of determining his tax residence in Portuguese territory, specifically, by not meeting any of the requirements or conditions provided for in sections 1 and 2 of Article 16 of the IRS Code, or any others of conventional source that could determine such residence.
According to the Claimant, between the years 2012 and 2014, he did not remain in Portuguese territory for more than 183 days, and remained habitually and paid his taxes in Spain, where he resided and worked.
For that reason, between 2012 and 2014, inclusive, Claimant A… considers that he should be regarded, in light of domestic and international law, as tax resident in Spain.
He concludes, therefore, that the IRS assessments in question are contrary to domestic and international law, and should therefore be annulled on grounds of their illegality.
On the other hand, the Respondent TA contends that Claimant A… should be considered as tax resident in Portugal for the period between 2012 and 2014 because:
He would have remained for more than 183 consecutive or intermittent days in national territory – criterion provided for in paragraph a) of section 1 of Article 16 of the IRS Code (cf. point III.4.1.1 of the response);
Even if he had remained for fewer than 183 consecutive or intermittent days in national territory, he had, on 31 December of each year, a dwelling under conditions that suggest the intention to maintain and occupy it as habitual residence – criterion provided for in paragraph b) of section 1 of Article 16 of the IRS Code (cf. point III.4.1.2 of the response).
The TA supports this understanding regarding Claimant A… because it considers that he would have had the intention to maintain and occupy as habitual residence the house located at …, in Porto, based on the following seven indicators:
Because the owner enjoys full and exclusive use and enjoyment of the things that belong to him (Article 1305 of the Civil Code);
Between 2012 and 2014 he did not enter into lease or loan agreements for that dwelling;
It is not merely a secondary or holiday residence;
He used the residence when he traveled to Portugal for professional or personal reasons;
He personally took care to increase the comfort conditions of the property, with the acquisition, in 2013, of a new garage space;
In 2014, he appeared in person at the tax office to proceed with the payment of property tax (IMI) for that property;
In the 3 property acquisition deeds, A… was personally present and declared himself as married and residing at … .
He had a family unit resident in national territory – criterion provided for in section 2 of Article 16 of the IRS Code (cf. point III.4.1.3 of the response);
There is a situation of dual residence between Portugal and Spain (cf. point III.4.3 of the response).
IV. FINDINGS OF FACT
IV.1. Facts Proven:
The following facts are considered proven and of interest for the proper resolution of the case:
Until the beginning of 2011, the Claimants A… and B…, married to each other, lived in Portugal, in Porto, in an apartment at …, together with their two children, C… and D…;
Until the beginning of 2011, Claimant A… lived and worked in Portugal, in E… (and its Portuguese associates), although he was also the executive president of a Spanish company of the F… group, G…;
Until the beginning of 2011, the majority of the annual employment income of Claimant A… came from a Portuguese source and the remainder from work carried out in Spain.
Claimant A…, from February 2011 onwards, moved to Spain to work in that country at the F… group factory located in León;
From February 2011 onwards, Claimant A… resided at …, no. …, …, in León, Spain;
Between 2012 and 2014, Claimant A… obtained the following employment income:
PORTUGAL (employment income paid by Portuguese entities): €315 (2012), €174,000 (in 2013) and €100,000 in 2014 – all of it taxed in Portugal, as income of non-residents obtained in Portugal;
SPAIN (employment income of A… paid by Spanish entities): €424,000 (2012), €595,000 (in 2013) and €586,000 in 2014;
On 9 August 2011, Claimant A… deregistered in Portugal with the Tax Authority as a tax resident and registered in Spain as a tax resident;
Between 2012 and 2014 (inclusive), A… remained, in each calendar year, for more than 183 days, consecutive or intermittent, in Spain;
Between 2012 and 2014 (inclusive), Claimant A… was in Portugal for fewer than 183 consecutive or intermittent days in each calendar year;
Between 2011 and 2014, Claimant A… was co-owner of the apartment referred to in paragraph a);
Between the beginning of 2011 and 2014, the Claimants were in fact separated, not cohabiting or residing in the same space, maintaining contacts only as necessary for common matters and for the couple's children, and Claimant A… never used, when he came to Porto, the apartment referred to, staying on those occasions in the home of relatives (brother or parents) and not in the property owned by him at … .
IV.2. Basis of Findings of Fact:
Regarding the findings of fact, the Tribunal need not rule on all that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven from the unproven facts (cf. Articles 123, section 2, of the Code of Tax Procedure and Process (CTPP) and 607, section 3 of the Code of Civil Procedure (CCP), applicable ex vi Article 29, section 1, paragraphs a) and e), of the LRAT).
Thus, the facts relevant to the judgment of the case are chosen and identified according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (cf. former Article 511, section 1, of the CCP, corresponding to the current Article 596, applicable ex vi Article 29, section 1, paragraph e), of the LRAT).
Therefore, taking into account the positions taken by the parties, in light of Article 110/7 of the CTPP, the documentary evidence and the administrative file attached to the case, the statements of party Claimant B…, and the testimony given by witnesses H…, I…, J… and K…, at the hearing held on 28 September 2017, the above-listed facts were considered proven, with relevance for the decision.
In the specific case of the witnesses, it is considered that they testified in a coherent, substantiated manner and demonstrating mastery of the bases of their knowledge relevant to providing information to the Tribunal. The statements of the Claimant were considered by the tribunal regarding the family life of her couple.
V. ON THE LAW:
V.1. General Framework:
The question to be decided is whether Claimant A… should, or should not, be considered as tax resident in Portugal between the years 2012 and 2014.
That is, it is necessary to determine whether Claimant A… met, or did not meet, any legal criterion capable of determining his tax residence in Portugal during those years.
Consequently, it is necessary to investigate whether the Claimant met the connecting elements provided for in Article 16, sections 1, paragraphs a) and b) and 2 of the IRS Code, then in force, which provided as follows:
"Article 16
Residence
1 - The following are residents in Portuguese territory those persons who, in the year to which the income refers:
a) Have remained there for more than 183 days, consecutive or intermittent;
b) Having remained for a shorter period, they have there, on 31 December of that year, a dwelling under conditions that suggest the intention to maintain and occupy it as habitual residence;
(…)
2 - The following are always considered residents in Portuguese territory the persons who constitute the family unit, provided that any of the persons responsible for its direction reside there."
V.2. On the interpretation and application of Article 16, section 1, paragraph a) of the IRS Code:
The facts sub judice must be appreciated in light of the concept of tax residence in order, subsequently, to determine the place of taxation of income obtained, in particular employment income.
To this end, tax legislation worldwide generally invokes the concept of residence since this, being based on a strong and stable connection to a specific territory, will be the criterion that allows for the determination of worldwide income taxation.
This is the case with the IRS Code in Portugal which, being based on the principle of worldwide income taxation for residents (worldwide income principle), determines, as the first possible connecting element, residence in Portuguese territory for more than 183 days, consecutive or intermittent, in a year.
Specifically, and in the case of Article 16, section 1, paragraph a) of the IRS Code, the criterion provided is limited to physical presence (corpus) in a territory (in this case, national territory), to attribute the country of tax residence.
In the case sub judice, in light of the documents submitted to the case – namely the lease agreement for Claimant A's residence in León, Spain; statements issued by Spanish official entities; consumption records from Spain – and following the hearing held on 28 September 2017, specifically in light of the testimony given by witnesses H…, I…, J… and K…, it was possible to conclude that Claimant A…, between 2012 and 2014, did not remain in Portuguese territory for more than 183 consecutive or intermittent days, since, throughout those years, he lived and worked in León, Spain.
Consequently, Claimant A… did not meet the first legal criterion capable of determining his tax residence in Portugal, in that the requirement or condition provided for in section 1, paragraph a) of Article 16 of the IRS Code was not satisfied.
In fact, the documents presented as well as the credible testimony of the witnesses referred to above allowed the conclusion that, between 2012 and 2014, Claimant A… lived and worked in León, Spain, where, as a consequence of the employment functions he performed, he lived for more than 183 days in each of those years.
V.3. On the interpretation and application of Article 16, section 1, paragraph b) of the IRS Code:
The Respondent TA further argued that Claimant A… had a dwelling in Porto under conditions that suggest the intention to maintain and occupy it as habitual residence, and therefore the connecting element provided for in Article 16, section 1, paragraph b) of the IRS Code would be satisfied.
In the case of paragraph b) of section 1 of Article 16 of the IRS Code, a less qualified physical connection is required – as opposed to what occurs with paragraph a) of the same provision – which implies a case-by-case analysis to ensure that there is an effective connection with the territory, in this case Portuguese.
This connection is deemed to be satisfied through an indirect subjective element, the intention to be a resident (animus), which must be analyzed from an objective perspective, that is, through immediate elements that allow the reconstruction of the individual's intention based on the indicators he has revealed.[1]
Thus, paragraph b) of section 1 of Article 16 of the IRS Code serves two essential functions: first, to consider as a resident in Portugal an individual who relocalizes his residence to national territory only in the second half of the year, when it is no longer possible to comply with the 183-day criterion; and second, to consider as residents individuals who, despite their connection to the territory, verified through a place where they habitually reside, may intentionally circumvent the permanence rule.[2]
As is stated in doctrinal and jurisprudential terms,[3] paragraph b) of section 1 of Article 16 of the IRS Code – which, it is recalled, would not require the presence of Claimant A… in Portugal for fewer than 183 days – imposes three requirements, whose cumulative verification depends on the qualification as a resident:
residence in Portugal;
possession of a dwelling; and
the presence of conditions that suggest that the dwelling will be maintained and occupied as habitual residence.
Let us examine:
The first requirement – residence in Portugal – concerns the presence in Portugal of Claimant A…, who, as was proven at the hearing, remained in Portugal for fewer than 183 days per year between 2011 and 2014.
This first requirement is therefore satisfied.
However, the same cannot be said regarding the second and third requirements – possession of a dwelling and the presence of conditions that suggest that the dwelling will be maintained and occupied as habitual residence.
It is true that Claimant A… was co-owner of the apartment located at …, between 2011 and 2014.
However, it was a property where he did not reside nor intended to reside, given the circumstance that, on the one hand, he lived and worked in Spain and, on the other hand, during the entire period (between 2011 and 2014) he was in fact separated from Claimant B…, as was proven, and it was she who resided in that property.
This property cannot, therefore, be considered a dwelling of which Claimant A… was in possession.
But attention must be paid, in particular, to the third condition listed above.
The interpretation of this condition allows the conclusion that the legislator did not clarify how the individual's intention should be assessed, nor did it provide criteria from which the applicator of the law should form his conviction as to what is meant by habitual residence.
It becomes necessary, therefore, to conduct a case-by-case analysis, and the volitional element (the intention to maintain and occupy a particular place as habitual residence) must be assessed through external manifestations of will.
The intention to maintain and occupy a given dwelling as habitual residence must be reconstructed from objective elements that make clear, the individual's will.[4]
It was proven that, in the period between 2012 and 2014, Claimant A… lived in fact separated from his wife B…, with whom he maintained no personal relationship, except what was necessary as regards contacts and sporadic visits that Claimant A… made to their common children.
During that period, Claimant A… maintained the center of his personal and professional life in León, Spain, moving occasionally to Portugal.
As was proven, Claimant A… lived apart from his children, who resided with Claimant B…, not having in Portugal any residence, that is, a place where he could or intended to reside or dwell during part of the year.
As was proven at the hearing, Claimant A… lived in fact separated from his wife – and, furthermore, apart from his children – between 2012 and 2014, not using the real property of his ownership located at … as his residence or dwelling, nor therefore having the intention to maintain and occupy it as habitual residence.
Claimant A… had residence in León, Spain, where he lived the greater part of the year for professional reasons, moving occasionally to Portugal, specifically to Porto, staying on those occasions at the home of relatives (brother or parents) and not in the property of his ownership located at … which Claimant A…, between 2012 and 2014, did not intend, nor intended, to use as his residence, given the circumstance that he was in fact separated from his wife, Claimant B….
Consequently, there are no conditions that suggest that the dwelling located at … would be maintained and occupied as habitual residence.
He cannot, therefore, be considered tax resident in Portugal, in light of Article 16, section 1, paragraph b) of the IRS Code, for the period between 2011 and 2014 because the second and third conditions for the application of this provision are not satisfied.
V.4. On the interpretation and application of Article 16, section 2 of the IRS Code:
Nevertheless, the Respondent TA further attributes to Claimant A… the status of tax resident in Portugal based on the fact that his wife and children had their home in Porto ("residence by dependence") for the period between 2011 and 2014.
This concerns the application of Article 16, section 2 of the IRS Code, which considers as residents in Portuguese territory the persons who constitute the family unit, provided that any of the persons responsible for its direction reside there.
It transpires that, in the present proceedings, it was established as proven that Claimant A… was in fact separated from Claimant B… for the period from the beginning of 2011 to 2014.
As such, Claimant A… cannot be considered as part of the family unit of the Claimant Author during that period, i.e., between the beginning of 2011 and 2014, there being therefore no place for the application of the connecting element "residence by dependence" provided for in Article 16, section 2 of the IRS Code.
In these terms, it becomes unnecessary to investigate the possibility of dispelling the presumption provided for in section 2 of Article 16, by applying section 3 of Article 16 of the IRS Code, although, in the case sub judice, it could be demonstrated that there is no connection between the majority of Claimant A's economic activities and Portuguese territory during that period.
Indeed, it was proven that the majority of employment income earned by Claimant A… was paid by Spanish entities and that the employment income obtained in Portugal resulted from the fact that he exercised, by inherence, functions in corporate bodies of companies of the F… group with registered office in Portugal and that, in particular in the case of the high capital income earned in Portugal in 2013, this resulted from the liquidation of a Portuguese company called L….
It is also appropriate to clarify, in this regard, that the assessment of the concept underlying Article 16, section 2 of the IRS Code – "residence by dependence" – is contrary to the interpretation of Double Taxation Conventions (DTC), as will be seen below, since, as the Supreme Administrative Court recalled in Ruling 68/09, of 28/03/2009, Article 4, section 1 of the Convention requires that the analysis of the question of residence "be done individually, person by person, disregarding the family situation of the taxpayer and establishes limits to the nature of the connections adopted by the laws [internal] of the contracting States, requiring them to impose such criteria that impose an [personal] effective connection with the territory of the State".
V.5. On the interpretation and application of the Convention to Avoid Double Taxation between Portugal and Spain:
Having reached this point, and having verified that Claimant A… cannot be considered as resident in Portuguese territory, in light of Article 16, sections 1 and 2 of the IRS Code, it does not appear necessary to investigate his qualification as a resident in accordance with the Convention to Avoid Double Taxation concluded between Portugal and Spain.
In fact, the DTC refers, in Article 4, section 1, to the internal laws of each of the States (Portugal and Spain) to determine whether a given citizen is or is not considered resident in that State.
The question is resolved, as seen previously, since, in light of the criteria defined in the IRS Code, Claimant A… cannot be considered tax resident in Portugal for the period from 2011 to 2014.
In fact, the assessment of the DTC would only be relevant if it were necessary to find a tie-breaking criterion for Claimant A's residence, which is not the case sub judice.
That is, although the definition of resident is made using the criteria established by the internal law of each State, as referred to by Rui Duarte Morais "[i]nternational conventions on double taxation accept such competence (…) limiting themselves to establishing «tie-break» rules that allow qualifying a taxpayer as resident in (only) one of the contracting States when both (due to divergences between their respective laws) consider him as such." (Cf. Rui Duarte Morais, Sobre o IRS, Coimbra: Almedina, 2016, 3rd Edition, p. 12.).
These are the so-called tie-break rules contained in DTCs and which determine the allocation of a taxpayer's income to a State, in case of divergence between two (or more) tax legal orders.
To this end, Article 4 of the DTC between Portugal and Spain seeks, precisely, to resolve situations of dual residence, in which someone has "prolonged contacts with more than one legal order" (Cf. J. L. Saldanha Sanches, Manual de Direito Fiscal, Coimbra, 2007, pp. 339-340), through various special rules (tie-breakers) whose application will determine residence in only one of the States that claim the tax residence of a particular taxpayer.
Now, pursuant to section 2 of Article 4 of the DTC, "[w]hen, by virtue of the provisions of section 1, an individual is a resident of both Contracting States, the situation shall be resolved as follows:
"He shall be deemed to be a resident of the Contracting State in which he has a permanent dwelling at his disposal (…)".
In the case sub judice, it was proven that Claimant A… had a permanent dwelling in León, Spain and that he did not have any residence or dwelling that he intended to use, nor did he actually use, as such in Portugal.
In this light, it is concluded that, also in accordance with the DTC between Portugal and Spain, Claimant A… should be considered as tax resident in Spain, between 2011 and 2014, and it is not necessary to apply the remaining tie-break rules provided for in the DTC.
In light of all of the above, Claimant A… cannot be considered as tax resident in Portugal between the years 2011 and 2014.
VI. DECISION
Accordingly, this Arbitral Tribunal rules that the arbitral claim is wholly granted, annulling the disputed assessments on grounds of illegality, and accordingly condemning the Respondent Tax Authority in the costs of the proceedings, fixed below, given its total defeat.
VII. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at €1,295,783.50 (one million two hundred and ninety-five thousand seven hundred and eighty-three euros and fifty cents), pursuant to Article 97-A, section 1, a), of the CTPP, applicable by virtue of paragraphs a) and b) of section 1 of Article 29 of the LRAT and section 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
VIII. COSTS
The arbitration fee is fixed at €17,442.00 (seventeen thousand four hundred and forty-two euros), pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, Articles 12, section 2, and 22, section 4, both of the LRAT, and Article 4, section 4, of the said Regulation.
Let notification be made.
Lisbon, 27 October 2017
The Arbitrators
(José Baeta de Queiroz)
(Nuno Cunha Rodrigues)
(Diogo Leite de Campos)
[1] Note that criteria for residence that are purely artificial, without being based on an effective connection with the territory, find restrictions on their application either via Public International Law (Cf. Rui Duarte Morais, Imputação de Lucros de Sociedades Não Residentes Sujeitas a um Regime Fiscal Privilegiado, Porto: Publicações Universidade Católica, 2005, p. 35), or at a later stage via application of DTCs (Cf. Klaus Vogel, On Double Taxation Conventions, Third Edition, Deventer: Kluwer Law International, 1997, pp. 232-233).
[2] Cf. André Salgado de Matos, Código do Imposto do Rendimento das Pessoas Singulares (IRS) Anotado, Lisboa: Instituto Superior de Gestão, 1999, pp. 206-207.
[3] Cf. proceeding no. 332/2016-T of CAAD.
[4] In the words of ALBERTO XAVIER "[t]he intention to maintain and occupy the dwelling as habitual residence is not the subject of direct proof, but rather results from objective conditions that suggest it." (Cf. Alberto Xavier, Direito Tributário Internacional, 2nd Updated Edition, Coimbra: Almedina, 2007, p. 286).
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