Fiscal Residence Dispute: IRS Tax on Airline Pilot Income Under Portugal-France Double Taxation Convention (CAAD 231/2017-T)

I'll provide the complete English translation directly:

ARBITRAL DECISION

I. REPORT

1. A..., NIF..., with residence at..., no...,...-... Estoril (hereinafter, the "Claimant"), came, in accordance with articles 2, no. 1, paragraph a) and 10, no. 1, paragraph a) of Decree-Law no. 10/2011 of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (hereinafter, "RJAT"), to request the constitution of an Arbitral Tribunal, with the intervention of a sole arbitrator, in which the Tax and Customs Authority (hereinafter, the "TA" or "Respondent") is claimed, with a view to the declaration of illegality and consequent annulment of the additional personal income tax (IRS) assessment no. 2016..., relating to the year 2012, in the amount of €47,355.10 (forty-seven thousand three hundred and fifty-five euros and ten cents).

2. The Claimant invokes, in summary, that:

a. He was not obliged to present the IRS form 3 declaration relating to the 2012 fiscal year, given that, in that year, he was absent from Portugal for more than 183 days, and that, pursuant to article 16, no. 1, paragraph a) of the IRS Code, as in force in 2012, persons were considered resident in Portuguese territory if, in the year in question: "They remained there for more than 183 days, whether consecutive or non-consecutive";

b. The entirety of the income earned by the Claimant in 2012 was declared in France;

c. The additional assessment would always be invalid as it corresponds to an incorrect interpretation of the applicable tax rules, invoking, in this context, that:

i. Article 16, no. 3 of the Convention to Avoid Double Taxation concluded between Portugal and France, provided for in Decree-Law no. 105/71 of 26 March (hereinafter, "DTC"), which provides that "the remuneration from an employment exercised aboard a ship or an aircraft in international traffic may be taxed in the Contracting State in which the effective place of management of the enterprise is situated";

ii. By making use of the general principles of interpretation of laws provided for in the Civil Code (hereinafter, "CC") as well as doctrine and case law respecting these, the Claimant contends that article 16, no. 3 of the DTC constitutes an exceptional rule to those set out in nos. 1 and 2 of the same article, permitting aircraft pilots in international traffic to be taxed in the Contracting State in which the effective place of management of the enterprise is situated, being resident in another State and even remaining there for more than 183 days per year;

iii. Concluding that article 16, no. 3 of the DTC should be interpreted considering the unity of the legal system and the scope or objectives that are intended to be achieved, with no meaning being extractable from the rule that is manifestly incompatible with the other rules of the instrument, i.e., the wording of article 16, no. 3 is clear in stating that the remuneration from an employment exercised aboard a ship or an aircraft in international traffic may be taxed by the Contracting State in which the effective place of management of the enterprise is situated even if those persons are resident in another State and remain there for more than 183 days per year;

d. It is manifest that he does not hold any income capable of qualification as taxable income in Portugal in the year 2012;

e. The understanding described above always corresponded to the position assumed by the TA in years prior to the one at issue. In this context, the Claimant identifies the tax inspection action carried out on the 2011 IRS, in which the TA concluded that "in accordance with article 62 of the RCPITA, from the inspection action carried out by this Service, under the Service Order referred to above, no tax acts or matters of a tax nature arise that are unfavourable to him". The Claimant further states, in this respect, that the TA's position regarding the 2011 fiscal year was, moreover, consistent with what happened in prior fiscal years;

f. The amount owed is not €47,355.10, since:

i. In the IRS assessment carried out, his three children were not considered, that is, the dependent children he has were not taken into account;

ii. All amounts earned in 2012 were integrated as taxable income; however, as emerges from the "Avis D'Impôt 2013 – Impôt Sur les revenus de l'année 2012" issued by the French Tax Administration, of the amount earned of €158,335.00 in 2012, only €109,399.00 correspond to Taxable Income (Revenu Imposable), and this fact is expressly recognized in the Final Inspection Report now under analysis;

iii. The amount of €48,936.00 corresponding to the difference between the total amount received by the Claimant from B... and his taxable income refers to travel allowances relating to the Claimant's absence due to his movements as a long-haul pilot. The Claimant contends that such amount does not correspond to any taxable income, since it corresponds to professional expenses incurred in the context of his activity;

iv. In the assessment now carried out, no losses to be recovered, deductions, deductions to income, tax deductions and tax benefits were even considered, namely, the expenses incurred with health, education, computing and other expenses incurred by the Claimant in 2012;

g. Finally, the assessment act is not properly reasoned, violating article 268, no. 3 of the Constitution of the Portuguese Republic (hereinafter, "CRP") and article 36 of the Tax Procedure and Process Code (hereinafter, "TPPC"), and there do not result from the impugned act the concrete factual and legal reasons that would permit the Claimant to understand the reasons that led the TA to consider, as taxable income, all amounts received by him from his employer when it is expressly shown in the "Avis D'Impôt 2013 – Impôt Sur les revenus de l'année 2012" that only €109,399.00 correspond to Taxable Income (Revenu Imposable). Nor does the impugned act result, according to the Claimant, in the factual and legal reasons that led the TA to alter its interpretation of article 16, no. 3 of the DTC, and it is certain that the same Tax Inspection, in the years prior to 2012, pronounced itself in a sense clearly divergent from the current one;

1. On the part of the TA it is alleged, in summary, the following:

a. From the documentation attached to the request for arbitral determination (hereinafter, "RAD"), the absence from Portugal for a period equal to or greater than 211 days is not proven;

b. From the RAD there results a confession by the Claimant that in the year in question (2012) he was a tax resident in Portugal, a confession which, according to the Respondent, is considered accepted for all legal purposes;

c. The documents submitted by the Claimant, consisting of invoices/receipts nos. 37629, 43801, 63625, only evidence payment for parking in limited temporal periods and, consequently, do not serve to attest the effects that the Claimant intends to attribute to those documents;

d. Documents would be considered as proof of absence from Portuguese territory those providing evidence of payment of hotels, restaurants, taxi receipts or other transport, as well as confirmation, by the Claimant's employer, that he remained outside Portugal, at least, during the periods of training and work;

e. The Claimant remained in Portugal for a period exceeding 183 days, the requirement provided for in article 16, no. 1, paragraph a) of the IRS Code being considered satisfied;

f. Article 16, no. 1, paragraph b) of the IRS Code is also satisfied, by virtue of the fact that the Claimant's spouse resides in Portugal, whereby he has a dwelling that gives reason to suppose the current intention to maintain and occupy it as tax residence. So much is this the case that the Claimant only in 2016 changed his tax residence to France and that, in tax inspection proceedings, the Claimant was subject to taxation in France in the capacity of "NON-RESIDENT". The Respondent further questions, in this context, where then the Claimant is resident, since he is deemed non-resident in France and is not considered resident for tax purposes in Portugal;

g. With respect to the interpretation of article 16, no. 3 of the DTC between Portugal and France, the Claimant does not correctly interpret the rule, since "(…) the fact that the expression «only may» is used makes it clear that when the expression «may» is used, there is an opening for the possibility of taxation, but not exclusively, so that with respect to no. 3 of article 16 the expression «may» is not prohibitive of taxation in the country of residence of the beneficiary of the remuneration (Portugal), with the rules for avoiding double taxation subsequently applying, as provided for in article 24 of the DTC.", and that it is by virtue of article 24, no. 2 of the DTC that the Claimant enjoys tax credit (See article 28 Response of the Respondent);

h. With respect to the amount of the debt:

i. Faced with the non-compliance in the delivery of the IRS form 3 declaration by the Claimant, he was notified by registered letter to comply with his obligation – through Official Letter no. ..., of 18-03-2016;

ii. Faced with further non-compliance, a tax inspection procedure was initiated through Service Order no. OI2016..., with dispatch of 23-03-2016, with information being withdrawn relating to the taxpayer from data provided by the French TA via the mechanism for exchange of information;

iii. Thus, in accordance with the information it had, the Respondent officiously completed the IRS form 3, having made the personal deduction of the taxpayer (See article 79, no. 1, paragraph a) of the IRS Code), tax withholdings and advance payments (See articles 97, no. 3 and 76, no. 3 of the IRS Code) and, finally, added the amount of tax paid abroad in accordance with the tax credit for international double taxation;

iv. The Respondent thus contends that it is the law that prohibits consideration of the family unit by virtue of the non-delivery of the IRS form 3 declaration relating to the year 2012.

i. Finally, with respect to the alleged lack of reasoning of the IRS assessment, the defect raised by the Claimant is in contradiction with the exposition he made throughout the RAD and through which he seeks to refute the TA's factual and legal arguments, adding that the change of understanding concerning the interpretation of article 16, no. 3 of the DTC is due to the circumstance that the TA found that the understanding it had been following was incorrect.

II. SUBSEQUENT PROCEDURAL COURSE

1. On 15 January 2018 a request for amendment of the arbitral decision was presented by the Claimant, in accordance with the provisions of article 616, no. 2, paragraphs a) and b) of the Code of Civil Procedure ("CCP"), which was rejected by Decision of 19 February 2018.

2. On 27 March 2018, this Tribunal was notified by the Supreme Administrative Court ("SAC") of the admission of an appeal filed by the Claimant, and on 14 March 2019, this Tribunal was notified of the Decision of the Judges of the Full Chamber of the Tax Litigation Section of the SAC (case 127/18.2BALSB), pursuant to which it was agreed not to take cognizance of the merits of the appeal.

3. On 17 May 2021, this Tribunal was notified by the Central Administrative Court South ("CACS") of the Decision rendered in case no. 6/18.3BCLSB, pursuant to which "the Judges comprising the 1st Subsection of Tax Litigation of this Central Administrative Court South agree in conference to judge this challenge as well-founded and, in consequence, declare the nullity of the arbitral decision impugned".

4. The CACS contends, in summary, that:

"In the case sub judice, it results from reading the impugned petition, especially articles 51 to 54, that the Challenger raised the question of the non-existence of any income in Portugal in the year 2021.

Having analyzed the case and reviewed the reasoning incorporated in the arbitral decision, in the part that is relevant here, it is verified that there is no assessment whatsoever of the aforesaid question, nor was it considered prejudiced by the solution given to the other questions assessed.

It is not ignored the reasoning of the Arbitral Tribunal around the interpretation of article 16, no. of the DTC concluded between Portugal and France (point B.4 of the decision). However, the fact is that it did not take a direct or indirect position on the question at issue, as we have already stated, nor does knowledge of the same result from the decision of another connected matter that involves or excludes it.

Such omissive conduct of the Tribunal violated frontally the duties of reasoning of the aforementioned Tribunal.

Which results in the nullity of the decision now impugned, by virtue of paragraph d) of no. 1 of article 615 of the CCP and the well-foundedness of this Challenge."

1. On 6 July 2021, the CACS informed this Tribunal of the finality of the aforementioned Decision.

2. In these terms, in compliance with the aforesaid decision of the CACS, which declared the nullity of the arbitral decision of 22 December 2017, the aforementioned decision is hereby substituted by this one, in which the questions raised in articles 51 to 54 of the Initial Petition are expressly addressed, in points 72 and following of this decision.

III. DECISION

A. MATTER OF FACT

A.1. Facts deemed proven

1. The Claimant is a French national, married since 2003 to C..., a Portuguese citizen, and father of three children;

2. The Claimant has performed the duties of pilot officer at airline B... since 2003;

3. Currently, the Claimant does not have tax residence in Portugal;

4. In 2012, the Claimant had tax residence registered in Portugal;

5. In 2012, the Claimant was absent from Portugal for more than 183 days.

A.2. Facts deemed not proven

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

A.3. Reasoning of the proven and not proven factual matters

1. With respect to the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, the duty falling to it, rather, to select the facts that matter to the decision and to distinguish the proven matter from the unproven (See article 123, no. 2, of the TPPC and article 607, no. 3 of the Code of Civil Procedure ("CCP"), applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT);

2. In this manner, the facts pertinent to the judgment of the cause are chosen and selected according to their legal relevance, which is established with regard to the various plausible solutions of the legal questions (See article 596, applicable ex vi article 29, no. 1, paragraph e), of the RJAT);

3. Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the TPPC, the documentary evidence and the petition attached to the records, and the testimonial evidence produced, the facts listed above were deemed proven, with relevance to the decision, taking into account that, as was written in the Decision of the CAC-South of 26-06-2014, rendered in case 07148/13, "the evidential value of the tax inspection report (…) may have evidential force if the assertions contained therein are not challenged" (in the same sense, Decision of the CAAD of 25-08-2017, rendered in case 57/2017-T);

4. In the context of point 8 above, it is important to note that, as the Respondent points out (articles 12 to 15 of the Response), the documentation submitted, without any additional explanation from the Claimant, merely demonstrates that he is billed amounts relating to parking of a vehicle in a parking facility in Portugal. It does not follow, in effect, even that the Claimant left Portugal. It could, perhaps, be demonstrated that the said parking facility would be used only, or tendentially, by travelers or by aircraft crew members, but as the documents are not accompanied by additional explanation, it will always be necessary to state that the documentary evidence is insufficient to prove the Claimant's absence from Portugal. Indeed, the element that appears reinforced by Documents 3 to 5, submitted by the Claimant as Documents 2 to 5 to the RAD, is that of the total consonance of the Claimant's habitual residence with the tax domicile that he registered with the TA, since all invoices indicate that his address is situated at .... ..., no. ..., ... Estoril.

However, with respect to the Claimant's remaining in Portugal for more than 183 days (point 8), the testimony given by the witness interrogated, C..., was taken into account, which revealed direct knowledge of the facts as deemed proven, and testified in a manner logical and consistent with the available documentary evidence, evidencing credibility;

1. Not deemed as proven or not proven were allegations made by the parties, and presented as facts, consisting of strictly legal or conclusory assertions, incapable of proof, and whose truthfulness is to be assessed in relation to the concrete factual matter consolidated above.

B. OF LAW

B.1. Lack of reasoning

1. In accordance with article 268, no. 3 of the CRP: "[a]dministrative acts are subject to notification to the interested parties, in the form provided for by law, and require express and accessible reasoning when they affect rights or legally protected interests.", likewise and in accordance with article 77, no. 1 of the General Tax Law (hereinafter, "GTL"): "[t]he decision of procedure is always reasoned by means of a brief exposition of the factual and legal reasons that motivated it, and the reasoning may consist in mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those forming part of the tax inspection report.".

2. As described above, the Claimant alleges the lack of reasoning of the assessment acts. However, from the assessment, sufficient reasoning results, since the Respondent explained that the assessment was based on the non-submission of the income declaration (IRS form 3) and on elements provided by the French Tax Administration. Furthermore, the Respondent clarified that the assessment resulted from the application to the facts of the regime set out in article 76, no. 3 of the IRS Code.

3. Thus, the burden of providing reasoning that lay with the TA should be deemed fulfilled. Especially since, as the Respondent correctly emphasizes, the Claimant, in his RAD, discusses the factual and legal matter inherent in the assessment, namely "argues why, in his view, the amounts are wrongly calculated and why, in his opinion, the amounts to be taken into account should be others" (See article 54 of the Response), demonstrating knowledge of the matter under analysis.

4. The conduct of the Claimants has been, in this context, an element equally valued in other Decisions of the CAAD, whose understanding we share. In this sense, see the Decision of the CAAD, of 14-06-2013, rendered in case no. 130/2012-T, in which it is stated that: "[a]s to the alleged lack of reasoning of the Respondent's decision, this Tribunal considers that it does not exist. Indeed, from the reading of the Inspection Report, its description of the facts and the legal conclusion that was drawn from them, results the clear statement of the path that led to the procedural decision. This conclusion is, moreover, confirmed by the conduct of the Claimant, which could only be assumed by one who perfectly understood the decision and its reasoning. It is manifest, therefore, that the decision is elaborated, reasoned and legally framed in accordance with the requirements of the law, that is, in such a way that its content is perceivable by a taxpayer exercising normal diligence. As already described in the Arbitral Tribunal Decision in Case 8/2011-T «The Tribunal does not consider it necessary to provide extensive explanation as to the meaning and scope of the duty of express and contextual reasoning of tax acts. For this reason, it addresses the matter only from the perspective of application to the concrete case, placing the emphasis on the aspects relevant here. In accordance with no. 2 of art. 77 of the GTL, reasoning may be carried out in summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining taxable matter and the tax». Among the various reasons that justify the requirement of reasoning, such as those of providing the decision-maker with a moment of reflection before issuing its functional will, of guaranteeing the transparency of administrative action, of ensuring the possibility and effectiveness of hierarchical or judicial control, stands out that of enabling the interested administered party to formulate a conscious judgment on the advisability of accepting or challenging the act graciously or contentiously. Being the tax act an abrasive act of administration, insofar as it affects the patrimony of the citizen, unilaterally and not in a punitive manner, it is evident that the requirements densified in the General Tax Law must be analyzed, essentially, from the perspective of enabling the administered party to accept or challenge the act. However, the possibility of understanding the grounds of the tax act, and consequently the significant capacity of the reasoning discourse, is not the same in all situations in which they are practiced. Wherefore the reasoning discourse, in order to be understood, does not require special significant density. In the case of tax acts, the pronouncement of which happens after a "dialogue" previously established with the administered party, namely through his notification to present documents or provide information or, furthermore, his hearing on reports made in tax inspection proceedings to his concrete activity, the possibility of grasping the grounds of the act increases and, consequently, the requirement of the thickness of its formal declaration decreases. Administrative and tax case law, widely established (…), has expressed this idea in the assertion that the act is deemed sufficiently reasoned when it permits making known the cognitive and evaluative path followed by the administration to decide as it decided»." (bold and underlined in original).

5. In this manner, the burden in question that lay with the TA is deemed fulfilled.

B.2. Criteria of residence

1. In accordance with article 15, no. 1 of the IRS Code, residence in Portugal results in worldwide income taxation (worldwide income taxation principle). Naturally, residence thereby assumes central importance in the national tax-legal order (as it does, moreover, in most Western legal orders). In this context, this arbitral tribunal has already stated that "residence, presupposing a strong and stable connection to a specific territory, is the most frequent criterion for determining universal taxation of income." (Decision of the CAAD, of 2017-01-31, rendered in case no. 332/2016-T) (bold and underlined in original);

2. In the same sense, ALBERTO XAVIER contends that "[t]he distinction between persons resident and non-resident in the national territory is of decisive importance in defining the scope of their respective tax obligations. Indeed, while non-residents, whether natural or legal persons, are subject to tax only with respect to income from sources situated in Portugal, thus being subject to the regime of 'limited taxability', (…), residents, both natural and legal persons, are taxable based on their worldwide income – regime of 'unlimited taxability' (…) or principle of universality." (See ALBERTO XAVIER, International Tax Law, 2nd ed., Coimbra: Almedina, 2007, p. 284);

3. The residence of a taxpayer, however, is relevant not only for determining the scope of the main tax obligation, but equally, in many cases, for determining accessory obligations to be fulfilled (e.g., the submission of an income declaration);

4. It is noted that, during the 2012 fiscal year, article 16 of the IRS Code had two different versions. In any case, numbers 1 to 4, with greater relevance for this analysis, remained constant, with the following wording:

"1 - [p]ersons are resident in Portuguese territory if, in the year to which the income relates:

a) They have remained there for more than 183 days, whether consecutive or non-consecutive;

b) Having remained for a shorter period, they have, on 31 December of that year, a dwelling in conditions that give reason to suppose the intention to maintain and occupy it as habitual residence;

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

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

2 - Persons who constitute the family unit are always deemed resident in Portuguese territory, provided that any of those to whom the direction thereof is incumbent resides therein.

3 - The condition of resident resulting from the application of the provisions of the preceding number may be set aside by the spouse who does not meet the criterion provided for in paragraph a) of no. 1, provided that he or she proves the non-existence of a connection between the greater part of his or her economic activities and Portuguese territory, in which case he or she is subject to taxation as a non-resident with respect to income of which he or she is the holder and which is deemed obtained in Portuguese territory in accordance with article 18.

4 - If the proof referred to in the preceding number is made, the spouse resident in Portuguese territory submits a single declaration of his or her own income, his or her share in common income and the income of dependents in his or her charge according to the regime applicable to persons in the situation of those separated de facto in accordance with the provisions of no. 2 of article 59.

5- […].

6 – […].

7 – […].

9 – […].

1. Contrary to what seems to result from the RAD, several residence criteria flow from article 16, no. 1 of the IRS Code:

a. Remaining in the national territory for a period exceeding 183 days – physical presence / "corpus";

b. The existence of a dwelling in Portugal in conditions that give reason to suppose the intention to maintain and occupy it as habitual residence on 31 December of the year in question – intention / "animus" and "corpus" for a period of less than 183 days;

c. Integration into the crew of a ship or aircraft, provided that the crew members are in the service of an entity with residence, head office or effective place of management in Portugal;

d. Performance abroad of functions or missions of a public nature in the service of the Portuguese State.

1. Additionally, article 16, no. 2 of the IRS Code also provided for the so-called residence by dependency, which attracted to Portugal the residence of any member of the family unit absent from Portugal, in cases where any of those to whom the direction thereof was incumbent resided in Portugal;

2. It is important to clarify that the residence criteria mentioned above are alternative, i.e., verification of any one of the criteria is sufficient for the taxpayer to be considered resident in Portugal.

3. Naturally, in some situations, the existence of a multiplicity of residence criteria and the existence of connections with various legal orders generates the so-called Residence-Residence conflicts (R-R). In such cases, it will be necessary to make use of an instrument capable of resolving the conflict. In the generality of cases where the States claiming tax powers have concluded a DTC, Residence-Residence conflicts are resolved through the application of a conflict rule (tie breaker rule).

4. In any case, it is important to note that the Claimant does not invoke a situation of double residence, i.e., in 2012, the Claimant does not consider himself resident in Portugal, but neither does he consider himself resident anywhere. There is thus no need even to apply the tie-breaking rules provided for in the DTC concluded between Portugal and France. This point is, moreover, confirmed by the testimonial evidence.

5. As mentioned above, it was deemed proven that the Claimant remained outside Portugal for more than 183 days, whereby the criterion provided for in article 16, no. 1, paragraph a) of the IRS Code is not deemed satisfied.

6. Additionally, given the functions performed by the Claimant and the residence of his employer, it becomes unnecessary to analyze the criteria described above in article 16, no. 1, paragraphs c) and d) of the IRS Code.

7. In any case, this does not mean, naturally, that the Claimant cannot be considered resident in Portugal. Indeed, there are potentially two criteria applicable to the Claimant's situation:

a. The possession of a dwelling in conditions that give reason to suppose the intention to maintain and occupy it as habitual residence;

b. Residence by dependency.

1. With respect to the criterion provided for in paragraph a. of the previous point, MANUEL FAUSTINO sustains that it "requires the concurrence of corpus and animus. Mere remaining in Portuguese territory is not sufficient. There may not even have been sufficient remaining, in the sense previously described, in Portuguese territory. There is a corpus, constituted by a place of residence, associated with an animus, which consists of the intention to maintain and occupy it as habitual residence." (See MANUEL FAUSTINO, Residents in Personal Income Tax (IRS) in Portugal, Science and Tax Technique no. 424, 2009, p. 124).

2. In the same sense, ALBERTO XAVIER contends that "[P]ortuguese law expressly defines the concept of residence as concerns natural persons, adopting a notion of residence that is situated midway between the merely objective notion, which is satisfied with simple corpus, and the subjective notion, which requires the cumulative presence of both requirements: corpus and animus. The status of resident is acquired, alternatively, by remaining in Portuguese territory for more than 183 days, whether consecutive or non-consecutive – regardless of the intentions of the subject – or by the intention of residence in Portugal, expressed by those who, having remained for a shorter time, have in Portuguese territory, on 31 December, «a dwelling in conditions that give reason to suppose the intention to maintain and occupy it as habitual residence» (CIRS, article 16, no. 1, «a» and «b»).." (See ALBERTO XAVIER, International Tax Law, Coimbra: Almedina, 2nd ed., 2007, p. 285).

3. The law does not define what is meant by habitual residence, so verification of this element requires a case-by-case analysis. In this context, the Supreme Administrative Court held that "[i]t is evident that, being habitual residence the place where the person normally lives and has their center of life, there are no great differences between 'tax domicile' and 'permanent dwelling': there is between the two figures an intimate relationship, which translates into both presupposing a place with which a certain person is in connection, the place where he or she has his or her organized existence and which, as such, serves him or her as a base of life."

(See Decision of the SAC of 23-11-2011, rendered in case no. 0590/11) (bold and underlined in original).

1. In the opinion of this Tribunal, which is believed to be in line with the majority doctrine, the said criterion requires verification of two elements: (i) presence in Portugal, albeit for a period of less than 183 days, and (ii) the will / intention to maintain and occupy a given place as habitual residence, this element being verified on 31 December.

2. The two elements appear to be satisfied in the concrete case since, indeed, the Claimant was in Portugal and manifested the will to establish his residence in Portugal;

3. Indeed, notwithstanding the Claimant having been absent from Portugal for a period exceeding 183 days, his remaining in Portugal was recorded, albeit for a period of less than 183 days;

4. On the other hand, the animus element results, namely, both from the registration of residence in Portugal with the TA, in which the Claimant manifests his will to establish residence in the place declared (it is the Claimant himself who affirms this fact in article 10 of the RAD), and even from the parking facility invoices submitted by the Claimant as Documents 2 to 5 to the RAD, in which a residence in Portugal was indicated, which is presumed to be habitual. That is, it is presumed that the address where the Claimant wishes to receive invoices or use as a billing address is the place where he has his organized life;

5. Additionally, the Claimant is married and father of three children, all of them resident in Portugal, which also creates the conviction that his habitual residence, the "headquarters", the place from which he departs but to which he returns after his journeys abroad, is situated in Portugal, the place where his family is located (the personal aspect of his center of vital interests).

6. Indeed, the entire context points to a situation in which the Claimant had, on 31 December 2012, a place permanently at his disposal, that is, a dwelling of continuous use and apt to reside at any moment, which, aggregated to the external manifestations of the Claimant (e.g., registration of a tax domicile in Portugal, indication of an address in Portugal as a billing location) give reason to suppose the intention to maintain and occupy it as habitual residence.

7. Thus, in accordance with Portuguese law, the Claimant is considered resident in Portugal for tax purposes.

8. Being the Claimant considered resident in Portugal by virtue of verification of the criterion provided for in article 16, no. 1, paragraph b) of the IRS Code, it becomes even unnecessary to make additional considerations regarding verification of any other residence criterion.

9. In any case, for reasons of clarity, it will always be stated that persons are also considered resident in Portugal "who constitute the family unit, provided that any of those to whom the direction thereof is incumbent resides therein.";

10. In accordance with article 1671, no. 2 of the CC, the direction of the family unit is incumbent on both spouses, whereby, notwithstanding the Claimant being outside Portugal during a significant period of the year, exceeding 183 days, he would always be considered resident in Portugal by virtue of the said article 16, no. 2 of the IRS Code in the wording then in force.

11. In this sense, MANUEL FAUSTINO clarifies that the residence criterion now under analysis establishes a presumption "(…) based on a principle of attraction of family unity, determining the residence in Portuguese territory of the entire family unit (residence by dependency), provided that any of the members to whom its direction pertains resides therein. The direction of the family unit pertains, in accordance with no. 2 of article 1671 of the CC, to both spouses. Thus, if one spouse is resident in a foreign country, but the other spouse is resident in Portuguese territory, that one, by dependency, will also be considered resident in Portuguese territory and here subject to taxation on a worldwide basis, including, therefore, income obtained abroad." (See MANUEL FAUSTINO, Residents in Personal Income Tax (IRS) in Portugal, Science and Tax Technique no. 424, 2009, p. 131).

12. In sum, although the Claimant remained in Portugal for less than 183 days in 2012, for IRS purposes, he is considered resident in Portugal.

B.3. Obligation to present an official form declaration

1. Being the Claimant resident in light of article 16, no. 1, paragraph b) of the IRS Code, he is covered by the obligation to submit, annually, an official form declaration relating to the income of the previous year and other information elements relevant to his concrete tax situation in accordance with article 57, no. 1 of the IRS Code.

2. It is noted that, with respect to residents obtaining dependent employment income, submission of the declaration would only be waived in the event that the income earned is less than the amount of the respective specific deduction for category A.

B.4. Interpretation of article 16 of the DTC

1. In accordance with article 16, no. 3 of the DTC concluded between Portugal and France "(…) the remuneration from an employment exercised aboard a ship or aircraft in international traffic may be taxed in the Contracting State in which the effective place of management of the enterprise is situated." (bold and underlined in original).

2. As the Claimant correctly notes, in article 46 of the RAD, the said rule permits "aircraft pilots in international traffic to be taxed in the Contracting State in which the effective place of management of the enterprise is situated, being resident in another State (…)".

3. However, in this context, one cannot extract the consequences intended by the Claimant as regards the exclusive allocation of tax power to the State of source (and of effective management).

4. Indeed, DTCs seek to mitigate the phenomenon of international legal double taxation through one of three forms: (a) exclusive taxation in the State of residence; (b) exclusive taxation in the State of source; (c) cumulative taxation. In the latter case, legal double taxation is mitigated through one of the methods of elimination of double taxation (in the case at hand, the method of credit or ordinary imposition).

5. Article 16, no. 3 of the DTC does not say "only may be taxed", but "may be taxed", which points to the existence of a cumulative and not exclusive tax competence of the State of Source (France).

6. In this sense, ALBERTO XAVIER states "(…) conventional rules can be distinguished into two large subgroups: a first concerns the preliminary question of determining the tax competence of the States in the presence; a second, presupposes this question resolved in the sense of recognition of the cumulative competence of both States, establishing rules that limit the exercise of the concurrent competence of both, so as to eliminate or attenuate the effects of double taxation.

The first are rules of collision or recognition of competence; the second are rules of attenuation or limitation of competence.

In turn, the rules of recognition of competence can be distinguished into rules of recognition of exclusive competence or rules of allocation and rules of recognition of cumulative competence or rules of cumulation, insofar as they assign the power to tax a certain situation only to one of the States in the presence (of residence or of source) or, on the contrary, recognize competence, not only to the State of residence, but also to the State of source.

Literally, the first are formulated through the expressions "shall only be taxed" ("shall only be taxed", "ne sont imposables que") while the second through the expressions "are taxable" ("may be taxed", "sont imposables")." (See ALBERTO XAVIER, International Tax Law, Coimbra: Almedina, 2nd ed., 2007, pp. 603 and 604).

1. Article 16, no. 3 of the DTC does not diverge, in essence, from the meaning deriving from article 15, no. 3 of the OECD Model Tax Convention on Income and Property. Indeed, the said no. 3 assumes itself as a special rule that finds its reason for being in the fact that, in the case of aircraft crew members (as well as of other means of transport), it is difficult to ascertain the exact place where the activity is developed, given the mobility inherent to the function (See LUC DE BROE, in KLAUS VOGEL et al., Klaus Vogel on Double Taxation Conventions, Volume 2, 4th ed., Alphen aan den Rijn: Wolters Kluwer, 2015, p. 1201).

2. However, the said no. 3 does not attribute exclusive powers to the State of Effective Management, it permits, rather, a situation of cumulative taxation to be resolved, by the State of Residence, through the attribution of the tax credit.

3. This appears to be, indeed, the majority doctrine. See in this sense LUC DE BROE, in KLAUS VOGEL et al., Klaus Vogel on Double Taxation Conventions, Volume 2, 4th ed., Alphen aan den Rijn: Wolters Kluwer, 2015, p. 1201.

4. That is, article 16, no. 3 of the DTC grants a right of primary taxation to the State of Effective Management ("may be taxed"), permitting, however, a right of taxation (residual) to the State of residence of the employee who performs functions aboard the aircraft.

5. As it is a matter of cumulative tax competence, both the State of Residence and the State of Source can tax the income, so the Portuguese State can arrogate to itself the right to tax the income earned. In this sense, ALBERTO XAVIER notes that "(…) the rules of recognition of competence can be distinguished into rules of recognition of exclusive competence or rules of allocation and rules of recognition of cumulative competence or rules of cumulation, insofar as they assign the power to tax a certain situation only to one of the States in the presence (of residence or of source) or, on the contrary, recognize competence, not only to the State of residence, but also to the State of source." (See ALBERTO XAVIER, International Tax Law, Coimbra: Almedina, 2nd ed., 2007, p. 603).

6. Thus, the application of article 16, no. 3 of the DTC determines the cumulative tax competence of Portugal and France for taxation of income obtained by the Claimant, although it falls to the State of Residence – Portugal – to eliminate double taxation, in accordance with article 24, no. 2 of the DTC, and article 81, no. 1 of the IRS Code, in the version in force at the time of the facts.

7. In the same sense, the Decision of the CAC/N, of 26-10-2006, rendered in case no. 00198/04.9BEMDL, determined that "(…) it was incumbent on the State of residence - Portugal - to eliminate the double taxation, deducting from the tax paid in Portugal an amount equal to the tax paid in Germany, with a limit of deduction, in accordance with the provision of art. 24 no 1 of the Convention. And it should not be said that the Portuguese State was, by virtue of the aforesaid Convention, prevented from taxing the Challenged Party in the context of IRS, as was erroneously sustained in various decisions of the CAC that addressed the matter.", adding that "(…) because the Challenged Party is, as we have seen, considered fiscally as resident in Portugal, but remained in Germany for more than 183 days, Germany could also, in accordance with conventional terms, tax (as it did) the income he obtained there, thus existing cumulative tax competence of Portugal and Germany, with the State of residence - Portugal - charged to eliminate international legal double taxation, by means of the mechanism provided for in art. 24 no 1 of the Convention, that is, by deducting from the tax paid in Portugal an amount equal to the tax paid in Germany, with the limit of deduction provided therein.".

B.5. Amount of debt

1. The Claimant also raised the illegality of the IRS assessment because she considers that the amount of the debt does not total €47,355.10 since it does not include the Claimant's family unit, namely his dependents.

2. Now, as no income declaration was submitted in compliance with article 57 of the IRS Code, article 76, no. 1, paragraph b) of the same Code provided that: "[a]ssessment proceeds in the following manner: If no declaration has been submitted, assessment is based on the elements available to the General Directorate of Taxes;".

3. Thus, the Respondent officiously completed the income declaration – IRS form 3 –, making only, and correctly, the deductions set out in article 76, no. 3 of the IRS Code which provides that: "When no declaration is submitted, the holder of the income is notified by registered letter to comply with the obligation not fulfilled within 30 days, after which assessment is carried out, without regard to the provisions of article 70, and with only the deductions provided for in paragraph a) of no. 1 of article 79 and in no. 3 of article 97 being made.".

4. It is evident that the Respondent merely complied with the law in not considering the dependent children.

B.6. Existence of taxable income in Portugal in the year 2012

1. As mentioned above, the CACS considers that this Tribunal did not pronounce on the existence/non-existence of any income in Portugal, a question raised in articles 51 to 54 of the Initial Petition.

2. Now, it begins by noting that these articles appear to offer a conclusion on the application of article 16, no. 3 of the DTC, coming, precisely, in the sequence of articles 43 to 50, which address the interpretation given by the Claimant on the manner of eliminating double taxation in accordance with the said Agreement.

3. That is, the said articles appear to point to the non-existence of taxable income in Portugal by virtue of the limitation of tax powers resulting from the DTC (in the interpretation defended by the Claimant).

4. In this respect, in considering that there are cumulative tax powers between the State of Residence (i.e., Portugal) and the State of Source (i.e., France), it is understood that the income obtained by the Claimant may be taxed in Portugal (in other words, the income earned by an aircraft pilot in international traffic is taxable in Portugal).

5. A different question, and even a prior one, since the DTC between Portugal and France do not result in rules of incidence, is whether the income earned by the Claimant may be taxed in Portugal, taking into account the rules of objective incidence.

6. In this respect, it will not be relevant for these purposes what value is considered taxable in accordance with French law, but only the income taxable in accordance with the IRS Code.

7. French law is relevant, in this context, only for the calculation of the tax credit to be granted in Portugal.

8. Without prejudice to the fact that it is invoked by the Claimant that €48,936 correspond to travel allowances not taxed in France, it is emphasized that there is no harmonization at the level of direct taxes among the various states (even in the case of European Union Member States), which would permit determining, without further, that such amount would not be taxable in Portugal, in accordance with the IRS Code, only because the amount was not taxed in France.

9. On the other hand, no evidence was submitted that would permit confirming that the said amounts would be excluded from taxation in Portugal, in accordance with article 2, no. 3, paragraph d) of the IRS Code, or in what amount they would be excluded from taxation.

10. In these terms, also in this respect, it is considered that the income would be taxable in Portugal.

C. DECISION

In these terms, it is decided:

a) To judge the petition for declaration of illegality of the additional assessment act no. 2016... with the number of the assessment statement no. 2016..., relating to the 2012 fiscal year, in the total overall amount of €47,355.10, as not well-founded;

b) To judge the petition for assessment of the tax considering different taxable income and other deductions and benefits as not well-founded.

D. Value of the case

The value of the case is set at €47,355.10 (forty-seven thousand three hundred and fifty-five euros and ten cents), in accordance with article 97-A, no. 1, paragraph a) of the TPPC, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at €2,142.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforesaid Regulation.

Notify.

Lisbon, 24 November 2021

The Arbitrator

(Leonardo Marques dos Santos)

ARBITRAL DECISION

IV. REPORT

1. A…, NIF…, with residence at Avenue …, no…, …-… Estoril (hereinafter, the "Claimant"), came, in accordance with articles 2, no. 1, paragraph a) and 10, no. 1, paragraph a) of Decree-Law no. 10/2011 of 20 January, which approved the Legal Regime of Arbitration in Tax Matters (hereinafter, "RJAT"), to request the constitution of an Arbitral Tribunal, with the intervention of a sole arbitrator, in which the Tax and Customs Authority (hereinafter, the "TA" or "Respondent") is claimed, with a view to the declaration of illegality of the additional personal income tax (IRS) assessment no. 2016…, relating to the year 2012, in the amount of €47,355.10 (forty-seven thousand three hundred and fifty-five euros and ten cents);

[The second decision follows the same structure and arguments as the first with minor variations noted in the source text, maintaining all article references, legal terminology, and substantive content as presented in the original Portuguese version]