Process: 248/2017-T

Date: November 3, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Arbitral Decision Process 248/2017-T addresses a critical issue of duplicate IRS tax collection (duplicação de colecta) affecting a non-resident Portuguese lawyer. The claimant, who relocated tax residence to the United Kingdom in 2014, remained a partner in a Portuguese law partnership operating under fiscal transparency rules. The central dispute arose when the partnership applied 28% liberatory withholding tax on distributions (€67,862 in 2014 and €42,000 in 2015), treating the claimant as a non-resident recipient of Portuguese-source income. Simultaneously, the claimant filed IRS Form 3 declarations reporting the same income as category B business income under fiscal transparency provisions, with the withheld amounts claimed as tax credits. The Portuguese Tax Authority subsequently issued supplementary assessments, effectively taxing the same income twice. This case exemplifies the complex intersection of fiscal transparency rules under Article 6 CIRC, non-resident taxation regimes, and withholding tax obligations. The arbitral tribunal, constituted under Decree-Law 10/2011 (RJAT), examined whether partnership income attributed under fiscal transparency principles should be subject to liberatory withholding tax or integrated into the partner's global income assessment. The decision clarifies crucial procedural aspects of CAAD arbitration, including tribunal constitution requirements, representation standards, and the legal framework governing challenges to AT assessment acts. This ruling provides essential guidance for tax professionals advising non-resident partners in Portuguese transparent entities, highlighting the risks of duplicate taxation and available arbitration remedies under RJAT provisions.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr.ª Carla Sofia Ricardo Borges, who also uses Sofia Ricardo Borges, and Dr. A. Sérgio de Matos (arbitrator members), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 27-06-2017, agree as follows:

1. Report

A…, NIF…, with address in …, …- …, …, …, London …, United Kingdom, came under the terms of Decree-Law No. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter "LRTA") requesting the constitution of the Arbitral Tribunal requesting the declaration of illegality of the acts of assessment of Personal Income Tax (PIT) for 2014 and 2015 Nos. 2017… and 2017…, respectively.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 26-04-2017.

Pursuant to the provisions of paragraph (a) of section 2 of article 6 and paragraph (b) of section 1 of article 11 of the LRTA, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

On 09-06-2017, the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the arbitrators, in accordance with the combined terms of article 11, section 1, paragraphs (a) and (b) of the LRTA and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph (c) of section 1 of article 11 of the LRTA, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 27-06-2017.

The Tax and Customs Authority submitted a response defending that the request should be judged as unfounded.

By order of 11-09-2017, a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.

The parties submitted written arguments.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, section 1, paragraph (a), and 10, section 1, of the LRTA, and is competent.

The parties are duly represented, possess legal personality and capacity, and have legal standing (articles 4 and 10, section 2, of the same statute and article 1 of Administrative Order No. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities.

2. Factual Matter

2.1. Proven Facts

Based on the elements contained in the proceedings and the administrative file attached to the record, the following facts are considered proven:

  • The Claimant is a Lawyer;

  • In 1998, the Claimant and B… established a law partnership under the name C…, Law Partnership, RL;

  • Said partnership was established to provide legal services;

  • In the year 2014, the present Claimant changed his tax residence to the United Kingdom, becoming a non-resident in Portugal;

  • The accountant of the law partnership understood that the present Claimant would be subject to withholding tax at liberatory rates for non-residents on income received from said partnership;

  • The said partnership proceeded to withhold tax on income made available to the Claimant;

  • The partnership C…, RL, with respect to the fiscal year 2014, proceeded to withhold and delivered to the Tax and Customs Authority the total amount of €67,862.00, relating to amounts made available to the Claimant in the total amount of €242,362.00;

  • The Claimant filed the Personal Income Tax Form 3 No. …-… -…, relating to the year 2014, in which he declared as category B income the amount of €242,362.00 and withholding tax of €67,862.00 (Annex D relating to fiscal transparency), in addition to real estate income in the amount of €1,167.72 (document No. 39 attached with the request for arbitral decision, the contents of which are hereby reproduced);

  • With respect to the year 2015, the said partnership made available to the Claimant income in the total amount of €150,000.00, withholding having been effected and the total amount of €42,000.00 delivered to the Tax and Customs Authority;

  • The partnership C…, RL, declared the withholdings at the liberatory rate of 28% (of €67,862.00 and €42,000.00) in Form 30 declaration and effectuated the respective payments (payment vouchers attached with the request for arbitral decision);

  • The Claimant filed the Personal Income Tax Form 3 No. …-… -…, relating to the year 2015, in which he declared as category B income the amount of €150,000.00 and withholding tax of €42,000.00 (Annex D relating to fiscal transparency), in addition to real estate income in the amount of €1,167.72 (document No. 84 attached with the request for arbitral decision, the contents of which are hereby reproduced);

  • The Tax and Customs Authority notified the Claimant of the order of 23-01-2017, which manifests agreement with information No. …/2017, a copy of which is contained in the administrative file, the contents of which are hereby reproduced, in which the following is stated, among other matters:

In compliance with article 3 of Normative Order No. 7-A/2015, of 30 April, the Personal Income Tax Form 3 declaration for the year 2014 with identification …-… and for the year 2015 with identification …-… -…-…, of the taxpayer identified above, was selected for purposes of analysis and confirmation of Fiscal Transparency Withholdings.

To this end, the taxpayer was notified for prior hearing on 2016/12/20 through order…, with the intention of making the following correction(s) to the amounts recorded in said Form 3 declaration, in accordance with relevant information in the database, correctly completing section 4 of Annex D.

Faced with the prior hearing notification sent to the Taxpayer, the Company … - C… on 29 December 2016 came to state the following through email to the Tax Assessment Division - The "TAC":

  • In the case of partner A…, the company considered that, from 2014 (inclusive), given that this taxpayer became "non-resident", payments of income (whether profits or advances on profits) would be subject to withholding tax at the rate of 28%

  • In accordance with this consideration, in 2014 the following transactions were recorded with partner A…:

  • €242,362 of profits were allocated to this partner

  • In reference to this amount, €67,862 were withheld as Personal Income Tax Withheld

  • The difference between the amount allocated (€242,362) and the amount of Personal Income Tax withheld (€67,862) was paid to the partner, that is, €174,500 was paid to the partner (rate 28%)

  • The Personal Income Tax Withheld was settled with the State (AT) and the respective Form 30 declarations were submitted to AT.

With respect to the year 2015, the Company … - C… states that €150,000 of income was allocated to partner A… (NIF …), having been withheld at source 28% × €150,000 = €42,000, and €108,000 was paid to the partner.

For this purpose, said Company sent a summary of payments made, as well as payment vouchers and Form 30 receipts.

Given that this is a Fiscal Transparency (article 6 CIRC), the collective income of the Professional Partnership, with registered office or effective direction in Portuguese territory, is allocated to the taxpayer's taxable income for purposes of Personal Income Tax, even if there was no distribution of profits. Constituting the income of partner PS the result of the allocation made in accordance with its terms and conditions or, when greater, the amounts that, as advances on account of profits, have been paid or made available (article 20 CIRS).

Thus, in light of the foregoing, and so that the assessment in question produces the appropriate effects, it is proposed to prepare a Supplementary Assessment, in accordance with the information below, given that it does not fall under section 4 of article 71 of CIRS.

  • Following the aforementioned order, the Tax and Customs Authority issued Personal Income Tax assessments and compensatory interest No. 2017…, relating to the year 2014, in the amount of €64,943.02 and No. 2017…, relating to the year 2015, in the amount of €37,513.09;

  • In the assessment relating to the year 2014, total income of €243,529.72 is indicated and the tax is determined at €60,917.46 and compensatory interest of €4,025.55, arriving at the amount due of €64,943.02;

  • In the assessment relating to the year 2015, total income of €146,113.61 is indicated and the tax is determined at €36,583.45 and compensatory interest of €949.64, arriving at the amount due of €37,513.09;

  • On 07-04-2017, the request for constitution of an arbitral tribunal was submitted, giving rise to the present proceedings.

2.2. Substantiation of Factual Matter and Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

The facts were found proven based on the documents attached with the request for arbitral decision and on the administrative file.

3. Points of Law

It follows from the evidence produced that the Claimant, being considered a non-resident in Portugal, earned in the years 2014 and 2015 professional income of category B for Personal Income Tax subject to the fiscal transparency regime and that the partnership which made the income available to him did not deliver it in full, having effected withholdings at source at the rate of 28%, which it delivered to the Tax and Customs Authority.

The Tax and Customs Authority does not contest these facts, namely that the withholdings were effected and that the amounts withheld by the partnership C…, RL were delivered to it, which declared the withholdings at the liberatory rate of 28% in the Form 30 declaration and effectuated the respective payments.

However, the Tax and Customs Authority issued the assessments under challenge without taking into account the tax payments that were made and the fact that the Claimant did not receive the full amount of sums declared as category B income.

The Claimant invokes that there occurred duplication of collection.

In accordance with the provision of article 205, section 1, of the Code of Tax Procedure, duplication of collection occurs "when, with a tax paid in full, another of like nature is demanded from the same or a different person, relating to the same taxable fact and the same period of time."

In the case at hand, regardless of whether or not withholding tax should be effected on all amounts made available to the Claimant in the years 2014 and 2015, the fact is that the partnership C…, Law Partnership, RL did effect withholding at the rate of 28% on the amounts made available and effected delivery to the Tax and Customs Authority of the amounts withheld.

With those deliveries, indicated in Form 30 declarations and respective payment vouchers, it became clear that the Personal Income Tax that the Claimant should have paid in those years was paid, since the rate that the Tax and Customs Authority applied in the assessments under challenge was 25%.

Thus, the requirements of duplication of collection are met, since, before the assessments were made, the entirety of the Personal Income Tax that should be paid by the Claimant, from income earned subject to the fiscal transparency regime relating to the years 2014 and 2015, had already been paid.

The Tax and Customs Authority argues that the requirements of duplication of collection are not met because the payments made by the partnership C…, RL are improper.

However, there is an imprecision here, since the Personal Income Tax that was paid by the partnership C…, RL to the extent corresponding to the application of the rate of 25% was due, this being the tax that was legally due in relation to the "same taxable facts" underlying the assessments. ([1])

The manner of payment of that Personal Income Tax due by the Claimant that was used (withholding at source by the partnership, acting as substitute) is what may not be correct, but this does not imply that the tax was not due by the taxable facts imputed to the Claimant. That is, the withholding may be considered improperly effected, but it does not follow that the tax payment is improper, that is, one cannot conclude that the Claimant should not pay Personal Income Tax on income earned in 2014 and 2015 as a partner of the same Partnership, which, being a professional partnership (see article 6, section 1, paragraph (b) of the CIRC), is subject to the fiscal transparency regime (cf. article 6 of the CIRC) by virtue of which its respective collective income is allocated to the Claimant, in the proportion falling to him, integrating into his taxable income. That is, the income, which is always one and the same, by virtue of a special allocation is considered one single time for tax purposes, namely, in the sphere of the respective partner (in this case, Claimant), in accordance with article 20 of the CIRS.

Thus, with all the requirements provided for in article 205, section 1, of the Code of Tax Procedure being met, and it not even being alleged that there is a situation provided for in section 2 of the same article, it must be concluded that the assessments under challenge are affected by a vice of duplication of collection, which justifies their annulment (and not a declaration of nullity), in accordance with article 163, section 1, of the Administrative Procedure Code, subsidiarily applicable, by virtue of the provision of article 2, paragraph (c), of the General Tax Law.

The assessments of compensatory interest, included in the assessments under challenge, have as their premise the respective Personal Income Tax assessments, so that the illegality of these implies the illegality of the compensatory interest assessments, which must also be annulled.

4. Indemnity Interest

The Claimant requests the restitution of overpaid tax with indemnity interest, from the date of entry of the present action.

Although article 2 of the LRTA only explicitly confers on the arbitral tribunals operating in the CAAD competences to declare the illegality of acts, the legislative intent of conferring on the tax arbitral proceeding the nature of "alternative procedural means to the judicial action and the action for recognition of a right or legitimate interest in tax matters," which is indicated in section 2 of article 124 of Law No. 3-B/2010, of 28 April, which granted the Government the legislative authorization on which was based the approval of the LRTA, leads to the conclusion that the object of arbitral proceedings is identical to that which the judicial action has.

The judicial action is essentially a contentious means of mere annulment, as follows from articles 99 and 124 of the Code of Tax Procedure, seeking thereby to eliminate the effects produced by illegal acts.

It has been understood, however, since the fiscal reform of 1958/1965, that sentences in payment of indemnity interest may be issued, today by virtue of the provision of section 1 of article 43 of the General Tax Law, and it is also usual to determine the restitution of amounts paid in compliance with the illegal act, which are the premise for the calculation of indemnity interest (in addition to indemnities for improper guarantees, by virtue of the provision of article 171, section 1, of the Code of Tax Procedure).

In the case at hand, however, the reimbursement that the Claimant seeks does not fall within the elimination of the effects produced by the acts under challenge, since it is not a sum that the Claimant paid by virtue of the impugned assessment acts. In truth, it was the partnership C…, RL that made the improper payments, on its own initiative, the withholding and payments not being attributable to error by the Tax and Customs Authority.

Thus, not being a reimbursement of a sum paid in compliance with what was decided in the acts under challenge, what the Claimant seeks is a declaratory decision of a right to reimbursement of sums overpaid through acts of withholding at source, which are not the subject of the present proceedings. This decision does not fall within the scope of the powers of cognition that this Arbitral Tribunal has in the present proceedings, which are restricted to the elimination of the effects produced by the acts that are the subject hereof.

For this reason, this Arbitral Tribunal cannot decide whether there is a right to reimbursement and to what extent, as such does not fall within the scope of the powers conferred on it in impugnatory proceedings.

On the other hand, with respect to indemnity interest, article 43, section 1, of the General Tax Law only provides that they are due when payment occurs by "error attributable to the services resulting in payment of the tax debt in an amount higher than legally due."

In this case, the overpayment that the Claimant refers to did not result from error attributable to the services, so there is no basis for indemnity interest as a consequence of the annulment of the assessments under challenge.

Thus, not being in a situation where this Arbitral Tribunal should determine the restitution of tax and indemnity interest, these requests are unfounded, without prejudice to the duties imposed on the Tax and Customs Authority by section 1 of article 24 of the LRTA.

5. Decision

On these grounds, this Arbitral Tribunal agrees to:

a) Judge the request for arbitral decision to be well-founded as to the requests for declaration of illegality of the Personal Income Tax assessments Nos. 2017… and 2017…;

b) Annul the aforementioned assessments;

c) Judge unfounded the requests for restitution of overpaid tax and indemnity interest, without prejudice to the duties of the Tax and Customs Authority to give effect to this arbitral award.

6. Value of the Claim

In accordance with the provisions of articles 306, section 2, of the Code of Civil Procedure, 97-A, section 1, paragraph (a), of the Code of Tax Procedure, and 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the claim is set at €102,456.00.

7. Costs

Pursuant to article 22, section 4, of the LRTA, the amount of costs is set at €3,060.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 03-11-2017

The Arbitrators

(Jorge Lopes de Sousa)

(Sofia Ricardo Borges)

(A. Sérgio de Matos)

[1] There is not, thus, a situation where the tax paid relates to distinct taxable facts, as is the case, for example, with the construction of a property in the place of another, the first disappearing and continuing to pay the respective real estate tax, to which RUBEN A. CARVALHO and FRANCISCO RODRIGUES PARDAL refer in Código de Processo das Contribuições e Impostos Anotado e Comentado, Volume I, 2nd edition, page 412.

In situations of that type, the assessments have underlying distinct taxable facts (distinct properties, with different patrimonial values), so that double collection of tax does not constitute duplication of collection, as there is not the identity of taxable fact ("same taxable fact") essential for it to occur.

But, that is not what happens in the case at hand, since it concerns Personal Income Tax that was paid by the partnership relating to the same income made available to the Claimant in the years 2014 and 2015.

Frequently Asked Questions

Automatically Created

What is duplicação de colecta (duplicate tax collection) under Portuguese IRS law?
Duplicação de colecta under Portuguese IRS law refers to the illegal double taxation of the same income within the same tax period. This occurs when the Tax Authority assesses tax on identical income twice through different mechanisms. In Process 248/2017-T, duplicate collection arose when partnership income was simultaneously subjected to 28% liberatory withholding tax (treating the taxpayer as a non-resident receiving Portuguese-source income) and also included in the regular IRS assessment under fiscal transparency rules (Article 6 CIRC and Article 20 CIRS). Portuguese tax law prohibits this duplication, as it violates fundamental principles of tax justice and the principle that the same income cannot be taxed multiple times by the same jurisdiction in the same period. The proper treatment depends on the taxpayer's residence status and the applicable fiscal transparency regime.
How can a taxpayer challenge duplicate IRS tax assessments through CAAD arbitration?
Taxpayers can challenge duplicate IRS assessments through CAAD arbitration by filing a request for constitution of an arbitral tribunal under Decree-Law 10/2011 (RJAT). The process requires: (1) submitting a formal arbitration request identifying the contested assessment acts with specific reference numbers; (2) paying the required arbitration fee; (3) demonstrating legal standing and interest in challenging the assessments; (4) presenting legal and factual arguments supporting the illegality claim. In Process 248/2017-T, the claimant successfully initiated arbitration by requesting declaration of illegality of IRS assessment acts 2017… for tax years 2014 and 2015. The CAAD President accepts the request, notifies the Tax Authority, and the Deontological Council appoints arbitrators. Parties can submit responses, written arguments, and request hearings. The tribunal reviews the administrative file, applicable law, and issues a binding arbitral decision resolving the duplicate taxation issue.
What legal framework governs tax arbitration proceedings under Decreto-Lei 10/2011 (RJAT)?
Tax arbitration proceedings are governed by Decree-Law 10/2011 of 20 January, establishing the Legal Regime for Tax Arbitration (Regime Jurídico da Arbitragem em Matéria Tributária - RJAT), as amended by Law 66-B/2012. The framework includes: Article 2 defining tribunal competence for challenging tax acts; Article 6 governing arbitrator appointment procedures; Article 10 establishing representation and capacity requirements; Article 11 regulating tribunal constitution timelines and party notification; and Administrative Order 112-A/2011 detailing procedural formalities. The regime allows taxpayers to challenge assessment acts, collection acts, and other tax administrative decisions through binding arbitration as an alternative to judicial courts. Key principles include mandatory arbitrator acceptance within specified periods, party rights to refuse arbitrator appointments under Article 7 of the Deontological Code, dispensation of hearings when parties agree to written submissions, and issuance of reasoned arbitral decisions with binding effect equivalent to court judgments.
Can a non-resident taxpayer file an arbitration claim against the Portuguese Tax Authority (AT) for duplicate IRS collection?
Yes, non-resident taxpayers maintain full standing to file CAAD arbitration claims against the Portuguese Tax Authority for duplicate IRS collection. Process 248/2017-T confirms this principle, as the claimant—a UK tax resident since 2014—successfully initiated arbitration proceedings challenging IRS assessments for 2014 and 2015. The tribunal explicitly verified that the claimant possessed legal personality, capacity, and legal standing under Articles 4 and 10(2) RJAT and Administrative Order 112-A/2011. Non-residence does not eliminate Portuguese tax obligations on Portugal-sourced income or partnership participations, nor does it restrict access to arbitration remedies. The CAAD framework applies equally to residents and non-residents contesting AT administrative acts. Non-residents facing duplicate taxation—particularly those with income from Portuguese partnerships operating under fiscal transparency—can effectively utilize RJAT arbitration to challenge illegal assessment duplications, regardless of their foreign tax residence status or representation through Portuguese legal counsel.
What are the procedural requirements for constituting a collective arbitral tribunal at CAAD?
The procedural requirements for constituting a collective arbitral tribunal at CAAD include: (1) Filing and acceptance of the arbitration request by the CAAD President; (2) Automatic notification to the Tax Authority within the legal timeframe; (3) Appointment of three arbitrators by the Deontological Council under Article 6(2)(a) and Article 11(1)(b) RJAT—one president and two members; (4) Arbitrators must communicate acceptance of their appointment within the applicable statutory period; (5) Notification of arbitrator appointments to both parties; (6) A 10-day period during which parties may refuse arbitrator appointments in accordance with Articles 6 and 7 of the Deontological Code; (7) Formal tribunal constitution occurs after this refusal period expires without objection, as specified in Article 11(1)(c) RJAT. In Process 248/2017-T, the tribunal was constituted on 27-06-2017 following this exact sequence: request acceptance on 26-04-2017, arbitrator appointments and acceptances, party notification on 09-06-2017, and constitution after the refusal period elapsed without objections.