Process: 285/2018-T

Date: January 22, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 285/2018-T) addresses whether a taxpayer can claim IRS capital gains tax exclusion under Article 10(5) of the Portuguese IRS Code when reinvesting proceeds from selling a primary residence. The taxpayer sold a property in Ericeira (Mafra) for €465,000 in February 2016 and reinvested €122,063.25 in a new property in Amadora in November 2016. The Tax Authority (AT) denied the capital gains exclusion, arguing the sold property didn't qualify as the taxpayer's permanent residence because she had changed her fiscal domicile (domicílio fiscal) to her son's address in March 2015, before the sale. The AT relied on Article 13(10) CIRS, which presumes fiscal domicile indicates permanent residence. The taxpayer contested this, arguing she continued living at the Ericeira property daily despite changing her fiscal address due to concerns about mail security during divorce proceedings. The tribunal heard witness testimony and examined whether fiscal domicile change automatically disqualifies property from permanent residence status. This case clarifies the relationship between declared tax domicile and actual permanent residence (residência própria permanente) for capital gains reinvestment purposes, addressing whether the AT can rely solely on fiscal domicile records or must consider actual residential circumstances. The decision impacts taxpayers undergoing family transitions who may change fiscal addresses for administrative reasons while maintaining actual residence elsewhere.

Full Decision

ARBITRAL DECISION

I. REPORT

I.1

On 11 June 2018, the taxpayer A..., Tax ID Number..., divorced, resident at ..., no. ..., Amadora, requested, pursuant to the terms and in accordance with the provisions of Article 2 and Article 10, both of Decree-Law no. 10/2011 of 20 January, the constitution of an Arbitral Tribunal with the designation of a sole arbitrator by the Deontological Council of the Centre for Administrative Arbitration, in accordance with the provisions of Article 6, no. 1 of the aforementioned legal instrument.

The request for the constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as AT or "Respondent") on 12 June 2018.

The Claimant did not proceed with the appointment of an arbitrator, and therefore, in accordance with the provisions of Article 5, no. 2, subsection b) and Article 6, no. 1, of the RJAT, the undersigned was designated by the President of the Deontological Council of CAAD to serve as sole arbitrator in this Arbitral Tribunal, having accepted in accordance with legal provisions.

The Arbitral Tribunal was constituted on 22 August 2018.

The AT submitted its response on 28 September 2018.

The examination of witnesses took place on 06.11.2018.

The parties presented their oral arguments on 06.11.2018.

The Claimant seeks a declaration from the Arbitral Tribunal that the Personal Income Tax (IRS) assessment no. 2018..., issued by the Tax Services of Amadora – ..., in the amount of €27,863.49, is unlawful.

I.2. The Claimant bases its claim, in summary, on the following grounds:

Pursuant to Article 10, no. 5 of the Personal Income Tax Code (CIRS), taxpayers are permitted to reinvest amounts obtained from the paid transfer of real property.

In order to exclude the taxation of capital gains, the same article requires only that both the transferred property and the newly acquired property be intended for the taxpayer's own permanent residence.

The circumstance of having changed the tax domicile to the house of his son's address cannot be understood as having ceased to reside in Ericeira.

In this regard, the taxpayer, in accordance with the requirements set out in Article 10, no. 5 of the CIRS:

Alienated the property which was her own permanent residence located in Ericeira;

Acquired a new property in Amadora for her new own permanent residence;

Expressly manifested the intention to proceed with the reinvestment.

Thus, both the transferred property and the acquired property serve as her own permanent residence; both are located in Portuguese territory; and the taxpayer had the corresponding intention to proceed with the reinvestment.

Given that the requirements for the exclusion of taxation as capital gains are met, the taxpayer does not understand why the Tax and Customs Authority took the position that the property subject to alienation (U-... of the Parish of ...) is not intended for her own permanent residence.

I.3 In its response, the AT invoked the following:

The Claimant's tax domicile, at the time of the alienation of the property located at ..., which occurred on 2016/02/25, had not been, since 2015/03/04, at the address of the property whose gains she seeks, in the proportion of 50%, to exclude from the taxation of real property transfers.

It is important to note what is provided, regarding the matter in dispute, by Article 19 of the General Tax Law.

That is, the declaration of tax domicile is mandatory and only with this declaration does the tax domicile declared by the taxpayer have efficacy before the AT.

What is relevant to the proceedings is the indisputable fact that, at the time of the alienation of the property located at Rua ..., the Claimant had had her tax domicile since 2015/03/04 in another location.

Furthermore, Article 13, no. 10, of the CIRS, as amended by Law no. 82-E/2014 of 31/12, which came into force on 01/01/2015, establishes that "Tax domicile shall presume the taxpayer's own permanent residence, which may be contradicted at any time by proof to the contrary."

However, based on the documents submitted by the Claimant in order to provide proof of her own permanent residence, what is verified is that in the deed of purchase and sale of the property located at Rua ..., ..., in ..., executed on 2016/02/25, the Claimant's residence is at ..., no. ..., ..., ...-..., parish of ..., municipality of Amadora.

Therefore, the Claimant did not prove unequivocally that the alienated property, at the date of its sale, was her own permanent residence.

II. DISMISSAL OF PRELIMINARY ISSUES

The Tribunal is competent and regularly constituted, pursuant to Articles 2, no. 1, subsection a), 5, and 6, all of the RJAT.

The parties have legal personality and capacity.

The parties are entitled to proceed and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011 of 22 March.

The proceedings are properly constituted.

There are no other preliminary issues to be addressed nor defects that would invalidate the proceedings.

It is now necessary to examine the merits of the claim.

III. THEMA DECIDENDUM

The central question to be decided, as posed by the Claimant, is whether the capital gain realised on real property is, or is not, excluded from taxation.

IV. MATERIAL FACTS

IV.1. Proven Facts

Before addressing the legal issues, it is necessary to establish the material facts relevant to their understanding and decision, which, having examined the documentary evidence, the administrative tax proceedings attached and taking into account the facts alleged, are established as follows:

On 10 October 1997, the taxpayer and her former spouse B... (previously married under the regime of community of property acquired after marriage) executed a deed of purchase and sale by which they acquired the urban real property located at Rua ..., parish of ..., municipality of Mafra, at that time registered in the cadastre under article ...º (currently ...º).

On 03.08.2011, the taxpayer changed her tax domicile to Rua ..., parish of ..., municipality of Mafra.

From at least 03.08.2011 onwards, the taxpayer moved permanently to the property acquired, making it her own permanent residence and that of her family household, commencing to reside there daily.

In October 2014, the taxpayer and B... initiated divorce proceedings with the corresponding division of assets.

On 04 March 2015, the taxpayer changed her tax domicile to the house of her son's address (C...) located at ..., no. ..., ..., ..., ... .

The Claimant continued to live at Rua ..., sleeping there, taking her meals there, receiving visitors there, and caring for and cleaning daily the property located at Rua ..., parish of ..., municipality of Mafra.

The Claimant feared that she would not receive her correspondence at Rua ..., Mafra, due to the tension existing with Mr. B..., who had access to the mailbox.

The property at ... in ... is the own residence of her son, who resides there with his family household, of which the Claimant is not a member.

On 25 February 2016, A... and B... alienated to a third party the property located at Rua ..., parish of ..., municipality of Mafra for the amount of 465,000 euros.

On 3 November 2016, the Claimant acquired a property with the sole and exclusive purpose of making it her own permanent residence located at ..., no. ... Corner, in ....

Her intention to use the amount of €122,063.25 to reinvest in the newly acquired property was communicated by the taxpayer in her IRS return for the 2016 tax year, filed on 20.04.2017.

On 07/12/2016, the taxpayer changed her tax domicile to the property located at ..., no. ..., ...-... Amadora.

IV.2. Facts Not Proven

There are no material facts not proven, since all facts relevant to the examination of the claim were considered proven.

IV.3. Reasoning Regarding the Material Facts

The proven facts are uncontested matters and are documentally demonstrated in the proceedings.

Facts numbered 1 to 5 and 8 to 12 are accepted based on analysis of the administrative proceedings, the documents submitted by the Claimant (documents 1 to 19 of the petition for constitution of the Tribunal) and the position taken by the parties.

Facts numbered 6 and 7 resulted from the testimony of witnesses C... (Claimant's son), B... (Claimant's former spouse), D... (Claimant's daughter-in-law) and E..., who confirmed with impartiality and objectivity the factual matters in question. The testimony was enlightening as the witnesses demonstrated direct knowledge of the subject matter.

Witnesses C..., B... and D... stated that the Claimant between 2011 and 2016 slept, ate and received her visitors in Mafra. Witnesses C... and D... stated that the Claimant occasionally, between 2014 and 2016, spent some weekends in ... to care for her grandchildren or during festive periods (Christmas), returning afterwards to the property located in Mafra.

Witness E... stated that in 2015, she had been received by the Claimant at the property located in Mafra, where the two of them had dinner.

Witnesses C... and D... attested that the change of tax domicile to Alfragide (the property where her son and daughter-in-law habitually reside) occurred only because the Claimant feared that she would not receive her correspondence due to the tension existing with her former spouse, who had access to the mailbox. Witness C... attested that the change of tax domicile had been advised by him.

V. THE LAW

The Claimant appeals for the exclusion of taxation in the context of Personal Income Tax (IRS) of the real property capital gain obtained.

What is the law?

Capital gains obtained from the alienation of real property are income of category H (Article 10, no. 1, subsection a) of the CIRS) and are taxed in the context of IRS.

However, Article 10, no. 5 of the CIRS provides for the exclusion of taxation:

5 - Excluded from taxation are gains from the paid transfer of real property intended for the taxpayer's own permanent residence or that of his family household, provided that the following conditions are cumulatively satisfied:

a) The realisation value, deducted from the amortisation of any loan contracted for the acquisition of the property, is reinvested in the acquisition of ownership of another property, land for construction of property and/or such construction, or in the enlargement or improvement of another property exclusively for the same purpose located in Portuguese territory or in the territory of another Member State of the European Union or the European Economic Area, provided that in the latter case there is an exchange of information in tax matters;

b) The reinvestment referred to in the preceding subsection is effected between the 24 months preceding and the 36 months following the date of realisation;

c) The taxpayer manifests the intention to proceed with the reinvestment, even if partial, by mentioning the respective amount in the tax return for the year of alienation;

The basis for this exclusion is related to the fundamental right to housing (Article 65, no. 1 of the Constitution of the Portuguese Republic).[1] The legislator intends not to create tax obstacles to the change of residence in owner-occupied property by families.[2]

"The exclusion aims to favour the ownership of property intended for permanent residence."[3] Under Article 10, no. 5 and no. 7 of the CIRS, in order for the full exclusion of taxation in case of reinvestment to be recognised, the following requirements must cumulatively be met:

a) The alienated property must be intended for the taxpayer's own permanent residence;

b) The property acquired in Portuguese territory must be intended for the taxpayer's own permanent residence;

c) The reinvestment must be made within a period of 24 months prior or 36 months following the date of realisation;

d) The entire realisation value must be reinvested.

As Professor José Guilherme Xavier de Basto teaches, "the 'departing' property and the 'receiving' property must be intended for own permanent residence".[4]

In the case at hand, the Respondent contends that the alienated property was not intended for the taxpayer's own permanent residence because the Claimant in 2015, at the time of its alienation, had her tax domicile at ..., ... and not at Rua ..., parish of ..., municipality of Mafra (alienated property).

Article 19, no. 1, subsection a) of the General Tax Law (LGT) provides as follows:

1 - The tax domicile of the taxpayer is, unless otherwise provided:

a) For natural persons, the place of habitual residence;
b) (...)

The tax domicile of natural persons is the place where they habitually reside.

On the conceptual plane, neither does habitual residence identify with permanent residence, nor does domicile coincide with the address, that is, the place where the person has his or her residence, as can be inferred from Article 82 of the Civil Code.[5]

Notwithstanding the distinction between the concepts of habitual residence and own permanent residence, Article 13, no. 10 of the CIRS (version at the time of the facts in judgement – 2016) had the following wording: "Tax domicile shall presume the taxpayer's own permanent residence which may be contradicted at any time by proof to the contrary."

Thus, the Claimant's tax domicile presumes that her own permanent residence between 04.03.2015 and 06.12.2016 was at Travessa do ..., in ... . This is a legal presumption. In the tax field, presumptions enshrined in tax incidence norms are rebuttable, as results from Article 73 of the General Tax Law.

In the case sub judice, the possibility of rebutting the presumption results expressly from the final part of Article 13, no. 10 of the CIRS. Even before this legal provision was approved (Law no. 82-E/2014 of 31/12), case law already admitted proof of own permanent residence in a certain place different from tax domicile.[6]

As results from the items in point 6 of the evidence, the Claimant succeeded in rebutting the presumption that her own permanent residence was at the location of her tax domicile.

The burden of proof of the facts invoked rests with the taxpayer (Article 74, no. 1 of the General Tax Law), and any means of proof admitted by law are admissible (Article 115, no. 1 of the Code of Administrative Court Proceedings applicable by reference from Article 29, no. 1, subsection a) of the RJAT).

The witnesses provided a sufficiently explicit and convincing contribution, adequate to support the conclusion that the Claimant actually intended the property in question for her own permanent residence during the period between 2011 and 2016.

The requirement "own permanent residence" is the factual situation that conditions the exclusion of taxation of the real property capital gain. The requirement of permanence in the "residence" (the law does not use the term "domicile"), should be understood in the sense of habituality and normality. To ensure the purpose underlying the exclusion of taxation, which consists of stimulating and encouraging access to owner-occupied housing (cf. subsection c) of no. 2 of Article 65 of the Constitution of the Portuguese Republic), it is sufficient that the beneficiary organise in the property the conditions of his normal life and that of his family household, in such a way that it is seen as the place of his residence.

The centre of the Claimant's personal life was at Rua ..., parish of ..., municipality of Mafra. This was the place where she habitually slept, took her meals and received her visitors. The Claimant established the centre of her personal life in the property located in Mafra.

From point no. 5 of the proven facts, it results that the Claimant inhabited the property located in Mafra until the date of its sale.

The Claimant reinvested the realisation value in another property located in Portuguese territory, which she intended for her own permanent residence.

Total exclusion of taxation only occurs if the realisation value is entirely reinvested (Article 10, no. 5, subsection a) and no. 7 of the CIRS).

The realisation value from the alienation of the property located at Rua ..., parish of ..., municipality of Mafra was €232,500.00 (50% of €465,000.00). However, the Claimant declared in her IRS return an intention to reinvest the amount of €122,063.25. This part of the taxpayer's IRS return is presumed to be true (Article 75, no. 1 of the General Tax Law), particularly since the AT did not contest it. Thus, the declared reinvestment was not total, as required by Article 10, no. 5, subsection a) of the CIRS.

When reinvestment is partial, Article 10, no. 7 of the CIRS provides as follows: "In the case of partial reinvestment of the realisation value and where the conditions established in the preceding number are satisfied, the benefit referred to in no. 5 shall apply only to the proportional part of the gains corresponding to the reinvested amount."

Having regard to the realisation value (€232,500.00) and the declared reinvested amount (€122,063.25), it appears to us that only 52.50% of the realisation value was reinvested. Consequently, 52.50% of the real property capital gain obtained is excluded from taxation, with the remaining 47.50% of the real property capital gain being subject to taxation.

Thus, it remains to conclude that the Claimant partially satisfied, in the proportion of 52.50%, the requirements necessary and required by Article 10 of the CIRS for the exclusion of taxation as capital gains of the part of the gains from the paid transfer of the property she inhabited and which was partially reinvested in the purchase of a property for her own permanent residence within the legal period of 36 months following.

VI. DECISION

In light of everything set forth above, it is decided:

a) To judge partially the petition for declaration of unlawfulness of the Personal Income Tax (IRS) assessment no. 2018..., relating to the tax year 2016 as granted;

b) To annul partially that assessment, to the extent that the real property capital gain is not excluded from taxation in the proportion of 52.50% (Article 10, no. 5, subsection a) and no. 7 of the CIRS);

c) To condemn the Respondent to bear the costs of the proceedings in the proportion of 52.50% and the Claimant in the proportion of 47.50%, in light of the respective success in the proceedings.

The value of the proceedings is fixed at €27,863.49 in accordance with Article 97-A, no. 1, subsection a), of the Code of Administrative Court Proceedings, applicable by force of subsection a) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €1,530.00 in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent and the Claimant in the proportion of the outcome of the proceedings, in accordance with Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the aforementioned Regulation.

Let notification be given.

Lisbon, 22 January 2019

The Arbitrator

(André Festas da Silva)

[1] In this sense, see André Salgado de Matos, Personal Income Tax Code (IRS), Annotated, ISG, Coimbra, 1999, p. 168

[2] In this sense, see Rui Duarte Morais, On IRS, Almedina, Coimbra, 2014, p. 137

[3] In IRS: Real Scope and Determination of Net Income, Coimbra Editor, 2007, p. 413.

[4] In IRS: Real Scope and Determination of Net Income, Coimbra Editor, 2007, p. 413.

[5] See Antunes Varela and Pires de Lima, Annotated Civil Code, Vol. I, p. 111

[6] See Judgment of TCAS of 08.10.2015, case no. 06685/13, Judgment of STA of 23/11/2011, case no. 0590/11, Judgment of STA of 14.11.2018, case 01077/11.9BESNT 01448/17, CAAD decision of 09/09/2016, case no. 92/2016 and CAAD Decision of 26.04.2016, case no. 721/2015

Frequently Asked Questions

Automatically Created

Can I claim the IRS capital gains reinvestment exemption if I changed my tax domicile before selling my property in Portugal?
The ability to claim IRS capital gains reinvestment exemption when changing tax domicile before selling depends on proving the property remained your actual permanent residence despite the fiscal domicile change. Article 13(10) CIRS creates a rebuttable presumption that fiscal domicile indicates permanent residence, but taxpayers can provide contrary evidence. In this case, the tribunal examined whether the taxpayer actually continued living at the Ericeira property daily despite changing her fiscal address to her son's home in March 2015, fourteen months before the February 2016 sale. Evidence of continued daily residence—sleeping, eating, maintaining the property—can overcome the fiscal domicile presumption, though the Tax Authority typically relies on official domicile records.
What are the requirements for capital gains tax exclusion under Article 10(5) of the Portuguese IRS Code when reinvesting in a new primary residence?
Article 10(5) of the Portuguese IRS Code requires three key conditions for capital gains tax exclusion on reinvestment: (1) the transferred property must be the taxpayer's own permanent residence (residência própria permanente), (2) the newly acquired property must also be intended for own permanent residence, and (3) both properties must be located in Portuguese territory. The taxpayer must expressly manifest intention to reinvest in their IRS return. The contentious issue is proving 'permanent residence' status. Article 13(10) CIRS presumes fiscal domicile indicates permanent residence, but this presumption can be contradicted. The Tax Authority examines fiscal domicile records, notarial deeds showing declared residence, and actual occupancy patterns. Changing fiscal domicile before sale creates challenges requiring substantial evidence of continued actual residence.
Does changing fiscal domicile to a family member's address disqualify a property from being considered a permanent residence for IRS purposes?
Changing fiscal domicile to a family member's address does not automatically disqualify a property from being considered a permanent residence for IRS purposes, but creates evidentiary challenges. Article 13(10) CIRS establishes that fiscal domicile presumes permanent residence, creating a rebuttable presumption the taxpayer must overcome with contrary proof. In this case, the taxpayer changed her domicile to her son's address during divorce proceedings, citing concerns about mail security, while claiming she continued living daily at the Ericeira property. The tribunal evaluated witness testimony and evidence of actual residence patterns. Article 19 of the General Tax Law requires taxpayers to declare fiscal domicile, giving it legal efficacy before the Tax Authority, so contradicting this official record requires convincing evidence of actual residential circumstances differing from declared domicile.
How does the Portuguese Tax Authority (AT) determine whether a sold property qualifies as the taxpayer's primary and permanent residence for capital gains reinvestment?
The Portuguese Tax Authority determines whether a sold property qualifies as the taxpayer's primary permanent residence by examining multiple factors, with fiscal domicile (domicílio fiscal) serving as the primary presumption under Article 13(10) CIRS. The AT reviews official domicile declarations filed under Article 19 of the General Tax Law, which are mandatory and create legal presumptions. The AT also examines notarial deeds (such as purchase/sale contracts) showing the taxpayer's declared residence at transaction dates. When fiscal domicile differs from the claimed permanent residence, the AT typically denies capital gains exclusion unless the taxpayer provides substantial contrary evidence. In arbitration proceedings, tribunals may consider witness testimony and documentary evidence of actual daily residence, utility bills, correspondence, and other indicators of genuine permanent occupancy, weighing these against official domicile records maintained by the AT.
What is the CAAD arbitration process for challenging an IRS capital gains tax assessment in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for challenging IRS capital gains tax assessments begins with filing a request under Decree-Law 10/2011 and the RJAT (Regime Jurídico da Arbitragem Tributária). The taxpayer must file within the statutory deadline after notification of the tax assessment. According to Article 6(1) RJAT, parties may designate an arbitrator or request appointment by the CAAD Deontological Council. In this case, the taxpayer requested constitution of an arbitral tribunal on 11 June 2018, the President accepted and notified the Tax Authority on 12 June 2018, and the sole arbitrator was appointed on 22 August 2018. The AT submitted its response within the legal timeframe (28 September 2018). The tribunal conducted witness examination and heard oral arguments (6 November 2018). The process involves examining documentary evidence, the administrative tax file, witness testimony, and legal arguments before issuing a binding arbitral decision on the assessment's legality.