IRS Tax Residency Dispute: Dual Residence Under Portugal-Spain Double Taxation Convention (CAAD 332/2016-T)

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), Dr. João Taborda da Gama and Dr. André Bacelar Gonçalves, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. The Claimant A…, taxpayer no. …, with tax domicile at Rua …, no. …, …, …-… …, submitted, on 20 June 2016, a request for arbitral pronouncement for assessment of the legality of the taxation of Personal Income Tax (IRS), with no. 2016…, of 2016/02/15, relating to the fiscal year 2014, in the total amount of € 134,917.71, which already includes € 25,558.71 of extraordinary surcharge and €2,439.05 of compensatory interest.

2. The subject matter of the request for arbitral pronouncement consists of the assessment of the IRS taxation above identified on the basis of illegality due to violation of law, as it was founded on the condition of the Claimant A… being resident in Portuguese territory and/or illegality due to violation of conventional norms, since under article 4 of the Convention to Avoid Double International Taxation, concluded between Portugal and Spain, the Claimant should be considered as tax resident in Spain, as well as the taxation of the extraordinary IRS surcharge, with the same arguments.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 11-07-2016.

3.1. The Claimant failed to appoint an arbitrator, whereby, in accordance with the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of RJAT, the President of the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the prescribed period.

3.2. On 28-08-2016, the parties were notified of the appointment of the arbitrators and raised no objection.

3.2. In accordance with the provision of subparagraph c) of no. 11 of RJAT, the collective arbitral tribunal was constituted on 12-09-2016.

3.3. In these terms, the Arbitral Tribunal is regularly constituted to assess and decide the subject matter of the proceedings.

1. To substantiate the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

4.1. The Claimant, a professional football player, was contracted by B… ("B…"), for five sporting seasons, on 12 July 2014, with whom on the same date he concluded a sports employment contract, having previously been in the service of the football club "C…", in Spain.

4.2. The Claimant holds Spanish nationality.

4.3. The status of employee of B… required obtaining a Portuguese tax identification number (NIF), which had never previously been assigned to him.

4.4. Following the conclusion of the employment contract in question, the Claimant immediately joined the preparation stage for the 2014/2015 football season in …, the Netherlands, and did not personally handle the process associated with obtaining the NIF.

4.5. For reasons unknown to him, on 18/07/2014, he was assigned a NIF with the status of tax resident in Portuguese territory.

4.6. It was never the Claimant's conviction that he would be a tax resident in Portugal during the year 2014 because, in fact, he had and maintained his usual residence in Spain, in Oviedo, where he had a house that constituted his permanent residence and where the Claimant's family resides, namely his parents, siblings and a nephew.

4.7. The Claimant paid his taxes, insurance and charges related to the maintenance of his residence and motor vehicle tax in Spain.

4.8. Indeed, he was assigned as his tax domicile in Portugal, the address of "…", precisely because he did not have a building (apartment/house) in Portugal for this purpose, which he only came to obtain, in September 2014, when he concluded the rental of a house in ….

4.9. Because he genuinely did not consider himself a tax resident in Portugal, in the fiscal year 2014 he did not submit any income tax return.

4.10. His income tax return was submitted in Spain, where he considered himself a tax resident, with reference to the fiscal year 2014.

4.11. The Claimant, having been contracted by B… on 12 July 2014 and never having been in Portugal before, objectively, did not remain, nor, by the nature of things, could have remained, more than 183 days in Portuguese territory in the fiscal year 2014, as required by subparagraph a) of no. 1 of article 16 of the IRS Code.

4.12. And notwithstanding the fact that the author lived in Portugal on 31 December 2014, in a house rented by him and situated in …, this is not sufficient, in itself, to allow the inference enshrined in subparagraph b) of no. 1 of article 16 of the IRS Code.

4.13. Considering that none of the legal requirements on which the Claimant's status as a tax resident in Portuguese territory depends has been verified, the taxation in question suffers from a vice of violation of law.

4.14. But even if this is not understood, there is here a case of dual residence which, because between the States of Portugal and Spain there exists and is in force a Convention to Avoid Double International Taxation (CDT), cannot fail to be resolved through its application, considering its prevalence over Portuguese domestic law.

4.15. It was in Spain that, in 2014, the center of the Claimant's family and economic interests was established, there therefore lay his vital interest center and there he should be considered resident within the scope of application of the CDT for tax purposes.

4.16. In the event this is not understood, again without conceding, resorting to the tiebreaker rule of subparagraph b), no. 2 of article 4 of the CDT, it must be determined in which State he habitually remains, and if such determination proves impossible, to conclude for the prevalence of nationality, in this case Spanish, the only one the Claimant has.

4.17. The IRS taxation which is the subject of this request for arbitral pronouncement is therefore illegal as it violates the provisions of no. 2 of article 15 of the IRS Code and consequently the provisions of subparagraph a), of no. 4 of article 71 of the same code, by violating the provisions of nos. 1 and 7 of article 13 of the IRS Code and if not understood thus, by violating the provisions in the CDT concluded between Portugal and Spain, namely its article 4.

4.18. The taxation of the extraordinary surcharge is illegal as it violates the provisions of no. 1 of article 176 of Law no. 183-C/2013, of 31 December, whereby it should be wholly revoked with all legal consequences.

1. The Tax and Customs Authority presented its reply and attached the inspector's file, invoking in summary, the following:

5.1. On 31 December 2014, the Claimant had his usual residence in Portugal. Proof of this is the conclusion of a contract for 5 years with B…, the rental of a house in Porto (district), as well as the relocation of his girlfriend there.

5.2. The ownership of a property in Oviedo, the existence of financial investments in Spain and the fact that his closest family members reside there (with whom the Claimant maintained no bond of dependence) and his friends are neither grounds nor justification for disregarding the residence in Portugal.

5.3. Thus, it will always be said that there are no doubts that parents and friends do not constitute and do not form part of his family unit, while the girlfriend, in turn, may form part of his family unit and, as was verified, came with him to Portugal.

5.4. The delimitation of residence for tax purposes obeys objective criteria, in strict compliance with the applicable legal tax norms.

5.5. In light of what has been said above, considering the evidence provided in the file and against the allegations of the Claimant, we can only give as proven the following facts:

• On 12-07-2014, the Claimant was contracted from C…, for a period of 5 years, in the context of a sports employment contract, as a professional football player, by B…;

• On 18-07-2014 the Claimant submitted, at the Tax Office Porto–…, a request for registration in the registry of the Tax and Customs Authority as a taxpayer;

• The Claimant declared himself as resident;

• He did not declare himself as non-resident abroad, as non-resident or as non-habitual resident.

• He did not appoint tax representatives,

• He declared as tax domicile Rua…, No. …, …, …-… ….

• On 28-07-2014 the Claimant concluded a rental contract for a property located at Rua…, no. …, Parish of …, Municipality of …, which was intended for the "…habitation of the TENANT [Claimant] and his family unit, and may not be given any other purpose…" (cf. clause 2 of the rental contract attached by the Claimant).

• The aforementioned contract was concluded for a period of 11 months.

• In accordance, the Claimant submitted on 9-12-2014, via internet, the corresponding request for change of address of the tax domicile;

• Situation that would only change again on 12-09-2016 with the request for change of address submitted at the Tax Office Porto–….

• Thus, on 31-12-2014, insofar as it now concerns us and insofar as commanded by the IRS Code, in its article 16 (as written at the time of the facts), the Claimant was resident in Portugal, having a dwelling in conditions which, manifestly, inevitably and indisputably, it should be noted, made it reasonable to presume his intention to maintain and occupy it as his habitual residence,

• that is, since his registration, only mere changes of address of tax domicile were submitted to registry changes, all of them located in the District of Porto.

• Never, at any time, was a request made, by any means, to change the Claimant's status as resident in national territory;

• On 31-08-2015 the Claimant was loaned to the Spanish club D…;

• The Claimant never delivered the income tax return for the year 2014.

• The Claimant never proceeded with the communication of change of address, namely, for notification purposes.

• Thus, he was notified, through official letter no. …/…, of 01-09-2015, sent by registered mail to his tax domicile, at that time, in accordance with no. 3 of article 76 of the IRS Code, to, within a period of 30 days, proceed with delivery of the missing return.

• The aforementioned official letter was returned with the indication of the postal services of "unclaimed item".

• The Claimant was considered duly notified in accordance with article 43 of RCPIT.

• On 1-09-2015 the Service Order filed with no. OI2015… was triggered, by virtue of the Claimant, as resident in national territory, having not delivered the income tax return for the year 2014, in accordance with article 57 of the IRS Code.

• Through official letter no. …/…, of 25-09-2015, sent by registered mail to the Claimant's tax domicile, he was notified of the draft report and to, at the same time, exercise, if he wished, the right to prior hearing.

• The official letter was returned with the indication of the postal services of "unclaimed item".

• The Claimant was considered duly notified, on 28-09-2015, in accordance with and for the purposes of the combined reading of no. 1 of article 43 and article 39, both of RCPIT and article 39 of CPPT.

• By virtue of the Claimant not having responded or delivered the missing return, the inspection services of the Authority, in strict compliance with their duties and obligations, fully complied with the normative provision set out in no. 3 of article 76 of the IRS Code, converting as final the corrections proposed in the draft report.

• In this context, the corresponding official assessment now contested was issued,

• Indeed, within the scope of the inspection procedure the Claimant was considered as resident in national territory in that:

• That was the classification contained in his registry - specifically in the "system for management and registration of taxpayers";

• His employer entity "B…, NIPC…, declared having paid dependent employment income to the taxpayer, in statement model no. 10 referred to in subparagraph c) of no. 1 of article 119 of the IRS Code, in the capacity of resident in national territory; and

• Notified to exercise the right to hearing on the conclusions contained in the draft report, he did not make any statement.

• Thus in the official assessment, the dependent employment income (category A – article 2 of the IRS Code) made available to the Claimant by his employer entity, B…, NIPC…, and duly declared by the latter through the statement DMR/Model. 10;

• which is intended "…to declare the income subject to tax, exempt and non-subject, which are not or should not be declared in the monthly statement of remuneration (DMR), earned by IRS taxpayers resident in national territory, as well as the respective withholdings at source."

• In which must be included "The income paid or made available to the respective holders resident in the year to which the statement refers…"

• being that "withholding at source made to non-residents must be communicated through statement Model 30."

• Being certain that with respect to the Claimant there is no value declared in the Respondent's computer system based on statement Model. 30.

5.6. In light of the above, it is understood that the arguments of the Claimant cannot, at all, proceed, as they make an interpretation and application of the legal norms subsumable to the case sub judice manifestly wrong.

5.7. As has been mentioned above, on 31-12-2014, insofar as it now concerns us and insofar as commanded by the IRS Code in its article 16 (as written at the time of the facts), the Claimant was resident in Portugal, having a dwelling in conditions which, manifestly, inevitably and indisputably, it should be noted, made it reasonable to presume his intention to maintain and occupy it as his habitual residence, indeed in accordance with the employment contract concluded in Portugal, a dwelling that the Claimant occupied, at least, in the time period elapsed between the signing of the rental contract and his transfer to the Spanish club D…, on 31-08-2015.

5.8. The considerations of the Claimant lack any legal-argumentative support when he argues that the assessment suffers from illegality due to violation of the CDT concluded between Portugal and Spain.

5.9. First, with respect to the extraordinary surcharge, see what is provided in no. 4 of article 1 of the CDT: "The Convention shall also apply to taxes of a nature identical or similar which come into force after the date of signature of the Convention and which come to be added to the current or replace them. The competent authorities of the Contracting States shall communicate to one another the important modifications introduced in their respective tax legislation", that is, without further analysis being necessary, it clearly results that the IRS surcharge in effect is covered by the material scope of the Convention.

5.10. Considering that we are in a hypothetical situation of conflict of legal systems in that both Contracting States consider him as resident in their respective States, based on subparagraph a) of no. 2 of article 4 of the CDT, the claimant will always have to be considered resident in Portugal, in so far as he has a permanent dwelling available in Portugal, and, even if it is considered that he would have another permanent dwelling in Spain, which is not conceded at all, since between Oviedo and Porto there is a distance of more than 508 km, and a permanent dwelling between these two cities would never be compatible with the Claimant's professional obligations, based in the city of Porto, it will always be said that the vital interest center was in Portugal, at the time of the facts, in that it was in national territory that the Claimant fulfilled his employment contract (with a duration of 5 years) and that he lived with his girlfriend at his tax domicile (with a rental contract concluded for 11 months).

5.11. Also by recourse to subparagraph b) of no. 2 of article 4 of the CDT, also here the Claimant's claims fail, as it was proven, it was in Portugal that he habitually remained, by virtue of his work obligations.

5.12. And by recourse to subparagraph c) of no. 2 of article 4 of the CDT, the Claimant did not provide proof that he habitually remained in Spain.

5.13. Indeed, reiterating what has been mentioned above, habitual residence in Spain would be incompatible with the Claimant's work obligations towards B…, since between Oviedo and Porto there is a distance of approximately 508 km and he maintained in national territory a permanent own dwelling, which he occupied with his girlfriend.

5.14. That is, for purposes of the Convention, and even factually, the claimant remained permanently and ubiquitously in both States.

5.15. In light of the above, this request for arbitral pronouncement should be judged unfounded.

1. As there were no reasons to justify it, the tribunal dispensed with the holding of the first meeting provided for in article 18 of RJAT, which it did in exercise of the principles of the Tribunal's autonomy in conducting the proceedings.

6.1. On 17-11-2016, at 2 p.m., the judgment hearing took place, at the headquarters of CAAD, in accordance with the minutes which are considered reproduced. Upon conclusion of the meeting, by agreement of the parties, the tribunal granted a period of 15 days for the Claimant and the Respondent to submit written submissions consecutively, and, in compliance with the provisions of article 18, no. 2, of RJAT, designated 11-3-2017 as the date for the pronouncement of the award.

1. The Claimant and the Respondent submitted submissions reiterating the arguments presented in the previous procedural pleadings.

II. SANITATION

8.1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (articles 4 and 10, no. 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

8.2. The tribunal is competent and is regularly constituted.

8.3. The proceedings do not suffer from nullities.

8.4. No exceptions were raised.

8.5. There are no other circumstances that prevent examination of the merits of the case.

III. MERITS

III.1. Matter of Fact

1. Established Facts

9.1. With relevance to the assessment and decision of the issues raised, preliminary and merits, the following facts are established and proven:

a) On 12-07-2014, the Claimant was contracted from C…, for a period of 5 years, in the context of a sports employment contract, as a professional football player, by B…;

b) On 18-07-2014 the Claimant was registered at the Tax Office Porto–…, as a tax resident in Portugal, with domicile at Rua …, No. …, …, …-… Porto;

c) On 28-07-2014 the Claimant concluded a rental contract for a property located at Rua…, no. …, Parish of …, Municipality of…, which was intended for the "…habitation of the TENANT [Claimant] and his family unit, and may not be given any other purpose…";

d) The aforementioned contract was concluded for a period of 11 months;

e) The Claimant submitted on 9-12-2014, via internet, the corresponding request for change of address of the tax domicile;

f) Situation that would only change again on 12-09-2016 with the request for change of address submitted at the Tax Office Porto–….

g) The Claimant came to live in the rented house with his partner and his son, moving to the house he had in Oviedo Spain occasionally, in particular when the club released him, to visit his closest family members, parents and siblings;

h) On 31-08-2015 the Claimant was loaned to the Spanish club D…;

i) The Claimant never delivered the income tax return for the year 2014;

j) The Claimant was notified, through official letter no. …/…, of 01-09-2015, sent by registered mail to his tax domicile at that time, in accordance with no. 3 of article 76 of the IRS Code, to, within a period of 30 days, proceed with delivery of the missing return;

k) On 1-09-2015 the Service Order filed with no. OI2015… was triggered, by virtue of the Claimant, as resident in national territory, having not delivered the income tax return for the year 2014;

l) Through official letter no. …/…, of 25-09-2015, sent by registered mail to the Claimant's tax domicile, he was notified of the draft report and to, at the same time, exercise, if he wished, the right to prior hearing;

m) The official letter was returned with the indication of the postal services of "unclaimed item";

n) The Claimant was considered duly notified, on 28-09-2015, in accordance with and for the purposes of the combined reading of no. 1 of article 43 and article 39, both of RCPIT and article 39 of CPPT;

o) The Claimant did not respond or deliver the missing return, with the inspection services of the AT having converted as final the corrections proposed in the draft report;

p) The IRS assessment no. 2016…, of 2016/02/15 was subsequently issued.

9.2. Substantiation of the Matter of Fact

The proven facts were based on the documents attached to the file, with the exception of point g) which results from witness testimony. The witnesses testified, in essence, in a coherent, sustained manner and revealing mastery of the reasons for knowledge with relevance to the provision of information.

9.3. There are no other facts with relevance to the assessment of the merits of the case that have not been proven.

III.2. Matter of Law

The central question to be decided is whether the Claimant should, or should not, be considered resident for tax purposes in Portugal in the year 2014, in accordance with and for the purposes of article 16 of the IRS Code.

III.2.1. Meaning and scope of subparagraph b) of no. 1 of article 16 of the IRS Code

In order to better understand the issue sub judice, it is important to emphasize the importance that the concept of residence assumes in Tax Law and, in particular, in the taxation of income.

Limiting ourselves to the IRS Code, we find that residence is the criterion used to determine the scope of application of the tax (cf. article 15), with residents being subject to a principle of worldwide taxation in contrast with non-residents, who are only subject to taxation with respect to income obtained in Portugal.

Indeed, residence, presupposing a strong and stable connection to a specific territory, is the most frequent criterion for determining universal taxation of income.

No. 1 of article 16 of the IRS Code, in the wording in force at the time of the facts, and with relevance to the case in question, used more than one criterion of residence, determining that: "[r]esidents in Portuguese territory are persons who, in the year to which the income relates: a) Have been present there for more than 183 days, consecutive or non-consecutive; b) Having been present for less time, there have available, on 31 December of that year, a dwelling in conditions that make it reasonable to assume the intention to maintain and occupy it as their habitual residence.

It thus appears that the criterion provided in subparagraph a) is limited to physical presence (corpus), in Portugal, considering as residents, automatically, individuals who remain 183 days in national territory. Subparagraph b), on the other hand, requiring a lesser qualified physical connection, imposes a case-by-case analysis that still allows ensuring that there is an effective connection with the territory. This connection is considered verified through a mediate subjective element, the intention to be resident (animus), which should be analyzed from an objective perspective, that is, through immediate elements that allow the reconstruction of the individual's will from the indices he reveals. Note that the existence of purely artificial residence criteria, without having as their basis an effective connection with the territory, find restrictions on their application either through International Public Law (Cf. Rui Duarte Morais, Imputação de Lucros de Sociedades Não Residentes Sujeitas a um Regime Fiscal Privilegiado, Porto: Publicações Universidade Católica, 2005, p. 35), or at a later time through application of DTCs (Cf. Klaus Vogel, On Double Taxation Conventions, Third Edition, Deventer: Kluwer Law International, 1997, pp. 232-233).

Thus, subparagraph b) of no. 1 of article 16 of the IRS Code serves two essential functions: firstly, to consider as resident in Portugal an individual who only moves his residence to national territory in the second half of the year, so that it is no longer possible to comply with the criterion of 183 days; and, secondly, to consider as residents individuals who, despite their connection to the territory, verified through a place where they habitually reside, may intentionally circumvent the permanence rule (Cf. André Salgado de Matos, Código do Imposto do Rendimento das Pessoas Singulares (IRS) Anotado, Lisboa: Instituto Superior de Gestão, 1999, pp. 206-207).

Focusing now on subparagraph b) of no. 1 of article 16 of the IRS Code, with greater relevance to the specific case – since the Claimant's presence in Portugal for less than 183 days is not disputed – it is usually stated that the aforementioned norm imposes three requirements, whose cumulative verification depends on the qualification as resident: (i) permanence in Portugal; (ii) the availability of a dwelling; and (iii) the verification of conditions that make it reasonable to assume that the dwelling will be maintained and occupied as a habitual residence.

Naturally, based on the body of no. 1 of article 16 of the IRS Code, the verification of the aforementioned requirements should have as reference the "year to which the income relates", being this the temporal spectrum during which residence should be verified.

With respect to permanence in Portugal, it will not be necessary to discuss the verification of this requirement, as both the Claimant and the Respondent consider that he remained in Portugal during part of the year 2014, but less than 183 days.

With respect to the availability of a dwelling in Portugal, this requirement is also met. As Manuel Faustino states, "(…) it is not required that there be a property title to the house, but only a title that legitimizes its use, such as rental, usufruct, use and habitation or loan." (Cf. Manuel Faustino, "Os residentes no Imposto sobre o Rendimento Pessoal (IRS) Português", Ciência e Técnica Fiscal no. 424, 99, pp. 124-125).

Now, the Residential Rental Contract with Fixed Term, attached by the Claimant as Doc. 14, clearly demonstrates that he had sufficient legal title to use a dwelling in Portugal.

It is therefore important to analyze the verification of the third requirement, the existence of conditions that make it reasonable to assume that the dwelling will be maintained and occupied as a habitual residence.

In this regard, however, we find that the legislator does not clarify how the individual's intention should be ascertained, nor does it provide criteria from which the law applier should form his conviction as to what is meant by habitual residence.

In the absence of a legal definition, a case-by-case analysis will be necessary, with the volitional element (the intention to maintain and occupy a given place as a habitual residence) being ascertained through external manifestations of will. The intention to maintain and occupy a given dwelling as a habitual residence must, therefore, be reconstructed from objective elements that clearly make the individual's will apparent.

In the words of Alberto Xavier "[t]he intention to maintain and occupy the dwelling as a habitual residence is not subject to direct proof, but rather results from objective conditions that make it presumed." (Cf. Alberto Xavier, Direito Tributário Internacional, 2ª Edição Actualizada, Coimbra: Almedina, 2007, p. 286).

Since the intention to be demonstrated refers to the maintenance and occupation of a habitual residence, it is important to determine, as a preliminary point, what is meant by habitual residence, so that it is clear that it must result from the individual's intention. Now, the concept of habitual residence should be interpreted in the context in which it is inserted, that is, article 16 should be read as a whole. As stated, both subparagraph a) and subparagraph b) of no. 1 of article 16 of the IRS Code impose an effective connection with Portuguese territory. If the status of resident, in accordance with subparagraph a) results automatically from a factual criterion, merely numerical, the presence in Portugal, subparagraph b) requires, due to lack of greater presence in the territory, an additional element of intention. The aforementioned article thus imposes the will to be regularly present in national territory, using for this purpose a determined dwelling.

Habitual residence is thus equally a factual criterion determined by regular (habitual) permanence in a determined dwelling and where, as such, it is presumed that he has organized his life. As the Supreme Administrative Court has already sustained, "[i]t is evident that, being habitual residence the place where a person normally lives and has the center of his life, there are no great differences between the «tax domicile» and the «permanent dwelling»: there is between the two figures an intimate relationship, which is reflected in both presupposing a place with which a certain person is in connection, the place where he has his existence organized and which, as such, serves him as a basis of life." (Cf. Award of the Supreme Administrative Court, of 11/23/2011, given in case 0590/11), as well as the Central Administrative Court South, stating that "[t]he concept of habitual residence (which coincides with the concept of voluntary domicile), must be sought in domestic law, embodying itself as the place where a natural person normally lives and from where he absents himself, as a rule, for periods more or less short (cfr. article 82, of the Civil Code)." (Cf. Award of the Central Administrative Court South, of 12/11/2012, given in case 05810/12).

As Manuel Faustino argues, the aforementioned legal criterion "(…) by integrating itself in the provision the maintenance and occupation of that house as habitual residence forthwith excludes from the status of residents those who have in Portugal a mere secondary dwelling (provided they do not remain in it for more than 183 days per year) or vacation home, as well as those who, namely emigrants, having here a dwelling that they may come to occupy as their habitual residence when they definitively return to Portugal, only occupy it on the occasion of their vacations or in occasional and fortuitous displacements." (Cf. Manuel Faustino, "Os residentes…" op. cit., pp. 124-125 and, in the same sense, Award of the Supreme Administrative Court of 02/24/2011, given in case 876/10).

For there to be a habitual residence, it must be clear that the dwelling maintained in Portugal, by its characteristics, is intended for permanent residence and not for mere passage of short duration (Cf. Alberto Xavier, Direito Tributário…op. cit. 286).

In any case, since the law requires, not the existence of a habitual residence, but the verification of conditions that make it reasonable to assume the intention to maintain and occupy a given dwelling as such, it is necessary to verify the existence of elements that can presume that the Claimant had the intention to use the dwelling that he had available in Portugal as a habitual residence.

The first element to be considered in this context should be the declaration of the taxpayer (or someone in his representation) to the Tax and Customs Authority (an official entity), that he intends to be considered resident in Portugal. Note that the declaration that the residence of a given person is situated in Portugal cannot be made lightly, as from this element results the application of an important set of rights and obligations, not only of a tax nature.

On the other hand, this is not a formalistic understanding that seeks to result from the existence of a document a substantive result. In fact, in accordance with Decree-Law no. 14/2013, of 28 January, which instituted the tax identification number ("NIF"), as well as the conditions for its assignment, the registration for purposes of assigning the NIF must be carried out at the request of the interested citizen, his representative or business manager, by means of a verbal declaration of all the relevant identifying elements to its registration, among which the tax domicile and the tax status, in accordance with the rules of residence connection provided for in the IRS Code (Cf. subparagraph c) of no. 1 of article 9). Now, a declaration by the taxpayer that he qualifies as resident for purposes of the IRS Code should be considered an unequivocal manifestation of the intention underlying his permanence in Portugal. There will be no other way clearer or more direct to ascertain the intention of a taxpayer than the will manifested by him (or in his representation, by one who had sufficient powers for this representation). Note that, having the registration as resident been effected in mid-July, the residence in Portugal could never result from the application of subparagraph a) of no. 1 of article 16 of the IRS Code, i.e., permanence in Portugal for more than 183 days. The status of resident could only thus result from the application of subparagraph b) of the aforementioned article, that is, the availability, on 31 December of that year, of a dwelling in conditions that make it reasonable to assume the intention to maintain and occupy it as a habitual residence.

Thus, a declaration in which the intention of residence is manifested and which, moreover, was not subject to rectification, makes it indubitably reasonable to assume the intention to maintain and occupy a determined place in Portugal as a habitual residence. Although this may not be the only element to value, the aforementioned declaration should certainly be duly considered.

In the same sense, that is, valuing as a determining element of intention, declarations of taxpayers with tax relevance, the Central Administrative Court South, in an Award, of 07/02/2012, given in case 05350/12 determined that "(…) had available, on 31 December, a dwelling, to which he manifested, expressly and unequivocally, the intention to occupy and maintain as habitual, personal and permanent residence, by means of a request for exemption from IMI which he formalized, with Portuguese tax authorities, on 27.11.2007, it is unassailable the conclusion that he, in the year at issue, had residence in Portugal, by meeting the requirements set out in article 16, no. 1 subparagraph b) IRS Code.".

Similarly, also in case no. 64/2012-T, of 05/30/2013, given in the Administrative Arbitration Center (CAAD) it was determined that "[i]n truth, in view of the proven facts (the Claimant was registered as resident and his employer entity made the withholding of tax at the rate applicable to the remuneration of resident employees), the conclusion was clear: the taxpayer was a tax resident in Portugal, being thus a taxpayer subject to IRS as a tax resident in Portugal and subject to withholdings at source in that capacity.".

Several additional elements should, however, be considered:

First and foremost, the characteristics and specific terms of the Rental Contract allow for the presumption of a qualified presence in Portugal, and not a fleeting stay. It is, in fact, a contract with a duration of 11 months, for the habitation not only of the Claimant but also of his family unit, in which automatic renewal for periods of 11 months is provided if neither party opposes renewal. This type of formulation points to the intention to remain in a place for a significant period of time and not for occasional permanence.

Note that the Claimant himself, when identifying himself in the aforementioned rental contract, indicates a Portuguese address and not, as would be expected with respect to a non-resident, his usual residence outside Portugal, a fact that should also be valued.

On the other hand, the concrete characteristics in which the dwelling is used may contribute decisively to forming the conviction about the intention that presided over its use. Thus, objective elements are relevant, such as the existence of sufficient furniture for dignified habitation, or the house maintaining active connections, for example, to water, electricity, gas, internet, telephone networks (house ready to inhabit). Now, no proof was presented to demonstrate that the dwelling rented and available to the Claimant was not ready to inhabit, and it should be presumed otherwise since it is the Claimant himself who admits having resided in it for a great part of the year 2014 (Cf. article 72 of the request for arbitral pronouncement).

Also the use of the address for the purpose of receiving correspondence of a diverse nature should be subject to proper consideration. In this sense, the Award of the Central Administrative Court North, of 09/17/2015, given in case 00546/10.2BEVIS, states that "(…) it is known, by the rules of common experience, that in official and private documents, it is the norm to indicate the address corresponding to the respective habitual residence (…).". In this regard, the rental contract above identified indicates the rented property as the place for receipt of correspondence.

On the other hand, subjective elements should also be analyzed, such as the reasons that led the individual to occupy a determined place or even the permanence in the same residence of other family members. Now, the reasons that led the Claimant to occupy a house in Portugal were the conclusion of a sports employment contract which, by its duration, made it reasonable to presume the continuity of his presence in Portugal, not only during the year 2014, but at least until June 2019.

Note that the intention that is sought to be ascertained, in subparagraph b) of no. 1 of article 16 of the IRS Code, is not an intention of, in the future, to occupy, or not, the dwelling as current residence, but rather, as Manuel Faustino mentions, a present intention (Cf. Manuel Faustino, "Os residentes…op. cit."p. 125), which should be ascertained by means of external manifestations of that will.

Thus, even if in his heart the Claimant might not have intended to remain in Portugal for a significant period, always seeking better work opportunities in other clubs, both the conclusion of a rental contract with the content described above, and the factual elements that result from the use of the rented property, such as the conclusion of a sports employment contract until 2019, are elements capable of making presume that intention. Additionally, and as was already decided in several cases in this Arbitration Center (e.g. cases nos. 64/2012-T of 05/30/2013, nos. 37/2003-T, of 11/29/2013, 63/2014-T, of 09/15/2014), in accordance with the provisions of no. 1, of article 74 of the LGT "[t]he burden of proof of the facts constituting the rights of the tax administration or of taxpayers falls on those who invoke them.", with no. 1 of article 342 of the Civil Code determining that "[h]e who invokes a right is responsible for proving the constitutive facts of the right alleged".

Thus, the burden of proving residence outside Portugal fell on the taxpayer, who did not provide sufficient proof of that fact. It results, moreover, from common experience to consider that someone who becomes a player of a football club (B…), who represents it in competitions and training, who lives in Porto with his girlfriend, is resident in Portugal.

For purposes of Portuguese domestic law, in particular the IRS Code, it is understood, therefore, that the Claimant should be considered resident in Portugal during the entire year 2014, since he meets the requirements provided for in subparagraph b) of no. 1 of article 16 of the IRS Code.

It is important to recall that, for reasons of simplicity and seeking to prevent situations of dual non-taxation, the IRS Code established at the time of the facts, as Gustavo Lopes Courinha states, an "annual temporal scope of residence" (Cf. Gustavo Lopes Courinha, A Residência no Direito Internacional Fiscal, Coimbra: Almedina, 2015, pp. 98-99). The status of resident, ascertained on 31 December of each year, implied, at the time of the facts, residence during the entire tax period. As Gustavo Courinha further states "[i]n Portuguese Law, once obtained and regardless of when it occurs, the status of resident extends itself throughout the year, contaminating the income earned by the subject in that year, before or after the grant of that status, in accordance with its respective tax regime and according to a universal basis." (Cf. Gustavo Lopes Courinha, A Residência…op. cit., p. 102).

Only with the reform of the IRS Code, operated by Law no. 82-E/2014, of 31 December, was partial residence expressly accepted, whereby, for purposes of Portuguese law, it is repeated, the Claimant was a tax resident in Portugal during the entire year 2014.

Therefore, being the Claimant considered resident in accordance with Portuguese law and, simultaneously, in accordance with Spanish law, since he was taxed as a resident in Spain (Cf. Doc. 16 attached by the Claimant). We are thus faced with a situation of dual residence which must impose recourse to the Convention to Avoid Double Taxation concluded between the Portuguese Republic and the Kingdom of Spain ("CDT").

III.2.2. On the application of the CDT between Portugal and Spain

Although the definition of resident is made using the criteria established by the domestic law of each State, as Rui Duarte Morais states "[i]nternational conventions on double taxation accept such competence (…) limiting themselves to establishing «tiebreaker» rules that allow qualifying a taxpayer as resident in (only) one of the contracting States when both (by force of the divergences between their respective laws) consider him as such." (Cf. Rui Duarte Morais, Sobre o IRS, Coimbra: Almedina, 2016, 3rd Edition, p. 12.).

Article 4 of the CDT seeks, precisely, to resolve situations of dual residence, in which someone has "extended contacts with more than one legal order" (Cf. J. L. Saldanha Sanches, Manual de Direito Fiscal, Coimbra, 2007, pp. 339-340), through various special rules (tiebreakers) whose application will determine residency in only one of the States that claim the tax residency of a given taxpayer.

In accordance with no. 2 of article 4 of the CDT, "[w]hen, by virtue of the provisions of no. 1, a natural person is resident of both Contracting States, the situation shall be resolved as follows:

"He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him (…)".

In this regard, it should always be noted that, during the tax year, the Claimant had a permanent dwelling available to him both in Portugal and in Spain. In fact, at least from the conclusion of the Rental Contract, the Claimant came to have a permanent dwelling available to him in Portugal, having simultaneously a residence available to him in Spain, as indeed, he sought to demonstrate in article 73 of the request for arbitral pronouncement and in the witness testimony.

The article continues saying that "If he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic interests are most closely connected (centre of vital interests);"

Now, having regard to the relevant period – the year 2014 - it will not be possible to identify a single center of vital interests, but two successive centers of vital interests: in Spain, while there he resided and worked, in Portugal from his transfer – sporting and personal – to Porto which occurred in July. What is at issue in the case sub judice is a succession, a substitution of one State for another, being unable to identify, in 2014, one but two centers of vital interests.

Subparagraph b) of no. 2 of article 4 of the CDT provides that:

a) If the State with which he has the most closely connected center of vital interests cannot be determined (…) he shall be deemed to be a resident only of the Contracting State in which he habitually resides;

In this regard, Commentary 17 to article 4 of the Model of Tax Convention on Income and on Capital notes that "(…) in case of doubt as to the place where the person has his center of vital interests, it makes the scales tip towards the State in which he resides more frequently. For this purpose, stays effected by the person should be taken into consideration not only in his permanent dwelling in the State in question, but also at any other point within the same State.". During the year 2014, the Claimant spent more time in Spain than in Portugal, both by force of the date when he effectively moved his residence to Portugal, and by force of the regular displacements he was making to Spain in the same period (according to the witness testimony).

For Klaus Vogel, who states that "[c]ontrary to what the Commentary to the Model Convention indicates, what should tip the scales should not, however, be merely the place where the individual «resides more frequently» (MC Comm., loc. cit.). What should be determined is where the taxpayer normally lives." (Cf. Klaus Vogel, On Double Taxation…op. cit., pp. 252-253). Now, even if a position closer to what Vogel advocates were adopted, and it were understood that it is not absolutely clear the prevalence of Spanish jurisdiction, then the criterion provided in subparagraph c) of no. 2 of article 4 of the CDT would be applicable, which determines that "[i]f he resides habitually in both States, or if he does not reside habitually in either of them, he shall be deemed to be a resident only of the State of which he is a national;"

In this way, being the Claimant an individual of Spanish nationality, the residence in Spain should prevail over the residence in Portugal.

Furthermore, although Commentary 10 to article 4 of the OECD Model Convention points to a possible criterion of partition of the tax year, not only did Spain present observations to the application of the aforementioned commentary, but, in truth, there remain no doubts as to the application of the aforementioned tiebreaker rules, there being no need to seek alternative solutions.

Thus, although we conclude that the Claimant resides, for tax purposes in Portugal, by application of Portuguese domestic law (subparagraph b) of no. 1 of article 16 of the IRS Code), we consider, however, that the CDT concluded between the Portuguese Republic and the Kingdom of Spain prevents Portugal from being able to tax the income earned by the Claimant, in that it resolves the positive conflict of tax residences in favor of Spain. That is, in the year 2014 the Claimant is considered a tax resident in Spain and non-resident in Portugal for tax purposes.

Consequently, the assessment sub judice is illegal and, as such, must be annulled.

III.2.3. Issues of Prejudiced Jurisdiction

Being necessary to annul the entirety of the assessment impugned on the basis of the grounds stated in III.2.2., it is rendered unnecessary (article 130 of CPC) to examine the remaining vices alleged.

IV. DECISION

Consequently, this Tribunal agrees to judge the arbitral request as granted and to declare the illegality of the IRS assessment no. 2016…, of 2016/02/15, relating to the fiscal year 2014, in the total amount of € 134,917.71, with the consequent annulment.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of articles 306, no. 2, and 297, no. 2 of the CPC, article 97-A, no. 1, subparagraph a) of the CPPT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value assigned to the proceedings is € 134,917.71

VI. COSTS

In accordance with the provisions of articles 22, no. 4, and 12, no. 2, of the Legal Regime of Arbitration, article 2, no. 1 of article 3 and nos. 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, and the Table I attached to this decree, the total value of costs is fixed at € 3,060.00

Let notification be made.

Lisbon, 31 January 2017

The arbitrators,

Fernanda Maçãs (presiding)

João Taborda da Gama

André Bacelar Gonçalves