Process: 447/2017-T

Date: December 20, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 447/2017-T addresses whether Portuguese tax authorities can deny foreign tax credit for income earned by a statutory body member in Spain. The claimant, a Portuguese tax resident, served as non-executive director of a Spanish company, earning €60,000 in 2015 with €11,850 withheld in Spain. The AT denied the foreign tax credit, classifying the claimant as a cross-border worker based on a box erroneously checked in the IRS return. The claimant argued that director fees fall under Article 16 of the Portugal-Spain Double Taxation Treaty (DTT), not Article 15 which governs employment income and cross-border worker provisions. Under Article 16, income of statutory body members is taxable in both the source state (Spain) and residence state (Portugal), with Portugal obligated to eliminate double taxation through tax credit. The key legal issue concerns whether the cross-border worker classification, applicable only to Article 15 employment income, can deny double taxation relief for Article 16 statutory body member income. The claimant contended the erroneous declaration was irrelevant since statutory directors' remuneration is governed by specific DTT provisions distinct from employment income rules. This case clarifies the critical distinction between employment income and statutory body member remuneration for international double taxation relief purposes, and demonstrates the CAAD arbitral procedure for challenging IRS assessments involving DTT interpretation.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1. A…, taxpayer no. …, resident at Avenida…, no.…, Lisbon (hereinafter designated "Claimant"), filed on 26/07/2017 a request for arbitral pronouncement in order to examine and declare the illegality of the Personal Income Tax (IRS) assessment act no. 2016 …, relating to the year 2015, from which resulted an amount payable of € 116,775.32.

1.2. His Excellency the President of the Ethics Council of the Administrative Arbitration Center (CAAD) designated, on 13/09/2017, as sole arbitrator Dr. Augusto Vieira.

1.3. On 28/09/2017, the Claimant requested the disqualification of the arbitrator.

1.4. On 28/09/2017, His Excellency the President of the Ethics Council of the Administrative Arbitration Center (CAAD) communicated that Dr. Augusto Vieira, in his capacity as arbitrator of the sole tribunal to be constituted in the case at hand, renounced his functions as arbitrator, thereby rendering the request for disqualification submitted by the Claimant moot. He further determined his replacement, in these same functions, by the arbitrator who signs this decision.

1.5. On 19/10/2017 the arbitral tribunal was constituted.

1.6. In compliance with the provisions of no. 1 of article 17 of the Legal Regime for Tax Arbitration (RJAT), the Tax and Customs Authority (AT) was notified on 20/10/2017 to, if it so wished, submit a response and request the production of additional evidence.

1.7. On 22/11/2017 the AT submitted its response, and also attached to the file the administrative proceedings.

1.8. On 24/11/2017 the arbitral tribunal decided to dispense with the holding of the meeting to which no. 1 of article 18 of the RJAT refers, on the grounds of the principle of autonomy of the arbitral tribunal in conducting the proceedings, inviting both parties to, if they so wished, submit optional written submissions and scheduled the date for pronouncement of the final decision.

1.9. Neither the Claimant nor the AT submitted optional written submissions.

2. CASE MANAGEMENT

The arbitral tribunal was regularly constituted and is materially competent.

The parties have legal personality and capacity and are legitimate, with no defects in representation.

The proceedings do not suffer from defects that affect its validity.

Consequently, the conditions for pronouncement of the final decision are met.

3. POSITIONS OF THE PARTIES

As the basis for the claim, the Claimant alleges, in summary, that in 2015 he earned income as a member of the statutory bodies of a company based in Spain. The Spanish State exercised its tax jurisdiction pursuant to article 16 of the DTT, and tax was paid in the amount of € 11,850.00. The AT denied the Claimant the right to a deduction for the tax paid abroad, on the grounds that it considered him to be a cross-border worker. He further argues that – despite an evident error in filling out the tax return – the Claimant is not a cross-border worker, and that such classification would be absolutely irrelevant in any case, since the income earned in Spain is classifiable under article 16 of the DTT and not under article 15 of the DTT, and therefore the Claimant has the right to a deduction from tax for the tax paid in Spain, wrongfully disregarded by the AT in the assessment at hand.

In contrast, the AT argues for the dismissal of the claim and, consequently, for the maintenance of the said assessment act, on the grounds that, considering the indication in the Claimant's tax return, in which he mentioned his status as a cross-border worker, in light of the provisions of the DTT, the only possible consequence could be the non-deduction from tax of the income earned in Spain.

Indeed, faced with what was declared by the Claimant, it was incumbent upon him to prove that he would not in fact be a cross-border worker, which, according to the AT, he failed to do, either in the administrative proceedings or in the request for the arbitral pronouncement at hand.

Nor did the Claimant manage to prove that, in light of the income earned in Spain, in the event that he was subject to taxation in that State, whether or not a tax debt resulted from the supposed assessment.

What would necessarily require the attachment to the file of the respective proof of payment of tax in that State, or a declaration issued by the tax authorities certifying the income earned and the respective tax paid in the end, which, according to the AT, did not occur.

4. FACTUAL MATTERS

4.1. FACTS DEEMED PROVEN

Based on the documents brought into the proceedings, the following is deemed proven:

4.1.1. The Claimant always resided and exercised his professional activity in Portugal.

4.1.2. The Claimant had been performing, for several years, functions as General Director of B…, S.A. (NIPC…), earning income from category A (dependent work income).

4.1.3. The Claimant also held the position of Chairman of the Board of Directors of C…, S.A. (NIPC…).

4.1.4. The Claimant was further appointed to the corporate bodies of D… (NIPC…), likewise earning income from category A (dependent work income).

4.1.5. In 2015, in addition to the dependent work income mentioned, the Claimant earned income from a Spanish source, in the amount of € 60,000.00, in his capacity as non-executive director of E…, S.A., a company governed by Spanish law with headquarters in Oviedo, on which withholding tax was levied in Spain, in the amount of € 11,850.00.

4.1.6. On 30/04/2016, the Claimant filed the IRS Model 3 tax return for the year 2015, having declared the dependent work income earned as General Director of B…, S.A. and as a member of the corporate bodies of D…, as well as the income earned in Spain and the respective withholding tax, a situation that gave rise to assessment no. 2016… .

4.1.7. On 19/09/2016, the Claimant paid assessment no. 2016 …, in the amount of € 116,775.32.

4.1.8. On 30/09/2016, the Claimant filed a substitute IRS Model 3 tax return for the year 2015, a situation that gave rise to assessment no. 2016…, from which resulted an amount payable of € 116,779.01.

4.1.9. In the said substitute IRS Model 3 tax return, the Claimant added Annex G, in order to include a real estate capital gain, in the amount of € 85.85.

4.1.10. In both tax returns, the Claimant filled in, by error, in box 4-C of Annex J, the field 451 relating to the status of cross-border worker.

4.1.11. Indeed, the assessment at hand shows that the income earned in Spain contributed to the formation of the Claimant's taxable income, but the tax paid in Spain was not taken into account.

4.1.12. Disagreeing with the assessment, the Claimant filed, on 30/11/2016, with the AT a petition for administrative reconsideration (case no. …2016…) of the said assessment act, requesting its annulment on the grounds of illegality, which was dismissed on 21/04/2017.

4.1.13. The Claimant filed on 26/07/2017 the request for arbitral pronouncement at hand.

4.2. FACTS NOT DEEMED PROVEN

There are no facts with relevance to the decision that have not been deemed proven.

5. THE LAW

The central issue at hand concerns the tax situation of the Claimant regarding the income obtained in Spain in the year 2015, and the deduction, or otherwise, of the tax paid in that country on the same income, by way of deduction from tax for international double taxation.

Let us examine this:

On the application of article 16 of the DTT

As follows from the factual background, the Claimant has been performing the functions of non-executive director of E…, S.A., a company governed by Spanish law with headquarters in Oviedo, having been re-elected on 09/04/2015.

Now, in accordance with the provisions of no. 1 of article 15 of the DTT, "Subject to the provisions of articles 16, 18, 19, 20 and 21, salaries, wages and similar remuneration obtained from employment by a resident of one Contracting State may be taxed only in that State, unless the employment is exercised in the other Contracting State. If the employment is exercised there, the corresponding remuneration may be taxed in that other State."

Already in accordance with article 16 of the DTT, "Directors' fees, attendance fees and similar remuneration derived by a resident of one Contracting State [Portugal] in his capacity as a member of the board of directors or board of auditors of a company resident in the other Contracting State [Spain] may be taxed in that other State [Spain], provided that such remuneration is determined and paid by the company in respect of their participation in the activities of the board of directors or board of auditors. Otherwise, the provisions of article 15 apply."

Thus, when remuneration earned by members of the board of directors of companies is at issue, article 16 applies and not article 15, by virtue of the special character of the former in relation to the latter.

Indeed, the prevalence of article 16 over article 15 of the DTT follows from the most elementary principle of general legal theory, according to which the special norm prevails over the general norm.

That is, when a special norm exists, it applies to its particular field of application, applying to cases covered by its provisions, to the detriment of general law.

This principle is further embodied in the commentaries to article 15 of the Model Tax Convention on Income and on Capital, which state that "(…) the remuneration of members of the board of directors or board of auditors of companies is the subject of article 16 (…)". [1]

In this regard, it becomes clear that, contrary to what the AT advocated in the order dismissing the petition for administrative reconsideration, article 15 of the DTT does not apply to the case at hand.

Indeed, the Claimant was, at the date of the facts, a director of E…, S.A. – the paying entity – and therefore there is no doubt that the jurisdiction to tax the income earned by him is determined by article 16 of the DTT.

Thus, the income earned by the Claimant in Spain may be taxed there, in accordance with the provisions of article 16 of the DTT.

It is, therefore, incumbent upon Portugal, pursuant to the provisions of sub-paragraph a) of no. 2 of article 23 of the DTT, to eliminate double taxation, a situation that is materialized through the deduction from tax provided for in no. 1 of article 81 of the IRS Code.

On the classification of the Claimant as a cross-border worker

In accordance with the provisions of no. 4 of article 15 of the DTT, a cross-border worker is one who exercises his professional activity in one Contracting State although "(…) he has his habitual residence in the other Contracting State to which he normally returns every day (…)".

Indeed, the concept of cross-border worker is precisely intended to deal with cases where the holder of work income resides near the border and exercises his professional activity in one Contracting State and resides in the other to which he returns daily.

The holder of dependent work income earned in this context would thus spend more than 183 days in the two Contracting States, causing both States to have tax jurisdiction, placing an excessive burden on the cross-border worker.

It was, indeed, for that reason that the concept of cross-border worker was inserted into the DTT.

As Ana Cláudia Afonso de Oliveira notes, "Because Portugal and Spain have a common border, no. 4 provides for the specific treatment of cross-border workers. Thus, remuneration obtained through employment exercised in one Contracting State by a cross-border worker, that is, who has his habitual residence in the other Contracting State to which he normally returns every day, may only be taxed in that other State. That is, the exclusive right to tax the remuneration earned by cross-border workers is granted to the State in which they have their habitual residence." [2]

Now, this is not at all the case with the Claimant.

Indeed, in 2015, and despite sporadic trips to Spain in performance of his functions as non-executive director of E…, S.A., the Claimant resided and exercised his professional activity in Lisbon. [3]

From 01/2015 to 07/2015, performing functions as General Director of B…, S.A., in combination with the functions of Chairman of the Board of Directors of C…, S.A..

Such functions as would not have allowed the Claimant, as is of elementary inference, to commute daily to Spain to perform functions for E…, S.A. and return daily to Portugal.

And from 08/2015 onwards, the Claimant performed functions as a member of the Board of Directors of D…, a function that presupposed a weekly dedication of 30 hours, which evidently does not accord with daily trips to Spain.

In light of the foregoing, and without prejudice to the manifest error in filling out the tax return, both because of the functions performed (non-executive) and the practical impossibility of commuting daily to Oviedo, the Claimant could never be classified as a cross-border worker within the meaning of no. 4 of article 15 of the DTT.

Indeed, it can only be concluded that the Claimant has the right to a deduction from tax for the tax paid in Spain, wrongfully disregarded by the AT in the 2015 assessment.

Having concluded that the IRS assessment act which is the subject of the present request for arbitral pronouncement suffers from a defect of violation of law which requires its annulment, the examination of the order dismissing the petition for administrative reconsideration submitted is rendered moot by futility, as well as the examination of its unconstitutionality by violation of the principle of tax capacity.

On the right to compensatory interest

In addition to the annulment of the IRS assessment and consequent reimbursement of the amounts wrongfully paid, the Claimant further requests that he be granted the right to compensatory interest pursuant to article 43 of the LGT.

Indeed, according to the terms of the provision of no. 1 of the said article, compensatory interest is due "when it is determined, in administrative reconsideration or judicial challenge, that there was an error attributable to the services as a result of which payment of the tax debt was made in an amount exceeding what is legally due." In addition to the means referred to in the provision transcribed, we consider that, as follows from no. 5 of article 24 of the RJAT, the right to the mentioned interest may be recognized in the arbitral proceedings and thus the claim is heard.

The right to compensatory interest referred to in the LGT provision mentioned above presupposes that tax was paid in an amount exceeding what was due and that such resulted from an error, of fact or of law, attributable to the services of the AT. In the present case, both conditions are met, thus establishing the obligation of compensatory interest in favor of the taxpayer, which is hereby declared.

6. DECISION

With the grounds set forth, the arbitral tribunal decides:

a) To grant the request for arbitral pronouncement and, consequently, to declare the IRS assessment illegal with all legal consequences;

b) To grant the request for recognition of the Claimant's right to payment of compensatory interest;

c) To order the AT to refund to the Claimant the tax wrongfully paid;

d) To order the AT to pay costs.

7. VALUE OF THE CASE

The value of the case is fixed at € 11,850.00 (eleven thousand, eight hundred and fifty euros), pursuant to article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of sub-paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

8. COSTS

Costs to be borne by the AT, in the amount of € 918 (nine hundred and eighteen euros), pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, pursuant to no. 2 of article 22 of the RJAT.

Notify.

Lisbon, 20 December 2017

The Arbitrator,

(Hélder Filipe Faustino)

Document prepared by computer, pursuant to the provisions of no. 5 of article 131 of the CPC, applicable by cross-reference of sub-paragraph e) of no. 1 of article 29 of the RJAT. The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Cfr. Model Tax Convention on Income and on Capital, Condensed Version, Committee on Fiscal Affairs of the OECD, Tax Science and Technique Notebooks, p. 325.

[2] "Brief Commentary on the Convention between Portugal and Spain to Avoid Double Taxation and Prevent Tax Evasion in Matters of Income Taxes", Faculty of Law of the University of Porto.

[3] According to article 22 of the Board of Directors Regulation, the Board meetings have a quarterly frequency.

Frequently Asked Questions

Automatically Created

How does Article 16 of the Portugal-Spain Double Taxation Agreement apply to statutory body member income?
Article 16 of the Portugal-Spain DTT specifically governs income received by members of statutory bodies (directors, board members). This income may be taxed in the source country (Spain) where the company is located, and Portugal as the residence state must eliminate double taxation by granting a tax credit for foreign taxes paid. Crucially, Article 16 income is distinct from Article 15 employment income, meaning cross-border worker exceptions applicable to employment do not apply to statutory body member remuneration.
Can Portuguese tax authorities deny a foreign tax credit for IRS paid in Spain on director fees?
Portuguese tax authorities cannot legitimately deny foreign tax credit for director fees classified under Article 16 of the DTT, even if the taxpayer erroneously declared cross-border worker status. The cross-border worker provisions in Article 15 apply only to employment income, not to statutory body member remuneration governed by Article 16. The claimant in Process 447/2017-T successfully argued that proper DTT classification requires Portugal to grant credit for Spanish taxes paid on director fees, regardless of an administrative error in completing the tax return.
What is the tax treatment of cross-border statutory body member remuneration under Portuguese IRS?
Under Portuguese IRS law and the Portugal-Spain DTT, cross-border statutory body member remuneration is taxable in both countries. The source country (Spain) may tax director fees under Article 16, while Portugal taxes worldwide income of its residents. To eliminate double taxation, Portugal must grant a tax credit (deduction from Portuguese tax) for the amount paid in Spain. The income contributes to determining the Portuguese tax rate but the foreign tax paid reduces the final Portuguese tax liability. This differs from employment income where cross-border worker provisions may allocate exclusive taxing rights.
How does the frontier worker classification affect double taxation relief for director income between Portugal and Spain?
The frontier/cross-border worker classification under Article 15 of the Portugal-Spain DTT should not affect double taxation relief for director income classified under Article 16. Cross-border worker provisions apply specifically to employment income under Article 15, creating special rules for employees working near borders. However, statutory body member income (directors, board members) falls under Article 16, which has separate taxation rules without cross-border worker exceptions. Process 447/2017-T clarified that erroneously declaring cross-border worker status cannot override the proper DTT classification of director fees under Article 16.
What is the CAAD arbitral procedure for challenging IRS assessments involving international double taxation?
The CAAD arbitral procedure for challenging IRS assessments involving international double taxation begins with filing a request for arbitration after exhausting administrative remedies (such as filing for administrative reconsideration). The CAAD President appoints an arbitrator to constitute the tribunal. The Tax Authority (AT) is notified and given opportunity to respond and present evidence. Both parties may submit written arguments and evidence. The tribunal examines the legality of the assessment based on proper application of Portuguese tax law and relevant double taxation treaties. The process provides a specialized forum for resolving complex international tax disputes outside traditional court litigation, with expertise in DTT interpretation.