CAAD 46/2018-T: Capital Gains Taxation for Non-Habitual Residents Under Article 43 CIRS

ARBITRAL DECISION

I. Report

A... and B... (hereinafter designated as "Claimants"), taxpayers with tax identification numbers ("NIF") ... and ... respectively, resident in ..., ..., ..., ...-..., Portugal, presented on 16 April 2018, in accordance with the provisions of article 10 of the Legal Framework for Arbitration in Tax Matters ("RJAT"), a request for constitution of an arbitral tribunal, with a view to:

(i) declaration of annulment of the decision of the Gracious Complaint and, consequently, annulment of the Personal Income Tax ("IRS") assessment no. 2017..., relating to the tax period of 2016, from which resulted tax payable in the amount of € 16,508.80;

(ii) consequent substitution by assessment that applies items 1 to 3 of article 43 of the IRS Code;

(iii) restitution of the amount considered paid in excess, plus indemnity interest.

A) Constitution of the Arbitral Tribunal

Pursuant to the provisions of article 6, paragraph 2, letter a) and article 11, paragraph 1, letter b) of the RJAT, the Ethical Council of this Administrative Arbitration Centre ("CAAD") appointed the undersigned as sole arbitrator, who communicated acceptance of the charge within the applicable period, and notified the parties of this appointment on 27 March 2018.

Thus, in accordance with the provisions of article 11, paragraph 1, letter c) of the RJAT, and by communication of the President of the Ethical Council of the CAAD, the Sole Arbitral Tribunal was constituted on 16 April 2018.

The request for constitution of the arbitral tribunal was accepted and communicated to the Tax and Customs Authority (hereinafter, "Respondent" or "ATA").

B) Procedural History

In the request for arbitral decision, the Claimants petitioned for annulment of the IRS assessment no. 2017..., relating to the income period of 2016, from which resulted tax payable in the amount of € 16,508.80 and its substitution by assessment that applies article 43 of the IRS Code, alleging that the ATA incorrectly disregarded the application of the scheme established in article 43, paragraph 3 of the IRS Code, which provides that the balance of capital gains realized from the disposal of equity interests "relating to micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, when positive, is equally considered at 50% of its value", due to the fact that they were covered by the regime of non-habitual residents ("NHR").

In parallel, they also wish to be refunded the amount paid in excess, plus the legally due indemnity interest.

The ATA submitted a response, petitioning for dismissal of the request for arbitral decision, on the grounds that there is no vice as pointed out by the Claimants.

By order of 3 September 2018, the Sole Arbitral Tribunal, under the provisions of article 16, letter c) of the RJAT, and following the request made by the ATA, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in article 18 of the RJAT, as a result of the simplicity of the issues in question, as well as because it considered that it had at its disposal all the elements necessary to make a clear and impartial decision.

It also decided, in accordance with article 18, paragraph 2 of the RJAT, that oral argument was not necessary, as the positions of the parties were perfectly defined in their respective pleadings, and set the end of September 2018 as the date for the arbitral decision.

Subsequently and ad hoc, a request was attached to the proceedings, filed by the Claimants in which, on a voluntary basis, Portuguese translations of certain documents appended to the proceedings are attached and, additionally, a revision of the value of the case is requested, initially fixed at € 16,508.80 in accordance with the IRS assessment no. 2017..., to € 8,254.40, on the ground that what is being discussed is the taxation of 50% of the capital gains realized by the claimants in 2016, and therefore the value of the case should be considered as half the value of the said IRS assessment.

Furthermore, the Tribunal was regularly constituted and is competent to consider the issues indicated (article 2, paragraph 1, letter a) of the RJAT), the parties have legal personality and capacity and have full legitimacy (articles 4 and 10, paragraph 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March). There are no nullities and no exceptions have been raised, so nothing prevents judgment on the merits.

The present proceedings are therefore in a position for a final decision to be rendered.

II. Question to be Decided

The central question to be examined and decided regarding the merits of the case, as it emerges from the procedural documents of the parties, should be embodied generically in the determination of: (i) the extent to which the Claimants (A... and B...), with NIF ... and 2 ..., respectively, as NHR for purposes of Portuguese tax legislation, may benefit from the scheme provided for in article 43, paragraph 3 of the IRS Code; and (ii) whether the disposal of equity interests in a company with tax residence in France, held by them, may be considered for purposes of Decree-Law no. 372/2007, of 6 November, and as such be classified as a micro or small enterprise, as the Claimants allege.

III. Statement of Facts

Facts Established

Having examined the documentary evidence produced and the tax administrative proceedings appended, the tribunal finds proven, with relevance for the decision of the case, the following facts:

• The Claimants acquired in 2008 a set of equity interests in a Holding company based in France, for the value of € 272,000.00 (€ 136,000.00 each).

• In 2016, the Claimants disposed of the equity interests they held in that company for the value of € 350,000.00 (€ 175,000.00 each), and recorded this fact in the IRS return Form 3 for the period of 2016.

• At the time of disposal, the Claimants were resident in Portugal, benefiting from the NHR tax regime.

• The Respondent calculated the capital gain in accordance with the documents provided by the Claimants.

• From the filing of the return Form 3, a tax assessment resulted for the Claimants, of an amount payable of € 16,508.80, relating to the taxation of the capital gain realized from the sale of the said equity interests.

• The amount of tax in question was calculated by the Respondent as follows:

• [€ 136,000.00 × 1.07 = € 145,520.00 – that is, (value of acquisition of equity interests × currency devaluation coefficient in accordance with Ordinance 316/2016 of 14 December)];

• [€ 145,520.00 – € 175,000.00 = € 29,480.00 – that is, (updated acquisition value – sale value)];

• [€ 29,480.00 × 2 = € 58,960.00 – that is, (capital gain realized × number of holders of equity interests)];

• [€ 58,960.00 × 28% = € 16,508.80 – that is, (capital gain realized × applicable rate according to article 72, paragraph 1, letter c) of the IRS Code)].

• The Claimants were notified of the IRS assessment no. 2017..., which assessed the amount payable at € 16,508.80, against which they filed a Gracious Complaint on the grounds that they were not applied the percentage of 50% provided for in paragraph 3 of article 43 of the IRS Code.

• The Claimants also attached documents to prove compliance with the requirements for classification of the French Holding company for purposes of article 43, paragraph 3 of the IRS Code, petitioning for annulment of the disputed assessment.

Justification for the Statement of Facts

The Tribunal's conviction regarding the facts established resulted from the documents appended to the proceedings and contained in the petition and pleadings.

Facts Not Established

The Tribunal further considers that there is no factual relevance for the decision of the case that has not been established.

IV. On Law

A) Legal Framework

Given that the legal question to be decided in the present proceedings requires the interpretation of the relevant legal texts, it is important first to list the principal rules that compose the legal framework in question, which is constituted namely by the IRS Code, by Decree-Law no. 372/2007, of 6 November and its annex, and also by the Convention to Eliminate Double Taxation ("DTC") concluded between Portugal and France, it being noted that the wording of all of them shall be that considered at the date of occurrence of the facts.

Category G Income

Article 10, paragraph 1 of the IRS Code provides that "Capital gains are the gains obtained that, not being considered business and professional income, income from capital or property income, result from:

a) (...)

b) Onerous disposal of equity interests (...)".

Tax Residence / NHR

Article 16 of the IRS Code determines from the outset that:

"Paragraph 1 – Persons who, in the year to which the income relates:

a) Have remained therein for more than 183 days, consecutive or interpolated, in any period of 12 months with commencement or ending in the year in question;

(...)

Paragraph 8 - Non-habitual residents in Portuguese territory are considered to be taxpayers who, upon becoming tax residents under paragraphs 1 or 2, were not resident in Portuguese territory in any of the five preceding years.

Paragraph 9 - The taxpayer considered a non-habitual resident acquires the right to be taxed as such for the period of 10 consecutive years from the year, inclusive, of his registration as resident in Portuguese territory."

With regard to the taxation rules for NHR, article 81 of the IRS Code further provides:

"Paragraph 5 - To non-habitual residents in Portuguese territory who obtain income abroad in categories B, earned in high added-value service provision activities, with a scientific, artistic or technical character, to be defined by ordinance of the Government member responsible for the area of finance, or arising from intellectual or industrial property, or from the provision of information relating to experience acquired in the industrial, commercial or scientific sector, as well as from categories E, F and G, the exemption method applies, it being sufficient that any one of the following conditions be verified:

a) they can be taxed in the other contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; or

b) they can be taxed in the other country, territory or region, in accordance with the OECD model tax convention on income and property, interpreted in accordance with observations and reservations made by Portugal, in cases where there is no convention to eliminate double taxation concluded by Portugal, provided that they do not appear on a list approved by ordinance of the Government member responsible for the area of finance, relating to regimes of privileged taxation, clearly more favorable, and likewise, provided that the income, according to the criteria set out in article 18, is not to be considered as obtained in Portuguese territory."

DTC Portugal - France

Under article 14, paragraph 3 of the DTC concluded between Portugal and France "gains from the disposal of any other property, other than those referred to in paragraphs 1 and 2, can only be taxed in the Contracting State of which the alienator is a resident." It should be noted that, where it reads "any other property" should be understood, by exclusion, gains from the disposal of equity interests in companies whose assets are not composed essentially of real property.

Capital Gains

Article 43 of the IRS Code provides as follows:

"Paragraph 1 - The value of income qualified as capital gains is that corresponding to the balance determined between the gains and losses realized in the same year, determined in accordance with the following articles.

(...)

Paragraph 3 - The balance referred to in paragraph 1, relating to the disposals provided for in letter b) of paragraph 1 of article 10, relating to micro and small enterprises not listed on the regulated or unregulated markets of the stock exchange, when positive, is equally considered at 50% of its value.

Paragraph 4 - For purposes of the preceding paragraph, micro and small enterprises are understood to be the entities defined, pursuant to the annex to Decree-Law no. 372/2007, of 6 November".

At the date of the facts, article 72, paragraph 1, letter c), provided that "the positive balance between capital gains and losses, resulting from the operations provided for in letters b), c), e), f), g) and h) of paragraph 1 of article 10" would be taxed at the autonomous rate of 28%.

Certification of Micro and Small Enterprises

With regard to Decree-Law no. 372/2007, of 6 November, as amended by Decree-Law no. 143/2009 of 16 June, it should be noted that the same is to be referred to by virtue of article 43, paragraph 3 of the IRS Code, which establishes in its article 1, as to the respective subject matter, that:

"Paragraph 1. - Electronic certification is created for micro, small and medium enterprises, hereinafter designated as SME.

Paragraph 2 – The certification referred to in the preceding paragraph makes it possible to ascertain the status of SME of any company interested in obtaining such quality".

In parallel, article 2 of the said statute provides that for purposes of this Decree-Law, the definition of SME, as well as the concepts and criteria to be used to ascertain its status, are contained in its annex, which is an integral part thereof, and correspond to those provided in Recommendation no. 2003/361/EC of the European Commission, of 6 May.

In accordance with the annex mentioned above, the following provisions should be highlighted:

Under article 1 "an enterprise is understood to be any entity that, regardless of its legal form, carries on an economic activity. In particular, entities that carry on a craft or other activity on an individual or family basis, partnerships or associations that regularly carry on an economic activity, are considered as such".

For purposes of article 2 of the said annex, note further that:

"Paragraph 1 - the category of micro, small and medium enterprises (SME) is comprised of enterprises that employ fewer than 250 persons and whose annual turnover does not exceed 50 million euros or whose total annual balance sheet does not exceed 43 million euros.

Paragraph 2 - in the SME category, a small enterprise is defined as an enterprise that employs fewer than 50 persons and whose annual turnover or total annual balance sheet does not exceed 10 million euros.

Paragraph 3 - In the SME category, a micro enterprise is defined as an enterprise that employs fewer than 10 persons and whose annual turnover or total annual balance sheet does not exceed 2 million euros".

Under article 4, paragraph 1 "the data considered for the calculation of employees and financial amounts are those of the last closed accounting period, calculated on an annual basis. The data are taken into account from the date of closure of accounts. The amount of turnover considered is calculated excluding value added tax (VAT) and other indirect taxes".

Finally, article 6, paragraph 2 of the annex states that "the data, including employees, of an enterprise that has partner or associated enterprises are determined on the basis of the accounts and other data of the enterprise, or – where applicable – of the enterprise's consolidated accounts, or of the consolidated accounts in which the enterprise is included by consolidation. To the data referred to in the first paragraph, the data of any partner enterprises of the enterprise in question, located immediately upstream or downstream thereof, must be added".

In this way, it is on the basis of this legal framework that it is necessary to consider:

• the extent to which the Claimants, in the capacity of NHR, may benefit from the application of article 43, paragraph 3 of the IRS Code to the disposal of equity interests in a company held by them, and

• whether it is possible to qualify a French company as small or micro, in light of Decree-Law no. 372/2007, of 6 November.

B) Arguments of the Parties

In this regard, the Claimants alleged, in summary, the following:

• Lack of substantiation by the ATA regarding the dismissal of the Gracious Complaint, both with regard to the impossibility of application of the scheme provided for in article 43, paragraph 3 of the IRS Code to the Claimants, as NHR, and as to the impossibility of the company based in France being covered by the provisions of Decree-Law no. 372/2007, of 6 November.

• Consequent violation of the duties of substantiation of the tax act, as provided in article 77 of the General Tax Law ("LGT"), specifically as it relates to paragraph 2 of this article, which in turn determines that "The substantiation of tax acts may be carried out in a summary manner, but must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax".

• They further consider that in this context compliance should be given to the provisions of article 268, paragraph 3 of the Constitution of the Portuguese Republic ("CRP"), which stipulates that "administrative acts are subject to notification to the interested parties in the form provided by law, and require express and accessible substantiation when they affect legally protected rights or interests".

• The Claimants conclude on this matter that the administrative act (dismissal of the Gracious Complaint) is ineffective due to violation of substantiation duties.

• With regard to the question of the tax residence of the Claimants, they consider that the NHR regime is a special regime, whose application only occurs with respect to certain types of income provided for in article 81 of the IRS Code, and is also dependent on the verification of certain circumstances.

• They thus argue that an NHR who earns income in Portugal will always be taxed according to the general regime, with the exception of income that meets the requirements for application of article 81 of the IRS Code (special regime).

• By virtue of article 16, paragraph 8 of the IRS Code, it should further be considered that NHR are first and foremost residents for tax purposes in Portugal.

• In accordance with paragraphs 4 to 9 of article 81 of the IRS Code, Category G income earned abroad by NHR benefit from the exemption method provided that they can be taxed in the other contracting State, as defined by the DTC concluded between Portugal and that State.

• The DTC concluded between Portugal and France determines in article 14, paragraph 3 that gains resulting from the disposal of equity interests can only be taxed in the State of residence of their holder, in this case, in Portugal.

• The impossibility of application of article 81, paragraph 5 of the IRS Code, not allowing, therefore, application of the exemption method and consequently that the Claimants could benefit from this special regime, implies the taxation of capital gains in accordance with the general regime.

• With regard to the taxation of 50% of the balance of capital gain, the Claimants completed and filed annex J of the IRS Form 3 for the period of 2016, without having identified the company in question as micro/small, due to the alleged impossibility of including such information in the respective form.

• The Claimants argue for the application of the scheme provided for in article 43, paragraph 3 of the IRS Code to their specific case, in so far as none of the rules restrict its field of application to companies that are tax residents in Portugal (in particular, Decree-Law no. 372/2007, of 6 November, in its article 1).

• Decree-Law no. 372/2007, of 6 November requires the verification of two cumulative requirements for the determination of an enterprise as small/micro enterprise, specifically: (i) need to employ fewer than 50/10 persons, respectively; (ii) annual turnover or total annual balance sheet that does not exceed 10/2 million Euros, respectively.

• According to paragraph 1 of article 4 of the said Decree-Law "The data considered for the calculation of employees and financial amounts are those of the last closed accounting period, calculated on an annual basis. The data are taken into account from the date of closure of accounts. The amount of turnover considered is calculated excluding value added tax (VAT) and other indirect taxes."

• As the disposal of the said equity interests occurred in January 2016, the turnover for the financial year 2015 was considered, and as the fiscal year of the companies in question begins on 1 July and ends on 30 June, the accounts of 2016 are considered as those of the last closed financial year.

• Having examined the accounts of the company whose equity interests were disposed of, it appears that in 2015 the requirements for its consideration as a small enterprise were met.

• The enterprises B..., C... and D..., all based in France, should be considered as associated, for purposes of article 3, paragraph 3 of the Annex to Decree-Law 372/2007, of 6 November, so that the relevant data are considered on the basis of consolidated accounts, as results from article 6, paragraph 2 of the Annex to the same Decree-Law.

• To this extent it is concluded that, as a whole, the enterprises have 27 employees and a turnover of € 4,028,000.

• Thus, it is understood that article 43, paragraph 3 of the IRS Code does not limit its application to companies based in Portugal.

• Understanding to the contrary would be discriminatory and thus directly contrary to the rules of Community Law.

• Decree-Law taken into consideration has as its basis the Recommendation of the Commission no. 2003/361/EC of the European Commission, of 6 May 2003 (as stated in article 2 of Decree-Law 372/2007 of 6 November), meaning that the rules that provide for the qualification of various types of enterprise (e.g. micro / small) have a Community origin and are based on an assumption of legislative harmonization in the territory of the European Union, so that French rules also provide the same quantitative criteria.

• Additionally, the majority of enterprises follow international accounting standards ("IAS/IFRS"), so that the way of determining turnover, or balance sheet value is uniform across various countries in the European Union.

• There are also other Portuguese tax rules, such as the regime of tax neutrality (provided for in articles 73 et seq of the Code on Corporate Income, "CIRC"), applicable when enterprises based in other countries of the European Union are involved.

• It is now clear that the law does not impose the existence of certification issued by IAPMEI as SME for the regime of taxation of capital gains at only 50% to be applicable, as results from Arbitral Decision 270/2013-T of 23/04/2014, whose argumentation is further based on Circular no. 7/2014 of the IRS Services Directorate.

• The Claimants thus conclude for the application of article 43, paragraph 3 of the IRS Code to the disposal of equity interests of the said company with tax residence in France, consequently its taxation should be considered at only 50%.

The Respondent argues, in summary, the following:

• Following a personal meeting with the Claimants, in order to determine the calculation of the amount in question, the services clarified that it was IRS corresponding to the autonomous taxation of capital gain generated from the disposal of equity interests, calculated in accordance with the provisions of article 72, paragraph 1, letter c) of the IRS Code.

• The alleged reasons of fact and law alleged by the Claimants in the Gracious Complaint regarding the IRS assessment no. 2017/..., are far from substantiating and supporting any claims formulated.

• Following the alleged violations of articles 77 of the LGT and 268, paragraph 3 of the CRP, attention should be paid to article 66, paragraph 2 of the IRS Code, when determining that "the substantiation must be expressed through an exposition, albeit succinct, of the reasons of fact and law of the decision, being equivalent to the lack of substantiation the adoption of grounds which, by obscurity, contradiction or insufficiency, do not specifically clarify its motivation".

• Not having to obey specific canons, it is required, however, that the motivation be apt to reveal to a normal addressee the reasons of fact and law that determined the act, enabling it to react effectively by the legal means available.

• Under article 125, paragraph 2 of the Code of Administrative Procedure ("CPA"), substantiation is considered: (i) sufficient – when it encompasses all elements chosen by the administration in such a way as to allow the constitution of the logical and legal itinerary of the procedure that ended with the final decision; (ii) clear – when it is intelligible, without ambiguities or obscurities, taking into account the figure of the normal addressee who in the concrete situation has to understand the decisive and justifying reasons for the decision; and (iii) congruent – when it expresses consonance between the normative requirements of the act and its reasons, being that the adoption of arguments which by contradiction do not specifically clarify the motivation of the act is equivalent to the lack of substantiation.

• The judgment of the STA, of 06/02/2013, issued in case no. 0581/12 states that the requirements of substantiation are not rigid, varying according to the type of act and concrete circumstances in which it was issued, being sufficient the adequacy of the substantiating declaration of the evaluative act, with a clear and rational discourse that makes known to a normal addressee the evaluation/determination criteria used and the reasons why the values considered were reached.

• It further states the judgment of the STA of 14/10/2009, issued in case no. 0740/09, that "the IRS assessment act is substantiated, from a formal point of view, if the Tax Administration indicated the facts on which it was based to carry out the assessment and if from such facts clearly result the reasons why it decided in one sense and not another".

• In fact, the terms of the act of dismissal allow complete knowledge of the itinerary followed by the ATA, to such an extent that, from the determination of the taxable matter, the Claimants reacted and deduced a request for arbitration.

• In this context, the procedure described complied with the provisions of article 65, paragraphs 4 and 5 of the IRS Code, never put in issue by the Claimants, so that the alleged lack of substantiation by the Claimants should be considered as unjustified.

• With respect to the error in determining taxable income, the ATA understands that NHR have their own taxation regime (see articles 16, paragraph 8, 72 and 81 of the IRS Code).

• This own regime allows, in particular, to opt for the exemption method provided for in paragraph 5 of article 81 of the IRS Code.

• As such, the existence of its own regime prevents the application to the Claimants of the rules applicable to residents, namely that provided for in article 43, paragraph 3 of the IRS Code.

C) Tribunal's Examination

On the Lack of Substantiation

The substantiation presented by the ATA for the dismissal of the Gracious Complaint filed by the Claimants was essentially based on the fact that the NHR regime is its own regime, which, as such, allowed the benefit provided for in article 81, paragraph 5 of the IRS Code, so that such specific provision would prevent the ability to benefit from a regime (article 43, paragraph 3 of the IRS Code) provided for residents, who as such were considered as NHR.

In this regard, it is first important to emphasize that, with respect to the alleged lack of substantiation, the aim is not to assess the merits of the applicability of article 43, paragraph 3 of the IRS Code, per se, to the Claimants, but rather to assess whether the dismissal of the Gracious Complaint filed by the Claimants suffered from this vice of lack of substantiation.

In this respect, and taking into account what was mentioned above by the parties, it is important to reinforce article 66, paragraph 2 of the IRS Code, when determining that "the substantiation must be expressed through an exposition, albeit succinct, of the reasons of fact and law of the decision, being equivalent to the lack of substantiation the adoption of grounds which, by obscurity, contradiction or insufficiency, do not specifically clarify its motivation" and also article 125, paragraph 2 of the CPA when requiring that substantiation be sufficient, clear and congruent.

As can be seen, the legislative determination on this matter is made by resorting to a set of indeterminate concepts, which load that decision with a high subjective assessment of the underlying facts.

Thus, despite the clear objective of the law in concretizing some of these indeterminate concepts (i.e. sufficiency, clarity and congruence), it will always be necessary to proceed with a value judgment, which will imply correspondingly an implicit subjectivization of the analysis.

By this is meant that the barrier between the consideration, or not, of a vice of lack of substantiation can be too tenuous, so that the deciding criterion should, as such, attempt to be obtained in the most objective way possible.

In this measure, it should be noted that objectively the ATA substantiated, albeit in a simplistic manner, the decision to dismiss the Gracious Complaint, by considering that paragraph 5 of article 81 of the IRS Code provides its own regime which prevents taxpayers who fall within it from being able to benefit from the rules applicable to other residents.

It should be emphasized that what is being determined here is not the merits of the substantiation, but rather its existence, that is, even if one disagrees with the arguments used by the ATA, and considers them unjustified, one cannot call into question the effective existence of a justification for the taking of the decision.

Furthermore, it should be verified that as regards the content of the substantiation, the same may be succinct, as provided for in article 66, paragraph 2 of the IRS Code, provided it is clarifying of its motivation.

This tribunal considers that the present substantiation, although succinct, is clarifying of its motivation (it should be emphasized once again that such should be assessed independently of whether one agrees or not with the merits of the arguments, since such should be assessed through another petition in which the reasons for the disagreement are presented), so that, in the wake of the aforementioned, the claim for lack of substantiation of the dismissal of the Gracious Complaint made by the Claimants should be considered denied.

On the Application of Article 43, Paragraph 3 of the IRS Code to the Disposal of Equity Interests Held by NHR

The Tax Investment Code, approved by Decree-Law no. 249/2009, of 23 September, created the tax regime for NHR under IRS, with a view to attracting to Portugal non-resident professionals qualified in high added-value activities or intellectual, industrial property, or know-how, as well as beneficiaries of pensions obtained abroad.

In this measure, article 81, paragraph 5 of the IRS Code establishes that the exemption method will be applied, with reference to income of Categories B, E, F and G, obtained abroad by non-habitual residents in Portuguese territory, it being sufficient for this purpose that any one of the following conditions be verified:

"(...)

a) Can be taxed in the other contracting State, in accordance with a convention to eliminate double taxation concluded by Portugal with that State; or

b) Can be taxed in the other country, territory or region, in accordance with the OECD model tax convention on income and property, interpreted in accordance with observations and reservations made by Portugal, in cases where there is no convention to eliminate double taxation concluded by Portugal, provided that they do not appear on a list approved by ordinance of the Government member responsible for the area of finance, relating to regimes of privileged taxation, clearly more favorable, and likewise, provided that the income, according to the criteria set out in article 18, is not to be considered as obtained in Portuguese territory".

It should therefore be noted that the objective of the legislator is, through the introduction of this regime, to grant a tax advantage to certain subjects that it considers relevant as a way of attracting income to Portuguese territory.

This regime thus has specific characteristics that make it its own regime as the ATA refers to, and can therefore be considered a special taxation regime.

The question that arises, however, concerns the procedure to follow in the event that this specific regime is not applied.

In this measure, it should be understood that, if the special regime provided for NHR cannot be applied, the general rules provided in the IRS Code for other residents should be applied to them. This means that all the rules of the general regime should be applied to them and not just part of them.

Now, the general taxation regime for residents specifically provides in article 43, paragraph 3 of the IRS Code the possibility of taxation at only 50% of capital gains realized from the disposal of equity interests in micro or small enterprises.

As such, when dealing with a capital gain that meets the requirements for application of this rule, its application should be considered through the application of the general regime.

Moreover, the ATA cannot consider the application of the monetary correction regime provided for in article 50 of the IRS Code and then substantiate the impossibility of application of article 43, paragraph 3 of the IRS Code, when the latter is also an integral part of the general taxation regime for capital gains, under penalty of obvious contradiction.

Thus, on the basis of the Respondent's argument, the impossibility of application of the NHR regime would determine that one could not benefit from a tax advantage (article 43, paragraph 3 of the IRS Code) specifically created for this purpose, since, according to the same, such advantage could only be applied to tax residents. However, it should be noted that if the NHR regime cannot be applied, the regime of other residents must be applied subsidiarily, with the advantages and disadvantages that may result therefrom.

Therefore, it must be clear that the regimes must be applied in their entirety, that is, if the requirements for application of the NHR regime are met, it must be applied globally and not only in the part from which a benefit results for that taxpayer. And, also as regards the application of the general regime, due to the impossibility of application of the NHR regime, only part of the rules provided in that regime cannot be considered to apply, under penalty of arbitrary and disproportionate treatment of taxpayers.

It should therefore be concluded that the regimes must be applied in their entirety, which determines that an NHR who does not meet the requirements for application of article 81, paragraph 5 of the IRS Code should subsumptively benefit from the regime provided for in article 43, paragraph 3 of the IRS Code, if the necessary requirements for its application are met and under the same conditions as other tax residents.

On the Qualification of a French Company as Small or Micro in Light of Portuguese Rules

With respect to the aforementioned wording of paragraph 3 of article 43 of the IRS Code, the same was introduced by Law no. 15/2010, of 26 July, which repealed the exemption of capital gains relating to the disposal of shares held by their holder for more than 12 months and created, in addition to the regime under analysis, an exemption regime for capital gains for small investors, provided for in article 72 of the Status of Tax Benefits (later repealed by Law no. 66-B/2012, of 31 December), being thus a rule of partial exclusion of taxation with the nature of a tax benefit.

As previously decided by this learned tribunal, in the judgment of 27/01/2014 relating to case no. 155/2013-T, of which, by agreement, we avail ourselves below of some excerpts, "(...) the legislator did not establish any limitation as to the residence of the company whose participation or participations generated the taxable capital gain."

The aforementioned judgment understands that, when dealing with the disposal of a company resident in the European space, the field of application of the 50% reduction should be viewed in the individual sphere of the shareholders and not of the company. What could happen would be the impact on tax competition between countries, as it could be more advantageous to create an SME in Portugal, rather than in another country of the European Union, being thus an inequality in the area of tax competition, which goes against the general principles of law of the European Union.

On the other hand, and as understood in the aforementioned judgment, it could be argued that, if the legislator wanted to establish the limitation of the benefit to participations in national enterprises, it would be sufficient to add (...)relating to micro and small enterprises with headquarters in Portuguese territory(...).

From the analysis of the IRS Code it can then be concluded that the legislator expressly established limits to the rules that enshrine exclusions or more favorable tax treatment, as can be seen from paragraph 2 of the same article 43 of the IRS Code, by determining that the exclusion of taxation of capital gains relating to the disposal of real property is only applicable to tax residents.

Taking into account the rules of interpretation of law, article 9 of the Civil Code (via the referral made by article 11 of the LGT) determines that interpretation cannot be limited to the letter of the law, but must rather reconstitute the legislative thought from the texts.

In this way it must first be verified that the exclusion in question only indirectly constitutes a benefit for micro and small enterprises. "In the first instance, the benefit serves exclusively to the shareholder who finances the share capital of the company. And, as far as this one is concerned, there is no doubt that the benefit is granted to a resident in Portuguese territory who will pay tax here on the capital gain generated."

It should further be understood that micro and small enterprises also benefit from this exemption in so far as "if the shareholder invests its capital in an enterprise, the enterprise strengthens its own capital and financial availability, thus obtaining an advantage".

If one does not agree with such understanding and, nevertheless, considers that this benefit is only directed to micro and small enterprises resident in Portuguese territory, such reasoning encounters objections in the principles of European Law, e.g., freedom of establishment and non-discrimination, which in turn prevent a benefit of this nature from being applied exclusively to capital gains resulting from the disposal of equity interests of companies that have their headquarters in Portugal.

Moreover, as stated in the judgment of the STA of 16-1-2008 in case no. 439/06 (ex vi of the already aforementioned judgment of this tribunal of 27/01/2014), "even if the legislator had explicitly determined the application of this benefit to national enterprises it would be directly violating European Law, as has happened with the already cited paragraph 2 of article 43 of the IRS Code[ "(...)paragraph 2 of article 43 of the Income Tax Code, approved by DL no. 442-A/88, of 30 November, as reworded by Law no. 109-B/2001, of 27 December, which limits the incidence of tax to 50% of capital gains realized only by residents in Portugal, violates the provision of article 56 of the Treaty Establishing the European Community, by excluding from this limitation the capital gains that have been realized by a resident of another Member State of the European Union."

Even though in the case referred to in the aforementioned judgment one was faced with discrimination against natural persons, between residents and non-residents in Portugal, regarding income of identical nature, obtained in the same country, taking into account the issue from the point of view of individual rather than collective taxpayers, it would constitute a direct violation of the constitutional principle of tax equality (article 13 of the CRP) to distinguish for tax purposes the origin of identical income, which would imply that the same income of two nationals would be taxed differently under the same law.

"Looking at things from various perspectives and also taking into account the unity of the legal system (paragraph 1 of article 9 of the Civil Code, ex vi article 11 of the LGT), it does not seem that one can interpret the aforementioned benefit in a restrictive manner.

Seen from the perspective of the enterprise - which is not, as has been seen, the relevant one for the conclusion on the taxation of capital gains - in the absence of an express criterion in the law, concluding that it only applies to micro or small enterprises with headquarters in the national territory seems to constitute a deductive leap that has no connection in the letter of the law".

Thus, it should be concluded, in the wake of the reasoning already previously set forth by this tribunal that, it is essentially relevant for this purpose, "the location of taxpayers and the income earned by them, regardless of whether it comes from abroad or not", provided that there are no applicable international or Community rules that provide otherwise.

In this way, it should be understood that even if it is a company with tax residence in France, if the requirements for application of Decree-Law no. 372/2007, of 6 November are met, its application should be concluded.

Finally, it should also be noted that in accordance with the jurisprudence that has been consensual on the subject and on which we have pronounced ourselves in the past (e.g. CAAD Judgment, case no. 362/2014-T), obtaining electronic certification as an SME by IAPMEI is not a necessary requirement for the application of paragraph 3 of article 43 of the IRS Code. In fact, the issue is also overcome by the tax services themselves, as can be seen from Circular no. 7/2014 of the IRS Services Directorate.

In this context, this tribunal understands that the additional assessment made by the ATA should be annulled, in accordance with the above exposition, and that, thus, a refund of the amount paid in excess by the Claimants should be promoted, in the amount of € 8,254.40.

D) On Indemnity Interest

In addition to the refund of tax paid unduly, the Claimants have also requested the condemnation of the ATA to the payment of indemnity interest, calculated from the date of payment until full restitution of the amount paid in excess.

Letter b) of paragraph 1 of article 24 of the RJAT provides that the arbitral decision on the merits of the claim, which is not subject to appeal or contestation, binds the tax administration from the end of the period provided for appeal or contestation, and it must, in the exact terms of the merits of the decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of the sentences of tax courts, restore the situation that would have existed if the tax act subject to the arbitral decision had not been performed, adopting the necessary acts and operations for this purpose, which should be understood, in accordance with article 100 of the LGT, applicable ex vi letter a) of paragraph 1 of article 29 of the RJAT, as encompassing the payment of indemnity interest, in consonance, moreover, with the provisions of paragraph 5 of this same article 24 of the RJAT.

In this context, article 43, paragraph 1 of the LGT clarifies that "indemnity interest is due when it is determined, in a gracious complaint or judicial contestation, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than legally due".

Taking into account that, in the case at hand, there is the illegality of the assessment act, which is attributable to the ATA, which, on its own initiative, in the disputed assessment, proceeded to the incorrect interpretation and application to the case of the substantive rules analyzed above, the Claimants are entitled, in accordance with articles 24, paragraph 1, letter b) of the RJAT and 100 of the LGT, to the refund of the tax paid in excess in the amount of € 8,254.40 and to indemnity interest, pursuant to article 43, paragraph 1 of the LGT and 61, paragraphs 2 and 5 of the Code of Tax Process and Procedure ("CPPT"), calculated on the said amount of € 8,254.40 from the moment of payment of the tax, at the rate resulting from paragraph 4 of article 43 of the LGT, until full refund of the amount referred to.

V. Decision

Therefore, this Arbitral Tribunal decides:

A) To judge unjustified the claim of lack of substantiation of the dismissal of the Gracious Complaint relating to IRS assessment no. 2017....

B) To judge justified the claim for annulment of IRS assessment no. 2017..., in the amount of € 16,508.80 and its substitution by assessment that applies article 43, paragraph 3 of the IRS Code.

C) To condemn the Respondent, pursuant to article 43, paragraph 1 of the LGT and 61, paragraphs 2 and 5 of the CPPT, to the payment of indemnity interest, at the rate resulting from paragraph 4 of article 43 of the LGT, calculated on the amount paid in excess of € 8,254.40 from the moment of payment of the tax until full refund of the amount referred to; and

D) To condemn the Respondent in the costs of the proceedings.

VI. Value of the Proceedings

It is important to note that the Claimants attached ad hoc to the proceedings a request for revision of the value of the case in which it was determined that, although the value of the proceedings had initially been considered as € 16,508.80 in accordance with IRS assessment no. 2017..., what is being discussed is the taxation of 50% of the capital gains realized by the claimants in 2016, so that the value of the present action should be considered reduced to only € 8,254.40.

In this measure, the Claimants stated that, although they had initially considered the arbitration fee at € 1,224.00, having therefore paid the amount of € 612.00 upon submission of the request for arbitral decision, the same should be € 918.00, requesting for that reason that the payment of the arbitration fee could be made by the difference, that is, € 318.00.

Now, article 97-A, paragraph 1, letter a) of the CPPT, applicable by virtue of letters a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings ("RCPAT"), refers, in summary, that where there is an assessment act, the value to be considered for purposes of determination of the value of the case is the value of the act whose annulment is sought.

Thus, if the incident raised by the Claimants were to be judged justified, it would mean that the judge would be anticipating a substantive decision on the vices attributable to the assessment act, prior to the issuing of the Arbitral Decision.

Thus, it should be considered that the law is clear on this matter, leaving no room for the judge to alter the value of the case when the legality of an assessment act is being discussed, so that, in accordance with the above-mentioned, the value of the proceedings is fixed at € 16,508.80.

VII. Costs

In accordance with the provisions of article 22, paragraph 4 of the RJAT, the value of the arbitration fee is fixed at € 1,224, pursuant to Table I of the aforementioned Regulation, at the charge of the Respondent, given the merits of the claim.

Let notification be made.

Lisbon, CAAD, 27 September 2018

The Arbitrator

(Sérgio Santos Pereira)